AICM
Risk
REPORT
2022
AICM RISK REPORT 2022 Publisher: Nick Pilavidis FICM CCE Chief Executive Officer Australian Institute of Credit Management Editor: Claire Kasses General Manager Australian Institute of Credit Management Direct: 02 9174 5727 Mob: 0499 975 303 Design: Anthea Vandertouw Ferncliff Productions T: 0408 290 440 E: ferncliff1@bigpond.com Australian Institute of Credit Management Level 3, Suite 303, 1-9 Chandos Street St Leonards NSW 2065 T: 1300 560 996 E: aicm@aicm.com.au www.aicm.com.au
Contents WELCOME Nick Pilavidis FICM CCE Trevor Goodwin LICM CCE Our supporters
2 2 3
4
AICM
Insolvency Outlook
10
John Winter
Reform achieved by AICM advocacy
18
Nick Pilavidis FICM CCE
22
Mark Hoppe
RBA slams brakes on the brakes
HOW TO MANAGE RISK
Barbara Cestaro MICM and Dan Chapman MICM
Strategies to reduce risk with the 48 right contract terms and conditions Christopher Hadley MICM and Andrew Tanna MICM
Managing credit risk for improved cash flow in the digital age Current economic conditions, customer behaviour and mitigating risk
Anneke Thompson
Simplified debt restructuring
30
– should credit managers embrace this new insolvency reform?
Simplified liquidations and changes to liquidator preference payments
CONSTRUCTION IN FOCUS
Brad Walters
65
John McInerney MICM
Kirk Cheesman MICM
Are small operators the canary in the coal mine?
62
25
INSOLVENCY
Construction insolvencies:
54
Daniel Greenhoff MICM
– Australia enters new cash rate cycle as inflation rises
Dark clouds are building, the tide is turning…
45
Nikki Dennis MICM
IDENTIFYING RISK Insolvencies increase as government support ends
40
Wayne Clark MICM, MAICD
Making the most of your upcoming renewal
OVERVIEW Perspectives of the credit and risk profession
Elements vital to effective risk mitigation – construction industry
33
69
Henry McKenna MICM
OUR PEOPLE
74 AICM Risk Report 2022
Welcome
Trevor Goodwin LICM CCE
Nick Pilavidis FICM CCE
National President
Chief Executive Officer
The third issue of our risk report documents
In 2020 and 2021 credit professionals’ ledgers
how the increasing number of risk factors continue
have performed contrary to their expectations
to impact credit professionals.
at the outset of the year. The expected impacts of the environmental disasters, the pandemic,
Our inaugural report was issued in early 2020
withdrawal of government stimulus and the end
as Australia was in recovery from bushfires and
of limitations on enforcement failed to create the
unprecedented disasters, and we were starting
predicted spikes of risk and insolvency. However,
to see the impact of the COVID pandemic on
it is clear uncertainty and a diverse range of risk
business and the economy.
factors mean credit professionals need to be well informed to support their business with sound
The 2021 report painted a picture no-one
credit decisions and practices that manage credit
expected just 12 months earlier, insolvency
and reputational risk.
protections, moratoriums on enforcement and government stimulus dramatically countering
The 2022 Risk report brings together an
the rolling lockdowns to see corporate and
assessment of activity, trends and insights
personal insolvency hit record low levels. Credit
along with practical solutions to arm credit
professionals also reported record low DSO’s, bad
professionals with the information they need and
debts and improved engagement with customers.
an understanding of what best practice actions they can take to manage risk.
Our 2022 report summarises the reactions to the end of COVID relief measures, gradual reopening
AICM Certified Credit Executives are the AICM’s
of the economy and borders and the first signs
most experienced and knowledgeable group of
of credit professionals’ metrics beginning to
members, they have shared what they have seen
deteriorate.
over the last two years and what they expect as we move forward. The insights of our CCEs enable
I commend the team for their input in preparing
all credit professionals to consider how their
this report and the work that has gone into it,
experiences compare.
together with the accompanying insolvency seminars and networking by credit professionals.
It is fitting this is the largest and most
It is also pleasing to see a greater awareness of the
comprehensive Risk Report yet, considering
important work our members perform to ensure
the challenges credit and risk professionals face
their firms remain profitable and financially sound.
continues to increase.
2
AICM Risk Report 2022
Our 2022 SUPPORTERS National partners
Trusted Insights. Responsible Decisions.
Divisional partners
CREDIT MANAGEMENT SOFTWARE
Divisional supporting sponsors
AICM Risk Report 2022
3
Overview Perspectives of the credit and risk profession While all credit metrics continue to perform at much
the opportunities and implemented improvements
more positive levels than were seen prior to 2020,
to processes, general strategies to improve results
the rate of change and impacts of uncertainty are
and specific strategies to combat risk.
expected to put pressure on these results as we start to look toward a post covid environment.
Many CCEs and other AICM members have reported that the predicted impacts on cashflow
Impacts of the last 2 years
expected and experienced led their business
The positive movement in key metrics in the last
operations that had been pending consideration
2 years is clearly seen through the experiences
for extended periods. These improvements
of our Certified Credit Executives (CCEs) who
included:
overwhelmingly returned results contrary to what was expected at the outset of the pandemic. Graph 1 below shows the result of the survey question “did your collections/DSO performance improve over the last 2 years”.
to rapidly implement improvements in their
— Training team members in core credit skills necessary to manage risk — Resilience, mental health and financial hardship training and support so customer team members could support customers and each other.
Graph 2 below shows that while the billions of
— Process and procedure improvements to create
dollars tipped into the economy by federal and
efficiencies including increasing delegation
state Governments were identified as a significant
of authorities which enabled staff to provide
contributor to these results, CCEs also harnessed
immediate responses to customers.
Graph 1: Collections/ DSO performance 70%
Government COVID support payments
60%
Improvements to our credit processes
50%
Specific strategies to improve results Specific strategies to combat risks created by the pandemic
40% 30%
High demand in our sector
20%
Lack of enforcement by ATO, banks and other major creditors
10% 0%
Other
Yes
Stayed the same
No - they deteriorated
Sourced from a survey of AICM CCE’s conducted in March 2022.
4
Graph 2: Contributing factors
AICM Risk Report 2022
0%
10%
20%
30%
40%
50%
Sourced from a survey of AICM CCE’s conducted in March 2022.
60%
70%
OVERVIEW
Graph 3: Companies entering an insolvency process – annual appointments 12000 10000 8000 6000 4000 2000 0 -2000
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Appointments
7,277
7,737
7,521
9,113
9,437
9,601
10,481
10,632
10,821
8,794
10,164
8,505
7,811
8,044
8,324
4,943
4,511
Change
10%
6%
-3%
21%
4%
2%
9%
1%
2%
-19%
16%
-16%
-8%
3%
3%
-41%
-9%
Data sourced from Australian Securities and Investments Commission Series 1 Companies entering external administration and controller appointments. Reproduced with permission. Note: Series 1 data reflects the number of companies in the period that have entered external administration or had controller appointed for the first time. Some companies may have several appointments which is captured by ASIC’s series 2 data.
Graph 4: Personal insolvencies – 1 July 2019 to 6 March 2022 1,400 1,200 1,000 800 600 400 200
10 January - 23 January 2022
7 February - 20 February 2022
13 December - 26 December 2021
15 November - 28 November 2021
18 October - 31 October 2021
23 August - 5 September 2021
20 September - 3 October 2021
28 June - 11 July 2021
26 July - 8 August 2021
3 May - 16 May 2021
31 May - 13 June 2021
5 April - 18 April 20201
8 March - 21 March 2021
8 February - 21 February 2021
11 January - 24 January 2021
14 December - 27 December 2020
19 October - 1 November 2020
16 November - 29 November 2020
21 September - 4 October 2020
27 July - 9 August 2020
24 August - 6 September 2020
29 June - 12 July 2020
4 May - 17 May 2020
1 June - 14 June 2020
6 April - 19 April 2020
9 March - 22 March 2020
13 January - 26 January 2020
10 February - 23 February 2020
16 December - 29 December 2019
21 October - 3 November 2019
18 November - 1 December 2019
23 September - 6 October 2019
26 August - 8 September 2019
1 July - 14 July 2019
29 July - 11 August 2019
0
Data sourced from Australian Financial Security Authority Fortnightly bankruptcy and personal insolvency statistics. Reproduced with permission.
AICM Risk Report 2022
5
OVERVIEW
—
Communication and team
structures being adjusted and refined to cater for remote working.
Graph 5: Corporate insolvencies – Quarterly comparison
—
Implementation of
technology and use of data
2,000
enabling segmentation of
1,800
customer databases and enabling
1,600
experienced team members to
1,400
focus on high value tasks.
1,200 1,000
The AICM also responded to
800
these demands on members
600
providing additional updates via
400
webinars and publications as
200
well as implementing additional learning opportunities via virtual
0
n 2020 n 2021 n 2022
Jan - Mar 1,747
Apr - Jun 1,203
July - Sept 946
973
1,269
1,090
1,179
1,076
-43%
-59%
-50%
n 2020
n 2021
Oct - Nov 1,047
n 2022
Data sourced from Australian Securities and Investments Commission Series 1 Companies entering external administration and controller appointments. Reproduced with permission.
classes for Toolbox, Workshop and Qualification training.
Insolvencies continue to drop Contrary to the predictions of contributors to the 2021 risk report insolvencies in 2021 continue to decrease from the historically low-
Graph 6: Personal insolvencies – Quarterly comparison
level set in 2020.
6,000
Despite continued lockdowns, tapering-off of government
5,000
support and the end of temporary 4,000
enforcement protections corporate insolvency levels dropped a further
3,000
9% from the historically low-level 2,000
set in 2020 to remain over 50% down on pre-COVID levels as seen
1,000
in Graph 3.
0
Jan - Mar
Apr - Jun
n 2020
July - Sept
n 2021
Oct - Nov
n 2022
Data sourced from Australian Financial Security Authority Monthly personal insolvency statistics
Personal insolvencies also remained historically low with fortnightly insolvencies remaining around 400 per fortnight compared to 800-1000 prior to 2020 as seen in Graph 4.
6
AICM Risk Report 2022
OVERVIEW
However, there are signs that insolvencies
While corporate insolvencies remain low, analysis
are starting to increase. Analysing corporate
of insolvencies by industry (see Graph 7)
insolvencies (Graph 5) on a quarterly basis,
highlights some significant movements in those
we see that:
that make up the top ten industries.
z 3 of the 4 quarters in 2021 saw increases over the same time in 2020. z January to March 2021 was the only quarter down on the prior year. A surprising result considering many expected a significant spike following the end of temporary insolvency projections on 31 December 2020. z The January to March 2022 quarter has shown a slight increase on prior year indicating a trajectory of gradual increases in insolvency levels.
With many industries hamstrung by covid it is interesting to see: — Construction moved from 2nd place to take 1st place from Other (Business & Personal) services. — Professional and scientific services consistently moved up the rankings from outside the top 10 in 2019, to 9th in 2020 and 6th in 2021. — Rental and Hiring peaked in 2020 at 6th and just held onto a top 10 spot in 2021. — Administrative and professional services
Graph 6 shows personal insolvencies started to show signs of increasing above the 2020 levels in
moved from 20th in 2020 to 8th in 2021. — Financial and insurance services made the
the October to December quarter but the January
biggest move coming into 9th from 25th last
to March 2022 Quarter saw another drop.
year.
Graph 7: Corporate insolvencies by industry – Top 10 in 2021 2020
2021
2022
0 5 10 15 20 25 30 Construction
Financial & insurance services
Professional, scientific & technical services
Accommodation & food services
Other (business & personal) services
Administrative & support services
Transport, postal & warehousing
Retail Trade
Rental, hiring & real estate services
Manufacturing
Data sourced from Australian Securities and Investments Commission Series 1A: Companies entering external administration and controller appointments by industry, July 2013–January 2022. Reproduced with permission.
AICM Risk Report 2022
7
OVERVIEW
Looking forward In the current context of rising inflation and interest rates, labour
Graph 8: Collections/DSO outlook
shortages, supply chain delays and global uncertainty a lot of credit professionals are looking to the future with optimism supported by the record performance of their ledgers, very low insolvencies and improved relationships with their customers.
Improve Stay the same Deteriorate
0%
10%
20%
30%
40%
50%
60%
Sourced from a survey of AICM CCE’s conducted in March 2022.
When we asked CCE’s how they expected their collections and DSO to perform in 2022, 50% of
Graph 9: Significant losses expected when recovery actions recommence?
respondents expect to continue improvement and only 25% expect deterioration (see Graph 8). Their optimism seems due to high current quality of their ledgers and the improvements they have implemented which will provide insulation from the growth in insolvencies. Supporting this, Graph
Yes Yes - but we don't have significant exposure Unsure but worried No
0%
5%
10%
15%
20%
25%
30%
35%
Sourced from a survey of AICM CCE’s conducted in March 2022.
9 shows only a third of CCEs expect significant losses when the ATO and other major creditors re-commence enforcement activity.
Graph 10: Risk factors in 2022 Inflation/Price rises
While the outlook is positive for credit professionals the current
Supply constraints Interest rates
environment does not allow them to
Labour shortage/ the great resignation
relax with CCE’s currently vigilant on
War in Ukraine
a range of risk indicators as listed in
Environmental disasters
Graph 10.
COVID-19 Australia's relationship with China
While inflation and supply constraints rate the highest when assessing individual customers credit professionals clearly need to weigh up the specific impacts of all these factors and many more. 8
AICM Risk Report 2022
The Federal election Property prices 0
2
4
6
Sourced from a survey of AICM CCE’s conducted in March 2022.
8
10
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Insolvency Outlook
John Winter Chief Executive Officer ARITA – Australian Restructuring Insolvency & Turnaround Association
To say that we continue to live in strange times
Of course, this doesn’t at all align with the general
would best be described as an understatement.
publics or the media’s view of what is happening
For those of us in the restructuring, insolvency and
in the economy. The perception persists that these
turnaround market, the conditions we see continue
must be halcyon days for insolvency practitioners
to defy the old rule book.
when, of course, the opposite is true.
Where did all the insolvencies go?
Indeed, you might have expected to see an increased take up of advisory work to help
The number of formal insolvencies in Australia
businesses navigate the turbulent times but
halved after March 2020. While this is a global
that didn’t transpire either. “Safe harbour”
phenomenon found across most developed
and other advisory work has also fallen to low
economies it has been driven in Australia by:
levels based on anecdotal feedback from our
z Massive stimulus (also global driver)
members. Though, we do know that a lot of
z Largely “free” money through low interest rates (also global) z Protections on enforcement especially commercial leases and loans z ATO withdrawing all enforcement activity z General “signalling” from the Government e.g. temporary insolvency protections leading directors to believe that their insolvency issues
major companies, especially listed ones, did undertake a safe harbour engagement as a risk management strategy for if market conditions worsened sharply. This use of the regime was less about actual genuine concerns about insolvency than it is simply a wise insurance policy for directors and ensured that they had a “Plan B” readily to hand if conditions worsened.
were not problematic. Of course, the lack of formal appointments and Despite most of those measures having either
the parallel reduction in informal advisory work
been fully or largely wound down, the level of
to financially distressed businesses, implies that
insolvency activity has not recovered. We are still
directors saw stimulus and protections as a “get
at 40-50% below pre-COVID levels of external
out of jail free card” and have simply ignored
administrations.
their director obligations and kept trading.
