AICM
Insolvency
RISK REPORT
2020
Contents Welcome
3
ANALYSIS & COMMENTARY
By Nick Pilavidis, CEO
Resilience - using ratings to restore credit confidence Brad Walters
NATIONAL INSOLVENCY National snapshot
11
4
From the front line of insolvency
15
John Winter
Businesses must adapt in changing economic times
CORPORATE INSOLVENCY
Kirk Cheesman
Insolvency appointments z Annual z By appointment z By industry
17
5 6 7
Understanding Insolvency Risk: COVID-19 and Beyond
19
Patrick Coghlan
PERSONAL INSOLVENCY Publisher: Nick Pilavidis, CEO
Number of Debtors entering new administrations
8
Total Personal Insolvency
9
Enforcement statistics
10
Editor: Peter Gosnell | Insolvency News Online T: (02) 8005 7656 | M: 0414 879 060 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
This report has been produced by the AICM with contributions and data from Australian Financial Security Authority (AFSA), Australian Restructuring Insolvency and Turnaround Association (ARITA), Australian Securities and Investments Commission (ASIC), Equifax, National Credit Insurance (NCI) and CreditorWatch. 2
AICM Insolvency Risk Report 2020
Welcome FROM CEO The COVID-19 crisis is creating economic conditions
deep knowledge from industry experts to provide
never before seen by today’s credit professionals.
an unsurpassed analysis in respect of: z Historic insolvency trends
After an unparalleled run of growth, the Australian
z Trends in the lead indicators of insolvency
economy is facing significant contraction. For
z What these trends mean for you
almost 30 years credit growth in Australia has
Produced amid the most rapidly changing
been a constant. A generation of business leaders
economic conditions imaginable, this report
are unaware of the impact of a downturn or worse.
provides a valuable longterm resource for the
The economic threat posed by the Corona virus
interpretation of emerging trends along with
pandemic only serves to highlight the critical
insights central to determining how these may
value credit professionals provide to commerce
impact your credit operation. The report will
and enterprise through their ability to navigate
become a foundation against which trends and
uncertainty whilst managing cashflow, the
changes in years to come can be reliably measured.
lifeblood of all businesses. This, the inaugural Insolvency Risk Report, aims to
About the AICM
provide a comprehensive and detailed overview
Without our members, businesses are exposed to
of the underlying trends affecting credit and
reputational damage, poor cashflow management,
insolvency risk in Australia in 2020.
inefficient processes, the risk of regulatory intervention and the risk of not getting paid for
Commissioned in late 2019, the report came
hard won sales and services delivered.
about as a result of AICM members advising that uncertain economic headwinds would be the
The Australian Institute of Credit Management
number one challenge they expected to face in
(AICM) is Australia’s leading professional
the current year. We did not foresee the pandemic
membership body for over 2,600 commercial and
and the serious impact it will have on Australia’s
consumer credit professionals, and the only credit
financial security amid an already misfiring
industry-specific Registered Training Organisation
economy.
in the country. We are the voice of the credit management profession.
Drawing on the AICM’s extensive network of regulators, specialist industry bodies and
Our members are the custodians of cash flow.
key credit industry stakeholders, this report
They assess and mitigate credit risk in all sectors
summarises data from relevant public and private
and manage credit terms for the supply of goods,
sector sources, complimented by insights and
services and finance.
3
AICM Insolvency Risk Report 2020
National INSOLVENCY National Snapshot Corporate and Personal Insolvency Appointments by State July 2018 to June 19
69 | -19.7% 287 | -18.5% 2,116 | -5.5% 8,065 | -12.7%
1,205 | -18.2% 3,494 | -13.1% 408 | -18.2% 1,587 | -17.5%
3,651 | +4.8% 7,844 | -14.0% 181 | -9.95% 3,026 | +0.16%
310 | -24.0%
4,674 | -18.3% CORPORATE
PERSONAL
NSW 3,651 +4.8% Victoria 3,026 +0.16% Queensland 2,116 -5.5% South Australia 408 -18.2% Western Australia 1,205 -18.2% Tasmania 91 +54.23% Northern Territory 69 -19.7% ACT 181 -9.95% Australia Total 10,748* -2.8% *In 2017/18 the annual national total for Corporate Insolvency was 11,057
4
NSW 7,844 Victoria 4,674 Queensland 8,065 South Australia 1,587 Western Australia 3,494 Tasmania 618 Northern Territory 287 ACT 310 Australia Total 27,058#
-14.0% -18.3% -12.7% -17.5% -13.1% -22.7% -18.5% -24.0% -15.1%
91 | +54.23% 618 | -22.7%
In 2017/18 the annual national total for Personal Insolvency was 31,859 #
AICM Insolvency Risk Report 2020
Corporate INSOLVENCY Insolvency Appointments Annual
This data is drawn from ASIC’s series 2 data and show the number of insolvency appointments recorded for the period. As a company can be under more than one form of insolvency appointment at any one time and can progress from one type to another, a company can be included in these statistics more than once. Click here for more information.
