Kohler: Brace for “long catastrophic wave of insolvencies”

According to Alan Kohler, a wave of insolvencies is set to hit Australia, adding to the hundreds of thousands of unemployed already thrown out of work by the COVID-19 pandemic.

Some expert estimates suggest that up to 100,000 businesses could go under in the next few years. As Alan Kohler explains, a lot depends on the temporary safe harbour for these companies being extended:

“The Corporations Act was amended at the same time as JobKeeper was brought in March to allow businesses to trade while insolvent for six months. It’s usually an offence. And that ends on September 25th.

“Demand for air travel and tourism has virtually collapsed. And that has virtually disappeared…

“There are thousands of businesses that depend on people travelling. Like retail, restaurants, security firms and caterers…

“But other private data is showing that trouble is brewing more broadly. The average delay in paying invoices across all industries has blown out from 11 days to 49 days…

“Basically, the safe harbour amendments is keeping thousands of zonbie businesses from going to the wall until September the 25th.

“Insolvency practitioners say they are bracing for a tsunami of insolvencies after October. One told me he wouldn’t be surprised in 100,000 businesses went broke…

“Insolvencies caused from the GFC peaked in 2012, four years later. And that’s what always happens. The average time between a business going insolvent and admitting it is 18 months…

“There’s gonna be a long, catastrophic wave of insolvencies that will lead to higher unemployment and pressure on the banks.

Leith van Onselen
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Comments

  1. Stupid, stupid, stupid to change the insolvency laws like that. Anyway, extend and extend it will be.

    No doubt it was primarily to protect the cancerous hordes of builders and construction industry.

    • Yeah, but the entire business model is based upon pretending. That’s what you do when you stand in front of your house and imagine hard that the bricks are increasing in value before your eyes even when they crack. But it’s no good if you do it alone, you need lots of other people doing the same thing so they can convince others that they best do as you – before they are written off as fools and dragged away by the Fairfax-Domain rubber truck. Of course you need the government to pretend that this quaint habit deserves a tax break and a supporting cast of trained spruikers always helps.

      So it only stands to reason that when it all goes tits-up speculators should be given six months more delusion time by your ‘hands off’ and ‘free-market faithful’ government. It’s like an appeal process when you are on death row. And you can always use the time to ponder what you will order for your last meal.

    • Display NameMEMBER

      Extend insolvency rule and you will have a web of inter-dependencies that will take forever to untangle. You can jut see it. Protected from prosecution with far too much time on their hands (No customers) WTF are these companies going to do? Invest in demand that is not there? They will of course need the latest audi SUV…

      • ashentegraMEMBER

        Businesses extending trade credit under current settings are very brave.

        If counterparties can trade while insolvent without consequence for six months, they will. Plenty of time to rack up giant debts, shift assets to the missus and organise for the inevitable bankruptcy. Rational behaviour.

    • Debt Collector

      Name one company in the last 8 years that has been charged by ASIC for trading whilst insolvent?

  2. Insolvency has not been reformed since the eighties, these laws are totally outdated/do not work especially in this crazy context, they will make things much worst than need to be. We should copy/adapt the new UK bill (Corporate Insolvency and Governance Bill 2020, sort of Ch11).

    This must be done ASAP, it s really an emergency.

      • I can’t comment on the UK bill but Chapter 11 was alluded to and this is a form of bankruptcy in which a company can restructure their debts while being protected from creditor action. In theory, Ch 11 should deliver better outcomes for all parties including allowing the company itself to survive.

      • The Australian system is pretty crazy, creditors decide (and mostly wind up businesses to punish director instead of receiving 1c on a $) ), the whole process s basically limited to 5 weeks (instead of 6 months in UK), liquidation is a priority basically and administrator take control of the business (and they have no clues how to run it) instead of monitoring the directors like in UK. Insolvency has only 2% success rate here.

    • What should go are the timed repayment of business loans to directors trusts. It takes 18 months so the till can be emptied

  3. Know IdeaMEMBER

    Insolvencies will peak in 18 months, apparently. That would come as no surprise to the readers of this forum.

  4. Aussies Can't Socially Distance

    Businesses will go bust and in there place new businesses where they will pay lower rents, owners burdened by less debt, able to operate leaner with lower prices.

    Different people make money is all.

    Let the overleveraged go bust.

    Sometimes you go broke when you punt with money that isn’t yours LOL

    • Anecdote, start of covid.

      Suburban shopping street, hair dresser who was needing to work almost all day to pay the rent – with the last hour or so of work being profit expenses. Barely surviving. Landlord came in and put the rent up. We told her to move as everyone would be offering cheap rent.

      Hair dressing competitor but different gender in same area got together and approached another land lord who was empty – offered half their previous price and they took it. She was therefore paying 1/4 of what she was previously.

