Bankruptcies

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<p class="legacy"><strong>EXPERT INSIGHT</strong></p>

<p>The vast arsenal of fiscal, monetary and legal measures used by Australian governments to offset the COVID-induced economic crisis have worked well. They did not prevent a recession (popularly defined as two quarters of negative GDP growth) but things could have been much worse.</p>

<p>What is particularly interesting is that the expected consequences have not shown up in the official statistics for financial distress – insolvent companies entering administration and individuals declaring bankruptcy.</p>

<p>Indeed, a misleading impression of 2020 being one of “economic good times” could be gained from the statistics.</p>

<p>The big question is whether these statistics show government relief measures have averted economic pain or simply deferred it. As measures are wound down and withdrawn, will the private sector be willing and able to pick up the resulting slack?</p>

<p><strong>Companies entering administration</strong></p>

<p>There are, of course, “lies, damn lies, and statistics”. The figures hide what is likely to be actually happening in terms of financial distress.</p>

<p>Impacts on businesses and individuals have been quite varied. Some large corporations have come through in good shape, much better than might have been imagined. But the tourism, hospitality, entertainment and higher education sectors have taken significant hits and face an uncertain and drawn-out recovery.</p>

<p><a href="https://download.asic.gov.au/media/5946060/asic-insolvency-statistics-series-1-published-february-2021.xlsx">Using data</a> from the Australian Securities and Investments Commission, shows the number of companies entering external administration (quarterly from 2010 to 2020).</p>

<p>Notable is the decline in business collapses in 2020 – the opposite of what one would expect in a time of economic stress.</p>

<p><strong>A number of policy actions contributed to this.</strong></p>

<p>The most obvious contributors to keeping failing businesses alive were JobKeeper payments as well as changes increasing “<a href="https://asic.gov.au/about-asic/news-centre/articles/directors-duties-in-the-context-of-covid-19/">safe-harbour protections</a>” to reduce the risk of prosecution for trading while insolvent. These changes also reduced the ability of creditors to speedily force a debtor company into insolvency.</p>

<p>In many cases it is quite possible these simply put off that day to some time in 2021.</p>

<p><strong>Individuals declaring bankruptcy</strong></p>

<p>At the personal level, which includes owners of small unincorporated businesses, a similar pattern can be seen.</p>

<p>The next uses data from the <a href="https://www.afsa.gov.au/about-us/statistics/quarterly-personal-insolvency-statistics">Australian Financial Security Authority</a>. It shows the number of individuals entering into insolvency (bankruptcy, debt agreements etc) on a quarterly basis. The latest data is for the September quarter of 2020. The number had fallen to about half of what it had been prior to 2020.</p>

<p>Notably, the number of personal insolvencies began falling in early 2018. There is no obvious single explanation for this trend, though good economic conditions and low interest rates are probably part of the story.</p>

<p>The further decline in 2020 (in contrast to expectations of an increase) is most likely due to legislative changes introduced in March 2020 and extended in September 2020. These include increasing the size of debt owed before a creditor can initiate action from A$5,000 to A$20,000, and allowing debtors six months (rather than 21 days) to respond to creditor demands. Mortgage repayment deferrals by banks also would have helped.</p>

<p><strong>A difficult balancing act</strong></p>

<p>What to make of these unexpected declines in official indicators of financial distress when economic conditions have surely increased the reality?</p>

<p>The more optimistic interpretation is that various government support measures have prevented both business and individuals sliding into insolvency.</p>

<p>The less optimistic interpretation is the measures have simply deferred the final outcome – with the statistics soon to show a bounce in business failures and personal insolvencies.</p>

<p>There is no point keeping “zombie” businesses alive, nor in dissuading heavily indebted individuals from taking action under insolvency arrangements that can give them a fresh start.</p>

<p>But finding the right balance of continuing support for recoverable cases while terminating it for others (and limiting the hardship caused by failure) is a difficult and challenging task for our economic masters.<img alt="The Conversation" height="1" src="https://counter.theconversation.com/content/155744/count.gif?distributor=republish-lightbox-basic" width="1" x21hkp71h=""></p>

<p><span><a href="https://theconversation.com/profiles/kevin-davis-3497">Kevin Davis</a>, Emeritus Professor of Finance, <em><a href="https://theconversation.com/institutions/the-university-of-melbourne-722">The University of Melbourne</a></em></span></p>

<p>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/hard-bump-ahead-drop-in-insolvencies-and-bankruptcies-is-a-ticking-time-bomb-155744">original article</a>.</p>
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kdavis