Insolvency appointments peaked in 2012/2013 in the wake of the GFC before generally reducing. It is likely that COVID-19 related insolvencies will start to emerge in 2020/2021 data.
“A credit professional needs to have an understanding of insolvency risk and use their specialist skills, experience and knowledge to protect their business from reputational damage, poor cashflow management, inefficient processes, breached regulatory requirements and the risk of non or late payment for sales and services delivered.” – Kirk Cheesman, NCI 5
“It’s also important to understand a business’s trade payment performance. Equifax notes those with an average of 15+ days past due are nearly 4x more likely to have an adverse event recorded in the next 12 months.” – Brad Walters, Equifax AICM Insolvency Risk Report 2020
Corporate INSOLVENCY
Insolvency Appointments By Appointment Type Table 2.3: Insolvency appointments – Appointment type – Annual
Period
Wind-up
Receiver
Scheme administrator appointed
Voluntary Deed Administration Administration
Foreign/RAB wind-up
Total
2007-2008
8,612
1191
1
2,158
562
0
12,524
2008-2009
9,954
2619
25
2,258
711
0
15,567
2009-2010
9,392
2462
4
1,657
541
0
14,056
2010-2011
9,801
2649
5
1,614
497
0
14,566
2011-2012
10,846
2403
0
1,615
552
0
15,416
2012-2013
11,212
2541
0
1,644
418
0
15,815
2013-2014
9,938
2326
2
1,307
410
0
13,983
2014-2015
9,220
1804
0
1,326
376
0
12,726
2015-2016
10,347
1449
6
1,652
399
0
13,853
2016-2017
8,513
1006
2
1,272
505
0
11,298
2017-2018
8,405
1068
7
1,182
395
0
11,057
2018-2019
7,993
1048
8
1,277
422
0
10,748
Receiverships steadily declined after 2010-2011 and wind ups have consistently been the most common appointment type.
“Rather than an enormous number of voluntary administrations (VAs) which would have started already, I think we will see a slow drip feed of them as people take stock over the coming months and realise they either won’t be able to get going again, or chose not to get going again.”
“Indicators of sector or geographic insolvency risk are helpful in making generalisations about risk exposure and manage trading terms ahead of any build-up of debt” – John Winter, ARITA.
– Patrick Coghlan, CreditorWatch “We expect to see more creditor support for their debtors with a greater willingness to approve extended payment periods and to agree to repayment plans.” – Kirk Cheesman, NCI
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AICM Insolvency Risk Report 2020
Insolvency Appointments
Corporate INSOLVENCY
By Industry: July 2018 to June 2019
© Australian Securities & Investments Commission
The Construction, Accommodation & Food Services and Retail sectors regularly feature among those industries with the highest proportion of insolvencies. Post COVID-19, a detailed understanding of individual customers will be required to understand the specific impacts on that business.
“ARITA members are seeing rising inquiries and distress among tourism, hospitality, retail and resources and construction.” – John Winter, ARITA.