“Despite most of those measures having either been fully or largely wound down, the level of insolvency activity has not recovered. We are still at 40-50% below pre-COVID levels of external administrations.” 10
AICM Risk Report 2022
OVERVIEW
Interestingly, COVID stimulus may well be hiding a longer-term trend. Research by ARITA revealed that insolvencies per company in Australia have been in long term decline anyway. And the start of that decline aligns with when interest rates started their downward move towards zero. Without question, it shows that
“As the price of debt increases, businesses will need to focus on their viability. Helpfully, it should also drive a long-lost quest for productivity.”
the free availability of debt has propped up companies that probably should have ceased operating.
courtesy of that aforementioned stimulus. But that is beginning to wind down with stimulus
That being said, there are obvious signs starting to
long finished. The acceleration of that has been
emerge for a return to some level of normality. The
brought about buy “shadow lockdowns” occurring
most obvious is the expectation of interest rate
in most States that have cut into profitability and
rises. As the price of debt increases, businesses
therefore their reserves. And, of course, most
will need to focus on their viability. Helpfully, it
other protections around rent relief and the likes
should also drive a long-lost quest for productivity.
are now off, too.
Throughout the years of the pandemic
As a result we will, necessarily, start to see a
accountants in public practice continued to
progressive rise to a more natural – and healthy –
report that clients had never been so cashed up
level of insolvency.
AICM Risk Report 2022
11
OVERVIEW
But most trade creditors remain firmly out of the
their reporting affairs in order and highlighting
market for initiating major recovery actions or
that they be subject to Director Penalty Notices or
pursuing formal windups of derelict debtors. We
garnishee orders.
suspect that this is because many no longer see the commerciality in initiating wind-ups on their
This represents a huge change in signalling.
own – a view likely arising from an expectation that their creditors may likely have very large
Of course, we won’t see actual DPNs, garnishees
tax and secured debt that will wipe out possible
or windups of any significance until after the
returns.
Federal election on this timeline and that is extremely politically expedient for a government
The ATO’s disappearing act
not wishing to have bad news stories of COVID
Speaking of tax debt, this is perhaps the most
down by the ATO in that heightened election news
important and underappreciated aspect of the
cycle.
or disaster-effected small businesses being shut
pandemic. The ATO is, of course, the initiator of the vast majority of windup actions in normal times. Unlike commercial creditors, the ATO
Banks disappeared, too
needs to undertake windups regardless of the
Major lenders have also stayed well away from
commerciality of the outcome. Yet the ATO has
major recovery action since before Hayne Royal
been almost totally absent from the market since
Commission. Banks were, of course, “highly
March 2020. This has been taken as a major
supportive” of borrowers throughout the
“signal” to directors of distressed businesses that
pandemic and went to even greater lengths to
the ATO was out of play and led to using the ATO
not take enforcement action against delinquent
as a de facto lender. While there was never an
borrowers. This was backed up by regular public
official policy statement to this effect, it is clear
statements by major lenders and the Australian
that the government allowed the ATO to act as
Banking Association that borrowers would be
an informal funder to businesses throughout the
assisted by their lenders.
period. And there’s no doubt that that informal funding has been extensively taken up.
Alongside this, most banks had radically cut their teams who manage distressed borrowers over
The ATO started making noises about a return to
the last 5 years. Interestingly, there is a significant
the market early in 2022, though actual activity
scale up now happening in those teams. But
has remained close to zero until the end of March.
their approach is now profoundly different, and
Now we believe that some 50,000+ directors have
we expect there is a new normal which will see
been written to giving them 21 days’ notice to get
it remain that banks will be much less inclined to take formal enforcement.
“Unlike commercial creditors, the ATO needs to undertake windups regardless of the commerciality of the outcome. Yet the ATO has been almost totally absent from the market since March 2020.” 12
AICM Risk Report 2022
There have been wide reports of banks using a limiting of providing extra credit as a way to move poor quality/higher risk profile borrowers on. Of course, this is a completely reasonable approach given the attacks on banks around the Hayne Royal Commission about not taking greater steps to ensure responsible lending.
OVERVIEW
“There have been wide reports of banks using a limiting of providing extra credit as a way to move poor quality/higher risk profile borrowers on.” But in this instance, it leads to those borrowers
Well, it appears that they are ghosting out of
needing to depart to second or third tier lenders
existence and avoiding the proper solvent or
instead. The banks also either compromising
insolvent shutdown processes.
debt or offering generous extensions to other borrowers.
In a normal/pre-COVID year there are approximately 10,000 corporate insolvencies
But it is important for credit professionals to
per year. We now know that there are more
note that other creditors will not be able to rely
than 40,000 companies deregistered by ASIC in
on major banks leading recovery actions against
addition to those formal insolvencies. That means
distressed companies in the future as banks will
that only 1 in 5 shutdowns goes through the
remain primarily concerned about reputational risk
“proper” process.
in their decisions. Recently, ASIC has started to take some action
Deregistrations – the new phoenix?
against directors for false statements (i.e. that
There’s another important issue coming to the fore
deregistrations and that’s shed some light on this
through COVID and it comes from a very obvious
occurrence.
there were actually debts owing) around those
observation: we can see lots of businesses have closed their doors but they haven’t appeared in
So, could deregistrations be the new phoenix?
the insolvency statistics. So, what happened to
Well, to an extent, yes. We do have plenty of
them?
anecdotal information that dodgy advisers are AICM Risk Report 2022
13
OVERVIEW
using the ghosting out technique as their primary exit strategy. They coach financially distressed
Where do we see the strain?
directors to pay enough for key creditors to
You will no doubt see articles in this Risk Report
go away and then ignore the rest of their debt.
from other contributors who will be sharing their
They do this alongside ceasing all ATO and ASIC
data on areas of risk, but from the viewpoint of
reporting for the entity. Then they leave it to be
insolvency professionals, we are seeing five factors
deregistered.
that are really driving insolvency right now: 1.
Away from this very dodgy usage, there is a counter argument that it’s not necessarily a bad “public good” outcome if all creditors are properly
Supply chain crunches/delays – companies being placed under strain because essential supplies delay their ability to complete their own product or service to generate revenue.
satisfied (if not fully paid), but avoids any checks and balance and all investigations. The foundation principle of pari passu may go by the wayside and ATO debt is particularly at risk if not reported on prior to abandonment.
2. Supply chain cost increases/accelerating inflation – these impacts are reducing profitability of companies especially in areas where there are fixed cost contracts or limited ability to pass on those costs.
Regardless, this issue may that become a very big
3. Lack of staff to meet demand – again causing
public policy problem as we exit COVID, start to
companies to be placed under strain because
see rising insolvencies and the return of the dodgy
they cannot deliver their own product or
advisers.
service to generate revenue.
14
AICM Risk Report 2022
OVERVIEW
4. COVID-economy shifts – some segments such as international tourism, CBD hospitality, international education and the likes will take a long time to return, if they ever do. Businesses in these areas are unlikely to make it through. 5. Weather/disaster events – the sequence of bushfires, floods, storms and so on having taken a serious toll in some regions. In terms of sectors that we see under insolvency strain, these include:
“We are now over two years into the level of insolvencies being 50% below baseline. Insolvency firms are, of course, businesses themselves. So unsurprisingly, that reduction in work has had a profound and negative effect on the profession.”
— Supply chain costs and crunches are hitting construction and related sectors the hardest. We are likely to see biggest rise in insolvencies there – signs already coming through with Probuild and Condev. A ripple effect is also likely. — Supply chain also a big problem for transport – where rising fuel costs will be major factor.
This may well be a challenge when work returns as firms will not readily have the capacity. This is compounded by it being very hard to attract good junior-mid level staff with salaries for these staff being much, much higher outside insolvency (yes, despite all views to the contrary, insolvency actually doesn’t pay very well!)
— COVID-economy shifts continue to impact hospitality and tourism (e.g. tourism now
Registered liquidator numbers remain resilient,
domestic versus international) and staff issues
though, and there’s becoming quite a generational
are also most prevalent there.
change occurring. This gives us the base from which to rebuild. Firms are working to get ready
Impacts of the pandemic on the profession
for the projected increase in work – but it’s hard to
We are now over two years into the level of
So, this may lead to a squeeze of availability but
insolvencies being 50% below baseline. Insolvency
ARITA is working with ASIC and AFSA to plan
firms are, of course, businesses themselves. So
around this.
plan for alongside the scarcity of mid-level talent.
unsurprisingly, that reduction in work has had a profound and negative effect on the profession. It comes on top of long-term reductions in staffing
Has COVID changed insolvency forever?
as work has been in decline for 8 years – a product
There’s a genuine question around whether both
initially of our long pre-COVID economic growth.
debtor and creditor behaviour has been altered. We think that its likely that the actions of all –
When insolvency numbers collapsed in March
especially ATO and lenders – may have trained in
2020, revenue in most firms dried up as well.
new behaviours.
More than half of all insolvency practices ended up on JobKeeper. But most firms have had to
Debtors learned that they could “push back” and
significantly reduce their headcount leaving many
may now have an expectation that they do not
firms now skeleton staffed.
have to fully meet their debts. Alongside this, the AICM Risk Report 2022
15
OVERVIEW
current government is moving towards “debtor in
from our framework and that with which the PC
possession” and an expectation that creditors will
agreed.
simply compromise debts/wear the pain of losses. Instead, the government opted for a cut And, as previously mentioned, many trade creditors
and paste” of Part 5.3A into Part 5.3B – with
may no longer have the desire to formally pursue
other oddities added – making it a complex
debts over viability concerns. Additionally, that
and therefore expensive approach. They also
exploitation of deregistrations and “informal exits”
broadened its access up to firms with a $1 million
may become part of the new normal.
in debts.
All of these observations combine to suggest that
The government claims that SBRs is one of the
we won’t be going back to the old patterns and
most major reforms undertaken in 30 years
that creditors will firmly be expecting much more
but all points to it being practically limited in
debt forgiveness in the futures
application. At this time, well over a year since commencement, still only 40 Small Business
Small business restructuring: Fizzer or slow burn?
Restructures have been engaged with only 30
While we are on the subject of “debtor in
the time you read this.
making it to a plan. Much will depend on the outcome of the election that will be known by
possession” we should consider the government’s signature legislation in the area – small business
The Morrison Government was making noises
restructuring.
that they may open up the requirements (e.g. increase debt levels to $5 million). We see this
The idea for SBRs came from ARITA in 2014. It was
as a problematic response that will lead to abuse.
a concept targeted only at micro businesses where
It’s the form and complexity of the current
there was little risk of exploitation. The concept
legislation that is the problem and there’s no
was given the approval of the Productivity
appetite to address this.
Commission in their 2014 Business Setup, Transfer and Closure Inquiry Report. And it remained “on
Lots of insolvency firms are now marketing SBRs
the books” as something the government was
as a tool, but the take-up remains low, even in
meant to respond to from that time.
recent weeks as we’ve started to see inquiry levels pickup around ATO’s renewed activity. So, while
As COVID hit the government searched for quick
use of the SBR regime may pick up, it’s our view
fixes for what was perceived as a coming tsunami
that this is a missed opportunity that is unlikely to
of insolvencies, and they landed on this concept.
be a major tool to save distressed businesses in its
Sadly, it was largely on the name that they took
current form.
“The government claims that SBRs is one of the most major reforms undertaken in 30 years but all points to it being practically limited in application. At this time, well over a year since commencement, still only 40 Small Business Restructures have been engaged with only 30 making it to a plan.” 16
AICM Risk Report 2022
OVERVIEW
The law reform landscape
liquidator. Liquidators often have to rely on
What’s coming down the pipeline in terms of
their statutory work.
change? Of course, everything is totally dependent on the outcome of the May Federal election. There are no guarantees that the Morrison government will pursue any pre-election reform proposals even if re-elected noting that there is no significant draft legislation (just announcements). On top of that’s, there’s absolutely no expectation that an incoming Labor Government would have the same agenda. What does remain on the agenda of the Morrison Government are proposals around the following:
preference recoveries to fund them to do
— $5,000 “grant” for unfunded liquidations – also a Federal Budget announcement alongside the unfair preference statement. Given the complexity of work that liquidators must do under the Corporations Act, this doesn’t even begin to cover their costs, especially once ASIC fees are paid. Both above will make it unlikely for liquidators to take unfunded small jobs especially court liquidations meaning that you won’t be able to rely on the historic processes. — Clarifying treatment of trusts – the government has budgeted for work to continue on this. It’s a task left unfinished since Harmer Report
— One year bankruptcy – an idea which we are
of the 1980s and needs to be addressed to
vehemently opposed to for the risk that it
bring down cost of insolvencies (most SME
causes. Far better to consider enhanced early
insolvency have a trust structure).
discharge options — Push to have more people, including directors,
— Response to the excellent Safe Harbour Review Panel report – government has funded some
go down the path of Debt Agreements rather
implementations (unspecified) but stopped
than bankruptcy – also a proposal we oppose.
short of adopting the Panel (and ARITA’s)
Debt Agreements were designed mainly for
recommendation of a “root and branch” review
consumer personal insolvencies. Pushing
of insolvency laws to simplify and reduce cost.
complex personal insolvencies into them will only lead to more legislation and therefore
If there is a change of government, there is little
more cost. Everyone loses from that. In
indication from the ALP as to any interest they
addition, they juts aren’t fit for that purpose.
have in this space. ARITA will continue to push
— Free ASIC searches – this is unquestionably good for all, especially creditors. IF there is a change of government credit professionals should join us in pushing an incoming government to deliver on this Budget announcement. — Unfair preferences – this Federal Budget announcement on a prohibition on amounts
for a “root and branch” review of our insolvency regime to be conducted by the Australian Law Reform Commission – a repeat of the 1980’s Harmer Inquiry which was the last fulsome review we had. This is a 3-5 year project but it’s essential if we want to radically reduce the cost, complexity and accessibility of our restructuring, insolvency and turnaround regime and be fit for the future.
less than $30k and more than three months prior isn’t backed up by any draft legislation. While we know that credit professionals love the sound of this, it’s the end of pari passu and it will also leave many small business insolvencies unable to find a
John Winter Chief Executive Officer ARITA – Australian Restructuring Insolvency & Turnaround Association T: (02) 8004 4344 www.arita.com.au
AICM Risk Report 2022
17
Reform achieved by AICM advocacy Nick Pilavidis FICM CCE Chief Executive Officer Australian Institute of Credit Management
Credit professionals deploy a range of skills and
to weather temporary disruptions to their business
experience to assess and manage and respond
and cashflow. Drawing on the experience of
to credit risk and insolvencies. Their ability to
AICM Members the AICM showed how a business
make fully informed credit decisions and ensure
seeking a temporary extension to payment
maximum returns for their organisations hard
times or a repayment arrangement may face
earned sales and services is heavily influenced by
unnecessary hurdles as the credit providers seek
legislative and regulatory settings which is beyond
to mitigate risk of payments later being clawed
their direct influence.
back as an unfair preference claim.
As the only membership body for the credit
In March 2022 Assistant
professionals the AICM is a strong voice advocating
Treasurer the Hon. Michael
for its members and their organisations to achieve
Sukkar’s announced of reform
the right settings that benefit our members,
and $22 million in funding to
businesses and consumers. While much of this
simplify and make the rules
work is only seen in lengthy submissions published
governing ‘unfair preference’
on our website it also includes involvement
claims by liquidators fairer.
of AICM staff and members in numerous conversations, meetings and industry forums.
The Hon Michael Sukkar
While details are limited to a media release the intent is clear with the Hon Michael Sukkar stating,
Recently a number of noteworthy outcomes
“Creditors who act honestly and at arm’s length
have been achieved that are a significant return
shouldn’t be pursued for small payments where a
of members investment in the AICM and will be
company they dealt with enters liquidation.”
relevant to how they adjust their operation in the short to medium term.
For credit professionals once implemented, transactions will be excluded from claw back
Fairness for unfair preference payment rules
where they are made to unrelated creditors in
AICM has repeatedly called for reform of the rules
entering external administration.
ordinary course of business. And the amount is less than $30,000 or within 3 months of company
so arm’s length credit providers are not further penalised when a company is liquidated and they
To support this change the 2022 federal budget
are pursued for payments collected using normal
included $22 million in funding of the Assetless
commercial practices.