      Original land lord has dropped price repeatedly for no tenants – now less than half what her original rent was.

      It’s absolutely glorious – and its happening everywhere.

      • 1000s
        Landlords have been living in a delusional world for too long. I wish maximum pain on these commercial landlords. My local area is littered with empty retail units all because landlords steadfastly refuse to acknowledge the reality.

      • Ulrike Meinhof

        Sounds great but as counterpoint my hairdresser is absolutely shi.ting bricks
        She has personally guaranteed her business which purchased the RE a few years ago.
        everything she owns is tied together and mortgaged.
        She’s working as long hours as she possibly can but the numbers just don’t add up
        there’s no Audi, there’s no secret stash, there’s no hubby to transfer the assets to.
        To put it bluntly she is absolutely and completely @#$%^ed, but here’s the thing she still has cash flow with which to support herself for as long as we all play this extend and pretend game. By all normal metrics her business is insolvent but who is it really harming if she continues to trade while insolvent?

        • Aussies Can't Socially Distance

          Many of those small businesses aren’t real businesses the owner has basically bought themselves a full time job where they are liable for everything.

          The hairdresser where she/he doesn’t make money until the final hour of the day, it would have only been a matter time before he/she gives it away because it’s not worth the effort. If it wasn’t Wuhan Flu it would have been something else in the next few years.

    • Anecdote 2.

      My sister-in-law bakery in a suburban shopping complex got a50% discount on rent during the peak of COVID in Sydney. They were still open, but other stores like nail salons were closed and had to pay 50% rental, the other 50% is deferred so have to pay it back in the contracted period. She was saying some don’t earn enough to pay it back

  5. pfh007.comMEMBER

    “.. “There are thousands of businesses that depend on people travelling. Like retail, restaurants, security firms and caterers…..”

    There are thousands of businesses that depend on forms of economic activity that are going to be significantly reduced by COVID-19 permanently and it has nothing to do with lockdowns etc. Lockdowns make things worse but they were stuffed anyway.

    Even a fraction of CBD workers working from home a few days per week permanently will break service businesses in the CBD on the margins before COVID-19. As the fraction who continue to work from home rises more CBD businesses will fail.

    This happened in the 20th century as cars and public transport allowed the middle classes to escape from the inner suburbs. That is how those suburbs became the cheap low cost housing for waves of post war migrants.

    If the CBD becomes a sleepy zombie zone with boarded up shopfronts who would want to live in a skybox or crumbly cramped 19th century cottage close by.

    And before the creative destruction theorists get too excited, it may take a long time to develop enough mindless consumption alternatives (and the jobs that go with them) to the ones we currently hold precious.

    We need entrepreneurial minds keen to earn dollars in new ways like never before.

    But more importantly we need plenty of money in wallets on Main Street ready to trickle out and up to those entrepreneurs.

    And the RBA haven’t a clue about that as Governor Lowe made clear a few weeks ago.

    https://theglass-pyramid.com/2020/07/21/rba-watch-the-lowe-down-on-magic-money/

    The RBA thinks our broken, lazy and corrupted banks blowing assets bubbles is the solution.

    • I genuinely thought the office workers thing was overblown. Spoke with people in government and a BIG BANK employee the other day.

      They had 4 major towers in a CBD. They have mothballed 3 of those towers and will be selling them. Their position is no matter WHAT happens with Covid – a cure tomorrow they will not be going back to business as usual. 10% of their workforce is on site. Once they realised that people could be trusted to work from home and the technology was there the savings were ballistic. $400 / m2 – or something ridiculous.

      This is across the board – people have no idea the savings that are coming down the pipe line.

      • pfh007.comMEMBER

        Yes. We shifted home months ago and it has been working fine. Would still like a “store front” but that is about all it will be, for training new staff etc.

        Apart from all the small CBD servicing businesses (and these are in the burbs as well e.g dry cleaners) there are going to be a lot of property funds with assets in the CBD who will be unhappy).

        The biggest problem is that it is hard to blow cash without that daily trek to the office and all the activities that come with it.

        Business clothes
        Dry cleaners
        Hair dressing
        Business shoes
        Lunch
        Coffees
        After work drinks
        Dinner
        Transport fares
        Petrol
        Car maintenance
        Etc

        I even let my MB membership lapse for a few months as I didn’t have a commute each day to read it.

        🙂

        • Charles MartinMEMBER

          This.
          I’ve invested in a quality Moka pot and some new trackies and I am set to WFH for how ever long this all takes.
          I had a fair idea of some of the money that i wasted on that sort of stuff, but I was quite surprised when I looked at it closely. I no longer want those RM Williams boots, so saved 500 bucks right there. If only the gym close by would re-open, then I’d have no real cause to leave my suburb, other than to visit friends and family.

