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Monday, January 25, 2021

Australian insolvencies plunge despite Covid recession amid fears JobKeeper propping up zombie firms

Insolvency rates have plunged despite the steepest economic downturn since the 1930s Great Depression sparking fears JobKeeper is keeping struggling firms on life support.

Accountants fear business failure rates will soar in April after JobKeeper wage subsidies end. 

In November 2020 just 306 firms went into external administration compared with 748 in November 2019 before the first case of Covid came to Australia.

The national tally of insolvencies plunged by 59 per cent during a year that saw the economy sink into a recession for the first time in 29 years.

This occurred as coronavirus business closures caused a record seven plummet in gross domestic product in just three months during the June quarter.



Insolvency rates have plunged despite the steepest economic downturn since the 1930s Great Depression sparking fears JobKeeper is keeping badly-run firms on life support

Insolvency rates have plunged despite the steepest economic downturn since the 1930s Great Depression sparking fears JobKeeper is keeping badly-run firms on life support

Insolvency rates have plunged despite the steepest economic downturn since the 1930s Great Depression sparking fears JobKeeper is keeping badly-run firms on life support

The Australian Securities and Investments Commission data on insolvencies showed a consistent pattern in the face of economic turmoil.

Veteran accountant Ben Johnston, the director of accounting, taxation and business advisory group Johnston Advisory, said the end of JobKeeper on March 28 would see insolvencies spike again.

‘You’re getting this artificial money coming through,’ he told Daily Mail Australia.

‘People have been holding off liquidating because they are entitled to JobKeeper and I think you’ll find when their JobKeeper eligibility ends, you’ll have this huge spike in insolvency numbers again.’




The Australian Taxation Office has also been more lenient on struggling small busineses.

‘The ATO have really stopped chasing people for debt,’ Mr Johnston  said.

‘For a lot of small businesses, the ATO is their biggest creditor.’ 

In July 2019, 846 firms went into administration but a year later, in July 2020, that number more than halved to 373.

Veteran accountant Ben Johnston, the director of accounting, taxation and business advisory group Johnston Advisory, said the end of JobKeeper on March 28 would see insolvencies spike again. Pictured is Melbourne's Lygon Street in Carlton in October during the later stages of lockdown

Veteran accountant Ben Johnston, the director of accounting, taxation and business advisory group Johnston Advisory, said the end of JobKeeper on March 28 would see insolvencies spike again. Pictured is Melbourne's Lygon Street in Carlton in October during the later stages of lockdown

Veteran accountant Ben Johnston, the director of accounting, taxation and business advisory group Johnston Advisory, said the end of JobKeeper on March 28 would see insolvencies spike again. Pictured is Melbourne’s Lygon Street in Carlton in October during the later stages of lockdown

Insolvency rates plunged from April 2020 when struggling businesses started receiving  flat $1,500 a fortnight JobKeeper wage subsidies. 

The numbers dropped from 683 in March 2020, when the World Health Organisation declared a coronavirus pandemic, to 410 a month later. 

Monthly insolvencies haven’t been above 400 since May or been higher than 300 since July, with food and accommodation and construction firms making up a large proportion of companies going into liquidation.

Those figures taken before Treasurer Josh Frydenberg in September announced struggling firms would be allowed to trade while insolvent if they owed less than $1million to creditors.

The temporary rules, modelled on the American Chapter 11 bankruptcy code, passed the Parliament in December and cover more than three-quarters of businesses that can’t pay all of their debts.






Treasurer Josh Frydenberg in September announced struggling firms would be allowed to trade while insolvent if they owed less than $1million to creditors

Treasurer Josh Frydenberg in September announced struggling firms would be allowed to trade while insolvent if they owed less than $1million to creditors

Treasurer Josh Frydenberg in September announced struggling firms would be allowed to trade while insolvent if they owed less than $1million to creditors

Instead of having to appoint administrators, struggling small businesses are allowed to restructure their existing debts while remaining in control of their business.

They will have 20 business days to develop a restructuring plan with a specialist accountant before creditors are given 15 days to vote on the plan.

Costly administrators would no longer be needed unless the creditors refused to accept the debt restructure plan but those more lenient insolvency arrangements end at the start of April.

That coincides with JobKeeper wage subsidies ending on March 28, 2021.

The fortnightly subsidies have, since January 4, been diluted to $1,000 from $1,200, for those who work 20 or more hours a week.

Part-time workers putting in fewer hours had their subsidies drop to $650 every two weeks from $750 a fortnight.

Source: Daily Mail

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