Administration Fund to provide $5,000 in funding to liquidators for assetless appointments. Many
Our submissions and direct appeals from as far
expect this funding will not be sufficient to fund
back as 2014 have highlighted the impacts this
liquidators to perform investigations and reporting
legislation has on the success of the Australian
necessary to comply with their obligations
economy and ensuring viable businesses are able
including those that protect creditors interests.
18
AICM Risk Report 2022
OVERVIEW
The AICM’s role in achieving this change is a
businesses not paying their tax obligations an
long way from complete but we will continue to
unfair advantage over their competitors that are.
represent members to achieve the right settings once draft legislation is released.
The AICM also engaged with small business
Read the government announcement
advocates to address misconceptions including that adverse information on credit reports
Disclosure of Business tax debts
prevents access to credit forever and showed that
In 2014 the AICM began a campaign to call for
businesses that are paying their tax obligations.
closing this gap is a significant benefit to small
changes to allow the ATO to disclose businesses in default of their tax obligations to credit reporting
After 6 years of consistent activity, legislation
bureaus.
commenced in March 2020 to allow the ATO to report business tax debt where a business has
The AICM engaged with Government, ATO, Industry
one or more tax debts and at least $100,000
bodies and small business advocates to show how
is overdue by more than 90 days. Further, the
the absence of this information is one of the largest
disclosures will not be made if the business is
gaps in the Australian credit system. While ATO
engaging with the ATO to manage their tax debt
is the largest creditor in most insolvencies and a
or there is an active complaint with the Inspector-
creditor of all businesses, credit decisions are being
General of Taxation Ombudsman (IGTO).
made without transparency of if businesses were complying with their tax obligations.
With the pandemic resulting in the ATO pausing recovery action, the first disclosures were not
Not only does this gap expose credit providers
made until April 2022. These disclosures followed
to make fully informed credit decisions but it
250 letters of intent to disclose being sent in
facilitates illegal phoenix activity and gives the
August 2021.
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19
OVERVIEW
Pleasingly for all stakeholders, the majority of these letters resulted in the taxpayers re-engaging with the ATO to pay in full or negotiate payment plans. From engagement with CreditorWatch,
Director identification, accurate company records and free access to information
Equifax and illion the AICM understands
As access to accurate information on companies
approximately a dozen disclosures were made in
is a fundamental requirement of accurate and
April 2022 indicating the remainder of the 250
efficient credit decisions the AICM has engaged
letters sent in August resulted in engagement with
with government and regulators to voice credit
the ATO or a formal insolvency process.
professionals’ frustrations at the lack of integrity and efficiency of company information for many
On 25 March 2022, the ATO sent out approximately
years.
29,000 letters to taxpayers who are at risk of having their debts disclosed to make them aware
Recently there has been significant advancement
of their current position and encouraging them to
in this space with the benefits starting to flow.
effectively engage with the ATO to avoid disclosure. The mailout is being followed up with phone calls
Director Id’s
to encourage these taxpayers to work with the ATO
On November 2021, the Director Identification
to manage their debt and understand what the
Number regime commenced with directors for the
next steps might be.
first time required to prove their identify within 28 days of becoming a director. This is the first phase
For more information about the measure visit
of addressing a fundamental flaw that creates
www.ato.gov.au/disclosurebusinesstaxdebt
inaccurate credit information.
The AICM continues to support the approach
The new regime requires directors to undergo
taken by the ATO to implement this measure
identity verification in order to obtain a director
to and advocates for the criteria can be refined
ID which will ensure the integrity and accuracy of
further improve the information available to inform
company register information.
credit decisions. The regime is being phased in until November
Financial hardship information on credit reports
2022 when all directors are expected to obtain a director ID and from 5 April 2022 new directors need to obtain an ID before appointment.
Changes to the Privacy (credit reporting) code commence on 1 July 2022 allowing clearer reporting of payment information when a creditor agrees to temporarily modify monthly repayments. The AICM participated in consultations with Australian Retail Credit Association (ARCA) the Office of the Australian Information Commissioner
Date you first become a director
Date you must apply
On or before 31 October 2021
By 30 November 2022
Between 1 November 2021 and 4 April 2022
Within 28 days of appointment
From 5 April 2022
Before appointment
(OAIC) on this long-awaited change. Further details of this change and what it means for credit professionals are covered in this Article. 20
AICM Risk Report 2022
OVERVIEW
For credit professionals the benefits of the director
The AICM is a member of the Business Advisory
ID’s will be seen as the Companies Register
Group to ensure credit professionals interests are
managed by ASIC migrates to the new Modern
at the core of the development of this new registry
Business Register (MBR) managed by Australian
service.
Business Registry Service (ABRS).
Free company searches Modern Business Register
Announced in the March 2022 Federal Budget,
The Modern Business Register, managed by the
Company search fees will be scrapped as part of
ABRS, will bring together more than 30 Australian
the Commonwealth’s Deregulation Agenda and
Securities and Investments Commission (ASIC)
ASIC will forgo $64.9 million over three years in
registers in one place. The vision of the ABRS is to:
late 2022 when the new Modern Business Register
z make it easier for businesses to meet their registration obligations
is expected to go live.
z improve the efficiency of registry service transactions
Once implemented credit professionals will no
z make business information more trusted and valuable.
obtaining basic information on their current and
As one of the largest digital transformation projects in Australia, the transition to the new registry is being being implemented in phases until 2024. In late 2022, the transition of the Companies Register is expected.
longer need to make cost benefit decisions when potential customers.
Nick Pilavidis FICM CCE Chief Executive Officer Australian Institute of Credit Management T: 1300 560 996 E: nick@aicm.com.au www.aicm.com.au
Trusted Insights. Responsible Decisions.
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21
Identifying RISK Insolvencies increase as government support ends Mark Hoppe Managing Director Oceania Atradius
During the Covid-19 pandemic, global
these countries experiencing low insolvency levels
insolvencies fell by a cumulative 32% in 2020 –
in 2021 and the withdrawal of fiscal support in late
2021. We believe generous government support
2021 or early 2022.
measures saved not only viable companies but also created zombie companies i.e. the ones that would have defaulted even in normal times. The highest insolvency contractions in 2020
Countries with the lowest insolvency forecasts
were in Australia, Singapore, France, Austria,
Turkey and Brazil are forecast to experience some
Belgium and Italy as insolvency legislation was
of the lowest increases in 2022, at 9% and 6%
temporarily relaxed to protect companies from
respectively but not because of the pandemic
bankruptcy. There has been speculation about
related adjustment, as fiscal support was already
insolvencies rising over the last couple of years
phased out in 2020. Instead, our forecast for
but there was a question mark on when. Now
these countries reflects a deterioration of GDP
that government support is being withdrawn
growth relative to its long-term trend. The Czech
for businesses across most markets, the tide
Republic (5%), Romania (16%), Finland (24%) and
is beginning to turn and we expect a rise in
Switzerland (35%) are forecast to see insolvencies
insolvencies to occur in 2022 and 2023 for the
grow by a relatively small percentage because in
majority of markets globally.
their case most or all of the adjustment to normal took place in 2021.
Countries with the highest insolvency forecasts The highest insolvency rates for 2022 are
Countries with a decrease in insolvencies
expected in Portugal (124% yoy growth),
Two striking outliers are New Zealand and Hong
Netherlands (101%), Singapore (88%), Belgium
Kong, both are forecast to see a decrease in
(83%) and the United States (70%). This is due to
insolvencies for 2022. This is because in their case
22
AICM Risk Report 2022
IDENTIFYING RISK
“During the Covid-19 pandemic, global insolvencies fell by a cumulative 32% in 2020 – 2021.”
forecasting Australian insolvencies to grow by 64% in 2022. We’ve already seen some high profile insolvencies in Q1 2022 with Probuild and Condev construction companies collapsing, with flow on effects expected so the tides appear to turning in
the fiscal support is estimated to extend until
our region.
the end of 2022. This effectively concentrates all the adjustment in 2023, therefore inflating the
You’ll also see on Chart 1 that 2023 growth rates
insolvency growth rate to the highest across all
of insolvencies are on the high side for Australia
markets, with NZ forecast to increase 188%, and
(31%), South Korea (61%), France (40%), Poland
Hong Kong 63%.
(40%) and Norway (32%), this is still due to low insolvency levels in 2021 and a later withdrawal
So how does Australia compare?
of fiscal support in mid 2022. As a result the
At this stage, the number of insolvencies in
2023 and will progressively normalise through the
Australia are well below pre-pandemic numbers
year.
insolvency levels will still be high at the start of
but we do expect insolvencies to rise in the back half of 2022 which is when we’d expect to see
Beyond 2023, we expect that insolvencies globally
the numbers reflect pre-pandemic levels. We’re
will again start to decline or remain constant. AICM Risk Report 2022
23
IDENTIFYING RISK
This is because insolvency levels will have largely
Read the full Atradius Economic Insolvency
returned to normal and zombie firms that are
Forecast
not able to survive without support, have gone bankrupt already. In the coming years, firms Mark Hoppe
will have to adjust to an environment without
Managing Director Oceania
significant government support. For firms that
Atradius
have taken up a lot of debt during the pandemic,
T: +61 2 9201 5222
this could be a challenge.
atradius.com.au
Chart 1: Insolvency growth, year-on-year % change Spain Turkey Czech Republic South Africa Finland Romania Switzerland Hong Kong Sweden Russia Denmark United Kingdom Italy Germany Japan Canada Ireland Poland Brazil Norway United States Belgium Singapore Austria Australia France New Zealand Netherlands South Korea Portugal
-50
0
50 2022
24
AICM Risk Report 2022
100 2023
150
200 Source: Atradius
Source: Atradius
RBA slams brakes on the brakes Australia enters new cash rate cycle as inflation rises Anneke Thompson Chief Economist CreditorWatch
High inflation is currently a global phenomenon,
nations reached an average inflation rate of almost
with various structural elements combining to
eight per cent by Q1 2022. The Reserve Bank
create a perfect inflationary storm. High fuel
of Australia (RBA) appears to be particularly
costs as a result of the war in Ukraine is one
concerned about the steepness of the inflation
major factor, impacting everything from shipping,
curve, and moved to increase the cash rate on
trucking, air freight to food and manufacturing.
3 May ahead of any official data indicating wages
Ongoing supply chain disruptions and production
are starting to increase. Inflation is now well
and staffing issues associated with COVID-19
outside the RBA’s target band of two to three
are causing short term havoc. And global labour
per cent: bringing in under control will involve a
mobility has been severely impacted by the
measure of short-term pain (for borrowers) for
pandemic, with countries that typically import
long term gain as price increases are brought
a lot of labour reporting severe productivity
under control.
constraints as they make do without these employees.
Reflecting their rising risk profile due to Australia’s higher inflationary environment, the
Compared to other OECD nations, Australia’s
Food and Beverage Services, Arts and Recreation
inflationary curve was relatively modest, until
Services and Transport, Postal and Warehousing
the March 2022 quarter data was released.
Industries have all recorded an increase in their
The USA and UK are recording inflation between
Probability of Default this year. As inflation
5.5 and eight per cent. Combined, the OECD
works through the economy, it is expected that consumers will reduce spending on discretionary
“Inflation is now well outside the RBA’s target band of two to three per cent: bringing in under control will involve a measure of short-term pain (for borrowers) for long term gain as price increases are brought under control.”
items. Combined with home loans becoming ever more expensive for borrowers, we will start seeing spending patterns change, and reduce in many areas. Indeed, this is partly the aim of the RBA when they increase the cash rate. Cafés, restaurants and the arts and entertainment sectors are all typically areas where consumers choose to spend less as their discretionary income declines. AICM Risk Report 2022
25
IDENTIFYING RISK
Annualised Inflation
Source: OECD
What does rising inflation mean for consumer confidence?
Since then, the trajectory has been progressively
In the world’s major economies, rising prices
up. Importantly, most consumers have now come
and further interest rate rises are weighing on
to expect that their home and personal loans
consumers’ minds more than they did when
are going to get progressively more expensive,
COVID-19 first went global in early 2020. In 2020,
and this will curtail discretionary spending going
consumer confidence plummeted as the shock of
forward.
worsening, as rising prices, COVID-related supply chain disruptions and the war in Ukraine all add
the pandemic set in. However, massive amounts of government stimulus quickly reversed the trend,
Consumer confidence in Australia is sitting
and, like it or not, most consumers settled into a
above the USA, UK and OECD average, however,
life of online shopping, home renovations and lots
we are not as far into our inflationary cycle.
of cooking! In Australia and the OECD, consumer
So, expect that this indicator will continue to
confidence peaked around mid 2021, before the
worsen. Incredibly, consumers feel worse now
Delta wave arrived, and we realised that COVID-19
than when they did when COVID-19 began. This
was not going away any time soon.
is likely because both consumers and borrowers
26
AICM Risk Report 2022
IDENTIFYING RISK
Consumer Confidence Index
Source: OECD
now know that government stimulus has dried up, and central banks are going to need to wind back two years’ worth of extra liquidity injections.
What does this mean for the credit outlook for Australia’s industry sectors? CreditorWatch’s February 2022 industry data
Most developed economies were flooded with
recorded a significant rise in the probability of
cash during the pandemic, which alleviated short
default for the Food and Beverage Services sectors,
term economic pain and certainly kept workers
which rose from 5.7 per cent to 6.7 per cent over
who were unable to work financially afloat,
the month. This was the highest probability we had
however, the cash is now showing up as higher
calculated in some time, and once again, probability
prices across the board as the world normalises
of default for this sector has risen, now sitting at 7.1
again. Australia’s money supply rose by about 22
per cent as at April 2022.
per cent throughout COVID-19, far less than some other countries, so the good news is we may have
This figure sits well above all other industries,
a smaller problem to work through than some
with the Arts and Recreation sector being the
larger economies, namely the US.
next most vulnerable at 4.8 per cent. The Food AICM Risk Report 2022
27
IDENTIFYING RISK
and Beverage Services sector is facing numerous
The April 2022 Business Risk Index shows that the
headwinds, even though turnover will be well up
three industries with the highest probability of
after years of COVID disruption. Labour, food,
payment default over the next 12 months are:
utilities and borrowing costs are all rising for this sector, while at the same time consumers are easily able to substitute eating a meal out
1. Food and Beverage
at a restaurant for eating at home. This means
Services:
that demand is likely to wane, particularly after further cash rate increases. In a similar vein, the
2. Arts and Recreation
Arts and Recreation sector will feel the burden of
Services:
consumers reducing their discretionary spending
3. Transport, Postal and
as we move through 2022.
“Most developed economies were flooded with cash during the pandemic, which alleviated short term economic pain and certainly kept workers who were unable to work financially afloat, however, the cash is now showing up as higher prices across the board...”
28
AICM Risk Report 2022
Warehousing:
7.1% (down from 7.2%) 4.8% (down from 4.9%) 4.7% (down from 4.8%)
At the other end of the spectrum, Health Care and Social Assistance maintained the lowest probability of default, at 3.3%. Agriculture, Forestry and Fishing remains the sector with the second lowest probability of default, at 3.5%. The challenges of moving goods around the globe means that the local manufacturing sector now comes in as the sector with the 3rd lowest probability of default (3.6%), overtaking Wholesale Trade.
IDENTIFYING RISK
The April 2022 Business Risk Index shows that
Payment arrears is still a particular problem for
the three industries with the lowest probability of
the construction industry, with 11.7 per cent of the
payment default over the next 12 months are:
sector in 60 days or more arrears. This proportion is by far and away above any other sector, and partially represents almost the normalisation of
1. Health Care and
late payment in the industry. As such, even though
3.3%
Social Assistance: 2. Agriculture, Forestry and Fishing:
arrears are a problem in the construction sector,
(steady at 3.3%)
the probability of default rate is still a relatively low 3.8 per cent.
