What Is the Outlook for Restructuring and Insolvency in Australia in 2021?
The COVID-19 global pandemic is far from over, both in terms of the direct health effects and the economic, social and political flow-on effects.
11 February 2021
In comparison to major world economies like the U.S., U.K., Germany, China and India, Australia has, thus far, been spared the catastrophic infection and mortality rates of the virus.
From an economic perspective, though, the jury is still out on the financial impacts of COVID-19 in Australia. For the first time in over two decades, the country’s economy went into recession. Analysts broadly agree that the long-term financial consequences of lockdowns during 2020 remain to be seen.
We spoke to Peter Bowden from Gilbert + Tobin to get his professional perspective on restructuring and insolvency in 2021. As a partner in the Banking and Infrastructure Team with over 15 years of experience in the industry, Peter focuses on the front-end transactional aspects of restructuring and insolvency matters. Such responsibilities include handling distressed transactions and restructuring activities such as distressed mergers and acquisitions, distressed investing (on both the equity and debt sides) and turnarounds.
According to Peter, "Global and local politics, as well as some important legislative changes including the ceasing of temporary measures and new laws that came into effect on January 1, will have major implications for the Australian economy over the coming 12 months," which means that Australia is moving into largely uncharted economic waters.
SS&C Intralinks: How would you describe the current climate in Australia when it comes to restructuring and insolvency?
Peter Bowden: It’s an extremely interesting time in Australia in both the restructuring and insolvency industry, and in day-to-day life in Australia from a public health perspective, as well as from a social, economic and political perspective.
At the federal level, the government moved really quickly in March 2020 to introduce legislation designed to deal with the potential economic consequences of COVID-19. The temporary legislation imposed a moratorium on director liability for insolvent trading, and also increased the thresholds for issuing and enforcing statutory demands – the trigger used by unpaid creditors to compulsorily wind-up other companies. Both of these measures were effective in reducing corporate insolvencies. Between March 2020 and September 2020, there were approximately 40 percent fewer companies entering into external administration compared to the previous year.1
While community transmission of the virus currently appears to be under control in Australia, despite an outbreak in greater Sydney and Melbourne between late December and early January (and recent scares in both Brisbane and Perth), the economic consequences of COVID-19 and the various state-based lockdowns are still to flow, particularly after the JobKeeper regime comes to an end on March 28, 2021.
The underlying economic conditions are troubling. In 2020, Australia had its first recession in some 25 years.2 For many people in the industry, this is the first recession they’ll have experienced in a professional sense but, interestingly, due to the noted legislative changes, the restructuring and insolvency market was perhaps the quietest it has been during that period. Many restructuring and insolvency professionals, including myself, are really interested to see what happens across the market in 2021.
Can you please provide a high-level summary of the changes to insolvency trading statutory measures and new insolvency laws? What do business directors need to be aware of?
The most significant change to insolvency legislation in 2021 will be the introduction of new, simplified debt restructuring and liquidation processes for businesses that have under AUD $1 million in liabilities. The new regime came into effect on January 1, 2021, and it’s a completely new framework for allowing the directors of a company to continue to manage the organization’s ordinary business during the restructuring period. In this sense, it includes elements of a debtor-in-possession model like the Chapter 11 process in the United States, although, as noted, the regime applies only to very small businesses.
In general terms, directors this year will really need to pay attention to their cash levels. Under Australian law, insolvency is a cash-flow rather than a balance-sheet test, so directors need to ensure they understand whether their businesses have enough cash to meet their liabilities as and when they become due and payable. Cash, as the saying goes, is “king,” so directors will really need to understand their cash flows and their forward-looking cash requirements.
How do you see these changes impacting restructuring and insolvency in 2021? Positively, negatively or otherwise?
The market sentiment is that insolvency and restructuring work is going to ramp up in the first half of this year with statutory relief for directors from liability for insolvent trading having ceased on December 31, 2020, together with the thresholds for issuing and enforcing statutory demands reverting back to their usual levels.
As well as the impact of legislative changes, the top-level JobKeeper payment was reduced from the previous $1,200 per fortnight to $1,000 per fortnight on January 4, and the program is currently slated to cease altogether on March 28, 2021. Perhaps it will take a little while for the end of these various relief measures to flow through the market but, at this stage, it appears likely they’ll lead to distress in the market.
It also seems likely that lenders may take a harder line on businesses that have underperformed in recent years. Many of the lenders that have been providing concessions to their borrowers during the COVID-19 pandemic period — for example, by giving maturity extensions or waiving or reducing covenants — may potentially look to be a little more active in working with those borrowers and closely monitoring whether they can demonstrate a return to profitability over the coming year.
