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Decline in voluntary administrations prolonging the inevitable insolvency cliff

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Is Australia’s decline in voluntary administrations actually bad news?

New data has revealed voluntary administrations have significantly reduced during the COVID-19 pandemic, reflecting the uncertain mindset of small business owners. However, this could be prolonging an insolvency cliff.

Prushka Fast Debt Recovery revealed through data sourced from court records that the number of liquidations and administrations started to drop in April this year.

In June to August, just 192 Australian businesses entered in voluntary liquidation, a decrease of 53 per cent compared to the same period the previous year.

Roger Mendelson, CEO of Prushka, says this decline, in conjunction with the ATO and most governmental agencies essentially ceasing winding up companies, is creating a backlog that will result in mass amounts of liquidations in the future.

“Directors are simply waiting to see what will transpire with the economy and are avoiding spending money liquidating their company when they aren’t under pressure from creditors.”

On Sunday, the Federal Government announced that it will extend insolvency relief until the end of the year. The measures will were put in place from March 2020 as part of its response to the COVID-19 pandemic which were due to expire on 25 September 2020.

While described by Federal Treasurer Josh Frydenberg as a ‘regulatory shield’ to help viable businesses to survive as they adapt to a new COVID-safe economy, Mr Mendelson thinks the extension will prolong the problem for businesses, not solve it.

“This just perpetuates a safe harbour for businesses to make it unviable to take wind up action until the new year, further fuelling the insolvency cliff.”

Related: “6 out of 10 Australian SMEs report losses up to 75 per cent”

Mr Mendelson predicts we will see the trend reverse once the government even slightly reduces the COVID-19 related support mechanisms.

“This backlog of cases could cause major economic dislocation post-COVID in a time where we will need entrepreneurs thriving and small business owners working towards rebuilding.”

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Ellie Dudley

Ellie Dudley

Ellie Dudley is a journalist at Dynamic Business with a background in the startup space and current affairs reporting. She has a specific interest in foreign investment and the Australian economy.

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