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WHAT HAPPENED TO THE PREDICTED INSOLVENCY DISASTER?

Kim Radok17 June 2021

Since the end of government support, it was said, that all the businesses with cashflow problems, poor reputations, and those with naïve business owners, would suddenly become insolvent. A flood of insolvencies would then follow.

Unfortunately for all the noise of success in the media and by governments, there was not ever going to be a short term flood of insolvencies. The real world does not operate that way. What will occur in fact is, there was always going to be a brief pause after the government support ended and any insolvencies would come through later. During this initial period, businesspeople will start to take stock of their situation and then make the hard decisions to close their business and appoint insolvency administrators.

The businesses which do close down in the initial period will primarily be composed of two types. The first will be those where the decision to close down had already been taken. The second type will be when business owners just closed down the business and walked away, without any insolvency administrator appointed.

If there is a flood of insolvency administrations, it will come in the next six to twelve months, or longer. The exception may be for those businesses located in Victoria where a fourth lockdown has commenced with no end in sight.

There are many factors at play as to why it will take some time for business insolvencies to start to take effect. A number of these factors are shown below.

  1. Desperate and naïve business owners will try to work something out in the hope they can trade out, or obtain finance to keep their businesses solvent. Many of these businesses will be forced to close anyway.
  2. The zombie businesses will continue to operate for some time due to the support of desperate suppliers which hope that both businesses will receive enough cashflow for them to keep going.
  3. The businesses waiting desperately for their major customer(s) to pay them, will go slowly broke as their major customer(s) slow pay them to protect their own cash reserves. Their major customer(s) also know most of their small business suppliers will never sue them.
  4. The efficient supplier which does get paid by their customers, which subsequently go into insolvency, are then hit by preferential payment claims. These claims may then place the supplier at risk of survival.
  5. The cost of disputes with employees who make either false or legitimate claims against sexism, racial discrimination, bullying, unfair dismissals etc., decide the cost is too great and call in the insolvency administrators.
  6. The costs of compliance and government regulations in all forms these days, means the cash strapped business owner decides it is not worth operating a business.
  7. The business is unable to get employees (for whatever reason), stock, or finance, to

maintain the operations of a viable business and closes down, etc.

Insolvencies rarely occur in a flood at the beginning of an event of any description, for example a flood, bushfire, the announcement of a recession, or the end of government support. The thought that there would be a flood of insolvencies at the end of March 2021 which has not occurred, is an example.

There are many factors influencing why business owners close down their business and appoint insolvency administrators. The decision and the process may take some months. In addition, other business owners may just close down their business and walk away and no insolvency is recorded.

As a result, and as evidenced in previous times, the number of insolvencies will creep up slowly and if there is to be a flood, this will occur some months in the future.

Want to know more, contact Kim at kim@creditmatters.com.au, or telephone (03) 9886 6707, A/H (03) 9802 0608, mobile 0411 649 261, or have a look at what we offer via our website at www.creditmatters.com.au

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