Survey highlights COVID-19 challenges for the insolvency profession

The peak professional body for insolvency and restructuring experts in Australia, ARITA – Australian Restructuring Insolvency and Turnaround Association, surveyed its members on Friday 17 April to gauge the impact of the coronavirus and government response to it.

With the participation of nearly 200 insolvency professionals, a clear picture has evolved that the suspension of insolvent trading laws combined with the various Federal and State stimulus packages have caused insolvency activity levels to fall radically below their baseline.

'In a typical year, we see around 8,000 insolvencies. There is always a natural level of insolvency as businesses go through their natural lifecycle and it’s a healthy process. What we are seeing is that even businesses that are insolvent are delaying taking action to deal with that,' said ARITA CEO John Winter

'There’s no doubt that the government has achieved its goal of propping up businesses at a time when, for many, their revenue has evaporated because of COVID-19. But a side-effect of that is that businesses that under normal circumstances would have been wound up, are continuing to trade. Many of them will continue to rack up debts with unwitting creditors – quite likely SMEs themselves who are already under financial pressure, too.'

'There are genuine concerns from insolvency professionals that, without the behavioural handbrake of insolvent trading laws, directors of businesses large and small are going far deeper into insolvency than they otherwise would have, with no chance of turning their businesses around. And it’s creditors who will wear the cost of that down the line,' said Winter.

It’s also clear that the current environment has put the insolvency profession itself under pressure.

'With the evaporation of insolvency work, many insolvency firms are concerned they will struggle to make it through the next 6 months themselves, leaving the market severely depleted down the track when we expect to see a significant rise in insolvencies as a consequence of the stimulus packages rolling back,' said Winter.

'And the concern there is that without a sufficient number of insolvency specialists, many creditors aren’t going to have any chance of recovering what they are owed, with dead companies left as zombies or the cost of insolvency processes rising dramatically due to a lack of competition.'

Highlight data from the survey:

  • 38.6% of insolvency professionals surveyed said their current level of work was significantly less than this time last year and a further 17.8% said it was slightly less.
  • 31% reported that the amount of 'safe harbour' advisory work that they had done was down on the same time last month.
  • More than half of all insolvency firms have registered for JobKeeper or are intending to, signalling that revenue is at least 40% down year-on-year.
  • 19% of insolvency firms have recently implemented redundancies in their own firms.
  • 13.6% of insolvency firms are very concerned about their viability in the next 6 months and a further 42.4% are slightly concerned.