For the first time in 29 years, on June 3rd Australian’s heard the ‘R’ word used to describe the nation’s economic health. Beleaguered treasurer Josh Frydenburg pointed to graphs depicting in wiggly lines the tragic tale of a March quarter slammed by devastating bushfires and a global economy sent sideways by the onset of COVID-19.The short version of the story: we were in a recession.
Yet, he insisted, it could have been much worse. A raft of measures was rolled out, including the largest financial lifeline in Australian history, as well as significant changes to laws governing bankruptcy and insolvency. Most noteworthy of these changes included:
An increased threshold for issuing a creditor’s statutory demand from $2000 to $20,000; An increased threshold for commencing bankruptcy proceedings from $5,000 to $20,000;
An extended period for responding to a creditor’s statutory demand or bankruptcy notice from 21 days to six months; and,
An extended period within which unsecured creditors cannot take action to recover a debt against a debtor who declares an intention to present a debtor’s petition from 21 days to six months.
Despite what many economists claim was a world-class government response, few believe we’ve seen the worst of the economic fallout.
GDP figures from the Bureau of Statistics show Australia’s economy shrank 0.3 per cent in the March quarter. Though it’s important to remember, Australia hadn’t experienced its first case of Coronavirus until March 3rd. The prospect of a drawn-out economic downturn looms as already, 1.4 million Australians report experiencing mortgage stress, with fears that approximately 100,000 may default after JobKeeper support ends.
Evidently, these payments cannot go on indefinitely.
If the March quarter figures are the canary in the coal-mine, we can expect a far sharper decline to show up when June quarter figures are released. The painful equation of replacing Government support with real incomes derived through business activity needs to be filled.
Dubbed the ‘COVID Safe Harbour’ amendments, the Commonwealth government introduced changes to the Corporations Act to help businesses weather the economic storm. These included a loosening of restrictions on insolvent trading restrictions to allow businesses to recover from short-term liquidity issues without putting directors personally at risk.
For most businesses in financial distress due to the COVID-19 crisis, the measures will fall short.
The changes do not cover a director from debts incurred before the amendment changes on 25th March. Businesses have a six-month window, meaning that as September rolls around (precisely when JobKeeper payments will end), the protection offered the ‘Safe Harbour’ will be withdrawn. While praise has been heaped on our leaders for injecting $130 Billion into the economy and adjusting laws to offer hope to individuals and businesses trying to struggle through, it’s clear the horizon for economic recovery is further off than these responses account for.
Recently, ASIC chairman James Shipton warned Australia might not have enough liquidators and administrators to deal with the oncoming wave of corporate collapses. Clearly, without the necessary return to business activity by the time JobKeeper payments cease, a vicious cycle of company closure leading to increased unemployment and rapidly-spreading risks of personal bankruptcy will surely follow.
With heavy restrictions still being imposed on business activity, the likelihood of a ‘J-curve’ recovery, like the one predicted last time we heard the ‘R’ word, is low. Governments need to take a second look at these amendments and the clock they’ve put on the economy to get back to full steam, lest a broader and perhaps far more savage blight than a viral pandemic is unleashed on the Australian public.