What next? The end of JobKeeper and other government interventions to prevent insolvencies - Insolvency/Bankruptcy

This week's TGIF focuses on themes that are emerging as Australia moves to an economic recovery phase and sees the end of government intervention to prevent insolvencies.

Key takeaways

With JobKeeper stimulus and other temporary relief measures set to end this month, it remains to be seen whether the expected 'fall out' and rise in insolvencies will occur.
Recent insolvency figures released by ASIC suggest the Government's various initiatives helped prevent the increase in insolvencies that we otherwise would have expected to see in this economic climate, at least in the short term.
The potential failure of companies that have otherwise been protected by various Government interventions to date gives rise to an increased risk of preference clawbacks for creditors and landlords that have also supported these businesses over the last six months.

End of government intervention to prevent insolvencies

JobKeeper

On 28 March 2021, the Commonwealth Government's most significant initiative to protect businesses and jobs during the pandemic - JobKeeper - ends.

Payments of $1,500 per fortnight per employee were paid to employers, who kept workers on during the pandemic after satisfying certain eligibility criteria. The scheme was adjusted and extended over time.

Prime Minister Scott Morrison first announced what he described as "an historic wage subsidy" one year ago on 30 March 2020. As at December 2021, there were still 1.5 million recipients of the JobKeeper subsidy with 494,415 businesses registered for JobKeeper (just over half the number who were registered in August 2020).

Postcode data released by Treasury last month indicates that Victorian businesses still have the highest concentration of recipients in the country, with the number of businesses registered remaining at 70 per cent of the peak August 2020 levels.

Commercial tenancy relief

Also ending on 28 March 2021 is the Victorian moratorium on commercial tenancy evictions that was put in place to relieve the financial hardship faced by commercial tenants as a result of the lockdowns and other public health measures. Similar measures in other states and territories have already ended.

The moratorium, and other related relief for commercial tenants such as the freeze on rental increases, applies to SMEs with an annual aggregate turnover under $50 million that experienced a minimum 30 per cent reduction in turnover due to coronavirus.

Some recent statistics

ASIC

The latest Australian Securities and Investment Commission (ASIC) figures suggest that the range of relief measures described above have been effective, at least temporarily so.

ASIC reported record low insolvency figures in 2020, with only 946 insolvencies in July, August and September 2020. This represents a 60% decrease when compared to a quarterly average of 2,367 in previous years. This is an even more startling figure considering the economy had significantly contracted in the same period. The Q4 figures were marginally higher, with 1047 insolvencies in October, November and December 2020.

Unemployment rate

The unemployment rate in February 2021 fell from 6.3 percent to 5.8 percent, with 69,000 jobs added in February, more than three times the number economists had expected.

APRA

Many authorised deposit-taking institutions (ADIs) also granted temporary relief to borrowers impacted by COVID-19, allowing them to defer loan repayments for a period of time.

On a monthly basis, APRA publishes aggregated data from ADIs on loans subject to repayment deferrals - which indicates that the quantum of temporary repayment deferrals is also trending steadily downward.

APRA's data for January 2021 shows around 1.4 per cent of total loans outstanding ($37 billion) are subject to repayment deferrals, down from 1.9 per cent of total loans outstanding ($50 billion) in December 2020.

Of the $37.1 billion for January 2021, $3.6 billion comprise SME loans, with the majority ($32.0 billion) comprising housing loans.

Exits from deferral continued to outweigh new entries for the seventh straight month in January, with $14 billion in loans expiring or exiting deferral and less than $1 billion entering or being extended.

SME Recovery Loan Scheme

The Government has also introduced a targeted assistance program specifically for SMEs as a transition package to coincide with the end of JobKeeper payments.

The SME Recovery Loan Scheme (Scheme) is a revamped and expanded version of the Coronavirus SME Guarantee Scheme providing continued assistance to companies currently on JobKeeper.

The Scheme is designed to enhance lenders' ability to provide cheaper credit and provide SMEs (with up to $250 million turnover, who were recipients of the JobKeeper payment between 4 January 2021 and 28 March 2021) access to additional funding.

Some of the key features of the Scheme:

new loans of up to $5 million are available with a repayment period of up to 10 years;
the Government will guarantee 80% of the loan amount;
lenders are allowed to offer borrowers a repayment holiday, up to 24 months; and
the loans can be used broadly, including to support business or refinance pre-existing debt.

Comment

The state of the Australian economy over the last year has consistently defied dominant economic theories and the predictions of the country's leading economists.

It remains to be seen what impact the end of the JobKeeper stimulus and other insolvency protection measures will have over the coming months, and the extent to which the startling low ASIC insolvency figures may adjust to a 'new normal'.

Another pressure point is the increased exposure of suppliers and other trade creditors, including landlords, to preference claw backs should the companies that have been propped up during the pandemic ultimately fail.

A more detailed examination of the preference risk of creditors and landlords is provided here and here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.