No Tsunami of Insolvency: A Report from Down Under

Author’s Note: Australia has a debtor-in-possession insolvency system administered by insolvency practitioners.

In 2020, when the Australian governments (federal and the states) started to take active steps to suppress COVID-19, the insolvency profession expected that the economic downturn would result in a “tsunami” of insolvency.[1] In hindsight, this was a major miscalculation that did not anticipate massive fiscal spending to support the economy and the temporary suspension of insolvent trading laws and creditor winding-up rights. Insolvency practitioners and lawyers in Australia are still waiting at the date of this article for a boom in insolvency appointments to begin.[2]

What Did the Australian Government Do at the Start of COVID-19?

In March 2020, influential Australian academics wrote a blog post series that recommended that Australia should develop an “economic hibernation” strategy to respond to the pandemic.[3] Within days, the policy of “economic hibernation” was adopted by the government, and with it a commitment to a massive fiscal outlay. It was akin to a declaration of economic war.[4]

To combat COVID-19, the following fiscal measures were undertaken by the federal government[5]:

• JobKeeper: A payment to businesses that suffered a 30% turnover reduction of AUD$1,500 per fortnight per employee;[6]
• JobSeeker: Doubling of unemployment benefits; and
• Cashflow Boost: A tax credit of up to AUD$100,000 for small- to medium-sized businesses.

The JobKeeper measure has been reduced, and its end date is currently being debated. Both JobSeeker and Cashflow Boost have ended. The scale of the fiscal spending was large for a middle-sized economy, and although the initial estimate of federal spending on the measures was AUD$130 billion,[7] the expected cost has reduced.

The changes to the business insolvency regime and related law to implement the economic hibernation of Australia included:

• the suspension of insolvent trading laws during 2020;[8]
• protection from eviction by landlords of commercial and residential tenancies during 2020;[9]
• extensions in the time periods before creditors can commence winding-up actions against companies from 21 days to six months during 2020;
• the development of a new debtor-in-possession restructuring process for small businesses (companies that owe less than AUD$1 million in debt).[10]

Although it is arguably too early to judge the “success” of the above measures, the Australian unemployment rate at the date of this article is 6.4%,[11] and that is substantially below other developed economies. History will be the judge regarding whether the increased government and private debt was necessary to avoid an economic depression.

What Was the Effect on Insolvencies in Australia?

The temporary COVID-19 economic and legal measures resulted in a large downturn in insolvency appointments in Australia. One measure, the number of companies entering liquidation and voluntary administration, saw a reduction of approximately 40% in 2020 compared to 2019.[12] The temporary suspension of insolvent trading laws were qualified in scope and did not provide protections for companies that were already insolvent before the pandemic, but in my opinion, this limitation was largely ignored by businesses during 2020.

The result of the economic and legal measures was a drought of work for insolvency practitioners in Australia in 2020. Australia has a creditor-in-possession corporate insolvency regime, and there are around 600 registered liquidators as of the date of this article. While the insolvent trading laws were suspended, hundreds of insolvency accounting firms suffered a catastrophic loss of revenue and qualified for the JobKeeper scheme.[13] Ironically, the peak body of insolvency practitioners (ARITA) also registered for the JobKeeper scheme.

What Will 2021 Bring for Insolvency Practitioners?

After mistakenly forecasting the “tsunami” of insolvency filings early in 2020,[14] insolvency practitioners and lawyers in Australia may consider themselves victims of unintended consequences. The other unintended consequence of the fiscal stimulus in 2020 has been a real property price boom, particularly outside of the major cities.[15]

The most interesting reform of 2020 was a new small business restructuring process that included debtor-in-possession features. Insolvent companies with less than $1 million of debts are able to use the procedure, but as of the date of this article there has been little or no take-up.[16] The intention of the legislators was a noble and somewhat daring attempt to implement debtor-in-possession restructuring for small business.[17] The law that was subsequently passed has been heavily criticised on a number of grounds, and at a recent seminar one leading law professor called it a “white elephant.”[18] More work needs to be done for a more creative restructuring process if debtor-in-possession is to be tested in Australia.

The least that will occur in 2021 is likely to be a catch-up of insolvency appointments that were deferred in 2020. It is unknown how many businesses will collapse when the fiscal measures are withdrawn in March 2021, but it is obvious that sectors such as tourism, retail, commercial property and education have been damaged by the pandemic. Further, Australia’s largest trading partner, China (the recipient of approximately 40% of Australia’s exports), has commenced a “trade war” due to political disputes with Australia, and this could have a very significant negative impact on Australia’s long-term economic growth.

There are no further proposed insolvency law reforms in Australia at this time, and that includes any further exploration of debtor-in-possession insolvency systems. This year, Australian insolvency practitioners and lawyers will be more circumspect about their predictions for a “tsunami” of insolvency appointments, but Australia faces significant economic headwinds when the fiscal stimulus ends and there are further developments in the China-Australia trade war.