“The economic cost of insolvency is significant, with 96% of unsecured creditors estimated to receive less than 11c in the dollar” – Brad Walters, Equifax
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AICM Insolvency Risk Report 2020
Personal INSOLVENCY July 2018 to June 2019 Total Personal 180, -15.9%
11,549 -22.1%
n Debt Agreements
15,329 -8.8%
n Personal Insolvency Agreements
n Bankruptcies
NSW
ACT
VIC
48, -4.0% 3,540 -20.7%
5, +150%
151 -31.4%
4,256 -7.6%
QLD
6, -71.4% 576 -24.7%
8
1,005 -11.7%
2, -33.3% 143 -25.1%
142 -10.1%
TAS 45, +18.4%
1,368 -28.7%
2,581 -15.8%
NT
4,581 -8.6%
WA
2,066 -21.2%
154 -17.2%
SA 43, -30.6%
3,441 -17.3%
27, -20.6%
2,081 -0.8%
4, +33.3% 256 -22.9%
358 -22.8%
For further information on these statistics, please read the Guide to provisional personal insolvency statistics click here
AICM Insolvency Risk Report 2020
Number of Debtors entering new Administrations July 2018 to June 2019
Personal INSOLVENCY
Total Debtors 4,938 18% n Business Related
22,534 82%
n N on-Business Related
Number of Bankrupts
Number of Debt Agreement Debtors 824 7.1%
4,065 25.8%
11,670 74.2%
10,725 92.8%
NUMBER OF DEBTORS ENTERING NEW ADMINISTRATIONS UNDER THE BANKRUPTCY ACT 1966, 2018-2019 State/ territory
Number of bankrupts Business related
Nonbusiness related
Total
NSW
962
3,370
ACT
36
119
Vic
712
Qld SA
Number of debt agreement debtors Business related
Nonbusiness related
4,332
242
3,298
155
5
146
1,912
2,624
172
1,322
3,409
4,731
234
810
1,044
NT
43
109
WA
661
Tas Other Total
Total
Number of personal insolvency agreement debtors
Total debtors
Business related
Nonbusiness related
Total
Business related
Nonbusiness related
3,540
14
36
50
1,218
6,704
151
2
3
5
43
268
1,894
2,066
7
21
28
891
214
3,227
3,441
10
34
44
36
540
576
2
5
7
152
9
134
143
0
2
1,500
2,161
129
1,239
1,368
13
52
309
361
16
240
256
43
132
175
1
7
8
4,065
11,670
15,735
824
10,725
11,549
Proportion of debtors with a business related personal insolvency Total
Bankrupts
Debt agreement debtors
Personal insolvency agreement debtors
Total debtors
7,922
22.2%
6.8%
28.0%
15.4%
311
23.2%
3.3%
40.0%
13.8%
3,827
4,718
27.1%
8.3%
25.0%
18.9%
1,546
6,670
8,216
27.9%
6.2%
22.7%
18.8%
272
1,355
1,627
22.4%
6.3%
28.6%
16.7%
2
52
245
297
28.3%
6.3%
0.0%
17.5%
35
48
803
2,774
3,577
30.6%
9.4%
27.1%
22.4%
1
3
4
69
552
621
14.4%
6.3%
25.0%
11.1%
0
0
0
44
139
183
24.6%
12.5%
–
24.0%
49
139
188
4,938
22,534
27,472
25.8%
7.1%
26.1%
18.0%
Note: State/territory “Other” includes records where no address is stated, records coded to Other Territories and records where the stated address is not in the Australian Statistical Geography Standard (ASGS). For further information please read the Guide to business and non-business personal insolvency activity click here
9
AICM Insolvency Risk Report 2020
Personal INSOLVENCY
AFSA Enforcement statistics July 2019 to December 2019
Personal insolvency related (Bankruptcy Act 1966)
432 pre-referral
37 infringement
457 a lleged
38 b riefs of evidence
157 o fficial
36 b riefs accepted
enquiries assessed
notices issued
offence referrals assessed
forwarded to CDPP
for prosecution by CDPP#
cautions issued
Include a portion of the briefs prepared and referred to the
#
CDPP in the previous financial year. Supplied by AFSA
Offence referrals and investigations Pre-referral enquiries: During the year, 432 PREs were assessed. Of these 264 did not require a detailed offence referral. Alleged offence referrals: 457 offence referrals were assessed in the year, of which 339 were accepted for investigation. Investigations AFSA assesses alleged offence referrals for investigation as either compliance or complex offence matters. Compliance offences During the year, 105 compliance investigations were completed. Of these, 47 alleged offenders complied with their obligations after Enforcement intervention.
