Will 2023 be the year that insolvency becomes normal?

Insolvency Levels

Before the COVID-19 pandemic, there was a broadly consistent number of appointments to companies of external administrators (including liquidators and also other “controllers” such as receivers and managers).

This appointment figure dropped dramatically as the pandemic progressed, due to initiatives taken to assist companies to keep afloat, including the Jobkeeper wage subsidy scheme and, also, temporary changes to insolvency laws:

However, Jobkeeper and other assistance measures have now ended.

It is also worth noting that the Australian Taxation Office, which is Australia’s largest creditor, has indicated that its position on debt collection is firming, stating on 13 May 2022: “that it expects a number of insolvencies to occur over the coming months as the economy normalises” (ATO Media Release,13 May 2022). That being said, the ATO still encourages companies struggling with tax payments to engage with it, so as to arrange a payment plan.

At Sharrock Pitman Legal, we also note in our experience that we are seeing additional cases of creditors taking action to recover debts owed to them.

All of these changes have led to the fear (arguably a hope, for some sectors of the legal and accounting professions) that we will return to "normal" levels of insolvency. It is worth noting that that would involve a short term spike in insolvency, as companies that would have been expected to go into liquidation earlier now do so.

So, will we reach normality this year?

We will not know until the end of 2023 but the suggestions are:  No, this will remain another year of expectation and uncertainty in insolvency. Although we will see insolvency numbers continue to increase, we do not expect them to reach the pre-pandemic level.

Notwithstanding negative global economic issues, the expectation remains for positive growth in Australia this year (eg Organisation for Economic Cooperation and Development, Australia projection note OECD Economic Outlook November 2022)

A positive outlook is of course a good thing. Uncertainty in insolvency may mean a favourable economic situation.

In terms of how insolvency is developing, insolvency statistics as at 25 December 2022 did show an increase in creditors’ voluntary liquidations, and also controller appointments, but court appointments of liquidators remained low (only slightly above the figure for 25 December 2021):

(Source: Australian Securities and Investments Commission, Insolvency statistics (current), Chart 2.1.2, 9 January 2023)

These figures indicate insolvencies are increasing – but still remain low for court ordered processes, and are unlikely to reach the pre-pandemic level in 2023. It is even less likely that there will be a spike such as to “catch up” with previous levels of insolvency since the beginning of the COVID-19 pandemic.

Legal Developments

In terms of legal issues, we have two High Court appeals to watch out for. Although this will not affect the numbers of insolvencies, there are two insolvency law cases where the High Court has “reserved” its decisions. Both are in relation to claims by liquidators for “unfair preference”, namely claims for repayment of amounts creditors received from a company before the company went into liquidation.

Both of the following cases were heard by the High Court in October 2022, so decisions could be expected in the second half of 2023:

• Bryant & Others v Badenoch Integrated Logging Pty Ltd (Case A10/2022): this case is in relation to how the amount of a preference claim is calculated. The Full Federal Court had held that the “peak indebtedness rule” – which had the effect of larger amounts being able to be sought for repayment – was not the correct way to calculate the amount. This decision was contrary to what was previously understood, and it was a negative development for liquidators (seeking to increase the amounts that would be available to pay any possible dividends to creditors of the company in liquidation). The High Court will now decide whether that stands.
• Metal Manufactures Pty Limited v Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Another (Case B19/2022): this case is in relation to whether unfair preference claims by a liquidator against a creditor can be “set off” (under section 553C of the Corporations Act 2001) against claims that the creditor has against the company in liquidation (allowing the creditor to reduce or defeat the unfairpreference claims). The historical position had been that this was not possible, but this had begun to be doubted. The High Court will now decide the issue after the Full Federal Court confirmed that set off under section 553C was not available.

To have two cases on unfair preference claims before the High Court is an unusual situation and could lead to changes in how the law has been understood and applied, depending upon what the High Court decides. This situation alone will cause uncertainty until the issues are resolved.

Conclusion

Our prediction is that 2023 will not be a normal year for insolvency, but another year of anticipation, expectation and uncertainty, as:

• Insolvency levels continue to increase, but not to the level of what was normal before the COVID-19 pandemic.
• The state of the law in relation to unfair preference claims is likely to remain unsettled at least until the High Court gives its decisions in the Bryant and Metal Manufactures cases, which can be expected in the second half of 2023.

In this environment we expectmore companies to be at risk of insolvency and at risk of being wound up by creditors. If you find yourself the subject of a threat of insolvency, you should seek advice early.

How can Sharrock Pitman Legal help?

We will be monitoring legal developments in insolvency over the year, and regularly giving updates.

If you have a specific issue about insolvency, whatever that may be (whether in relation to pursuing or resisting a claim), please do not hesitate to contact member of our Litigation Team.

If we can assist you please contact us by email litigation@sharrockpitman.com.au or call 1300 205 506.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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