The prevailing sentiment is that financiers will have scope to be lenient with businesses that were otherwise traveling well prior to COVID-19, but businesses that had been in difficulty prior to 2020 – and which have continued to experience financial difficulties across the year – won’t be given the latitude they might once have enjoyed with their arrears position. On this basis, we anticipate that the distressed debt market will be more active in the latter part of 2021.
"Our advice to businesses experiencing any form of distress is to seek professional advice as early as possible. The most successful restructuring and turnaround stories we see are where directors have acted quickly. Seeking early advice without hesitation maximizes a business’ options and ensures cash is preserved."
Apart from JobKeeper winding back and changes to insolvency laws/trading measures, is there anything else that could impact restructuring and insolvency in Australia in 2021?
There are various other matters that are likely to impact Australia’s restructuring and insolvency market in 2021. If the Federal Government takes steps to prop up any particular industry — for example, tourism or aviation — then that would naturally assist businesses that operate in those sectors.
The other significant factor is the geo-political climate as we move further into 2021. We’ve recently seen China introduce a number of trade restrictions, which are placing real pressure on Australian businesses that export commodities to China or are part of the broader supply chain involved with exporting goods to China. In December 2020 alone, the Chinese Government either officially or unofficially targeted Australian exports as diverse as wine,3 lobsters4 and coal.5
In America, the impact which Joe Biden becoming President will have on the U.S. economy, and the global economy overall, remains to be seen. Then we’ve also had Britain recently leave the E.U., so time will tell if these sorts of political and economic factors are going to result in a disruptive and tumultuous 2021, or whether Australia will continue to be partially protected from the more extreme effects.
Finally, the uptake and effectiveness of the COVID-19 vaccines both in Australia and internationally will be a significant factor in the speed and extent of economic recovery.
What is your advice to businesses that may be experiencing financial stress? What can they do now to ensure the best outcome for 2021?
Our advice to businesses experiencing any form of distress is to seek professional advice as early as possible. The most successful restructuring and turnaround stories we see are where directors have acted quickly. Seeking early advice without hesitation maximizes a business’ options and ensures cash is preserved.
As the end of temporary relief measures start to impact the market, directors should already be thinking about whether it may be appropriate for them to seek to restructure their businesses. Directors should be preparing short-term and long-term cash flow forecasts that enable them to gain comfort as to whether their businesses are in a position to pay their debts as and when they become due and payable.
Any such analysis should also be stress tested and incorporate various contingencies, such as whether the business will still be able to pay its debts if it were to lose a major customer (or market), if one or multiple customers were to default, if the market was to experience a further lockdown or if the business was to experience a major delay in supply and so on.
In terms of how Australia is going to look, it’s likely that we are behind the rest of the world in terms of the economic effects of the COVID-19 pandemic. This is partly due to the economic stimulus packages like JobKeeper, JobSeeker and HomeBuilder being pumped into our economy but also partly because the temporary relief measures I mentioned earlier appear to have prevented a significant number of corporate insolvencies. So, while Australia’s situation from a public health perspective is currently better than most other developed countries, our economy hasn’t really yet experienced the full effects of the COVID-19 pandemic.
For this reason, it’s possible there might be a two-fold effect on the Australian economy. First, there may be an initial hit to the Australian economy in early 2021 as the temporary relief measures and economic stimulus packages expire and the consequences of such expiry play out, and secondly, depending on whether major economies overseas continue to experience second and third waves of infections and lockdowns, we may see some flow-on effects in the Australian economy.
The last thing I want to add is that we’re in some really unexplored territory here. Australia has never seen this level of stimulus and disruption across the market. Australia will come out of a year where insolvencies have been at record lows, despite the economy being in recession for most of 2020, but general concerns regarding the health of many businesses may make 2021 a busy year for the restructuring and insolvency sector.
1 “Series 1 Companies Entering External Administration,” ASIC Insolvency Statistics
2 “Australia’s Recession in Seven Graphs,” Australian Financial Review, September 2, 2020
3 “Australia Slams China’s Trade Thuggery After Wine Hit Job,” Australian Financial Review, November 27, 2020
4 “Tonnes of Australian Lobsters Stuck in Chinese Airports Amid Trade Tensions,” ABC, November 2, 2020
5 “Australia Warns China Coal Ban Will Contravene WTO Rules,” Financial Times, December 15, 2020
Based in Australia, Lauren looks aftervarious top-end law firms, investment banks, consultancies and boutiques. Coming from a digital background, she brings a deep understanding of UX and technology integration. Heading up the EY ANZ relationship, she supports teams such as M&A, restructuring and bankruptcy, transaction advisory and diligence.