3.5% (down from 3.6%) 3.6%
3. Manufacturing:
Anneke Thompson Chief Economist CreditorWatch T: 1300 501 312 www.creditorwatch.com.au
(down from 3.7%)
Health Care and Social Assistance
Agriculture, Forestry and Fishing
Manufacturing
Wholesale Trade
Construction
Electricity, Gas, Water and Waste Services
Retail Trade
Professional, Scientific and Technical Services
Accommodation
Other Services
Mining
Administrative and Support Services
Rental Hiring and Real Estate Services
Information, Media and Telecommunications
Financial and Insurance Services
Education and Training
Transport, Postal and Warehousing
Arts and Recreation Services
Food and Beverage Services
Average Probability of Default by Industry
Source: CreditorWatch BRI April 2022
AICM Risk Report 2022
29
Dark clouds are building, the tide is turning… Kirk Cheesman MICM Group Managing Director National Credit Insurance Brokers
Since the beginning of the pandemic the data
longer than first thought and businesses will need
that we have reported on has been very unusual
to be aware of this for some time to come.
and not what we would have initially predicted. The Australian Government helping the economy
As a trade credit insurance broker, key indicators
financially has played a large role in reducing the
that are specific to us include the number of
amount of corporate insolvency from 2020 to 2022.
claims we receive, the overdue data that our clients are submitting, limit decisions from
It was not until late 2021 when we witnessed
insurers and our incoming collection work. These
a couple of larger failures which looked to be
factors give us an idea as to how the economy is
the tipping point. For now, it would seem that
performing around Australia.
insolvencies are on the rise, and this is because of a number of factors. Will we see a return to pre-
A subtle increase in our Trade Credit Risk Index,
pandemic insolvency levels in 2022, or will this be
which is a mixture of the abovementioned factors,
further prolonged until 2023? What we are sure of
indicates that we could expect more insolvencies
now is that the return to normality will take much
in the remainder of 2022. Although it is a relatively small increase of 9.7%, the 2 key factors of claims and incoming
NCI Trade Credit Risk Index Score 1100
Index Score
1000
collections are both up 25% and 30% respectively from Q4 2021 to Q1 of 2022. The
900
number of reductions
800
and NIL limits from
700
the insurers have
600
dropped this past
500 400
their appetite for new business and trade in general is positive.
Q
12 Q 017 2 2 Q 017 3 2 Q 017 4 2 Q 017 12 Q 018 2 2 Q 018 3 2 Q 018 4 2 Q 018 12 Q 019 2 2 Q 019 3 2 Q 019 4 2 Q 019 12 Q 020 2 2 Q 02 3 0 2 Q 02 4 0 2 Q 020 12 Q 021 2 2 Q 02 3 1 2 Q 02 4 1 2 Q 02 12 1 02 2
300
quarter, suggesting
Note: The NCI Trade Credit Risk Index score is based on an aggregate of claims data, collection activity, credit limit decisions and overdue accounts.
We have seen immediate flow on effects from some well reported insolvencies
30
AICM Risk Report 2022
IDENTIFYING RISK
in Q1 of 2022, particularly Probuild and Condev, which has resulted in an increase in the
22m
110
20m
100
18m
90
16m
80
14m
70
12m
60
10m
50
8m
40
6m
30
4m
20
2m
10
0
r r r r t y y y y y y il h ar uar arch Apr Ma June Jul gus be obe be uar ruar arc be r nu M M Au ptem Oct ovem ecem Jan Feb Ja Feb D N Se
Value
Number
Value
NCI Claims – Number and Value (01-01-2021 – 31-03-2022)
0
Number
NCI Claims by Industry (01-07-2021 – 31-03-2022) 120
10m
109
9m
98
8m
87
7m
76
6m
65
5m
55
4m
44
3m
33
2m
22
1m
11
0
l e ort are ica Hir ctr nsp ur rdw e a o l a r b E T /H La ing ild Bu
number and value
el Ste
s rs nic loo cto /F Ele ure t i n Fur
Value
r e g be rin Hir nt Tim ctu me ufa p n i u Ma Eq
Number
11m
Value
“Will we see a return to pre-pandemic insolvency levels in 2022, or will this be further prolonged until 2023? What we are sure of now is that the return to normality will take much longer than first thought and businesses will need to be aware of this for some time to come.”
0
Number
of claims. Without a doubt, these insolvencies will have flow on effects to other businesses in the industry,
This domino effect that we predict will mean that
not just to the 50 or so NCI clients that have
the number of insolvencies will grow, businesses
reported losses, but more so to those that deal
will experience tighter cashflow, and many will
with other suppliers.
have to seek additional work to recoup these AICM Risk Report 2022
31
IDENTIFYING RISK
120k 110k 100k 90k 80k 70k 60k 50k 40k 30k 20k 10k 0
y Jul
ust
g Au
S
r
be
tem ep
er
tob
Oc
r ry ry er be ua rua mb vem eb ce Jan F o e D N
Average
h
rc Ma
2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Number
NCI Overdues Reported 90+ Days (01-07-2021 – 31-03-2022)
Average
“... we believe that we are at the beginning of an increase in corporate insolvencies. The external factors and pressures on businesses have been building and for many this may prove too much.”
Number
losses. Depending on the outcome, more work will
this Financial year, we believe that we are at the
need to be sourced which could mean taking on
beginning of an increase in corporate insolvencies.
more risky jobs, ultimately placing more risk on
The external factors and pressures on businesses
their business.
have been building and for many this may prove too much. A renewed emphasis by the ATO
As part of the requirements of a trade credit
looking at recouping outstanding tax debts and
insurance policy, clients must report to the
a tightened labour market will certainly play a
insurer when an account has become overdue.
part but the current pressures on the supply of
This valuable information can be collated and
materials – causing contractors to commit funds
summarised to show the total amounts that are
earlier than they otherwise would – will not only
outstanding in each band, either current, 30, 60,
make businesses more vulnerable to failure but
90 or 90 days plus.
those failures will hit harder than they would have previously.
Our data shows there has been a decline in value of seriously overdue accounts (90+ days), in
We are not just watching metaphorical boats head
the first 3 months of 2022. The number of such
out into bad weather but heavily laden boats that
accounts has stayed steady (if not increased)
have had to put off making repairs heading out
during this period. The reduction in the value of
into particularly stormy waters.
overdues could be the result of businesses taking earlier actions to recover their larger value debts at the expense of those of lower value overdues. Considering the data we have examined from 32
AICM Risk Report 2022
Kirk Cheesman MICM Group Managing Director National Credit Insurance Brokers E: kirk.cheesman@nci.com.au T: 1300 654 500, www.nci.com.au
Construction IN FOCUS Construction insolvencies: Are small operators the canary in the coal mine? Brad Walters Head of Product and Rating Services | Commercial Equifax
Small scale operators in Australia’s construction industry could well be the canary in the coal mine for the difficulties that lie ahead for this sector. Rising rates of construction industry insolvency through the March quarter of 2022 put significant pressure on sole traders and small business owners, who make up 97% of construction companies 1.
Jump in insolvencies While some non-believers are sceptical about an uptick in insolvencies, recent data indicates that construction company failure is indeed on the rise. While the overall rate of insolvencies in March 2022 was 5% up on last year, construction insolvencies jumped by 24% in March and were 28% higher than last year. This first quarter has seen 271 construction companies filing for insolvency, an increase of 21% from the first quarter last year. AICM Risk Report 2022
33
CONSTRUCTION IN FOCUS
The beginning of the second quarter has seen this
contagion risk, creating a house of cards where
trend continue, with the number of construction
a single failure in the broader delivery chain can
insolvencies in April being 46% higher than last
have catastrophic consequences for all other
year. Creditor wind-ups have triggered the large
parties involved. When construction giant Probuild
majority of insolvencies, and the construction
collapsed (see case study), the devastation rippled
sector has grown to almost 30% of all insolvencies.
across a vast network of associated players.
Already under pressure from rising material costs,
Small operators under pressure
labour constraints, inclement weather, project delays and stretched supply chains, additional
It is not just the larger operators under strain,
stressors have recently emerged that compound
with small construction businesses increasingly
the difficulties for construction businesses. These
finding it difficult to cope with the growing slew of
include the rising interest rate environment,
pressures.
increased costs of obtaining insurance, and renewed debt recovery efforts from the ATO.
Many smaller operators support their businesses through personal loans, using assets like their
It all adds up to significant risk, particularly with
family home as collateral. Equifax data shows
the widespread use of integrated project delivery,
that these personal finances are increasingly
where several parties work together to optimise
being dipped into to keep their operations
results. This cascaded delivery model escalates the
afloat. Mortgage arrear rates for construction
800
40%
600
30%
400
20%
200
10%
0%
n Construction
34
AICM Risk Report 2022
n Total Insolvencies
22 Ja n-
1 Oc t-2 1
Ju l-2
r-2 1 Ap
1 -2 Ja n
-2 0 Oc t
Ju l-2 0
0 r-2 Ap
0 -2 Ja n
9 -1
9 Ju l-1
Oc t
9 r-1 Ap
Ja n
-1
9
0
Proportion
Proportion (%)
Number of Insolvencies
Construction v. Total Insolvencies
CONSTRUCTION IN FOCUS
“Missed mortgage repayments for construction proprietors are now twice that of the average customer.”
SME
industry sole traders have been trending up since
Sole Traders/ Proprietors
Total Construction
30%
100%
Building Construction
30%
80%
Construction Services
30%
100%
November 2021, and they are now twice that of the average consumer. Sole traders/proprietors in building construction are 80% more likely to have mortgage arrears than the average consumer. Those in construction services are 100% more likely, and SME Directors Heavy & Civil Engineering Construction
in building construction and construction services are 30% more likely.
Par
170%
Likelihood of Mortgage Arrears vs. Consumer Average (%)
Missed mortgage repayments for construction proprietors are now twice that of the average customer.
Mortgage Arrears
Increasing sole trader arrears
Mortgage Arrears (%)
1.50%
1.00%
0.50%
0.00% Jan-21
Mar-21
l Consumer
May-21
Jul-21
l SME
Sep-21
Nov-21
Jan-22
l Sole Trader/Proprietor
AICM Risk Report 2022
35
CONSTRUCTION IN FOCUS
Director Penalty Notices
Profitless boom
The Australian Taxation Office has resumed
Rising costs, disrupted supply chains and periodic
its debt recovery activities put on hold during
lockdowns have created what many refer to
the pandemic. This includes the issuing of
as a ‘profitless boom’, with many construction
Director Penalty Notices (DPNs), which hold
companies committed to fixed price projects that
Directors personally liable for the tax debts
may no longer be financially tenable given the
of their business2. The outstanding tax debts
major price increases for building materials.
that companies have been able to accrue on their balance sheets must now be paid, further
Over half (57%) of all Australian businesses
exacerbating stress across the sector.
experienced increased costs over the three months to April 2022, with 21% reporting that
More recently, as a part of this process, the
costs had risen to a great extent3. Of these
Government is sharing with Equifax and some
businesses, 52% have not passed on these
other credit bureaus the identity of those parties
increased costs4, further eroding profit margins.
with a significant tax debt that have not otherwise engaged with the ATO on a tax payment
The knock-on effect of staff shortages from COVID
plan. This further increases transparency and,
sick days has caused delay blowouts. Nearly 1 in
when combined with the changes to the DPN
5 businesses report a scarcity of employees, with
regime, will likely see more companies put into
84% unable to find suitable staff compared to 27%
administration/liquidation.
in June 20215.
“Rising costs, disrupted supply chains and periodic lockdowns have created what many refer to as a ‘profitless boom’, with many construction companies committed to fixed price projects that may no longer be financially tenable ...” 36
AICM Risk Report 2022
CONSTRUCTION IN FOCUS
Operating expenses are trending upward too. The proportion of businesses reporting increases
Insurance challenges
for April 2022 was the highest since the ABS first
Add to this harsh trading environment and
asked this survey question in July 2020.
rising insolvencies the challenges of maintaining sufficient insurance appetite.
These cost escalations are particularly problematic in the construction industry, where
APRA data shows that gross construction claims
credit risk is pushed down to smaller operators,
have previously trended higher than gross
constrained by fixed-price contracts from
earned insurance premiums for property-focused
passing on costs to consumers. Their ability to
insurance. In 2020, the gross loss ratio (GLR) for
contractually renegotiate is limited without rise
property-focused insurance performance was
and fall clauses or other contingencies. As the
104% nationally, before considering additional
work drags over many months and the costs of materials and fixed expenses go up, it becomes increasingly challenging to complete the project on budget. Some operators find themselves having signed onto contracts that they must continue to progress for months to come, knowing they are trading at a loss. This is a dangerous position for thinly capitalised, cash flow dependent businesses. This is equally true for the large operators who, when seeking to renegotiate their contracts with customers, may find they are constrained by the threat of consumer backlash and reputational damage. Last year we observed business exit
costs such as acquisition and operating expenses. Considering that insurance premiums represent the cost of risk, this unsustainable equation has understandably seen a rise in premiums. With insolvencies trending upward and numerous government reports highlighting the prevalence of construction defects, the construction industry has taken on a higher risk profile. Unfortunately, these construction woes come at a time when Australia’s housing shortfall dictates a need to build more, not less. Without the resources, the labour, the materials and the supply, it looks to be an uphill battle that will only worsen when our borders open once more to immigration.
rates that were double the entry rates for construction businesses with sales of more than $5m annually.
Encouraging trustworthy players Despite the real challenges the construction
Compounding the problem is the escalation in the
industry faces, it’s not all doom and gloom. There
cost of materials due to supply chain constraints.
are still operators exhibiting sufficient financial
In April 2022, 54% of construction businesses
capacity, capital, capability and resilience to
experienced supply chain disruptions, up from 35%
weather the storm. To recognise and reward these
during the same period the previous year6. With
trustworthy players, the NSW Government has put
global supply chains thrown into disarray from
a rating regime in place to enable construction
COVID and, more recently, the Ukraine/Russian
businesses to go through an independent and
conflict, there’s upward price pressure on materials
rigorous review process to obtain a star-rating
during a time of significant increase in domestic
outcome that substantiates and verifies their
building demand.
resilience. AICM Risk Report 2022
37
Red flags to Probuild collapse Data-driven insights are a valuable early warning tool. While some may have called out concerns around Probuild a couple of months before its collapse, that is just not enough notice, and is typically too late for stakeholders to protect their position and exposure. However businesses do not collapse overnight, there are early warning signs well in advance. Here are some of the red flags showing that construction giant Probuild was in trouble years before its demise.
2019
Clear signs of risk 2.5 bronze stars, Medium to High Risk Below "trustworthy" benchmark* Project delays impact profitability Limited working capital, dividend payouts & creditor exposure Low net asset backing and contagion risk to other parties with higher risk scores High-value litigation relating to their Abbotsford development.
Warning signs escalate
2020
2 bronze stars, Medium to High Risk Risk rating drops Brisbane Queen St development losses Reduction in net assets and equity Operating losses and limited borrowing capacity
iCIRT’s predictive capability was tested across thousands of construction firms. iCIRT was able to provide at least 12 months early warning for more than 90% of construction insolvencies, relying solely on public and proprietary data available to Equifax. These cases were shown to have achieved only one or two star-rating at least 12 months before their collapse. Get in touch at helloAU@equifax. com or check out the iCIRT website buildrating.com to discover what to look out for, and avoid being stung by the next construction collapse. Equifax Australasia Credit Ratings is the issuer of iCIRT.
Higher risk commercial scores: Probuild, Probuild’s officeholders, the Aust holding company & officeholders Significant funds extended to a sister entity with a high risk score.
2021
This data-driven assessment of the danger signals was undertaken using the new Independent Construction Industry Rating Tool, iCIRT, endorsed by the NSW government.
Risk rating plummets 1 bronze star, Very High Risk Lowest possible risk rating** Significant sales contraction, thin margins, concentration risk & project delays Net operating cash outflow of -$85m Lower working capital levels & significant creditor exposure Limited asset backing Funds extended to other parties that eroded capital adequacy levels Default judgement on Probuild Material court judgements on director-related parties Director commercial scores impacted by recent administration of a director-related entity.
