Will Liquidators Really See an Increase in Business During the Global Pandemic?

5 min read

It’s a common expectation during an economic downturn – insolvency practitioners and lawyers will see a significant uptick in work as a consequence of the failing businesses around the world that require their assistance.

But is that true, and is that going to happen in the short term?

As you might expect, financial distress isn’t always as easy as 1 minus 2 = insolvency.

The Main Catalysts for Insolvency

Companies being insolvent and companies being put into external administration are quite obviously different things. Sometimes one follows the other, but not always.

Any survey of external administrations you care to look at will find more than a few companies which have been operating at a loss, or even demonstrably insolvent, for months before the directors:

  1. Realise the issue; and
  2. Take action in response to it.

Sometimes directors genuinely (but mistakenly) believe that it’s merely a matter of temporary illiquidity and that an increase in cash flow is just around the corner.

Other times directors bumble on despite all the warning signs to the contrary.

But whatever the case, appointments for liquidators still depend on those two main factors: there being a company in severe financial distress, and somebody doing something about it.

Enter… The Statutory Demand

The humble statutory demand is a powerful tool that has been instrumental in company liquidations for years.

Whether it’s because a company voluntarily appoints external administrators or the Court appoints liquidators based on presumed insolvency, the statutory demand is a standard part of the equation.

But now things have changed dramatically in that arena.

Firstly, the statutory demand threshold has increased from $2,000 to $20,000. That in itself has been a topic of debate for years, but it does push a lot of standard collection practices aside for the time being.

But more importantly, the time to respond to a statutory demand has increased from 21 days to 6 months.

This is a dramatic and unprecedented shift.

Realistically, this simply means that people owed significant amounts of money won’t bother chasing it via the statutory demand process.

The result: a conventional (and possibly the most common) catalyst for insolvency appointments has been reduced to rubble.

But surely directors will still have an incentive to appoint external administrators if their companies are in financial distress, right?

Insolvent Trading Is Now Permitted

The stick that prevents directors from incurring enormous debt through insolvent companies is traditionally the risk that, in doing so, they would be personally vulnerable to a claim of insolvent trading.

That risk, and fear, often gave directors the nudge they needed to make the hard decision and put their companies into external administration.

Now, however, as part of the COVID-19 relief package, directors have something of a free pass when it comes to incurring debt because there is significantly reduced risk of insolvent trading for six months from 25 March 2020. There are a few conditions on this, but they aren’t hard to reach.

So with one fell swoop, we now have a situation where creditors won’t bother winding companies up, and directors don’t have much incentive to do it.

But won’t the downturn mean that companies will just run out of money at some point, even without these pressure points?

Artificially Inflated Cashflow

Now don’t get us wrong – the government’s stimulus package is probably a good thing overall, and we know many businesses who desperately needed many of the measures that have been introduced. That includes the rent relief package, the cash flow boost payments, and the JobKeeper initiatives.

So we’re not saying those are bad things.

What we are saying though, is that the stimulus is probably going to prop up more than a few otherwise insolvent companies for the next six months.

Those companies might be in financial distress for reasons unrelated to COVID-19, but will probably still be able to cling on thanks to the stimulus package. So, with creditors unable to do anything about collecting their debts, and directors having no real incentive to put the companies into administration or liquidation, these companies will probably still be here when the stimulus ends, and the Corporations Act returns to normal.

So will there be some kind of glut of profitable appointments for liquidators when the stimulus ends?

The Problem of Empty Shells

One of the more significant challenges for insolvency practitioners is not getting appointments to companies in distress. It’s getting profitable appointments to companies in distress.

There isn’t much that can be done beyond the essential compliance if a company has so few assets at the time of appointment that the liquidators are unable to pursue any debts or voidable transactions.

Similarly, with directors having a free pass on insolvent trading over the next little while, practitioners likely won’t find much benefit in pursuing those regular investigations about company insolvency.

