8 Apr 2021

Covid-19: Business failure numbers still below pre-pandemic levels

10:56 am on 8 April 2021

Fears that the pandemic would prompt a wave of business failures have not come to fruition, yet.

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Photo: 123RF

The Restructuring Insolvency & Turnaround Association (RITANZ) expected the end of various government support measures, such as the wage subsidy scheme, would trigger a slew of insolvencies towards the end of 2020, which could continue for a number of years.

That was based on what happened during the 2008 global financial crisis.

However, the chair of RITANZ and PWC partner, John Fisk, said the business failure numbers were still below pre-pandemic levels.

"The expectation, particularly as we were going into the level 4 lockdown, was that the economy was really going to suffer and I think that's proved to be not the case in a lot of situations.

"There's just been a lot of support provided to companies, there's a lot of money that's being printed and available credit, and we're seeing a lot of businesses that we thought were going to get into some difficulty actually doing okay, if not thriving in some situations as well."

But that did not mean a rise in businesses going bust was out of the question.

Fisk expected to see an uptick in the number of formal insolvency appointments later this year, but nothing like the rush that was predicted in 2020.

Insolvency law review

The recent Court of Appeal ruling on the former directors of the failed company Mainzeal has thrown the Companies Act into the limelight.

In its judgement, the Court made the point that current laws governing insolvent trading were unsatisfactory and in need of a review to ensure it provided a clear regime that protects creditors.

The Institute of Directors has already backed the call, saying the law was nearly 30 years old and now was good opportunity to clarify directors' responsibilities.

Fisk agreed, saying it had been nearly 8 years since Mainzeal failed and it was still unknown how much directors would have to pay in damages.

He thought it could be another year or two before there was an outcome, which is unsatisfactory for creditors who did not know if they were going to get a recovery and also tough for the directors who had been under a lot of pressure with the claim hanging over them.

"We need to create an environment where there's greater certainty for directors, that they know what their responsibilities are and it's clear what the consequences are if they breach [them] and we need to have a process that is more efficient to get recovery for creditors if this sort of situation happens."

He added that a review should consider the possibility of "safe harbour provisions" for directors.

The provisions were rolled out in Australia in 2017 and protect company directors from liability for reckless trading if they act early at the first signs of financial stress, such as seeking independent advice or avoiding taking on new debts.

"I think the time is right now to have a look at that process, see how it's working in Australia, see if there's some other remedies or adjustments to the existing legislation that we have... to make it work better and provide clarity."

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