*The NSW Government has been calling for industry to obtain and publish their iCIRT rating on the soon-to-be-released public-facing register. Probuild would have been excluded from the register of trusted construction firms as it requires a minimum of 3 out of 5 gold stars. **This bottom rating indicates to other industry players that they would substantially increase their risk exposure by doing business with Probuild. Copyright © Equifax Pty Ltd, a wholly owned subsidiary of Equifax Inc. All right reserved. Equifax and EFX are registered trademarks of Equifax Inc.
This data-driven assessment of the danger signals was undertaken using the new Independent Construction Industry Rating Tool, iCIRT, endorsed by the NSW government. This data-driven assessment of the danger signals was undertaken using the new Independent
38
Construction Industry Rating Tool, iCIRT, endorsed by the NSW government.
iCIRT’s predictive capability was tested across thousands of construction firms. iCIRT was able to provide at least 12 months early warning for AICM Risk Report 2022 more than 90% of construction insolvencies, relying solely on public and proprietary data available to Equifax. These cases were shown to iCIRT’s predictive capability was tested across thousands of construction firms. iCIRT was able to have achieved only one or two star-rating at least 12 months before their collapse.
CONSTRUCTION IN FOCUS
The new Independent Construction Industry Rating Tool, iCIRT from Equifax, shines a light on the trustworthy players who are seeking to differentiate themselves from unscrupulous and
“Despite the real challenges the construction industry faces, it’s not all doom and gloom.”
high-risk operators. This improved transparency works toward developing public trust and is one of the critical pillars of the NSW Government’s reform
confidence, with insurance premiums based on
strategy for the building industry.
underlying risk profiles rather than competitive market factors. As one example, SIRA recently
“Ratings will paint a clearer picture of a
amended its guidelines to enable insurers to
developer’s trustworthiness and the predictability
adopt rating tools provided by regulated rating
of whether they are likely to construct a compliant
businesses for both eligibility and premium
and safe building and have the capacity to fix
purposes.
issues if they do arise in the future,” NSW Better Regulation Minister Kevin Anderson said last year.
Equally, they have been embraced by an industry seeking improved transparency and the
Constructors rarely collapse overnight, so
recognition of reliable and resilient constructors.
data-driven star-rating insights can be used as an
With the growing number of construction
early warning tool to cut through where risk sits
insolvencies, notably evidenced from an increasing
across the construction ecosystem. The demise
number of creditor wind-ups, credit managers will
of Probuild is one of many examples of low credit
benefit from leveraging ratings insights across this
quality constructors exhibiting increased risk.
segment.
This infographic, Red Flags to Probuild Collapse, demonstrates the trouble it was in years before it plunged into administration. Data points used within iCIRT showed its risk rating deteriorating from 2.5 bronze stars in 2019 down to only 1 bronze star in 2021.
Good news for insurers and industry on risk Insurers are among many stakeholders looking
Brad Walters Head of Product and Rating Services | Commercial Equifax E: helloau@equifax.com www.equifax.com.au
for improved transparency to restore trust. Given the elevated risks of construction insolvencies,
FOOTNOTES:
it’s no surprise we’ve seen a growing demand for
1
Small businesses – those generating <$5m in sales revenue – represent 97% of the 411k construction businesses in Australia as at June 2021
2
https://www.ato.gov.au/Tax-professionals/Newsroom/ Lodgment-and-payment/Director-penalty-notices/
3
Business Conditions and Sentiments, April 2022, https:// www.abs.gov.au/statistics/economy/business-indicators/ business-conditions-and-sentiments/latest-release
4
As above
To this end, ratings have been recognised as
5
As above
being critical in strengthening transparency and
6
As above
rating insights to strengthen insurer appetite in this market. This is especially relevant as global reinsurers have sought to deploy their capital in other segments and jurisdictions viewed with more favourable risk-return fundamentals.
AICM Risk Report 2022
39
Elements vital to effective risk mitigation - construction industry Wayne Clark MICM, MAICD Executive Director, Building Industry Credit Bureau Construction is the third largest industry in
historical numbers. However, insolvency experts
Australia based on the number of people it
are warning that the construction industry
employs and its contribution to GDP (Gross
is a “bubble waiting to burst”, and that more
Domestic Product). However, construction is
companies will go under in the coming months 1.
the second largest industry when it comes to
This is probably accurate, but just how many will
corporate insolvencies, with a pre-pandemic five-
go under is the burning question.
year average of 1,590 per annum. Understanding the nature of the industry is extremely important
There is no doubt that insolvency numbers have
for effective credit management.
started to rise again, with average insolvencies per month up by almost 14% on last financial year.
Overview of current risk in the Building & Construction industry
However, this is still 29% lower than the five-
Despite the spate of high-profile company
also increased by around 6% during the Covid era.
year average pre-Covid. Construction industry insolvencies as a percentage of all insolvencies has
collapses over the last few months, which have sent shockwaves through the industry, overall insolvency numbers remain low compared to
What is actually happening? Debt Above 60 Days Trend BICB’s data clearly shows how
Average Insolvencies per month – Construction
the debt percentage above 60 days in the construction industry has decreased during the Covid era. This trend is more than likely a legacy of the stimulus measures. Recent feed-back from BICB members suggests that payments are continuing to be paid within the agreed terms, or close to terms in most cases. This anecdotal information is reflected in the payment data, below. It is also interesting to look at
Source: ASIC Insolvency Statistics
‘construction insolvencies against the number of Australian private dwelling commencements. During
40
AICM Risk Report 2022
CONSTRUCTION IN FOCUS
Construction Industry as % of ALL INSOLVENCIES
Source: ASIC Insolvency Statistics
the pre-Covid period 2014 to 2019 insolvencies as a percentage of dwelling commencements (IAPDC) averaged 0.73%. During the Covid era, January 2020 to December
Construction Industry as % of ALL INSOLVENCIES
2021 insolvencies as a percentage of dwelling commencements dropped to 0.51%. However, there was a sharp increase in insolvencies in the fourth quarter of 2021 resulting in the (IAPDC) rising back to 0.65%.
Factors contributing to this elevated risk While current payment trends and overall insolvency numbers are looking ok, there are multiple heightened risk factors still at play. We know that the industry is currently under tremendous
Source: ASIC Insolvency Statistics
pressure due to the elevated level of demand that has driven up material AICM Risk Report 2022
41
CONSTRUCTION IN FOCUS
and labour costs, and extended build times by around thirty percent. Also, many builders on
BICB Total Consolidated Debt Above 60 Days Comparison
fixed-price contracts have made substantial losses. There is no doubt these issues are putting many businesses at risk. It is expected that the recent spate of high-profile construction business failures, which include Probuild, Condev, Privium, and B. A. Murphy, will lead to further insolvencies. These businesses owe around 2,000 creditors an estimated $1.5 billion. The big unknown factor, of course, is the extent of the unpaid corporate tax debt. The
Source: Building Industry Credit Bureau Payment Trend Data
ATO’s softly, softly approach over the last two years is a major reason for the lower insolvency numbers. The Tax Office
Australian Private Dwelling Commencements -v- Insolvencies (per Qtr)
has recently warned tens of thousands of directors to act on company tax debts or face the
70,000
600
60,000
500
495 470
50,000
423 416
407 384 357
40,000
369 376
378 374
404
402
388
355
354 303
400
401 328
341 302
30,000
293
255
255 224
181
20,000
187 181
0 2014
2015
2016
2017
n APDC
2018
2019
2020
2021
again begin to pursue delinquent tax debts through the Supreme
300
second half of 2022.
200
Tips on how to manage risk in the current environment
237
100
10,000
It is expected that the ATO will
and Federal Courts during the
371
309
risk of full enforcement action.
0
Insolvencies Source: Australian Bureau of Statistics & ASIC
Know Your Customer – Front and centre of managing your risk is having a strong understanding of your customers. This is essential for any business
42
AICM Risk Report 2022
CONSTRUCTION IN FOCUS
looking to succeed in creating reliable credit risk management processes. Assessing any customers’ credit risk profile is only possible with
The value of good credit management data systems and procedures
access to data that is comprehensive, accurate
Key elements of good credit management systems
and up-to-date. ‘Credit Risk Management’
incorporate risk polices with dynamic reporting
techniques and models that are supplied with
and alerts that highlight customers at risk and
rich data sets will help significantly improve
ensure real-time risk profiling. Systems that
credit risk processes.
incorporate real-time analysis with early warnings of potential issues to keep you on the front foot
Assessing Risk – Whether onboarding new
and provide greater insight on trends in customer
customers or, reviewing existing customers,
behaviour. These systems should:
access to meaningful data is critical. This
z Incorporate data from sources that provide
information is generally sourced through Credit Reporting Agencies and Industry Trade Bureaus that provide online access to current and historical trading data, comprehensive Court action reports and alerts, ASIC data,
— current and historical payment patterns (a customer may be paying you, but are they paying other suppliers), Court actions, both current and historical, industry licencing regulators, ASIC information, defaults.
Licencing Regulators and Trade References from other suppliers. Both of these sources provide their own unique valuable data to feed into a comprehensive risk management process
z Create automated alerts when adverse information is detected. z Incorporate risk policies and strategies
that enables the credit team to make the most
that monitor change in characteristics and
informed decisions.
automate credit limit reviews.
ASIC National Insolvency Data Construction Industry
Source: ASIC Insolvency Statistics
AICM Risk Report 2022
43
CONSTRUCTION IN FOCUS
z Include pre-defined risk policies along with the flexibility to create new policies if required.
sources are retrospective in nature and provide great clarity after the fact, but these have limited value as situations evolve. Fortunately, there are
The value of data for successful risk mitigation
a number of other excellent tools available to
We live in a world where data is king. And with
of eventual business failures. Use of these tools
so much information available, the most effective
within your credit management processes can add
risk mitigation systems will pull data from multiple
significant value to your business.
credit managers that can identify deteriorating trends and potential red flags months in advance
different sources as no single source is able to Wayne Clark MICM, MAICD Executive Director, Building Industry Credit Bureau E: wayne@bicb.com.au, T: 0402 244515
provide the complete picture. However, for data to be useful in managing risk it needs to be accurate, comprehensive and, most importantly, early enough to provide advanced warning so you can be on the front foot to mitigate your risk in real-time. Some data
Acknowledgements Co-contributor Patrick Schweizer, Director Alares Systems Graphs supplied by Building Industry Credit Bureau FOOTNOTES: 1
S Sharples News.com.au 25 Feb 2022
Introducing ‘RiskTracker’
The most advanced credit risk management tool for the construction industry
Proudly developed by Building Industry Credit Bureau and ALARES The earliest and most comprehensive due diligence reports and alerts – stay informed and manage your risk in real-time Combining $billions worth of trade data with the industry’s most comprehensive dataset on Court and Tribunal actions To find out more and arrange a free trial please get in touch: Wayne Clark wayne@bicb.com.au
44
AICM Risk Report 2022
Patrick Schweizer patrick@alares.com.au
Coverage of more than 100,000 construction businesses, ranked by risk of insolvency and risk of late payment
How to MANAGE RISK Making the most of your upcoming renewal Barbara Cestaro MICM Client Manager, Credit Solutions
Barbara Cestaro MICM
Dan Chapman MICM
Dan Chapman MICM Director, Credit Solutions At the start of the COVID-19 pandemic insurers
To help your organisation get the best possible
were quick to perceive significant risk (with
outcome from your upcoming renewal, some key
flashbacks to 2008), and responded with a
considerations are outlined below.
contraction in risk appetite and increased policy premiums.
Estimated Turnover
As we now know, 2020 and 2021 didn’t see the
Insurable turnover is one of the key pieces of
cascade of insolvencies that many had predicted.
information in the renewal form which helps the
In fact, government stimulus and temporary
insurer to price your policy. Typically, a higher
changes in insolvency laws ultimately resulted in a
turnover drives a rate reduction, and vice versa,
benign loss environment.
but it is important to remember that all turnover isn’t equal.
Whilst insurer appetite has largely recovered from the initial shock of the pandemic, with premium
Consider what else you might want to disclose
rates falling and risk acceptance rates back at pre-
about your sales that could also impact your
pandemic levels, peak renewal season approaches
insurer’s underwriting. For example, has the
and insolvencies are once again slowly increasing.
distribution of your risk changed? If you have a
“Whilst insurer appetite has largely recovered from the initial shock of the pandemic ..., peak renewal season approaches and insolvencies are once again slowly increasing.” AICM Risk Report 2022
45
HOW TO MANAGE RISK
“Check your current list of limits on your insurer’s portal, noting each of your clients will have an assigned rating. Make sure that well-rated clients have full approval and investigate the others...” greater proportion of your revenues with well-
have increased your debtor monitoring, shortened
rated and known customers this has an impact on
payment terms with your low-rated clients, started
your risk profile. Your policy has a maximum TOP,
using the PPSR or have tightened up your T&Cs. If
but that doesn’t mean you are using this with all
properly outlined to your insurer, all these factors
clients. Where you have clients on shorter terms
could have an impact on your renewal rate.
make sure the insurer is aware. In many cases, your organisation won’t have Other disclosure considerations could include
experienced any losses in the past few years.
plans to exit poor-performing countries, buyers or
However, don’t let the insurer think that was all
lines, or your sales team’s strategy for the coming
down to macroeconomic factors. Demonstrate
year.
your management of your debtors’ book and how these actions have impacted your results.
Loss performances and future risk exposure
Risk acceptance
If your insurer has paid your claims, these will be
Check your current list of limits on your insurer’s
considered as part of the underwriting process.
portal, noting each of your clients will have an
Insurers expect to pay claims (that’s what they
assigned rating. Make sure that well-rated clients
are there for) but when you have incurred losses,
have full approval and investigate the others, as
especially large ones, it is important to show
you may be able to provide further supporting
the insurer what you’re doing to ensure it isn’t a
information. Ask your broker to benchmark your
regular occurrence. Perhaps you have exited a
buyer grade and risk acceptance with the market
market, implemented new credit management
and your sector, so you know where you stand
procedures and your DSO has reduced. Maybe you
relative to your peers.
46
AICM Risk Report 2022
HOW TO MANAGE RISK
Reviewing your limit listing is important to make sure you are maximising coverage.
Work with your broker
Increasingly, insurers are factoring the limits
Finally, work closely with your broker. Your broker
you hold (not just aggregate turnover) into
shouldn’t simply pass information between you
your policy rate. Reducing or removing
and the insurer. Their role should be that of a
unnecessary limits will breed goodwill with the
trusted advisor, supporting your business, sharing
insurer who can allocate capacity elsewhere,
insight about the market, maximising coverage
reduce your premium rate and remove
and optimising your policy structure to fit the
unnecessary limit fees.
evolving needs of your business. Take advantage of your pre-renewal meeting to discuss how your
Meet the insurer
business is going to change over the next three
Insurers are always available to meet their
are, and let them guide you on how your insurance
clients. If you haven’t met your insurer in person
program can be adjusted accordingly.
years, what your risk tolerance and premium goals
(or video call) yet, take the opportunity to do so. Underwriters genuinely appreciate the chance to
Barbara Cestaro MICM, Client Manager, Credit Solutions
know more about your business, and the more
Dan Chapman MICM, Director, Credit Solutions
they understand, the better they can support
AON
you.
T: (02) 9253 7000, www.aon.com.au
Optimise Working Capital And Mitigate Your Organisation’s Credit Risk Find out how Aon’s innovative credit solutions can help - talk to our experts today.
