The federal government has extended insolvency relief and bank protection beyond the original Sept. 25 deadline for another three months in a bid to avoid an avalanche of business failures amidst the economic recession.
The move, announced on Sept. 7 following Victoria’s decision to extend stage 4 lockdown, coincides with the end of the initial wave of 6-month deferrals for business loan repayments.
“These changes will help to prevent a further wave of failures before businesses have had the opportunity to recover,” Frydenberg said .
“As the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.”
The decision means that the federal government’s increase of the threshold for credit demands and bankruptcy to $20,000 will be extended until Dec. 31.
Businesses will also have a prolonged six-month time limit provided for them to respond to creditor demands or bankruptcy notices.
Under the original regime, the threshold was as low as $2,000 to prompt a credit demand, or $5,000 to initiate bankruptcy proceedings. At the same time, the response time for businesses to negotiate with their creditors was no more than 21 days.
Concerns Over Unnecessary Insolvencies
However, the credit sector is firmly against the extension due to “its serious and unintended consequences” of keeping what they term “zombie” businesses afloat.“Temporary measures to relax insolvency rules to provide support to businesses at the start of the pandemic must be wound back, ”the whitepaper states. “The risk is if they are extended, a domino effect will prompt a wall of unnecessary insolvencies, prompting a deep and damaging recession.”
The consequences of the lenient measures have already become apparent. The indicators include an exorbitant rise to 342.7 percent of payment time in June and 223.8 percent in July. There has also been a decline in business defaults during the same period despite challenging economic conditions.
CreditorWatch data shows the number of companies that became insolvent has halved this year, from 4,000 to 2,000, which can be directly attributed to the temporary moratorium on insolvent trading rules.
“This means our members are trading with insolvent businesses,” said Nick Pilavidis, the CEO of AICM. “They are extending credit and being forced to support businesses that are insolvent. ”
John Winter, the CEO of ARITA, said this could produce a snowball effect as these insolvent businesses were running even higher debts.
Banks Brace For A Difficult Time
A spokesperson of Australian Banking Association (ABA) told The Epoch Times that across the pandemic Australia’s four major banks have deferred 215,000 business loans, of which 137,000 being for small and medium enterprises.From late this month, as some borrowers start to approach the six-month mark, banks will be approaching them to work out an appropriate solution.
ANZ chief executive Shayne Elliott anticipates a pickup in insolvency next year when support measures phase out next year.