Australian insolvencies plunge despite Covid recession amid fears JobKeeper propping up zombie firms

Australian insolvencies plunge despite Covid recession amid fears JobKeeper propping up zombie firms

Fears that corporate default rates could rise in April fear that JobKeeper is propping up zombie companies and artificially suppressing bankruptcies

  • Data from the Australian Securities and Investments Commission shows a decline in bankruptcy
  • It did so despite the worst economic downturn since the Great Depression
  • Veteran accountant Ben Johnston feared that JobKeeper would end on March 28th
  • On April 1, milder rules for bankruptcy trading are also due to come to an end

Bankruptcy rates have fallen despite the worst economic downturn since the Great Depression in the 1930s, leading to fears that JobKeeper will continue to struggle with corporate life support issues.

Accountants fear corporate default rates will rise in April after JobKeeper’s wage subsidies end.

Only 306 companies went into external management in November 2020, compared to 748 in November 2019 before the first case of Covid hit Australia.

The national bankruptcy number fell 59 percent in a year the economy plunged back into recession for the first time in 29 years.

It happened when the June quarter’s closure of its coronavirus business caused a record drop in gross domestic product of seven in just three months.

Bankruptcy rates have fallen despite the sharpest economic downturn since the Great Depression in the 1930s, leading to fears that JobKeeper is keeping poorly run businesses on the supportive of life

The Australian Securities and Investment Commission data on bankruptcies showed a consistent pattern amid the economic turmoil.

Veteran accountant Ben Johnston, director of accounting, tax and business advisory group, Johnston Advisory, said the end of JobKeeper on March 28 would result in another surge in bankruptcies.

“You get this fake money through,” he told Daily Mail Australia.

“People withheld the liquidation because they were eligible for JobKeeper, and I think if their JobKeeper eligibility ends you will see another huge surge in bankruptcy.”

The Australian Tax Office has also been more lenient with small businesses.

“The ATO really stopped chasing people for debt,” said Johnston.

“For many small businesses, the ATO is their greatest creditor.”

In July 2019, 846 companies went into administration, a year later, in July 2020, this number halved to 373.

Veteran accountant Ben Johnston, director of accounting, tax and business advisory group, Johnston Advisory, said the end of JobKeeper on March 28 would result in another surge in bankruptcies. Pictured is Melbourne's Lygon Street in Carlton in October during the later stages of the lockdown

Veteran accountant Ben Johnston, director of accounting, tax and business advisory group, Johnston Advisory, said the end of JobKeeper on March 28 would result in another surge in bankruptcies. Pictured is Melbourne’s Lygon Street in Carlton in October during the later stages of the lockdown

Bankruptcy rates fell from April 2020 when companies in trouble started receiving a flat-rate $ 1,500 per two-week JobKeeper wage subsidy.

The number went from 683 in March 2020 when the World Health Organization declared a coronavirus pandemic to 410 a month later.

Monthly bankruptcies have not exceeded 400 since May or over 300 since July, with food, housing and construction firms making up a large portion of businesses going into liquidation.

These figures, taken before Treasurer Josh Frydenberg in September, announced that companies in difficulty will be allowed to trade if they are insolvent when they owe creditors less than $ 1 million.

The temporary rules, modeled after the US Chapter 11 bankruptcy law, were passed by parliament in December and cover more than three-quarters of companies that cannot pay all of their debts.

Treasurer Josh Frydenberg announced in September that companies in trouble will be allowed to act during bankruptcy if they owe creditors less than $ 1 million

Treasurer Josh Frydenberg announced in September that companies in trouble will be allowed to act during bankruptcy if they owe creditors less than $ 1 million

Rather than appointing administrators, small businesses struggling can restructure their existing debt while maintaining control of their business.

You have 20 business days to work out a restructuring plan with a specialist accountant before creditors have 15 days to vote on the plan.

Costly administrators would no longer be required unless creditors refused to accept the rescheduling plan, but these more lenient bankruptcy agreements end in early April.

This coincides with the JobKeeper wage subsidies ending on March 28, 2021.

The fortnightly subsidy has been diluted from $ 1,200 to $ 1,000 since Jan. 4, for those who work 20 or more hours a week.

For part-time workers who worked fewer hours, the subsidy decreased every two weeks from $ 750 per two weeks to $ 650.

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