AICM Risk Report 2022
47
Strategies to reduce risk with the right contract terms and conditions
Christopher Hadley MICM, Partner Andrew Tanna MICM, Special Counsel Commercial Recovery & Insolvency Holman Webb Lawyers Christopher Hadley MICM
Andrew Tanna MICM
As all credit professionals know – credit, cashflow
A failure to pay can quickly result in insolvency
and collections all work together to protect the
and loss, and depending on your exposure, and
lifeblood of many businesses. Without a proper
other liquidity concerns, the impact of lumpy and
functioning credit team, businesses run the risk
sometimes ‘difficult to collect’ credit can be a
of significant impacts on ongoing profitability
huge headache to the business.
and viability. Unfortunately, risk is an unavoidable part of the credit function, and well considered credit terms can often provide risk mitigation and safeguards to the business.
What’s the worst that can happen? No business wants to unnecessarily litigate to collect. Put simply, it is desirable to work
What are the impacts of the risk you take on?
collaboratively with customers to address any
Risk takes various forms – but in the credit
However, if your customer’s cash-flow problems
and collections world the biggest risks include
are affecting your business, you may need to
customers failing to pay creditors in accordance
consider litigation and other enforcement options.
with trading terms, and the inability to collect
There are a number of prudent steps which can
through standard collection processes.
be taken to put creditors in the best position to
non-payment outside of payment terms.
successfully deal with credit risk.
“Risk takes various forms – but in the credit and collections world the biggest risks include customers failing to pay creditors in accordance with trading terms, and the inability to collect through standard collection processes.” 48
AICM Risk Report 2022
Why does this matter? Economic data indicates that the economy could be in for a rough ride in the coming months. Those in the credit industry have long suspected the ATO of having taken, for some time, a “softly, softly” approach with respect to pursuing recalcitrant taxpayers.
HOW TO MANAGE RISK
These suspicions are borne out by the publicly
the ATO’s recent aversion to pursuing large-
available information which shows that record
scale enforcement, it is likely that insolvencies
debts are owed to the ATO, and that the ATO’s
will increase if the ATO reverts to its pre-COVID
total debt book has grown to about $60 billion.
practices.
Further, winding-up and bankruptcy petitions initiated by the ATO are at lows for modern times.
Statistics show that about 25% of insolvency activity occurs within the building and
Could increased ATO activity bring about more insolvency?
construction industry. Many readers will
Since the pandemic began in 2020, the ATO’s
that industry.
themselves have either direct involvement in the building and construction industry, or exposure to
overt collection activities (i.e. winding-up and bankruptcy petitions) have been almost non-
The building and construction industry otherwise
existent, although there have been some recent
has significant impacts on other parts of the
indications that the ATO’s collection activity is
economy, and can result in a domino effect
set to ramp-up. In April 2022, the ATO wrote to
impacting many suppliers and other contractors.
over 50,000 directors giving them 21 days’ notice
Recently, there have been some very high-profile
to pay their tax liabilities, failing which a Director
insolvency appointments in the building and
Penalty Notice (DPN) may be issued. This has
construction industry (including, Probuild and
been seen by some as a ‘warning letter’ on the
Condev).
part of the ATO and precursor to further action being taken.
Why does this impact on trade creditors? The ATO’s involvement in the insolvency space is well known, and historically, together with the major banks, the ATO has been a major driver of insolvency activity in the economy. Given
“No business wants to unnecessarily litigate to collect. Put simply, it is desirable to work collaboratively with customers to address any non-payment outside of payment terms.”
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What are we expecting to see in the coming year?
worked together to create a degree of recent
Historic low levels of interest rates have enabled
We are expecting to see a wave of increased
borrowers to borrow more, which has impacted on
insolvency activity over the coming months.
record high housing prices and inflation. Recent
This presents businesses with increased risk, and
data has confirmed that inflation has surged to
credit managers with challenges. Prudent credit
5.1% – the highest level since 2001. Those in the
managers will take early steps to mitigate that risk
building and construction industries have been
and implement numerous strategies to deal with
particularly hard hit. More broadly, at the time
that risk head-on.
economic uncertainty.
of writing, there are strong indications that the Reserve Bank will raise the official RBA cash rate from the current 0.1%.
What can you do now, to mitigate this risk?
There is otherwise severe pressure on supply
Whilst this does not form a bullet-proof list for
chains, energy markets, increased global inflation
every client in every situation, we consider the
and debt – all on top of a war taking place in
clauses set out below to be very important in any
Europe. These factors, amongst many others, have
credit professional’s arsenal.
“Statistics show that about 25% of insolvency activity occurs within the building and construction industry. Many readers will themselves have either direct involvement in the building and construction industry, or exposure to that industry.”
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What is the simplest, and most effective way to protect your credit risk?
CLAUSES TO INCLUDE IN CREDIT TERMS & CONDITIONS
We cannot emphasise enough the importance of having appropriate terms and conditions in place with respect to credit agreements and supplier
Personal guarantee and indemnity
agreements. Having appropriately worded terms and conditions can mean the difference between
Enforcement costs and expenses
a successful recovery and a write off. We are often surprised to see that many businesses do not pay
Contractual interest
enough attention to this very important aspect of the credit management framework.
Charging
Important terms and conditions
Retention of title – PPSA
Depending on the type of credit risks you are
Certificate
facing, it may be wise to consider including the following in your company’s terms and conditions
Privacy
(T&Cs): 1. Personal guarantee and indemnity. When dealing with incorporated customers, credit agreements could include a personal guarantee
See for example, Kyabram Property
and indemnity to be provided by the directors
Investments Pty Ltd v Murray [2005] NSWCA
of the creditor and/or other third parties (for
87 at [12]. There are many instances where
example, those who have real estate holdings).
courts have criticised the wording of cost
The inclusion of a properly formulated personal guarantee can mean the difference between a successful recovery and a write-off. Care should be taken in the drafting of a personal guarantee to ensure enforceability by a court (including whether it takes the form of a deed and is properly executed by the parties). 2. Enforcement costs and expenses. Creditors may wish to include in the T&Cs a clause allowing for the recovery of all legal costs and
clauses and have refused to order the losing party to pay costs on an indemnity basis under a poorly or ineffectively worded clause. 3. Contractual interest. Creditors may wish to include in the T&Cs a clause allowing for the charging and payment of reasonable interest at a contractual rate. Depending on which State you are operating in, the statutory rate of interest can be quite low. Currently, in NSW it is only 4.1%.
expenses from the debtor. It is important that
However, with an appropriately worded clause,
the wording of such an indemnity clause is
the parties can agree between themselves for
compliant with court and judicial expectations.
a contractual rate of interest which is higher
In particular, courts typically require that
than the rate provided by statute. We regularly
the subject clause is “sufficiently plain and
observe credit T&Cs including interest rates
unambiguous”.
exceeding 12%. AICM Risk Report 2022
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“Having appropriately worded terms and conditions can mean the difference between a successful recovery and a write off.”
4. Charging clause. Creditors may wish
with regard to defending a preference claim on
to include in the T&Cs a clause by which the
the basis that the creditor is a secured creditor
customer or guarantor charges his or her real
and not an unsecured creditor (which is a
property to secure all amounts outstanding
necessary pre-condition of a preference claim).
to the creditor, and for the creditor to lodge a caveat over any such real property. Regularly,
6. Certificate clause. Creditors may wish to
we observe credit agreements and guarantees
include a clause whereby an authorised
which do not include such a clause, or include
representative of the creditor can issue a
a poorly or ineffectively worded clause which
written certificate specifying various matters,
does not adequately protect a creditor’s
including the amounts outstanding under
interest in real property.
the credit agreement, the delivery of goods
In addition to the ability to lodge a caveat, the inclusion of such a clause can, in some cases, have a dual purpose with regard to defending a preference claim on the basis that the creditor is a secured creditor and not an unsecured
under the credit agreement, the legal costs incurred and interest accrued, and that such certificate will be treated as conclusive proof of the matters stated therein (including the customer’s indebtedness to the creditor).
creditor (which is a necessary pre-condition of
Such a clause is very useful in a litigation
a preference claim).
context which requires the plaintiff/creditor to prove various aspects of its case. See,
5. Retention of title – PPSA. Creditors that supply goods on credit may wish to include
Dobbs v National Bank of Australasia Ltd [1935] HCA 49.
a clause by which the customer grants a security interest to the creditor/supplier for the purposes of the PPSA. Depending on the
to include a clause enabling the creditor
circumstances, a creditor may wish to require a
to undertake credit worthiness checks at
PMSI and/or an ALLPAP.
the time of opening the account and on an
Further, the T&Cs may, in appropriate circumstances, also include a clause pursuant
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7. Privacy clause. Creditors may also wish
ongoing basis (for example, at the time of an application to increase a credit limit).
to which the supplier retains ownership of the
A properly worded privacy clause will also
subject goods until such time as payment for
enable a creditor to report any credit defaults
those goods has been received. The inclusion
to the relevant credit authorities and to
of such a clause can also have a dual purpose
otherwise be aware of any such defaults
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impacting its customers. The absence of such a
of implementing suitable credit agreements and
clause (or a poorly drafted clause) will prevent
terms and conditions.
a creditor from lawfully undertaking the necessary searches and exposing the creditor
Chris Hadley (Partner) and Andrew Tanna (Special
to claims under the Privacy Act.
Counsel) are on call for AICM members requiring assistance with reviewing, drafting or updating
8. Other form of security. Depending on the
credit agreements and terms and conditions.
nature of the customer and industry, creditors If you have any questions regarding the content of this article, please don’t hesitate to get in touch today:
may also wish to incorporate more stringent security clauses as a safeguard measure. Such further might include the granting of a mortgage in favour of a creditor, the provision of a bank guarantee, or a guarantee to be provided by third part (such as a parent or holding company).
Andrew Tanna MICM, Special Counsel E: Andrew.Tanna@holmanwebb.com.au NSW: 02 9390 8309
Holman Webb’s Commercial Recovery and Insolvency Group has decades of experience in the credit industry, and understands the importance
Christopher Hadley MICM, Partner E: Christopher.Hadley@holmanwebb.com.au NSW: 02 9390 8303 VIC: 03 9691 1206 M: 0417 491 041
Holman Webb, Level 25, 56 Pitt Street, Sydney NSW 2000 www.holmanwebb.com.au
REGISTER NOW
AICM Risk Report 2022
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Managing credit risk for improved cash flow in the digital age Nikki Dennis MICM Managing Partner/Co-Founder SalesCRED
We live in an increasingly complex and digital
Within the current credit risk climate, the timing
driven society. If you’re like most people, you
couldn’t be better to explore how this new and
spend on average 5.5 hours of your day looking at
emerging digital technology may be applied
your phone screen. Think about that for a second;
for more effective cash flow and collections
taking the average life span, that’s 17 years of your
management.
life spent on your phone! Yet despite this, digital receivables and collections technology is still very
And for those who question, is the market ready
much underutilised within Australia, and in fact,
for this? Let’s reflect on how ready for this we are!
around the world. At a time when we are facing emerging credit risk
Living in the digital age
from the largest quarterly and annual increase in
From the minute we wake up most of us are on
inflation we’ve seen in Australia since 2000. Not
our phones turning off our alarms and checking
to mention rising fuel prices from the ongoing
our news feed or messages. Digital communication
crisis in the Ukraine, labour shortages from the
is everywhere. We use our phones to check
continuing pandemic fallout, and recent figures
the weather so we can dress appropriately, to
from the Australian Energy Regulator showing
get us to work quicker by dodging traffic hold
average debt for gas and electricity rose 12% in
ups. We are emailed with updates on our child’s
the past year alone – it is essential that as credit
day at school, get reminded when our dentist
professionals, we review and keep abreast of new
appointment is due, when our account is going to
ways in which we can respond to, and better
be debited with the latest phone bill, and when our
manage these risks.
evening curry is being delivered. No wonder we are on our devices for roughly 33% of our waking
Ask many credit professionals what they think
life.
digital communication is and they will usually say SMS and email. But that is at its most simplistic
How many of us receive regular letters now or
and missing the real advantage of advanced digital
answer phone calls from unknown numbers? If
solutions. We now find ourselves on the brink of
you’re like most people, the answer is very rarely
an explosion in digital capability across the credit
or never. According to a recent study, 87% of
industry that incorporates AI, machine learning
people won’t answer the phone any more to
and other popular platforms such as whatsapp,
numbers they don’t recognise and Australia post
live chat bots, and conversational AI, to take
have reported over a 50% decline in letters being
communication with customers to the next level.
sent since 2008.
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On the other hand, according to recent marketing
Many digital solutions provide the option to
statistics conducted by Swift Digital, the SMS
speak with someone. The customer can have
open rate for Australia is 94%, 86.1% of recipients
the opportunity to choose a preferred time to
open SMS messages within 30 minutes of receipt
receive a call when it’s convenient for them to talk,
and 54% of people claim significant frustration if
or they can choose a warm transfer through to
they can’t send a business an SMS.
inbound staff. This is a much more cost effective and efficient use of resources and will make for a
And yet, how many times as a customer have you
much better experience for your staff and for your
received a bill or a reminder digitally that you can
customers, who are less likely to have to wait in
click on and pay seamlessly, without having to
long inbound queues to speak to someone.
scramble to find a letter/invoice with an account number on or other details you may need to key
Similarly, traditional letters sent by mail still have
in? Or, where you can quickly and easily propose
their place with older generations for example
a payment arrangement on or lodge and resolve a
or for compliance purposes but are becoming
dispute without having to spend a lifetime on hold
less and less relevant as an effective way of
trying to speak to someone?
communicating in today’s digital age. What if, instead of waiting potentially days for a letter to
What if?
be posted, received, and actioned, using digital
Instead of making monotonous outbound calls to
invoices and correspondence via their device?
communication your customers can easily access
distracted customers who would rather the option of settling their account in their own time – your
With smart digital solutions, payment can be
staff can have more effective conversations with
actioned much sooner for credit teams at a
customers who have chosen to speak via phone
fraction of the cost of sending hard copy letters
and prefer to settle their account that way?
and making phone calls.
“According to a recent study, 87% of people won’t answer the phone any more to numbers they don’t recognise” AICM Risk Report 2022
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The market is ready Particularly relevant research conducted by Global Management Consultants, McKinsey and Company on 1000 customers, and reported in ‘The Customer Mandate to Digitize Collections strategies’, focuses in detail on the customer experience of credit delinquency. Here are their findings:
“Essentially, customers told us that their contact preferences and responses are guided by personal considerations that bear little relationship to the risk categories and contact protocols worked out by
methods. From these findings, we have concluded that issuers need to better understand their customers’ diverse preferences and then design a sensitive multichannel contact strategy to address them.” Interestingly, the study found that most lenders still predominantly used traditional contact strategies based on customer balance, risk profile, and days delinquent. Those that did utilise digital strategies, did so predominantly on the low-risk accounts and largely abandoned this practice past the 30 days overdue mark, in favour of phone calls and letters.
lenders. Most customers prefer to be contacted and act through digital channels, while a smaller segment
However, a key takeaway from this research
remains more responsive to traditional contact
shown in the diagram below, was that customer
Contacting customers through preferred digital channels improves effectiveness most significantly in the 30-plus days past-due segment
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preferences for digital channels remained pronounced throughout delinquency, most significantly in the 30+ day segment, and were not aligned to or affected by issuer-assigned risk profiles. These findings shine a very clear light on the path that creditors need to take to achieve more effective responses to credit risk factors and improved collections. So, now we know our customers are ready to embrace digital communication in all stages of
“Improved customer engagement and communication at all stages of the credit process from billing right through to late-stage collections are paramount in addressing credit risk effectively.”
their credit delinquencies, let’s explore what these latest digital technologies are and how they can be
and responding to cash flow issues and potential
applied to respond to credit risk more effectively.
insolvency, payment difficulties, customer vulnerability, disputes, or simple evasion or
How AI driven digital technology can be applied to respond to credit risk more effectively
avoidance, so that the appropriate measures can
Globally there is a continued surge of investment
Current digital solutions incorporate popular
in AI research and applications. Research firm IDC
platforms such as SMS, Email, What’s App and
estimates the worldwide AI market will exceed
Online chatbots to communicate seamlessly with
US$500 billion by 2024. There is a lot of talk
your customers. Messages can include QR links to
currently about AI and machine learning in digital
advanced payment portals which allow customers
engagement but how can it be effectively applied
to make frictionless re-payments through a variety
to follow up on customer delinquencies?
of convenient channels and with flexible re-
be taken to ensure prompt payment or provide the right assistance.
payment options. At its most basic, AI is intelligence demonstrated by machines. Machine learning is a subset of AI
Such portals can also have inbuilt dispute
that is concerned with how that intelligence is
management and hardship solutions to help
acquired. It analyses patterns in existing customer
customers at find a solution in their own time at
data and applies that learning to predict future
their convenience, enabling a much-improved
decision outcomes. Outlined below are some ways
customer experience. Improved engagement
in which AI and machine learning are incorporated
at any stage of the delinquency process drives
within some of the leading digital engagement
higher collection rates and reduces the risk of
solutions to respond more effectively to credit risk.
default.
