Insolvency ‘tsunami’ will wipe out more than 10,000 businesses

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Thousands of COVID zombie businesses and many more with unmanageable debts mean Australia will be swamped with insolvencies in about six months, says Grant Thornton specialist.

Financial advisory partner John McInerney said 50,000 warning letters recently sent to business leaders by the ATO would trigger at least 10,000 insolvencies, and possibly 20,000 or more.

“There is potentially this tsunami of insolvencies – maybe not at the level expected at the start of the pandemic but compared to where wehave been,” Mr. McInerney said.

He said many companies on death row were actually assetless “zombies” that had been artificially kept alive by COVID provisions.

Over the past two years, the number of insolvencies had been half the usual average at around 4,000 a year.

“Insolvencies should have skyrocketed, they should have been above average,” he said.

Many companies with issues already had some kind of payment plan with the ATO before the pandemic, but many also came to light after applying for COVID support measures, such as JobKeeper, which required filing with the tax office. to be eligible.

Although it was not clear how many companies were involved, most would have only one or possibly two directors, he said, who had now been put on notice by the ATO to act or face the consequences.

“We now have 50,000 notices that have been issued as a pre-warning that if you don’t do something, the next letter you receive from the ATO is more threatening.said Mr. McInerney.

The letter sent to the directors is a warning that unless their company is managing its affairs, the ATO will serve a Director Penalty Notice, or DPN. Once served with a DPN, to avoid personal liability, a director must pay the debt or put the company into liquidation within 21 days of the date of the notice.

Other options include voluntary administration or appointment of a Small Business Restructuring (SBR) practitioner.

Mr McInerney said SBR, which began under COVID, was designed to help companies reach a formal compromise with creditors while allowing administrators to retain control and continue operations.

He said many accountants were still unaware of the benefits of SBR and only a few dozen companies had gone through the process.

“Advisors don’t really know the process and they’re still afraid of it. They say, ‘that’s great’ but there’s a reluctance to do anythingsaid Mr. McInerney.

“Normally, the ATO takes action to liquidate a company that does nott pay their debt so they had this DPN as part of their artillery for years.

“But the ATO is taking a business approach here to support businesses that have come into conflict post-pandemic.”

This would help the ATO recover some of the $21 billion SME tax debt, or about 40% of the total. and made him look like a good creditor, encouraging businesses to engage with the bureau.

Mr. McInerney said that for companies with the potential to survive, SBR was a good fit. For others, most insolvencies were six months away as the ATO tried to work with its debtors.

For the ATO, an SBR is equivalent to a good result.

“The ATO is currently accepting offers at 5¢ or 10¢ on the dollar, which is a significant amount of debt forgiveness. Oddly enough, the ATO is actually getting zero in a lot of cases, so it’s actually a very welcome backsaid Mr. McInerney.

Mr. McInerney said suing a company costs the ATO between $20,000 and $30,000 in legal fees and less than 1% of liquidations result in the debt being paid off at 51¢ on the dollar or better.

More than 90 percent ended without any reimbursement to the ATO.

The SBR process offered a yield of 5¢ at 10¢ on the dollar and worked for both sides. But he warned that the opportunity would not last forever.

“There was nothing written in the SBR process that sets a settlement rate with the bureau, and the ATO will eventually seek better outcomes,” Mr. McInerney said.

Insolvency ‘tsunami’ will wipe out more than 10,000 businesses

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Last update: April 06, 2022

Posted: April 07, 2022

Philip King

Philip King

Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, information and educational content for professionals in the accountancy and SMSF industries.

Philip joined the titles in March 2022 and brings extensive experience from various roles at The Australian national broadsheet daily, most recently as Automotive Editor. His background also includes spells in various consumer and trade magazines.

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