Insolvency

Global insolvencies

- how we stack up - and what to expect next

By Andrew Spring MICM*

In 2020, there was plenty of discussion about the looming global insolvency time bomb as a result of the pandemic, with predictions of an insolvency “tsunami” being touted on street ‘zoom’ corners and throughout mainstream media. However, with governments around the world scrambling to save companies battered by the pandemic and rolling out major support measures, those figures have been readjusted in many parts of the world.

The various business support measures implemented at all levels of government have resulted in the unlikely decrease in businesses entering external administration during 2020, highlighted in the recent AICM Risk Report 2021. However, locally, and around the world, zombie companies are coming to the surface as the measures come to an end. In its report 2021-2022: Vaccine Economics, trade credit insurer Euler Hermes states: “The broad-based extension of ‘temporary’ support ➤

How many insolvencies will the next two years bring?

Projected increase in business insolvencies in 2021 and 2022 compared to 2019 (%)

NORTH AMERICA INDEX

USA

BRAZIL

UK

CHINA

FRANCE

GERMANY

GLOBAL INDEX

SOUTH AFRICA

JAPAN

INDIA

SOUTH KOREA

AUSTRALIA

NEW ZEALAND

ASIA PACIFIC INDEX

-10 % 0 %

NORTH AMERICA / GLOBAL / ASIA PACIFIC INDEX 2021

-10 Source: Euler Hermes

0

10 %

10

20 % 30 % 40 %

NORTH AMERICA / GLOBAL / ASIA PACIFIC INDEX 2022

20 30 40

50 %

2021

60 %

2022

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measures into 2021 is likely to keep insolvencies artificially lower for longer but their phasing out should start an increase in insolvencies as early as the second half of 2021.

“The phasing out of support measures remains critical and uncertain. Any new extension in terms of timing or magnitude would lead to a modified outlook, with less insolvencies in the short term but more insolvencies in the long term due to the increased ‘zombification’ of companies, notably in the sectors most impacted by the crisis.”

Australia’s handling of the health crisis has led to a largely re-opened economic marketplace. As such, it seems likely that any further government support will be targeted rather than all-encompassing. Therefore, there is a degree of confidence in the conditions that are relied upon in the forecasts. According to Euler Hermes’ Global Insolvency Index, Australia’s insolvencies are predicted to be 10 per cent higher in 2021 and 10 per cent higher in 2022 compared to 2019. That compares to a 41 per cent decrease in 2020. Over the ditch, New Zealand is also predicted to see a 10 per cent increase in 2021 and 2022, after experiencing an 11 per cent decrease in insolvencies in 2019 and 16 per cent decrease in 2020. The Index also predicts that the Asia-Pacific region will outperform other regions of the world, with a 4 per cent increase in insolvencies in 2021 and 18 per cent next year compared to 2019.

Based on the above graphic, a number of countries are predicted to experience, if not an insolvency

“Australia’s handling of the health crisis has led to a largely re-opened economic marketplace. As such, it seems likely that any further government support will be targeted rather than all-encompassing.”

“In Australia, government support has cushioned the fall and put the country in a strong position compared with many other regions. But now that the stimulus “well” has dried up and the expenses still need to be paid, some businesses will have accumulated and potentially further losses that will result in them requiring the support of our insolvency regime. ”

“tsunami”, then perhaps a “king tide”. However, anecdotally, we are hearing from our colleagues across the globe that much will depend on the attitude of each country’s governments to extend support measures to manage the fall out. We have seen that the UK government has extended its “furlough” support, which provides the equivalent of 80% wage support to employees that have been “stood down” due to the pandemic, until September 2021. In France, over half a trillion Euro in support measures have been announced, including continued forbearance measures relieving distressed companies of their obligation to file for insolvency. And in Germany, an impending election this year has been suggested as a further motivation for continued support from government. As for the USA and Brazil, the vaccination program and the continued removal of trading restrictions, in contrast to some of the European countries’ approaches, seem to coincide with a predicted accelerated requirement for insolvency appointments in these countries. Therefore, it may be that the insolvency levels predicted above, include a timing element, may scarily extend the financial burden for some economies past the 2022 timeframe explored above. Which country gets it right economically is anyone’s guess and will only be measurable with the benefit of hindsight – but I am not disappointed to be situated “down under” right now.

In Australia, government support has cushioned the fall and put the country in a strong position compared with many other regions. But now that the stimulus “well” has dried up and the expenses still need to be paid, some businesses will have accumulated and potentially further losses that will result in them requiring the support of our insolvency regime. At this point, it is important for all stakeholders, but particularly creditors to be aware that the insolvency framework in Australia is a safety net. When accessed and utilised correctly, at the first signs of distress it can protect the debtor, the employees, the customers and the creditors from unnecessary loss.

Recent observations – “around the grounds”

Some recent observations from my colleagues around the country provide some insight into the moving risk landscape for creditors in a post-stimulus marketplace:

From my West Australian colleagues, we are hearing that “There’s a lot of legacy ATO debt that will raise its head once the ATO initiates collection again.”

The Queenslanders note that the ATO is still not winding up companies yet. “It remains the sleeping giant, there’s definitely been an uptick in enquiries since January, and particularly in the past few weeks. May will be a real ‘tell’ as to what lies ahead.”

Victorian Partners believe an increase in insolvencies will come in late May/June. “Following the extended lockdown in Melbourne, there are more people about and back in their offices, and more discussions about how businesses are faring is taking place”.

Our Newcastle office has also noticed a small increase in enquiries, saying: “We are now seeing the smarter people who can see the writing on the wall. But from what I’m seeing, many still have their heads in the sand.”

As for Sydney, we have noticed a change in communication from ‘We’ll wait and see’ to ‘We need to act’. The common theme is around deferred liabilities, particularly tax liabilities, and the increasing pressure to pay.

Overall, the message continues to be “remain vigilant”. The world is experiencing a common event but is implementing a variety of wide ranging strategies to combat it. It is unlikely that anyone will be completely insulated from the impact, but some trading partners may show the signs of distress at different stages depending on government responses. As always, caution should be shown when considering the risk profiling for customers. But, positively, the forecasts do show that Australia’s “scarring” is unlikely to be as gruesome as some other nations.

*Andrew Spring MICM Partner, Jirsch Sutherland T: 1300 547 724 E: andrews@jirschsutherland.com.au