A report issued by one of Australia’s leading credit agencies is warning COVID-19 insolvency relief measures will cause a domino effect of business shutdowns.
CreditorWatch says the safe harbour moratorium that is relaxing insolvency rules will dent business confidence and plunge the country into a deeper recession, as government assistance mechanisms are propping up businesses that will inevitably fail.
The moratorium, which is scheduled to end on September 25, enables companies that have become insolvent during the pandemic to continue trading. It also provides temporary relief from personal liability and debt obligations.
A white paper report published in conjunction with the Australian Institute of Credit Management (AICM) and the Australian Restructuring Insolvency and Turnaround Association (ARITA) has raised concern the measures are “artificially” distorting insolvency rates that follow an economic downtown and will likely result in a deluge of failing businesses come October.
CreditorWatch said the relief measures implemented in March would potentially further dent business confidence and derail Australia’s economic recovery.
CreditorWatch chief executive Patrick Coghlan said a possible extension of the grace period would significantly push up the number of bad and doubtful debts within Australia’s credit and lending industry.
“If you start having good healthy business starting to go into administration, it will put more pressure on the economy and GDP as there will be less trade happening,” he said.
“We need to stop throwing money at bad businesses. It (safe harbour moratorium) needs to be removed so creditors out there start to understand who is good and who is not.”
The report also notes the distortion is resulting in businesses denying insolvency or being unaware of their true financial position.
According to the report, July default and administration numbers are down by approximately 50 per cent compared with June.
Mr Coghlan said in an economic downturn that number should be increasing.
It is understood the Federal Government has made no decision regarding an extension of the insolvency moratorium.
Treasurer Josh Frydenberg said the changes to insolvency and bankruptcy laws were to help shield businesses from the pandemic and get as many as possible through to the other side of the crisis.
“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 to ensure productive assets are being utilised efficiently,” he said.
ARITA chief executive John Winter said a number of businesses were malevolently avoiding paying down due debts due to the temporary relief measures.
“Some debtors that are no longer solvent are saying everything is fine to their suppliers when that’s far from the case,” he said.
“So a lack of consequence is fostering abhorrent behaviour in the marketplace, and creditors are being misled about their debtors’ true trading situation.”