1. Improved Customer Engagement through Digital Platforms
2. Intelligent receivables management
Improved customer engagement and
workflow situation – currently different
communication at all stages of the credit
workflows may be typically set up for varying
process from billing right through to late-stage
credit risk profiles based on factors such
collections are paramount in addressing credit risk
as dollar value, age of debt, industry type,
effectively. Early intervention is key in detecting
geographical regions, and previous payment
Think of a standard automated collections
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“AI and Machine Learning algorithms within digital solutions can identify customers with a higher risk profile and target tailored messaging to particularly vulnerable customers or businesses.”
history. As such, for businesses who currently
This ‘learning’ is then applied to determine the
automate workflows, there may be 5-10 different
next communication, curating messaging, and
workflows set up for customers based on their
timing to maximise re-payments. With machine
credit risk profile with different messaging and
learning there are potentially hundreds of
methods of contact.
different workflows that could play out dependent on how your customer prefers to engage with you,
AI driven digital engagement technology takes
resulting in much more effective and intelligent
your receivables management to the next level. It
driven outcomes.
not only allows for automated workflows, tailored messaging, and segmentation, but analyses how
3. Prioritising credit risk
a customer responds to these messages, in what
AI and Machine Learning algorithms within digital
timeframe, what platform they prefer to engage
solutions can identify customers with a higher
with you on (SMS, email, Whatsapp) and what
risk profile and target tailored messaging to
time of day they engage.
particularly vulnerable customers or businesses.
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Champion challengers can be set up within
provide deep insights into campaign performance
these intelligent systems to scientifically track
and re-payment tracking.
the outcome of this different messaging against standard content.
New digital technology means you can know when customers are clicking on messages, what
Results can then be analysed to determine
times of day they prefer to engage with you, what
whether this new strategy has increased customer
platforms they prefer and how this ultimately
engagement levels, improved response rates,
drives improved collection rates. This enables
improved payments, and increased arrangement
much more informed decisions around credit risk
or PTP’s.
profiles in the future.
4. Conversational AI
Human element versus digital methods for responding to credit risk factors?
Conversational AI combines natural language processing (NLP) and speech analytics with online chatbots, interactive voice recognition systems, or live phone calls to analyse a
There is no doubt that digital communication has
customer’s language, tone, context, and
changed the world. But personally, I don’t buy into
sentiment. When used in a credit risk context this
the human versus digital, one or the other debate.
can help to pick up red flags that may indicate
I don’t think digital engagement will replace
imminent or future risk of default.
human interaction and leave many in the credit profession without jobs. As with many things in
This learning can be utilised during a live
life I believe the answer lies not in extremes but
conversation where agents can be provided
somewhere in between. Yes, roles will change
with suggestions on how to approach the call
but the use of AI will also create more jobs. The
or online chat, or in reviewing recorded calls
World Economic Forum estimates that by 2025,
and online chat. Thereby providing feedback to
85 million jobs may be displaced by a shift in the
agents and suggesting improvements for future
division of labor between humans and machines,
communication.
but also importantly that 97 million new roles may emerge.
5. Real time reporting dashboards Advanced digital solutions incorporate live activity
With current credit risk factors making it hard for
feeds and intuitive dashboards which capture
customers to meet their financial obligations, there
all outcomes for different credit risk profiles and
is more need than ever for effective empathy and problem solving to take place and in most cases
“New digital technology means you can know when customers are clicking on messages, what times of day they prefer to engage with you, what platforms they prefer and how this ultimately drives improved collection rates.”
that is done more effectively in a conversation with a real person. Assessment for hardship programs, customer advocacy and effective complaints resolution all rely heavily on human interaction for this reason. Additionally, depending on the industry you’re in, your customers may have challenges communicating digitally. Certain mass market consumer portfolios for example can often include AICM Risk Report 2022
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“Even with advanced credit risk and machine modelling available to help us assess credit risk, we are still not too familiar with how to respond to identified credit risks with AI driven receivables management technology.”
high levels of customer illiteracy, elderly customers
we are still not too familiar with how to respond
or those experiencing disabilities. This is another
to identified credit risks with AI driven receivables
example of where skilled human intervention
management technology. With that in mind, when
comes into its own talking people through their
exploring some of the current and emerging
options and guiding them towards a better
digital receivables technology companies to
outcome.
partner with on this exciting journey, how do you know what to look for and whether they are the
Similarly, commercial portfolios will require
right fit?
skilled human review and portfolio management at all stages of the process to analyse data and
Here are some key questions to consider:
assess risk of default due to cash flow issues and potential insolvency, with prompt referral
z Are they recognised as leaders within
to collection agencies and/or lawyers for
Fintech or AI Digital Receivables Solutions?
further follow up and potential for legal action,
Ground-breaking technology often attracts
bankruptcy proceedings and caveats.
awards, accolades, client testimonials and case studies. What can they share with you in this
The key lies in better understanding the respective strengths and limitation of humans and machines in a collection’s context so we can draw the maximum benefit from both emerging technologies and the skills of our staff. AI and machine learning can free up mundane, repetitive and data crunching tasks so humans can be used for higher value activities that require empathy, creativity and problem solving.
regard? z Do they measure the customer experience? One of the key outcomes of more intelligent driven communication is improvement of the overall customer experience. Do they measure this and if so, what does that look like? Do they use the international standard of measuring customer experience ‘Net Promotor Score (NPS)’ and if so, can they share details of that with you?
Questions to ask when exploring digital receivables solutions and companies to partner with
z Do they understand the receivables industry in Australia? Many digital solutions companies either don’t originate from within Australia or
This is unchartered territory for many of us. Even
don’t specialise within Credit. As such, they
though we live in a digital age, the credit industry
may not understand the nuances of our local
is far from being digitalised.
credit industry and associated regulation and compliance. Can they demonstrate
Even with advanced credit risk and machine
understanding of your challenges and pain
modelling available to help us assess credit risk,
points?
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z Do they offer other value add receivables
In summary, the introduction of AI driven
solutions or partner with someone who does?
digital technology is enabling much more
Some leading digital receivables companies
informed and intelligent responses to identified
also offer other outsourced engagement
credit risk factors. All of which will ultimately
solutions such as overflow management for
result in improved cash flow for Australian
arrangement monitoring, hardship assessment
businesses.
and monitoring and live customer engagement campaigns. Maybe they can offer a seamless
On that note, for those who may still be struggling
transition to 3rd party digital collections
with the bigger concept of AI in credit or for those
solutions as well?
who think we’re not quite there yet, I’ll leave you with this thought from the Global Technology
z Can they clearly communicate how they use AI effectively? AI is a bit of a buzz word now, as such it can be thrown around a bit too easily. Many may attest to using it but make sure you understand how AI and machine learning is utilised within their solution.
Consultancy, Thoughtworks: “By 2023, businesses will… … understand that AI is not the art of trying to force value out of historical data, but actually the art of creating new data and insight by interacting with the world.” – Jarno Kartela Global Head of AI Advisory
How customisable is the payment portal? Advanced payment portals can be developed
What an exciting time to be within credit!
to streamline a range of inbound queries from incorporating FAQ sections, capturing common complaints or additional required information from customers. Flexibility in customising a portal to your requirements should be key in your decision to partner with someone.
Nikki Dennis MICM Managing Partner/Co-Founder of SalesCRED (specialists in credit management solutions) T: 0437 652 562 E: nikki@salescred.com.au www.linkedin.com/in/nikki-dennis
AICM Risk Report 2022
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Current economic conditions, customer behaviour and mitigating risk Daniel Greenhoff MICM COO Recoveriescorp
At the end of last year, it was thought Australia’s
In theory, these factors should be having a positive
economy would be hitting a sweet spot around
impact on income and affordability and boost
now. However, the current instability says
debt repayments. However, the other side of the
otherwise.
affordability coin is causing uncertainty.
At the crux of this fragility are many factors. These
Impacts to expenditure
include strong economic expansion, inflation increases, reduced stimulus, debt program
Median weekly advertised rental rates increased
resumption, soaring energy and food prices,
4.7 per cent over the three months to December
Russia’s invasion of Ukraine, a low unemployment
2021 – the largest of any period over the past five
rate, and a demand for higher wages.
years.
To help you identify specific credit risks in the
Household spending increased in seven categories
midst of this, we have identified several monetary
in 2021 – the largest in recreation and culture
factors currently impacting consumer incomes and
(+11.3%), food (+9.7%), and clothing and footwear
expenses and ultimately affecting their behaviour
(+9.6%). The Consumer Price Index (CPI) also rose
and ability to repay debt.
2.1% this quarter and 5.1% over the 12 months to the March 2022 quarter. With the Eastern Europe
Impact to incomes
conflict further driving up prices, inflation will
Right now, unemployment is down to 4 per
outpace wage growth.
continue to steadily increase next quarter and
cent, with many predicting a further drop in Q4. Between January and February, the number of hours people worked also increased by 8.9 per cent in seasonally adjusted terms.
The resulting credit risk Given the economic instability, customer sentiment and confidence are being affected, leading to
The national Wage Price Index (WPI) rose by 0.7
credit risk.
per cent in Q4 21, with the annual rate now at 2.3 per cent. Meanwhile, the March 2022 flood
We are seeing a consistent downward trend in
disaster relief and support packages banks and
Arrangements and Promise to Pay in Full values
the government provided led to pockets of money
as consumers are hesitant to commit to larger
coming in.
amounts.
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“Household spending increased in seven categories in 2021 – the largest in recreation and culture (+11.3%), food (+9.7%), and clothing and footwear (+9.6%). The Consumer Price Index (CPI) also rose 2.1% this quarter and 5.1% over the 12 months to the March 2022 quarter.”
In April 2021, the average payment value of
Meanwhile, while Arrangements were beginning
Arrangements was $170, while Promise to Pay in
to recover after the December period, they
Full were around $1,400. Jump forward to March
noticeably dropped in March due to external
2022, and these have dropped to $160 and $1,100,
factors.
respectively – with further drops expected. This drop in Arrangements comes alongside a While payment arrangements have remained
rise in hardship referrals and in costs of living and
consistent in banking and utilities, transport,
uncertainty. Customers either do not have the
telecoms, and insurance has seen a notable
funds or are concerned about the future and want
increase given the rising CPI.
to retain as many funds as possible.
Promise to Pay in Full kept rates have remained
The rise in hardship referrals is also due to the
low during Q3 quarter given the rising costs but
external economic factors we are seeing, including
appear to be trending upwards heading into the
inflation increases, rising rental rates, energy
next quarter.
disconnection resumption, and soaring prices. AICM Risk Report 2022
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We know that currently, only one per cent of the
continue to tap into self-serve options, with the
population is accessing corporate hardship loans.
exception of government.
Unfortunately, those not applying risk falling further into hardship and have a bigger chance of
Generally arrangements via portals rose from
long-term hardship.
60 to close to over 300. Insurance increased from 60 to 100, while telco and utilities arrangements
How to mitigate the risk
grew from 200 to over 300.
With these conditions and trends in mind, what
Not only is self-serve convenient, but it can also
can you do to reduce the risk for your business
be a way for those suffering from mental health
and your customers?
struggles, or embarrassed about their situation, to deal with their debt as it avoids the need for direct
Firstly, many customers will settle their accounts
human contact.
if they are contacted early which has seen an increase in organisations choosing to partner
The most effective channels we are seeing driving
with collection specialists in a first party capacity
customers to self-serve across our industries
who have both the resources and technology to
(banking and finance, government, insurance,
achieve this.
utilities and telco) are SMS, letters with QR codes, and interactive voice response. So focus on these.
Therefore, make sure you introduce earlier collection programs and engagement as early as
Secondly, you could consider introducing
1-7 days past due date, especially with high-risk
incentives for customers to drive repayments. For
customers. This action can lead to a significant lift
example, you could offer a 5 or 10% discount for
in repayment. It can even improve relationships, as
early payment, or pay this month and don’t pay
customers appreciate you reaching out to remind
next month (2 for 1 mentality).
them. While this may seem like an outlay, the costs To support customers earlier in their credit
associated with this are usually recouped by not
lifecycle, a strong digital engagement strategy
having to chase payment.
is essential. Giving customers the opportunity to self-serve and contact their provider 24/7 via online portals has never been more important.
Summary We anticipate 2022 will be financially stressful for
In fact, our research shows that portal
customers and SMEs as the economic conditions
arrangements are up this quarter as customers
above roll on and bushfire and flood seasons approach. Customers will need increased financial
“We anticipate 2022 will be financially stressful for customers and SMEs as the economic conditions above roll on and bushfire and flood seasons approach.” 64
AICM Risk Report 2022
support and customer service, and if you don’t get ahead with engagement campaigns, your nonrepayment risk will be higher.
Daniel Greenhoff MICM COO Recoveriescorp T: 0420 802 763 www.recoveriescorp.com.au
Insolvency Simplified debt restructuring – should credit managers embrace this new insolvency reform? John McInerney MICM Partner, Restructuring Advisory Grant Thornton Australia
Why introduced
“new normal” whilst at the same time are having
On 1 January 2021 the Federal Government made
lockdown rules, staff shortages, poor weather
some significant changes to Australia’s insolvency
conditions along most of the East Coast, price
framework to better serve small businesses, their
escalation, the uncertainty of a change in
creditors and employees, namely the introduction
Government and looming interest rate rises.
of the Small Business Restructure process
All of this before even a mention of the ATO’s
as a streamlined way for a small business to
bad debt problem. If we turn to that and just
compromise debt. If you aren’t familiar with the
focus in on the ATO’s bad debt provision that
changes then you are not alone.
relates to Small to Medium Businesses, that has
to put out spot fires as a consequence of COVID
increased over the past 5 years from $19.2Bn Why? Well at the time the changes to the
to $34.1Bn as at 30 June 2020 (18 months ago,
insolvency framework were announced, most
before the effects of COVID have been factored
if not all businesses were relying on the COVID
in). That’s an increase of $14.9Bn or 178% over a
relief measures introduced by the Federal and
large number of taxpayers. As a credit manager,
State Governments to survive, and in some cases
imagine this is the predicament you now face
prosper. The main support being in the form,
with a large proportion of your customers…..
of JobKeeper, SME Recovery Loan Scheme,
what steps would you be taking to collect this
Temporary Rent Relief and let’s not forget the
debt and not put your own company out of
Temporary Relief from Insolvent Trading. Whilst
business in the process.
the insolvency reforms were announced as part of these COVID relief measures, it’s easy to see how
Now cue the Small Business Restructure
they were overlooked when the offer of “free cash”
Process or SBR for short. An SBR provides small
was available to just about any company that
businesses with a tool to compromise creditor
complied with their tax reporting obligations, even
claims and restore business viability, while allowing
if they couldn’t pay the tax debt.
business owners to remain in control of their business, and the reason why it was introduced,
Fast forward to where we are today, most if
being to allow more businesses to go on continue
not all stimulus measures have come to an end,
trading, meaning better outcomes for the
businesses are trying to move forward with the
businesses, their creditors and their employees. AICM Risk Report 2022
65
INSOLVENCY
Key features
and whether the company is likely able to meet
The key features of an SBR for a company director
sent by the RP to the company’s creditors the
include:
company must be up to date with the payment of
z Director protection - Directors can be
entitlements to creditors that are due and payable
its obligations under the Plan. Before the Plan is
protected from personal liability either for
(essentially wages and superannuation) and be up
Insolvent Trading and/ or Director Penalty
to date with tax reporting obligations.