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Complex offences During the year, 183 complex investigations were completed. Infringement notices During the year, 5 infringement notices were issued to registered trustees, with 32 issued to others*. During the year, 7 infringement notices were withdrawn. *Others includes petitioning creditors, RDAAs, controlling trustees and executors for deceased estates.
Prosecutions 66 persons were prosecuted for a total of 126 charges during the year. Of those charges, 17 were withdrawn, 94 proven with conviction, 8 proven without conviction and 3 not proven.
AICM Insolvency Risk Report 2020
Analysis & COMMENTARY Resilience – using ratings to restore credit confidence By Brad Walters Head of Product and Rating Services, Equifax Australia Brad Walters knows well the risk insolvency poses
– changes that will impact court and creditor
to a set of otherwise adequately weighted credit
wind-ups.”
terms. In addition to insolvency laws being relaxed, As head of Equifax Australia’s Credit Ratings
Mr Walters identified other initiatives that will
business he oversees a continuous process of
provide temporary relief including:
financial diagnosis, assessment and rating of all
z easing of capital requirements
manner of credit risk exposures. And insolvency
z mortgage deferral
poses particular dangers.
z small business debt relief (for those with <$3m in total debt)
“The economic cost of insolvency is significant, with 96% of unsecured creditors estimated to receive less than 11c in the dollar,” Mr Walters said. And he cautioned that those numbers will need adjustment once the full impact of the COVID-19 pandemic can be assessed. “Credit managers are experiencing unprecedented times and possibly being presented with challenges they’ve never seen before,” Mr Walters
z $90b funding facility for ADIs to support SME lending z SME guarantee scheme (50% of loan, up to $250k) z Employer cash support payments (up to $100k) z business investment support (including asset write off to $150k) z other State Govt stimulus (including payroll tax waivers, business grants/loans)
said. “While I would envisage there is strong universal support for tax relief, I also acknowledge there will be some with strong views around other measures, including temporary director relief (from insolvent trading) and higher thresholds and more time to respond to creditor demands 11
“Credit managers are experiencing unprecedented times and possibly being presented with challenges they’ve never seen before,” Mr Walters said. AICM Insolvency Risk Report 2020
“Given the unprecedented disruption to both
“Now would also be timely for credit professionals
domestic and global economies currently
to review the range of services available to assist
being experienced, credit professionals should
them in this process.”
consider augmenting their current credit assessment processes (especially for their larger
To this end Mr Walters recommended credit
credit exposures) by having a similar, open
professionals employ the following tools:
dialogue with their customers around these
z Portfolio risk monitoring
impacts and their respective business plans & activities to manage through this season,” Mr Walters said.
z Financial viability assessments z Registering security interests z Digital customer verification
“While there were 355,722 new businesses, there were 293,260 exits representing a 12.7% exit rate (up from a 12.5% exit rate in 2018).
z Fraud check services In terms of assessing the risk posed by larger credit exposures Mr Walters stresses the value in reviewing three areas – a company’s financials; its business and its people.
Consumer Defaults Equifax continues to actively engage all customers on their default provision for all portfolios. z Credit card decreased by 17.7% and Personal Loan default provision increased by 4.3% QoQ during 2019 Q4 period. z Mortgage defaults continued to experience a steep QoQ rise during the 2019 Q4 period. z Total Personal Insolvencies (as reported by AFSA), decreased 8.1% QoQ, for Q3 2019.
Credit Defaults Reported per Quarter Indexed to Sep QTR 2012
Bankruptcy & Personal Insolvency Credit Cards Personal Loans Mortgage
12
Analysis & Commentary
AICM Insolvency Risk Report 2020
“At 30 June 2019 there were 2.4 million actively trading businesses in the Australian economy,” Mr Walters said.
more likely to have an adverse event recorded
“A business’ financials are critical to understanding
“Some credit exposures can be quite complex,”
insolvency risk, especially when reviewing
Mr Walters said. “Understanding the various
businesses that generate sales revenue in excess
business linkages and potential contagion risk
of $5 million,” Mr Walters said.
is important prior to extending credit.”
