Businesses must adapt in changing economic times

By Kirk Cheesman, Managing Director, NCI

With COVID-19 and the measures imposed to combat its spread freezing cash flow across large expanses of Australia’s economy, assessing insolvency risk has never been more critical or more difficult.

Helping businesses stay afloat until Australians can spend or trade confidently again has involved relieving buyers of a range of insolvency-related obligations while at the same time curbing lenders’ and suppliers’ rights.

Repayment thresholds have been raised, defaulters can now sit on a statutory demand for up to six months and directors can trade while insolvent for six months with little to fear.

Kirk Cheesman, from leading trade credit insurance broker NCI, is ideally placed to see the trends in insolvency risk emerging from this radical, if temporary, change in the commercial landscape. “We expect to see escalating late payments by businesses and declining levels of communication with creditors,” Mr Cheesman said. “There will also likely be an increase in court actions, referrals to debt collection agencies, and wind-up actions.”

Mr Cheesman cited increasing levels of insolvency in the Retail, Building and Construction sectors, the impact of recent bush fires on agriculturerelated industries and COVID-19’s devastating effect on a wide range of industries such as tourism, travel and hospitality as key areas of concern.

Mr Cheesman advised credit professionals to beware of companies that lose projects and make staff redundancies.

“Both domestically and globally, late payments, insolvencies and bankruptcies have been increasing,” he said.

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“There’ll also likely be an increase in court action, debt collection actions and wind-up actions”

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“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”

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“With the COVID-19 pandemic there is a real concern that rate of increase will accelerate. Leading economists advise to brace for a financial crisis once we emerge from the current health crisis.”

“The Australian government is already concerned by the late payments coming from larger businesses to small businesses and are proposing ‘Prompt Payment Protocols.

Emerging trends won’t however be uniformly negative, Mr Cheesman said, as businesses attempt to adapt to the uncertainty.

“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.”

He said he expected that there would also be more creditors voting in favour of Deed of Company Arrangements (DoCA) when a company enters Voluntary Administration (VA) and fewer votes cast in favour of liquidation.

He also suggested that, to give credit professionals their best chance of understanding insolvency risk, they needed to focus on correctly identifying the legal entity and to continuously analyse adverse information on credit reports, financial, and trading information to confirm that their customers continue to maintain a satisfactory operating position.

“Credit information reports showing no adverse or alert factors such as court actions or payment defaults are critical,” he said.

In concluding, Mr Cheesman said that any deterioration in a business’s financial position needed to be addressed without delay. What was known pre-COVID-19 will be different to the impact of reduced trade during the crisis, therefore, being prepared and diligent will see businesses better placed when opportunities emerge after the crisis.

“A credit professional needs to have an understanding of insolvency risk and use their specialist skills, experience and knowledge, to protect their business from being exposed to reputational damage, poor cashflow management, inefficient processes, breached regulatory requirements and the risk of non or late payment for sales and services delivered,” Mr Cheesman said.

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