The Covid Effect We Are Yet To See

The Covid Effect We Are Yet To See

“I am insolvent, but I am still trading”, says no one, well at least openly.

A significant build-up of insolvencies will come into play at some point, most likely during the next 12 months. How does this affect you?

It is hard for a business to maintain a profit during ordinary times without its owners’ push and pull of energy. During the Covid pandemic, a plethora of words such as “shutdown orders”, “temporary closures”, “essential business”, and “lockdowns” emerged into our list of vocabulary that keeps reminding us of the complexity of life during these times. It’s a hard pill to swallow, but one must survive.

James Imray, Director at Rodgers Reidy in Brisbane, made splendid observations regarding turnaround strategies and insolvency.

The short term solvency fallout from COVID-19 depends very much on whether your specific industry has been affected positively or negatively. Apart from medical and personal protective equipment (PPE) manufacturers and suppliers, many businesses have seen extreme increases in demand for their products and services. Many companies connected to local and domestic recreation could not source enough stock to satisfy the immediate need. Workshop time is booked out months in advance, with the ever-growing longer lead times to source stock for those fitments is a challenge. Examples include those providing off-road vehicle modifications, caravans/campervans and general recreational vehicle enhancements, e.g. roof racks, bike carriers etc.

On the other hand, many businesses have been seriously negatively affected, having to close with each lockdown and with very little notice. Worse still would be knowing they will be forced to close again and the uncertainty of when the lockdown will be and its duration.

Other businesses, such as CBD retail and hospitality, are finding not as many people around to enter their premises. Many businesses have closed, and while some are still open, they are not providing their owners with a fair return for their ongoing investment of money and time. Before committing further financial resources to their businesses, those business owners should be cautious unless they have a clear pathway back to sustainable profitability.

While government support has undoubtedly saved many businesses and employee jobs that would otherwise have disappeared during the first COVID-19 wave, it appears that level of support will not be ongoing. Then we have to consider the continuing rise of the Delta variant’s in New South Wales and Victoria and the anticipated outbreaks into other states over time. It appears that businesses, whether COVID-19 has positively or negatively impacted them, may well continue to experience more of the same for quite some time into the future.”

An interesting trend in corporate insolvencies utilising formal appointments of external administrators under the insolvency provisions of the Corporations Act during pandemic shows that pre-Covid incidence (2019) was much higher than post-Covid Jun 2021 FY end.

The data demonstrates that the Covid lockdowns and stimulus measures introduced towards the end of June 2021 have caused a material reduction in the number of reported insolvency events in July and August 2021 compared with June 2021. The number of formal appointments of external administrators continues to be well below the pre-covid numbers and show no sign of increasing. Some businesses continue to rely on government pandemic relief measures, and others may be trading whilst insolvent in the hope of better days.

The difference between the natural level of insolvencies in pre-Covid 2019 and the August 2021 data indicates that Australia will face a “catch up” period” in insolvencies when all the government supports, grants, and stimulus have dried up. It will be devastating for those directly affected, but the flow on will inevitably create a domino effect and take out businesses that may have been otherwise viable.

Remember that the Australian government takes insolvent trading very seriously. Company directors that do not fulfil their duty to prevent their company from trading while insolvent can face “owning” their corporate debt personally.

Thanks to our friends at Rodgers Reidy for the graphics and commentary.

Contact Warren Maris on 0438-008-593 for an obligation free discussion if you are worried about your business solvency or need business advice in manoeuvring the complexity of the restructuring process for your business. As the Managing Director of Magnus Business Advisers and Accountants, Warren is an expert in business structures.

View more blog articles