“We’ve observed that financial statement analysis
It’s therefore important to understand who is
provides more than a 40% uplift in predicting
behind the business.
in the next 12 months. Understanding a business’s legal and ownership structure, including identifying where possible its proprietors, directors, related parties, and ultimate beneficial owners is also critical.
insolvency for these businesses.” “Some individuals can be seen propping up their It’s also important to understand a business’ trade
business through personal finance and may also
payment performance. Equifax notes those with
propose personal indemnities to support business
an average of 15+ days past due are nearly 4x
credit applications,” Mr Walters said.
Insolvency Trends
13
Analysis & Commentary
AICM Insolvency Risk Report 2020
“They may be financially vulnerable or exposed to other distressed businesses, so credit professionals should utilise both commercial and consumer reports and services to identify and make the necessary assessments,” he said. Especially as businesses with adverse information on file are significantly more likely to fail, being
“Insolvency appointments, which have decreased each calendar year since 2016, have most recently shown an annual increase of 5% to December 2019”.
up to 20x more likely than average. “At 30 June 2019 there were 2.4 million actively
price shocks and COVID-19 impacting global trade
trading businesses in the Australian economy,”
and supply.
Mr Walters said. Mr Walters is however encouraged by a growing “While there were 356k new businesses, there
focus on director traceability, phoenix operators,
were 293k exits representing a 12.7% exit rate
subcontractor payments and tax delinquency
(up from a 12.5% exit rate in 2018). While there
disclosures. He said credit professionals can take
have been some positive signs, industry remains
comfort in the knowledge that a business does not
exposed to several risk factors with increased
fail overnight and advised there are early warning
uncertainty and subdued sentiment following
signs enabling people to protect themselves from
significant market volatility on the back of oil
financial harm.
Commercial Defaults and Judgements by State Proportion to the Number of Active Entities, 2019 Q4 Commercial Defaults – State
Commercial Default Judgements – State
Previous 2 Years
Previous 2 Years
Eastern States (NSW, QLD, VIC and ACT) have the highest proportion of commercial defaults in Australia
NSW has the highest proportion of commercial default judgements.
Business Credit Demand Index by Equifax
14
Analysis & Commentary
AICM Insolvency Risk Report 2020
From the front line of insolvency
By John Winter, Chief Executive Officer of ARITA “There is a real risk that businesses will now push The Australian Restructuring Insolvency and
the maxim “you can’t get more broke than broke”
Turnaround Association (ARITA) doesn’t collect
even further and that some will attempt to rack
and collate data related to insolvency and its
up bills without concern or, perhaps, will just do so
effects on credit.
out of sheer desperation.
But as Chief Executive Officer John Winter points
“Concerns about insolvent trading claims always
out, the peak body representing Australia’s
acted as a moderator to reckless director
restructuring and insolvency profession has
behaviour in the majority of instances. But now the
something equally valuable.
handbrake is off and the car is rolling down the hill.
“ARITA is in the unique position of being in daily
“There’s a practical reality that businesses in many
discussion with insolvency professionals from
sectors are absolutely already hopelessly insolvent
across the country,” Mr Winter said.
and so credit professionals almost need to move to a default assumption that your client won’t be
“We gather anecdotal information about what
able to pay,” Mr Winter said.
level and type of inquiries our members are fielding – canary in the coal mine type information.”
Unfair Preferences
“Our members will be talking about a range
“It does need to be said that unfair preference
of support that covers everything from early-
claims in this environment are going to be
stage distress where informal restructuring
challenging for credit professionals,” Mr Winter said.
and turnaround is the solution, through to providing safe-harbour advice to directors
“A liquidator’s legal requirement is to pursue unfair
who are likely to have to trade while insolvent
preferences. Credit professionals will need to take
in a turnaround, right through to taking a
note that, as mentioned above, you’re almost
formal appointment over a business that’s
going to need to presume a debtor is insolvent
insolvent,” Mr Winter said.
and that will open you up to unfair preference claims should they fail.
So what trends are ARITA’s member’s seeing as the Australian economy grapples with combined
“To avoid preference claims from a liquidator,
effects of a devastating bushfire season and the
credit professionals need to be well out in front
economic freeze bought on by the COVID-19
of any insolvency risk and to be able to shift
pandemic?
trading terms to manage any exposure,” he said.