While we’re confident that there will be a large number of administrations and liquidations in the last few months of 2020 (assuming the stimulus does not get extended), a lot of those are going to be unprofitable for the practitioners.

What to Do as a Company?

As a company owner or director, don’t take your eyes off your finances during this period.

Yes – by all means avail yourself and your company of whatever boosts or stimulus you might be eligible for.

But make sure you’re keeping a close eye on the other numbers too – how are sales, profits, expenses and other matters going? Can you take steps to mitigate or expand during this period?

You’ve probably spent a bit of time battening down the hatches recently in response to the pandemic, but don’t forget to take some time to look ahead as well. What’s your plan to come out the other end?

What to Do as an Insolvency Practitioner?

Realistically, insolvency practitioners are used to appointments which don’t have a high (or any) profit from time to time.

Many insolvency practitioners are experts when it comes to turnaround opportunities, and our sense at PBL is that there will be a lot of those coming up soon.

Perhaps its businesses that managed to get through these tough times but just couldn’t come out the other end strong enough to survive.

Perhaps its businesses that need a restructure to help them thrive or just need to draw a line under their debt via a deed of company arrangement.

Whatever the case, there will be real opportunities for practitioners who can bring their expertise in a positive way to a market in desperate need of sound financial assistance and strategic advice.

So What’s The End Result?

The main drivers of insolvency appointments – statutory demands and the risk of insolvent trading – have mostly been removed from play for the next little while.

That, combined with the stimulus package, means that many companies will be carrying significant debt for a time, and might be functionally insolvent but take no action about it.

Appointments to liquidators following the stimulus end will probably be in high numbers. Still, the companies might be in such dire financial positions by then that insolvency practitioners can’t salvage much for creditors or, in many cases, even pay their fees.

Both companies and practitioners should be taking proactive steps both now and towards the end of the stimulus to position themselves well for the future.

We’re Here to Help

If you’re a business in distress or thinking that you might be once the stimulus ends, don’t wait to get proper advice.

If you’re an insolvency practitioner who needs a strong legal team by your side as you work with companies in distress, we’re ready to help.

Get in touch today.

Loading

Loading

Picture of Authored By<br>PBLTeam

Authored By
PBLTeam

Director Lawyer, PBL Law Group

Find what you need
Share this Article

Book a 15-Min Consultation​

Rated 5-Star By Our Clients

Jye Hall
Anita Bradley has been an absolute dream to deal with. Anita's conveyancing skills and knowledge knows absolutely no boundaries along with her effective communication skills which has made selling and buying a completely stress free exchange for us. We recommend PBL Law to everyone looking for outstanding service. We will definitely be returning clients.
Kushlan Aluwihare
PBL Law Group were fantastic. Anita from PBL worked with us closely during our property search and made the exchange and settlement process smooth and stress free. Highly recommended.
Gail Whitford
PBL handled my late mothers estate, they were very obliging and patient with any and all questions that we had, thank you to David , Sharon and the other staff that we dealt with, everyone was so easy to talk to and friendly .David came to the home where my Mother was living and helped her to get her will in order, Sharon helped us through the process of executing her wishes when the time came even doing a house call which was so much easier, thank you all so much
S M
I have experienced an excellent service from PBL (especially from Anita) during the sale of my recent property on Central Coast, and during the purchase of our current property in Sydney. Throughout many challengers, especially with the sale, Anita presented her very professional and knowledgeable conveyancer, positively solving all obstacles. "Above and Beyond" Award going to Anita!!! :-)
Amanda Reitzin
The five-star reviews are well-deserved. I needed a motion and a bylaw drawn up for urgent repairs of my strata unit and the AGM was in two weeks' time. My solicitor was friendly, efficient, knew what documents to ask for, and had all the paperwork prepared well within the timeframe. She also took the time to run through all the legalese and the different possible scenarios with me to make sure I understood. I am so glad to have found this firm and I will not hesitate to use their services again in future if the need arises.
Ricky Cooper
Anita is amazing! So attentive, approachable and communicates everything every step of the way. I have now bought and sold property with Anita and I cannot recommend her highly enough.
Ron Thomsen
Our Commercial Property conveyancing was handled very professionally. Anita’s experience and responsiveness was an asset in this transaction.
Trace M
I am so grateful for Anita Bradley from PBL Law Group helped me with this property settlement, she has went above beyond to ensure I understand everything because of our deafness. I will recommended Anita or their team. Thank you so much for all the hard work you have done for us.
Tricia Wheatstone
For almost 18 months I have been a client of Alex Ilkin. Alex is very knowledgeable and professional and has consistently provided me with thorough, honest and well set out advice, including steering my case through appeal proceedings. He always worked for my best interests with integrity and compassion. I recommend Alex and his team at PBL.

