Will Australia experience a surge in Voluntary Administration once financial stimuli lapses?

  • Jul 20, 2020 AEST
  • Team Kalkine
Will Australia experience a surge in Voluntary Administration once financial stimuli lapses?

Summary

  • The COVID-19 Pandemic has disrupted business activities leading to a significant business loss in many sectors primarily hospitality, tourism, airlines, and retail industry, pushing operators towards insolvency
  • Government stimulus programs such as job-keeper program and a temporary moratorium on director liability for insolvent trading are set to become ineffective from September end to November, pointing towards a possible uptick in insolvencies
  • Letter of extension for the stimulus measures and other relief programs to December 31 from the Australian Institute of Company Directors, indicates prevailing uncertainty of businesses in Australia

Voluntary Administration allows an insolvent company to be evaluated by an independent person who can assess every available option and proposes an outcome that provides financial relief to both business owners and creditors.

The COVID-19 Pandemic has disrupted business activities leading to insolvencies in many sectors, primarily hospitality, tourism, airlines, and retail industry. Many small business operators have also faced significant business loss resulting in their liquidation or collapse. Experiencing low turnover with high overhead costs and maintaining employees create too much burden.

As support to businesses, the Australian government is running a jobkeeper program effective till September end. Also, The Australian Parliament passed changes made in Schedule 12 the Coronavirus Economic Response Package Omnibus Act No. 22 of 2020 (the Act) in March 2020 to provide temporary relief for financially distressed individuals and businesses. The changes are:

  • Temporary suspension of directors’ personal liability for insolvent trading for a six-month period starting on 25 March 2020 incase debts are acquired during the ordinary course of business run.
  • Companies will have 6 months to respond to a statutory demand raised by a creditor rather than the current 21 days. Also, Creditors can issue a statutory demand from $2,000 to $20,000 for a period of 6 months.

Many businesses are also availing the temporary moratorium on director liability for insolvent trading. Though, these measures may have hurt small business suppliers and small creditors who may not be able to collect back their overdue payments, leading to an accumulation of higher debts. On the other hand, The Structured Finance Support Fund by the government will ensure that the small lenders have complete access to the funding to ensure these lenders can continue to issue new loans and receive funding from the market at a competitive price.

Will Stimulus Support be Withdrawn?

However, the stimulus measures are expected to terminate by Year end, raising fears of a plethora of insolvencies. JobKeeper program is applicable till the end of September. Other measures such including moratoriums on director liability to avoid insolvent trading and slackening of continuous disclosure laws are set to terminate by November.

Treasurer Josh Frydenberg has received letters of extension for the stimulus measures and other relief programs to December 31 from the Australian Institute of Company Directors. An extension of programs will continue to hurt small business suppliers and small creditors who had been waiting six months to collect back their overdue payments.

These programs have assisted the business sector of Australia significantly. Still, many companies have required the need for voluntary Administration.

  • Virgin Australia has announced voluntary administration in April 2020 with 15,000 airline workers’ job and job’s connected to supply chain workers left with a question mark. The airline said the move would assist the company in restructuring its business monetarily and coming out stronger financially post COVID-19 crisis
  • In June 2020, Seafolly, a national swimwear retailer, went for voluntary administration because of disrupted business due to COVID-19 pandemic impact that has derailed the Australian retail sector. Seafolly operated 44 domestic stores and 12 stores located in the United States, Singapore, and New Zealand.
  • In July 2020, Wirecard Australia availed voluntary administrator service as it failed to find a buyer for its business. The company has experienced a global fraud scandal. The move towards voluntary administration has made domestic customers such as Westpac and Bendigo and Adelaide Bank to wary more. Many operators from local banking and payments industry had been using technology and payment services of Wirecard.
  • In July 2020, Union Standard International Group PTY LTD (USGFX) has also availed the services of voluntary administration to restructure itself and to continue to services its financial sector clients. USGFX is an Australian foreign exchange broker.

At this juncture, KPMG had proposed a new voluntary administration regime that follows eased investigatory processes and less formality, based on strict criteria of the business being profitable before the COVID-19 pandemic started to affect the economy.

KPMG’s new proposed voluntary administration regime

KPMG has suggested a tailored regime which will provide some point of relief to the companies that had been operating profitably before the pandemic created business hindrance. The Regime will provide companies to secure protection from their creditors while they regain their business position. Companies who are suffering due to the Coronavirus crisis can park their debts and pay back their creditors in two years through his regime. The new administration regime has been suggested by KPMG ‘s Restructuring Services department for the operationally stable companies who were making profits prior to the COVID-19 crisis and had been hit hard and can secure protection from their creditors such as landlords, financiers and suppliers.

It is mandatory to be profitable or solvent before the pandemic to avail the regime, also known as The COVID-19 Administration Service. The company’s owners or managers must give a legal declaration that the company was solvent before COVID-19 and that their creditworthiness needs to be evaluated by an independent practitioner.

Companies, who want to avail the protection and use the COVID-19 administration, will require approval from a creditor. However, prolonged investigation or other formalities are not required for a formal administration process.

The COVID-19 administration is currently under review by Treasurer Josh Frydenberg, to whom the company has submitted the proposal.

 


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