Insolvent Trading
Sectors at Risk
“The suspension of insolvent trading provisions
“ARITA members are seeing rising inquiries and
should be a red-flag to all credit professionals,”
distress among tourism, hospitality, retail and
Mr Winter said.
resources and construction,” Mr Winter said.
15
Analysis & Commentary
AICM Insolvency Risk Report 2020
“The distress could well signal greater problems ahead, but inquiries, and their timing, is also a positive. “We know that many credit professionals are wary of safe harbour out of concern that it may increase their losses,” he said. “Instead, it means that even though there may be some sanctioned insolvent trading, there’s a greater likelihood of the businesses trading through their distress and going on to repair not just current debts but to also remain a productive customer – and that’s an outcome we should all
This is unprecedented and it threatens the solvency of a significant portion of business community. Counterparty risk is absolutely everywhere. Government stimulus means zero, or worse, if businesses are directed to close or have supply or demand collapse.”
aspire to.” Given the level of familiarity its members have with the various stages of distress, ARITA is well
“A credit professional can use those insights to
aware that insolvency risk is the primary risk of
stress test their approach to retail creditors.
default facing a credit professional in respect of an amount they’re owed.
“You can delve into the success or otherwise of the online channel of a retailer. You can see
And as Mr Winter points out, in many cases
reviews online from unhappy customers that
insolvency will represent a near or total loss
may indicate your borrower is experiencing
scenario, which is why credit professionals have
some of the same issues that preceded collapses
to know a borrower’s business intimately.
of other retailers.”
Whilst nominating cash flow, reserves and debt
And he has a warning for those in the business
maturity as the obvious areas where credit
of making loans and managing credit. “There’s
professionals are likely to uncover insolvency-
an increasing number of people and businesses
related risk, Mr Winter said the value of those
coming in to see liquidators for advice about
orthodox approaches can be enhanced by looking
their circumstances,” he said.
outside the square. “Secondly, insolvency practitioners are reporting “Indicators of sector or geographic insolvency
more and more people seeking advice to cover
risk are helpful in making generalisations about
themselves with the safe harbour provisions.
risk exposure and manage trading terms ahead of any build-up of debt,” Mr Winter said.
“The enormity of the financial impact of COVD-19 still hasn’t dawned on people,”
“Following the news is also a great way to see
Mr Winter warned.
where risk is unfolding,” he said. This is unprecedented and it threatens the “For example, the coverage of various recent
solvency of a significant portion of the business
retail sector collapses and the commentary from
community. Counterparty risk is absolutely
the liquidators charged with managing those
everywhere. Government stimulus means zero,
appointments gives a powerful insight into the
or worse, if businesses are directed to close or
systemic risks in the sector,” he said.
have supply or demand collapse.”
16
Analysis & Commentary
AICM Insolvency Risk Report 2020
By Kirk Cheesman, Managing Director, NCI
With COVID-19 and the measures imposed to
“We expect to see escalating late payments by
combat its spread freezing cash flow across
businesses and declining levels of communication
large expanses of Australia’s economy, assessing
with creditors,” Mr Cheesman said. “There will also
insolvency risk has never been more critical or
likely be an increase in court actions, referrals to
more difficult.
debt collection agencies, and wind-up actions.”
Helping businesses stay afloat until Australians
Mr Cheesman cited increasing levels of insolvency
can spend or trade confidently again has involved
in the Retail, Building and Construction sectors,
relieving buyers of a range of insolvency-related
the impact of recent bush fires on agriculture-
obligations while at the same time curbing lenders’
related industries and COVID-19’s devastating
and suppliers’ rights.
effect on a wide range of industries such as tourism, travel and hospitality as key areas of
Repayment thresholds have been raised, defaulters
concern.
can now sit on a statutory demand for up to six months and directors can trade while insolvent for
Mr Cheesman advised credit professionals to
six months with little to fear.
beware of companies that lose projects and make staff redundancies.
Kirk Cheesman, from leading trade credit insurance broker NCI, is ideally placed to see the trends
“Both domestically and globally, late payments,
in insolvency risk emerging from this radical, if
insolvencies and bankruptcies have been
temporary, change in the commercial landscape.
increasing,” he said.