Latest insights & Practical Guides

Speak to us Now or Request a Consultation.

We will call you within 24 hours.

How Can Our Expert Lawyers Help?

Strata Law

Property and strata disputes, building defects claims, setting up new Owners Corporations and more…

Construction & Building Law

Construction and building disputes, building defects, delays and claims, debt recovery and more…

International Estate Planning

Cross-border estate planning, international wills and trusts, tax-efficient wealth transfer strategies and more…

Commercial & Business Law

Starting and scaling your business, banking and business financing, bankruptcy and insolvency and more…

Planning & Environment Law

Environment and planning regulation, land and environment court disputes, sub-divisions and more…

Wills & Estates

Creating, updating and contesting wills, estate planning and administration, probate applications and more…

Thank You For Your Request.

We’ve received your consultation request and will contact you within the next 24 hours (excluding weekends).

Jye Hall
Anita Bradley has been an absolute dream to deal with. Anita's conveyancing skills and knowledge knows absolutely no boundaries along with her effective communication skills which has made selling and buying a completely stress free exchange for us. We recommend PBL Law to everyone looking for outstanding service. We will definitely be returning clients.
Kushlan Aluwihare
PBL Law Group were fantastic. Anita from PBL worked with us closely during our property search and made the exchange and settlement process smooth and stress free. Highly recommended.
Gail Whitford
PBL handled my late mothers estate, they were very obliging and patient with any and all questions that we had, thank you to David , Sharon and the other staff that we dealt with, everyone was so easy to talk to and friendly .David came to the home where my Mother was living and helped her to get her will in order, Sharon helped us through the process of executing her wishes when the time came even doing a house call which was so much easier, thank you all so much
S M
I have experienced an excellent service from PBL (especially from Anita) during the sale of my recent property on Central Coast, and during the purchase of our current property in Sydney. Throughout many challengers, especially with the sale, Anita presented her very professional and knowledgeable conveyancer, positively solving all obstacles. "Above and Beyond" Award going to Anita!!! :-)
Amanda Reitzin
The five-star reviews are well-deserved. I needed a motion and a bylaw drawn up for urgent repairs of my strata unit and the AGM was in two weeks' time. My solicitor was friendly, efficient, knew what documents to ask for, and had all the paperwork prepared well within the timeframe. She also took the time to run through all the legalese and the different possible scenarios with me to make sure I understood. I am so glad to have found this firm and I will not hesitate to use their services again in future if the need arises.
Ricky Cooper
Anita is amazing! So attentive, approachable and communicates everything every step of the way. I have now bought and sold property with Anita and I cannot recommend her highly enough.
Ron Thomsen
Our Commercial Property conveyancing was handled very professionally. Anita’s experience and responsiveness was an asset in this transaction.
Trace M
I am so grateful for Anita Bradley from PBL Law Group helped me with this property settlement, she has went above beyond to ensure I understand everything because of our deafness. I will recommended Anita or their team. Thank you so much for all the hard work you have done for us.
Tricia Wheatstone
For almost 18 months I have been a client of Alex Ilkin. Alex is very knowledgeable and professional and has consistently provided me with thorough, honest and well set out advice, including steering my case through appeal proceedings. He always worked for my best interests with integrity and compassion. I recommend Alex and his team at PBL.