Australian businesses are set to experience an increase in insolvencies this year as a result of another difficult economic year, according to the recently-published Atradius Economic Outlook. The likely 2% increase in insolvencies puts Australia in step with the UK and Canada.
The improving trend in the business environment across Australia and other advanced economies is expected to come to a halt this year. Changes in insolvencies predominantly depend on movements in the business cycle.
GDP growth in Australia for 2017 is expected to be 2.8%, which is slightly down on the 2016 rate of three per cent. This drop in the rate of growth is partly responsible for the slightly higher insolvency forecast.
Export growth is another area that we expect to slow considerably in 2017, down from seven per cent in 2016 to just 3.6% in 2017. Consequently, businesses that rely heavily on the export market will be particularly affected as trade pressures mount and prices are squeezed.
The contraction of China’s economy and the lowering of trade volumes in Asia as a whole are key factors in the expected reduction in business for Australia, given that China is our largest trading partner and the overall Asian market is hugely important to our own economic wellbeing.
With energy and commodity prices low, mainly due to reduced demand from China, and President Trump withdrawing the US from the Trans-Pacific Partnership (TPP) regional trade agreement, the situation is only likely to get worse before it gets better.
Additionally, changes to Australia’s corporate insolvency laws are also set to come into effect on March 1 and September 1 this year, which will see creditors in external administrations being given increased powers.
Those additional powers for creditors will include the ability to give directions to an external administrator, request the external administrator to convene a meeting or provide them with information or documents, and appoint individuals to give advice to the creditors or the committee of inspection.
In making a case for the changes, the Australian Government said concerns over “inadvertent breaches of insolvent trading laws” are frequently cited as a reason early stage (angel) investors are reluctant to get involved in a start-up. The government also claimed that our current insolvency laws put too much focus on penalising and stigmatising the failures.
Other changes to come into effect include a reduction in the current default bankruptcy period from three years to one year. A ‘safe harbour’ will also be introduced for directors from personal liability for insolvent trading if the company is undertaking a restructure.
Also, ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, will be unenforceable if a company is undertaking a restructure.
In such an uncertain economic climate, businesses should look to protect themselves. They can do this by carefully choosing which businesses they trade with, what terms they offer and, ideally, getting trade credit insurance to insulate themselves against non-payment by partners who may be affected by the growing rate of insolvencies.
About the author
Mark Hoppe is managing director, ANZ with credit insurer Atradius