Claims
17
Analysis & Commentary
Collections
Reductions
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Q4 2014
Q3 2014
Q2 2014
Index Breakdown
Q1 2014
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
“There’ll also likely be an increase in court action, debt collection actions and wind-up actions” Q3 2018
Q2 2018
Businesses must adapt in changing economic times
Overdues
AICM Insolvency Risk Report 2020
Trade Credit Risk Index Score 1,000 900 800 700 600
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Q4 2014
Q3 2014
Q2 2014
500 Q1 2014
Trade Credit Risk Index Score
“With the COVID-19 virus and its effect on businesses we expect to see more creditor support for their debtors as to approving later payment days and repayment plans”
Index Score
“With the COVID-19 pandemic there is a real
insolvency risk, they needed to focus on correctly
concern that rate of increase will accelerate.
identifying the legal entity and to continuously
Leading economists advise to brace for a financial
analyse adverse information on credit reports,
crisis once we emerge from the current health
financial, and trading information to confirm
crisis.”
that their customers continue to maintain a satisfactory operating position.
was known pre-COVID-19 will be different to “We expect to see more creditor support for their
the impact of reduced trade during the crisis,
debtors with a greater willingness to approve
therefore, being prepared and diligent will see
extended payment periods and to agree to
businesses better placed when opportunities
repayment plans.”
emerge after the crisis.
He said he expected that there would also be
“A credit professional needs to have an
more creditors voting in favour of Deed of
understanding of insolvency risk and use their
Company Arrangements (DoCA) when a company
specialist skills, experience and knowledge, to
enters Voluntary Administration (VA) and fewer
protect their business from being exposed to
votes cast in favour of liquidation.
reputational damage, poor cashflow management, inefficient processes, breached regulatory
He also suggested that, to give credit
requirements and the risk of non or late payment
professionals their best chance of understanding
for sales and services delivered,” Mr Cheesman said.
18
Analysis & Commentary
AICM Insolvency Risk Report 2020
2017
2017
needed to be addressed without delay. What
2016
attempt to adapt to the uncertainty.
2016
deterioration in a business’s financial position
2016
negative, Mr Cheesman said, as businesses
2015
In concluding, Mr Cheesman said that any
2015
Emerging trends won’t however be uniformly
2015
defaults are critical,” he said.
2015
‘Prompt Payment Protocols.
2014
or alert factors such as court actions or payment 2014
businesses to small businesses and are proposing
2014
“Credit information reports showing no adverse 2014
by the late payments coming from larger
2016
“The Australian government is already concerned
Understanding Insolvency Risk: COVID-19 and Beyond By Patrick Coghlan Chief Executive Officer, CreditorWatch Assessing insolvency risk is something
“We’re being inundated with requests for help and
CreditorWatch Chief Executive Officer Patrick
advice from B2B creditors who are communicating
Coghlan does every day and he is already seeing
to us that customers are flat out refusing to pay as
trends emerging in respect of the COVID-19
the government has essentially given them license
pandemic.
to do so.”
“Having had an opportunity to digest and see the
Mr Coghlan said the government changes, which
response to the insolvency changes, I am seeing
he regards as necessary, have allowed businesses
and hearing that the first wave of businesses
to adopt a wait and see approach.
affected by COVID-19, that is those reliant on foot traffic (hospitality and retail), benefited immediately
“Rather than an enormous number of voluntary
from the changes as their trade went to almost zero
administrations (VAs) which would have started
within a matter of days,” Mr Coghlan said.
already, I think we will see a slow drip feed of them as people take stock over the coming months
“We know most small businesses have a couple
and realise they either won’t be able to get going
of weeks, maybe a month or two of cash reserves
again, or chose not to get going again,” he said.
that would’ve been wiped out pretty quickly. “The big question is what happens in 6 months,” “They can now sit and wait it out. However, what
he said. “My best guess is we see a serious
is becoming more apparent and probably an
increase in VAs and from there an increase in
unexpected consequence of these legislative
creditor wind ups.
changes is that debtors in general are now using them as a reason to not pay bills at all, even if
“The legislative changes have essentially kicked
they do have cash in the bank.
these down the road. While there is a lot of
2019
In 2019, SME insolvencies decreased but payment defaults increased, spelling trouble for 2020 In 2019, SME insolvencies decreased but payment defaults increased, spelling trouble for 2020
Pa ym
19
Analysis & Commentary
ent defaults
Yo
Y
Ins
Y olvencies Yo decrease
Ins
olvencies Yo
Y
increase
ul
ts
ul
ts
01 8t Q4 2019o Q4 2019
Y ent defaults increase
decrease
oY
15% 15%
4
Q inc increase rease from
2
to
increase Pa ym
14% 14%
01 8
30% 30%
a a ef ef td td Paymen Paymen
“We’re being inundated with requests for help and advice from B2B creditors who are communicating to us that customers are flat out refusing to pay as the government has essentially given them license to do so.”