          • haroldusMEMBER

            New trackies! Are you made of money?

            Just turn them inside out every second day. You get 2 weeks out of them that way, with the judicious use of towels on the chair.

            *Black trackies needed.

        • Goldstandard1MEMBER

          Don’t see Macro as an expense, see it as a service to inform beyond just what you get out of it. Best media spend I make now even with tools who are here just to troll.

      • FUDINTHENUDMEMBER

        Just think of the savings when they realise they can just offshore all those work from home jobs!

        • Shades of MessinaMEMBER

          I work from home and outsource all my tasks to a guy in India.

          It has reduced my pay packet by 20%, but now I only have to work 2 hours a day checking the work he has done overnight and then again at the end of the day.

          Winning !.

        • nexus789MEMBER

          We are just proving it can be done…not sure what type of society we would have though.

    • Trickle up?! What fresh hell is this?

      Do we even have anything to file this under? (Hat tip Know Idea)

      Deep Fantasy?
      Cosmic Fantasy?

  6. is anyone surprised?
    Anyone who ever run a business knows that most of small businesses permanently operate on the edge.
    forcefully close them for few months and what can happen even if you give them money to survive?

    • When I see small business I immediately think ‘cashie’ ‘tax dodgers’ ‘tax write off’ ‘4wd on the beach’ ‘work vehicle’ ‘wage theft’ – engine of hour economy phh, more like juiced up sole traders working out the game, no better than broke gyro’s on the med sea.

      Just bring UBI already

      • Accountants, lawyers, doctors, IT contractors, every shop in every town in rural / regional Australia. You are seriously delusional with that comment mate.

        • yeh well said MG, and no RAM there are many legitimate small businesses that dont do any of what you say, mine included. your comment is ignorant.

          • Do you use an accountant to ‘minimise’ your tax obligations.

            No not ignorant at all.

            Workers are what drives the economy not a nation of shop owners.

        • The thing about generalisations is that they are generally true. I don’t doubt their may be some noble news agent bloke somewhere in regional Northern Territory. So I’m not bagging that guy you know or are related to. And I also don’t deny the gubbermint is responsible for making it almost impossible for small business with their red tape blah blah.

          However I would argue that there are more bogus small business than ones contributing positively in terms of producing something or not leveraged off some tax dodge or slave labour.

          But hey let’s resort to insults.

          • Not insult just observation.These generalizations show you have no clues about ATO scrutiny/Accounting/How to run a business.It s not much of a cash economy nowadays and only very large foreign entities can afford relatively dodgy tax practices (and most loopholes have been closed/thightened).

          • I’m with you Ram but you’re not gonna get much love here on MB. Personally, I’m sick to death of seeing small business owners writing off every bloody thing they can as a tax deduction. They wouldn’t survive If the govt teat was taken away.

          • To dam fair cop.

            May be my view is out of date. But I work in the construction industry which shapes my view.

          • so you work in the most heavily subsidised industry in the country. with tax loopholes and rorts arus including of course negative gearing etc. an industry that has thoroughly distorted and consumed the entire economy post mining bubble. projecting much? as other commenters have noted cash doesnt exist much in the economy today. and there are many people that operate sole trader ABNs and not housing bubble cafes etc. and you are very ignorant. what you dont realise is that running a small business is a bet on yourself, its risky, its terrifying, but it can also be highly gratifying especially when you begin to employ people and they create worlds from your risk taking. but that can also be more terrifying, sometimes you dont pay yourself so you can pay them. you have zero idea .grow up.

    • Yes, that’s what will happen. There, there, let magic money kiss it and make it all better. 💋

  7. Won’t thousands of companies trading insolvent for extended periods draw other (presently solvent) companies in? In this way multiplying the total number of insolvent companies?

    • MountainGuinMEMBER

      Yep. And as everyone starts requesting payment upfront, there will also be some big cashflow squeezes on some solvent firms

  8. The days taken to settle accounts is the destruction of trade credit between businesses. Both the amount of credit offered and the time to pay will be reduced and so will business be crimpred. I suggested this would unfold 6 weeks ago and now it is arriving. Liquidity crunch bigly in the construction industry, with UE second wave.

    • Ulrike Meinhof

      Yep the real problem here is liquidity or more to the point the rate of change in liquidity.
      Businesses that can hog their cash and force the weakest companies to assume much greater risks (basically support the liquidity of stronger companies). They do this because they can.
      This quickly creates very weak and very strong hands, eventually the weak hands fold often owing other weak players lots of money whereas the strong players that hogged the cash often get to buy assets cheaply with the very cash they didn’t pay to the weaker players.
      Fun times ahead.

  9. I do know the Victorian government brought forward there payment terms from 30 days to 5 to assist in this exact situation. The dodgy security firm got paid real fast to allow corona out of the quarantine box. LOL