COVID-19 has changed the social and professional landscape as we know it. Whilst the restrictions in place have certainly been ‘unprecedented’ from a social point of view, it has also been a challenging period for many businesses who have had to go through something they have not had to do before (and hopefully will not have to again). Although The Coronavirus Economic Response Package (Jobkeeper Payments) Amendments Bill 2020 was passed by the Senate on 1 September 2020 which extends the Government's wage subsidy program by 6 months to 28 March 2021, and despite the Government announcing on 7 September 2020 an extension to the Omnibus laws to 31 December 2020 insofar as they relate to bankruptcies and insolvencies (which we note is still required to pass both houses of Parliament), the relief programs cannot last forever.

When the various assistance and relief packages eventually come to an end, what will the insolvency space look like?

As was their purpose, the Government assistance programs and Omnibus laws have assisted businesses both big and small from entering administration since they were introduced in March 2020. In this respect, the Financial Review has reported that “CreditorWatch data shows there has been a 48 per cent drop in the number of company administrations in June compared with the same month the year before”.

How, at a time where the Australian Government is required to extend the JobKeeper scheme for a further 6 months at an estimate cost of $32 billion has there been such a significant drop in the number of company administrations this year?

According to the Australian Restructuring Insolvency and Turnaround Association (ARITA), at least 20 per cent of Australian businesses would be considered to be trading whilst insolvent had it not been for the Omnibus laws and temporary immunity from insolvent trading actions. In this respect, ARITA’s CEO, Mr John Winter has said “The insolvent trading moratorium has meant that there are people out there who say, ‘tough luck for my creditors. I might win lotto, I might come out of this the other side”.

This begs the question what will happen to these businesses (and creditors) once the Omnibus laws insofar as they relate to bankruptcies and insolvencies eventually fall away (currently scheduled to occur from 31 December 2020 assuming the legislation passes both houses of Parliament). Are the Omnibus laws providing businesses with a sense of false hope?

ARITA warns that there are a number of ‘zombie’ firms claiming they are financially viable when in fact they are not with Mr Winter stating that “It’s going to create a snowball later”, referencing businesses that will inevitably enter administration in the near future. The potential snowball has raised eyebrows at ASIC, with ASIC stating “Importantly, it is possible that many companies entering external administration following COVID-19 may be assetless… If so, it might be that no registered liquidator is prepared to accept a significant number of appointments to financially distressed companies because of the impact that unpaid remuneration from these appointments may have on the future financial viability of the registered liquidators’ business”.

There is not only concern within ASIC of the potential of liquidators not being willing to accept appointments, but also the number of liquidators available to accept appointments. To this end, ASIC has reported that the number of registered liquidators has declined by almost 10 per cent to 633 over the two years to 30 June 2020, with over half of insolvency firms registering for JobKeeper. Mr Winter said that “From that Monday morning, 23rd of March, when the Government made its announcement, every discussion dried up and there are liquidators who haven’t had a phone call for a new job since that day”.

With over $41.8 billion having been paid out through the JobKeeper scheme to over 995,000 companies since May 2020, it is inevitable that some companies will not survive.

If there is a spike in companies entering administration in the near future as predicted, creditors will need to be aware of their rights at that stage, but should also be taking steps now to ensure they are as protected as they can be with respect to any outstanding debts they have, particularly given Mr Winter’s comments that businesses’ “sense of responsibility to their creditors has been absolved by [the insolvent trading moratorium]”.

If the zombie is awakened, but there is a reluctance from liquidators to take on the fight due to their financial viability, what options are available, particularly in large scale administrations or liquidations?

A growing trend in litigation in Australia is the engagement by either one person, or a class of persons, of litigation funders, who, subject to agreements in place, will fund a legal action in return for a share of the final judgment / settlement.

At Polczynski Robinson, not only are we able to guide you through the recovery process and assist with preventative measures to protect your biggest asset, your money, but we also have a professional association with a number of both national and international litigation funders whom we have worked closely with.

For more information on how Polczynski Robinson can assist during this difficult time, please contact Kylie Tate or Dominic Dragicevic.