Notices issued by the ATO. z Creditor moratorium - Creditors are prohibited from taking any action against the company to recover money and/or property, terminating contracts, enforcing and security interests, the pursuit of personal guarantees and formal debt recovery proceedings. z Business as usual - Directors retain control of
Once a plan is issued by the RP, creditors have 15 business days to vote to accept or reject the plan. A plan is accepted, and is binding on all unsecured creditors, if more than 50% of creditors by value that vote, vote to accept the plan. Related party creditors are not entitled to vote on a restructuring plan. Unlike other insolvency processes there are no meetings of creditors in an SBR.
the business throughout the process and the company continues to trade under instruction
During the SBR, a company may continue to trade
of the existing directors in accordance with
in line with its normal, day-to-day operations. All
normal day to day operations.
unsecured debts incurred prior to the company
z Streamlined - It is a simple, low cost process aimed to maximise the dividend return to creditors in an expeditious timeframe, at best 45 business days and out to 3 years if required.
Eligibility & process To be eligible to access the SBR process a company must have less than $1M in total liabilities on the day it resolves to appoint a Small Business Restructuring Practitioner to oversee
entering SBR are included in the Plan. Debts incurred after the company enters SBR are not part of the plan and must be paid off outside the Plan. Once a plan is made, the RP manages the disbursement of payments to company creditors based on the terms of the Plan. Where funds are available “upfront” the disbursement of funds could occur within 10 business days or alternatively, collected and paid over time for up to a period of 3 years.
the restructuring process. The Restructuring
If the restructuring plan is not accepted, the
Practitioner (RP) must be a registered liquidator.
restructuring process ends and creditors are no longer prevented from enforcing their rights and
The role of the RP is to work with the company’s
a director is no longer protected from liability for
directors to develop a restructuring plan. The
insolvent trading.
restructuring plan sets out how creditors will be repaid as a proportion of the debt owing to them, which is essentially expressed as what “cents in the dollar” a creditor will receive if they accept the
ATO attitude to SBR’s as largest stakeholder
Plan. Within 20 business days of entering into the
Statistics produced by ASIC indicate that the
process, the RP circulates the restructuring plan
10 years to 2019 (pre-COVID), approximately
to the company’s creditors and certifies whether
10,000 companies per year entered into external
or not the company qualifies for the SBR process
administration and around 76 per cent of those
66
AICM Risk Report 2022
INSOLVENCY
“Once a plan is issued by the RP, creditors have 15 business days to vote to accept or reject the plan.”
agency the ATO is better off accepting a “cents in the dollar” return, as opposed to forcing a company into liquidation. ATO statistics also disclose the top 5 types of
companies had less than $1M in liabilities. So by deduction, in any normal year c. 7,600 companies should be eligible to use the SBR process. A review of external administration matters conducted by Grant Thornton indicate the ATO is the largest creditor in approximately 70% of all insolvencies. Again, by deduction, the ATO should be the largest creditor in 5,320 of the 10,000 insolvencies per year. To date the take-up of the use of the SBR has been low but is on the increase. Some key statistics produced by the ATO disclose that as at 31 January 2022: z 34 SBR’s had been conducted z c. 95% of SBRs where ATO was a creditor z 85% of SBR Plans had been approved
business who have used the SBR process are in the Hospitality, Retail, Construction, Labour Hire and Media industry. In March 2022, 52,000 letters were issued to 45,000 companies to inform them of their obligation to pay their tax debts to avoid the directors being personally liable pursuant to a director penalty notice. At present, all the ATO seeks in return is engagement so that they have visibility of the taxpayers affairs with the benefits of engagement including a tailored approach to help get taxpayers back on track, tailored payment plans, additional time to pay and supporting businesses via a formal restructure or exit.
As a credit manager Perhaps the ATO has caught up with the credit community when it comes to debt collection. That
As a stakeholder group the ATO has advised the
said, there is no reason why the credit community
SBR process is a 2nd chance for genuine business
shouldn’t continue to support genuine business
owners. The ATO has advised they will support
owners on a pathway to returning to normal,
companies who have:
particularly when it comes to voting on SBRs (and
z A history of engagement with the ATO (essentially via lodgement of returns and communication on the status of payments etc.) z Whose Plan is better than what could be
DOCAs). In fact, most of the time, the decision will be made by the ATO as the largest creditor and all other creditors will be bound by that decision. Don’t dismiss SBR’s as a restructuring process. I
available in a liquidation scenario. This takes
expect there will be an increase in the use of SBR
into consideration any uncommercial related
over the remainder of 2022 and into 2023. It has
party transactions
been discussed that a further reform could be to
z Encountered cash flow difficulties over the past
extend the eligibility criteria to $5M of total debt,
few years (pre- and post-COVID) and have a
instead of $1M. As these processes increase in
viable business to save and jobs to preserve.
popularity credit managers should be alert to any contagion risk amongst its smaller customers in
If you think of the alternative, approximately 95%
high-risk industries. By deduction, being exposed
of all liquidations don’t pay a dividend, so as long
to 50 SBRs where you are owed $50k is a
as the taxpayer exhibits the above criteria, as an
potential bad debt exposure of $2.5M. AICM Risk Report 2022
67
INSOLVENCY
Consider what debtor in possession (DIP) means to you when being asked to extend credit to a company during the SBR process. A DIP model means the existing directors remain in control and continue to trade in the ordinary course and the supply of stock will likely continue to be on credit terms unless credit terms are renegotiated post commencement of the SBR process. Under these circumstances, the RP is not in control and is not personally liable. As a credit professional, at this juncture you will need to consider the ongoing risk profile of any client subject to the SBR process. Demanding COD could result in the process failing and you not getting a dividend in 95% of matters. Supporting an SBR that fails to pass the vote, could mean that further credit has also been exposed to turning bad. My recommendation here is to register the supply of all goods on the PPSR. In fact, this should happen regardless, if not already doing. Set new credit limits on companies entering the SBR process and deciphering which companies to support based on their history of dealings with you. Openness and transparency is key. Security interest registrations and personal guarantees cannot be enforced during the SBR
“It has been discussed that a further reform could be to extend the eligibility criteria to $5M of total debt, instead of $1M. As these processes increase in popularity, credit managers should be alert to any contagion risk amongst its smaller customers in high risk industries.”
process. In this instance it’s time to revisit the terms and conditions of trade. Do those terms allow you to dictate how the proceeds from the sale of your goods are to be handled i.e. paid into a separate account on account of payment of those goods. If yes, you should seek to have the company confirm their practice. Engage with the RP. Share your concerns and tell them what you will need to see in their communications to allow you to vote for the
not to support the business via the supply of goods on credit (or COD as the case may be) during the period of the SBR and when voting on the Plan. If all of this sounds like a leap of faith, then I think your right. Keep alert to the SBR process and how it unfolds. If in doubt, please contact an insolvency practitioner you trust for support.
Plan. Unlike other forms of insolvency, there is no opportunity to remove and replace a RP from office. If faced with the prospect of a customer going into an SBR process, you will need to form your own view on the integrity of the RP and customer and use this to determine whether or 68
AICM Risk Report 2022
John McInerney MICM Partner, Restructuring Advisory Grant Thornton Australia T: +61 2 8297 2400 E: john.mcinerney@au.gt.com grantthornton.com.au
Simplified liquidations and changes to liquidator preference payments Henry McKenna MICM Director Vincents Insolvency & Reconstruction
Simplified Liquidations
Creditors in a Simplified Liquidation can still make
Simplified Liquidations came into effect from
liquidator.
reasonable requests for information from the
1 January 2021, although from looking at recent ASIC statistics, it appears that less than one
If funds will be available to pay a dividend to
percent (1%) of Creditors’ Voluntary Liquidations
creditors, the liquidator is only able to make one
are adopting the streamlined process – most likely
dividend payment. This is likely to be near the
because they don’t meet the eligibility criteria
end of the administration and there is no ability to
(which is outlined further below).
make an interim dividend distribution.
What is a Simplified Liquidation?
The liquidator in a Simplified Liquidation is
How is the Simplified Liquidation process different
still required to report alleged misconduct to
to a full creditors’ voluntary winding up?
ASIC if:
Meetings of creditors are not held in a Simplified Liquidation. Matters determined by creditors are decided without a meeting via the ‘proposal without a meeting process’. Also, creditors cannot form a committee of inspection.
z in the opinion of the liquidator, there are reasonable grounds to believe conduct constituting an offence under a law of the Commonwealth or a State or Territory in relation to the company may have occurred; and
A liquidator in a Streamlined Liquidation must
z that conduct has, or is likely to have, a material
report to creditors within three months of the
adverse effect on the interests of creditors as a
liquidator’s appointment, about:
whole or a class of creditors as a whole.
z any work performed to date by the liquidator; z the liquidator’s opinion on when the liquidation may be finalised; and z the likelihood of a dividend being paid to creditors. There are no other mandatory reports to creditors
Importantly for AICM members, in a Simplified Liquidation, unfair preference recoveries by liquidators, from non-related entities are limited to claims greater than $30,000 that occur 3 months prior to the relation back day (usually the date of
and the report that is sent has far less detail than
appointment). Previously there was no minimum
in a standard liquidation.
and the time frame was 6 months. AICM Risk Report 2022
69
INSOLVENCY
Overall, the purpose of a Simplified Liquidation
voluntary winding up must not exceed
is to reduce time incurred by the liquidator to
$1 million;
hopefully increase the return to creditors where there are recoveries by the liquidator; and also, to reduce time and costs being incurred by liquidators where there are little or no assets to pay them for tasks they might otherwise be required to do for no real benefit to the creditors.
3. the company will not be able to pay its debts in full within 12 months; 4. the directors must within five business days (after the day of the meeting of the company at which the resolution for voluntary winding up was passed) give to the liquidator:
What are the eligibility requirements?
a. a report on the company’s business affairs
A Simplified Liquidation is a streamlined creditors’
b. a declaration that they believe, on
voluntary winding up for companies that have
reasonable grounds, the company meets
liabilities less than $1 million. To be eligible for the
the eligibility criteria for the Simplified
simplified liquidation process:
Liquidation process will be met;
1.
the company must be in a creditors’ voluntary
5. no person who is a director of the company,
winding up where the event that triggers the
or who has been a director of the company
start of the winding up occurs on or after
within the 12 months before the date a
1 January 2021;
liquidator was first appointed, has been a
2. liabilities of the company on the day a liquidator is first appointed in the creditors’
director of another company that has been under restructuring or subject to the simplified
“Overall, the purpose of a Simplified Liquidation is to reduce time incurred by the liquidator to hopefully increase the return to creditors where there are recoveries by the liquidator...”
70
AICM Risk Report 2022
INSOLVENCY
liquidation process within the period of the
The liquidator must not adopt the Simplified
preceding seven years;
Liquidation process if, before the liquidator adopts
6. the company has not undergone restructuring or been the subject of a Simplified Liquidation process in the preceding seven years;
it, more than 25% in value of creditors provide a written statement to the liquidator requesting the liquidator not to follow the process.
statements, applications and other documents
When must a liquidator cease to follow the Simplified Liquidation process?
required under the Income Tax Assessment Act
The liquidator must cease to follow the Simplified
1997.
Liquidation process if:
7. the company has given all returns, notices,
A recent government review of the process has
z the eligibility criteria for the process are no longer met; or
acknowledged that the definition of “restructuring” in bullet points 5 and 6 above needs to be more
z the liquidator believes on reasonable grounds that the company, or a director of the
clearly defined.
company, has engaged in conduct involving fraud or dishonesty and that conduct has had,
Can a liquidator adopt the Simplified Liquidation process for a creditors voluntary winding up?
or is likely to have, a material adverse effect on
The liquidator in a creditors’ voluntary winding up
the interests of creditors as a whole or a class
may adopt the Simplified Liquidation process if:
of creditors as a whole.
z they believe on reasonable grounds the eligibility criteria are met; z not more than 20 business days have passed since the liquidator was first appointed; z the liquidator has given each member and creditor at least 10 business days before adopting the Simplified Liquidation process written notice of:
creditors when they find themselves faced with a Simplified Liquidation scenario. The two key questions for members then are: 1.
Do they anticipate they will benefit from the Simplified Liquidation process because of either less liquidator fees or a reduced ability for the liquidator to make preference recoveries due to the reduced relation back
grounds the eligibility criteria for the
period and the minimum quantum of a claim
Simplified Liquidation process will be met;
(being $30,000)?
an outline of the Simplified Liquidation
a statement they will not adopt the Simplified Liquidation process if at least 25% in value of creditors direct the creditor in writing not to adopt the simplified liquidation process; and
AICM members will most likely be acting for
a statement that they believe on reasonable
process;
Considerations for AICM members
2. Do they think that the Simplified Liquidation might be an abuse of process by the company’s director(s) and that a standard liquidation with more extensive investigations might lead to better prospects of dividends being paid to creditors? After those questions are considered, members
prescribed information, if any, on how the
can decide whether they want to support the
creditor may give the direction in writing not
process or actively oppose it when they receive
to adopt the Simplified Liquidation process.
notice from the liquidator. AICM Risk Report 2022
71
INSOLVENCY
Changes to liquidator preference payments
With this in mind, AICM members might wish to consider dropping credit limits to below $30,000 where it’s possible to do so.
The federal government plans to further simplify and streamline insolvency law, building on the recent introduction of the Simplified
Other changes coming
Liquidation process and the Small Business
From 1 July 2023, the Government is also
Restructuring process. It also follows a
providing an additional $20 million of funding over
government review of the Safe Harbour process.
two years to the Assetless Administration Fund,
The intention of the changes is to enable viable
which is a grant administered by ASIC from which
businesses which are facing financial challenges
liquidators will be able to apply for a grant of up to
to have an opportunity to restructure and
$5,000 per assetless liquidation, without needing
continue trading.
to provide evidence of potential misconduct. This recognises the high number of “Zombie
One of the reforms proposed is to make fairer
Companies” that need to be wound up often years
rules governing ‘unfair preference payment’ claims
after they ceased trading.
by liquidators for all liquidation types. In summary, creditors who act honestly shouldn’t be pursued
The Government is also clarifying the treatment
for small payments where a company they dealt
of trusts with corporate trustees under Australia’s
with enters liquidation.
insolvency law by introducing a legislative framework for the external administration of trusts.
Payments received by creditors that either
The framework will allow for greater efficiency
total less than $30,000 or are made more than
of the external administration of corporate
3 months prior to the company going into
trusts, ultimately supporting better outcomes
liquidation will no longer be able to be clawed
for distressed companies and their creditors. The
back by the liquidator, provided those payments
reform reflects the outcomes of the Government’s
are not to related creditors and are within the
2021 consultation, which demonstrated there is
ordinary course of business. This proposal mirrors
broad stakeholder support for reform.
what is already being done through the Simplified Liquidation process.
Finally, the Government is backing in reforms that provide greater certainty for company directors
“One of the reforms proposed is to make fairer rules governing ‘unfair preference payment’ claims by liquidators for all liquidation types. In summary, creditors who act honestly shouldn’t be pursued for small payments where a company they dealt with enters liquidation.” 72
AICM Risk Report 2022
seeking to save financially distressed but viable companies as part of the Government response to the Review of the Insolvent Trading Safe Harbour. These reforms have been commented on by Government, but the detail of the changes is not yet known.
Henry McKenna MICM Director Vincents Insolvency & Reconstruction E: hmckenna@vincents.com.au T: (02) 8224 8219 M: 0437 808 023 https://vincents.com.au/
2022
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