Hard bump ahead? Drop in insolvencies and bankruptcies is a ticking time bomb

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<div><span>The latest regional quarterly figures from the Australian Financial Security Authority (ASFA) provided the most compelling evidence yet of rising financial stress levels. </span></div>
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<div><span>Although the number of Part IV and Part XI bankruptcies was higher in the March quarter than in the preceding three months to December, year on year there was a modest decline. </span></div>
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<div><span>Western Australia has seen a clear uptrend since the June quarter of 2014 as the resources downturn continues to bite.</span></div>
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<div><span>Looking at new personal insolvency activity, however, there was a clear rise in the number of debtors both on a quarterly and on an annual basis. </span></div>
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<span>Here too the figures for Western Australia reveal clear signs of financial stress, but in fact there was a strong increase in the number of debtors right across the board in the first quarter of the calendar year.</span><br><span><br></span><span>Below the figures for personal insolvencies are smoothed on a rolling annual basis to strip out seasonality. </span>
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<strong><span style="text-decoration: underline;"><span>Sydney stress emerges</span></span></strong><br><span><br></span><span>The number of debtors entering personal insolvency in Greater Sydney increased by a non-trivial 11 per cent in the March quarter.</span><br><span><br></span><span>Drilling into the statistical areas it is clear that many of Sydney's lower socio-demographic suburbs and LGAs are driving the increase, with elevated levels of activity in Penrith, Campbelltown, Bankstown, and Blacktown, and a secondary tier of stress emerging in Fairfield and Liverpool. </span>
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<span>There is also a growing heat spot of financial stress focused on the Central Coast, with rising debtor activity reported in Gosford and Wyong. </span><br><span><br>As explicitly predicted in our Long &amp; Short Reports, the <span>region with the highest proportion of new debtors in the adult population was St Marys, for the apparent reasons explained in the report. </span></span><br><div><span> </span></div>
<div><span>Across regional New South Wales, there was also a small flash of debtor activity in Newcastle during the March 2017 quarter, which will warrant careful monitoring. </span></div>
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<div><strong><span style="text-decoration: underline;"><span>Stress on the urban fringe</span></span></strong></div>
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<span>Similarly in Queensland the greatest contributor to the rising number of personal insolvencies was the outer urban region of Ipswich, including Springfield, while there was also a higher number of new debtors reported in the Logan region, where unemployment rates are elevated.</span><br><span><br></span><span>Scanning out across regional Queensland the regions with the highest number of new debtors in the March quarter included Townsville and Rockhampton. </span><br><span><br></span><span>Meanwhile in Greater Melbourne the greatest number of insolvencies was also seen in outer suburban hubs such as Wyndham, Whittlesea-Wallan, and Frankston. </span><br><span><br></span><span>With both full time employment growth and wages growth so weak, the rise in the number of insolvencies looks set to continue. </span>
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<div>For ongoing timely analysis of mortgage arrears and personal insolvency activity, please see our detailed monthly subscription reports. </div>
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<div><strong><span style="text-decoration: underline;"><span>Rising population</span></span></strong></div>
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<div><span>It should be noted that with Australia's population swelling by well over 1 million people every three years or so, it is more or less assured that the absolute number of personal insolvencies will rise over time. </span></div>
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<div><span>Adjusting the number of personal insolvencies for the size of the incumbent population and we can expect to see Queensland and Western Australia rising to the top of the pile, being the states most comprehensively impacted by the winding down of resources construction (and in Queensland's case, severe flooding). </span></div>
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<div>Note that there is a series break in activity in the Australian Capital Territory (ACT), since before 2005 personal insolvencies were reported by state of lodgement rather than state of residence. </div>
<p><strong><span style="text-decoration: underline;"><span>The wrap</span></span></strong></p>
<div><span>Overall, the ASFA figures provide compelling evidence of a rising trend in the number of people in financial difficulty. </span></div>
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<div><span>The regions showing the greatest levels of financial stress fit closely with what has been previously highlighted in our detailed market reports. </span></div>
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<div><span>In the absence of further monetary policy easing, a further rise in insolvencies appears inevitable. </span></div>
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<p><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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pwargent-M4siyDbqQY

Sydney property concerns emerge in rising financial stress: Pete Wargent

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<p>Ian Romi, also known as Naim Rahimi, has been placed him on a good behaviour bond for two years after pleading guilty to the disposal of property sale funds prior to bankruptcy.</p>
<p>He pleased gulf to making a false declaration in his bankruptcy Statement of Affairs.</p>
<p>In July 2014, Mr Romi received $30,000 as a result of a property settlement.</p>
<p>Within two weeks he had withdrawn $24,000 in cash from his account, using $10,000 for a holiday and gambling the balance at a casino.</p>
<p>This money should have been used to pay his creditors, the Australian Financial Security Authority advised.</p>
<p>Rahimi was sentenced on 22 November 2017 at the Brisbane Magistrates Court. </p>
<p>On 28 July 2014, Mr Romi filed for voluntary bankruptcy with debts in excess of $113,000.</p>
<p>He failed to disclose in his Statement of Affairs that he had sold a house in 2013, that he had made a profit in relation to the sale of another house and that he had transferred ownership of motor vehicles prior to bankruptcy.</p>
<p>In an interview with AFSA investigators, Mr Romi admitted he received the $30,000 prior to bankruptcy and just ‘blew it.’</p>
<p>Magistrate Quinn convicted Mr Romi and placed him on a good behaviour bond for two years. In sentencing, the Magistrate considered Mr Romi’s early plea which indicated his remorse, his cooperation and the fact that he had no previous convictions.</p>
<p>The matter was prosecuted by the Office of the Commonwealth Director of Public Prosecutions on behalf of the Australian Financial Security Authority.</p>
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Bankruptcies

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