SMALL BUSINESS RISK REVIEW SMALL BUSINESS 2019 RISK REVIEW 2019RISK REVIEW SMALL BUSINESS
inc r
ease from
Q4
2
AICM Insolvency Risk Report 2020 YOY DEFAULTS BY INDUSTRY
goodwill and sympathy out there from creditors
Mr Coghlan suggested that the government
who are still trading, this will soon run out as they
may have to establish its own insolvency/
have their own bills to pay and essentially have
administration/liquidation authority to wind
been left with no leverage whatsoever at the
up valueless companies.
moment to chase unpaid bills.” don’t think the court system will be able SMALL “IBUSINESS RISK REVIEW to handle the influx of statutory demands,” “I don’t think we have heard the end of these 2019 Mr Coghlan said. changes from the government,” Mr Coghlan said. With expectations that insolvencies will soar “There will be a lack of insolvency practitioners insolvencies decreased butper payment past the current sub-10,000 annum average, and resources to deal with the increase in In 2019, SME defaults increased, spelling trouble for 2020 Mr Coghlan said it was paramount that credit insolvencies and I believe a large percentage of the companies entering insolvency will have
professionals register their security (PPSR) and
$0 to liquidate meaning insolvency practitioners
wherever possible obtain cash up front (or at
will shun them.”
least a sizeable deposit).
ent defaults
Ins
olvencies Yo
Y
Q4 2019
increase
ul
ts
to
decrease
Y Yo
01 8
increase Pa ym
15%
a ef
“The legislative changes have essentially kicked these down the road. While there is a lot of goodwill and sympathy out there from creditors who are still trading, this will soon run out as they have their own bills to pay and essentially have been left with no leverage whatsoever at the moment to chase unpaid bills.”
14%
td Paymen
30%
inc r
ease from
Q4
2
SMALL BUSINESS RISK REVIEW 2019 YOY DEFAULTS BY INDUSTRY Data showing year on year changes in default rates
12% -12% 26% 21% 29% 24% 17% 25% 64% -5% 28% 61% 24% 19% 73% -11% 79% -29% -42%
20
Analysis & Commentary
YOY COURT ACTIONS BY STATE AICM Insolvency Risk Report 2020 Data showing year on year changes
21% 29% 24%
“One insolvency practitioner I spoke 17% to said “utilise
“It of course depends on the size of the credit being
a ‘Deed of Forbearance’.
offered and just how critical a supplier you are to
25%
your customers, however the danger in providing 64% “Basically say to your -5% debtor, “we won’t chase you
credit at the moment cannot be understated as a
for X months and you can then pay the debt 28%off
result of these legislative changes.
over at an agreed rate, but in return you agree for us to register on the PPSR and get security on our 24% assets,” Mr Coghlan said. 19%
61%
“In most cases you can still pay legal fees and seek judgement, you don’t have to wait 6 months to do that.”
73%
-11% 79% -29% -42%
SMALL BUSINESS RISK REVIEW 2019
YOY COURT ACTIONS BY STATE Data showing year on year changes in court actions by state
+9% nationally
+33
+11%
%
+57%
+39%
“There will be a lack of insolvency practitioners and resources to deal with the increase in insolvencies and I believe a large percentage of the companies entering insolvency will have $0 to liquidate meaning insolvency practitioners will shun them.”
+4% -35%
RISKIEST INDUSTRIES Data showing days to payment for select industries in Q4 2019
Construction = 64 IT, Media and Telco = 62 Financial Services = 63 Rental, Hiring, and Real Estate = 66 Retail = 28 Admin and Support Services = 90
21
Analysis & Commentary
AICM Insolvency Risk Report 2020
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