AICM 2022 Risk report

AICM

Risk

REPORT

2022

AICM RISK REPORT 2022 Publisher: Nick Pilavidis FICM CCE Chief Executive Officer Australian Institute of Credit Management Editor: Claire Kasses General Manager Australian Institute of Credit Management Direct: 02 9174 5727 Mob: 0499 975 303 Design: Anthea Vandertouw Ferncliff Productions T: 0408 290 440 E: ferncliff1@bigpond.com Australian Institute of Credit Management Level 3, Suite 303, 1-9 Chandos Street St Leonards NSW 2065 T: 1300 560 996 E: aicm@aicm.com.au www.aicm.com.au

Contents WELCOME Nick Pilavidis FICM CCE Trevor Goodwin LICM CCE Our supporters

2 2 3

4

AICM

Insolvency Outlook

10

John Winter

Reform achieved by AICM advocacy

18

Nick Pilavidis FICM CCE

22

Mark Hoppe

RBA slams brakes on the brakes

HOW TO MANAGE RISK

Barbara Cestaro MICM and Dan Chapman MICM

Strategies to reduce risk with the 48 right contract terms and conditions Christopher Hadley MICM and Andrew Tanna MICM

Managing credit risk for improved cash flow in the digital age Current economic conditions, customer behaviour and mitigating risk

Anneke Thompson

Simplified debt restructuring

30

– should credit managers embrace this new insolvency reform?

Simplified liquidations and changes to liquidator preference payments

CONSTRUCTION IN FOCUS

Brad Walters

65

John McInerney MICM

Kirk Cheesman MICM

Are small operators the canary in the coal mine?

62

25

INSOLVENCY

Construction insolvencies:

54

Daniel Greenhoff MICM

– Australia enters new cash rate cycle as inflation rises

Dark clouds are building, the tide is turning…

45

Nikki Dennis MICM

IDENTIFYING RISK Insolvencies increase as government support ends

40

Wayne Clark MICM, MAICD

Making the most of your upcoming renewal

OVERVIEW Perspectives of the credit and risk profession

Elements vital to effective risk mitigation – construction industry

33

69

Henry McKenna MICM

OUR PEOPLE

74 AICM Risk Report 2022

Welcome

Trevor Goodwin LICM CCE

Nick Pilavidis FICM CCE

National President

Chief Executive Officer

The third issue of our risk report documents

In 2020 and 2021 credit professionals’ ledgers

how the increasing number of risk factors continue

have performed contrary to their expectations

to impact credit professionals.

at the outset of the year. The expected impacts of the environmental disasters, the pandemic,

Our inaugural report was issued in early 2020

withdrawal of government stimulus and the end

as Australia was in recovery from bushfires and

of limitations on enforcement failed to create the

unprecedented disasters, and we were starting

predicted spikes of risk and insolvency. However,

to see the impact of the COVID pandemic on

it is clear uncertainty and a diverse range of risk

business and the economy.

factors mean credit professionals need to be well informed to support their business with sound

The 2021 report painted a picture no-one

credit decisions and practices that manage credit

expected just 12 months earlier, insolvency

and reputational risk.

protections, moratoriums on enforcement and government stimulus dramatically countering

The 2022 Risk report brings together an

the rolling lockdowns to see corporate and

assessment of activity, trends and insights

personal insolvency hit record low levels. Credit

along with practical solutions to arm credit

professionals also reported record low DSO’s, bad

professionals with the information they need and

debts and improved engagement with customers.

an understanding of what best practice actions they can take to manage risk.

Our 2022 report summarises the reactions to the end of COVID relief measures, gradual reopening

AICM Certified Credit Executives are the AICM’s

of the economy and borders and the first signs

most experienced and knowledgeable group of

of credit professionals’ metrics beginning to

members, they have shared what they have seen

deteriorate.

over the last two years and what they expect as we move forward. The insights of our CCEs enable

I commend the team for their input in preparing

all credit professionals to consider how their

this report and the work that has gone into it,

experiences compare.

together with the accompanying insolvency seminars and networking by credit professionals.

It is fitting this is the largest and most

It is also pleasing to see a greater awareness of the

comprehensive Risk Report yet, considering

important work our members perform to ensure

the challenges credit and risk professionals face

their firms remain profitable and financially sound.

continues to increase.

2

AICM Risk Report 2022

Our 2022 SUPPORTERS National partners

Trusted Insights. Responsible Decisions.

Divisional partners

CREDIT MANAGEMENT SOFTWARE

Divisional supporting sponsors

AICM Risk Report 2022

3

Overview Perspectives of the credit and risk profession While all credit metrics continue to perform at much

the opportunities and implemented improvements

more positive levels than were seen prior to 2020,

to processes, general strategies to improve results

the rate of change and impacts of uncertainty are

and specific strategies to combat risk.

expected to put pressure on these results as we start to look toward a post covid environment.

Many CCEs and other AICM members have reported that the predicted impacts on cashflow

Impacts of the last 2 years

expected and experienced led their business

The positive movement in key metrics in the last

operations that had been pending consideration

2 years is clearly seen through the experiences

for extended periods. These improvements

of our Certified Credit Executives (CCEs) who

included:

overwhelmingly returned results contrary to what was expected at the outset of the pandemic.

Graph 1 below shows the result of the survey question “did your collections/DSO performance improve over the last 2 years”.

to rapidly implement improvements in their

— Training team members in core credit skills necessary to manage risk — Resilience, mental health and financial hardship training and support so customer team members could support customers and each other.

Graph 2 below shows that while the billions of

— Process and procedure improvements to create

dollars tipped into the economy by federal and

efficiencies including increasing delegation

state Governments were identified as a significant

of authorities which enabled staff to provide

contributor to these results, CCEs also harnessed

immediate responses to customers.

Graph 1: Collections/ DSO performance 70%

Government COVID support payments

60%

Improvements to our credit processes

50%

Specific strategies to improve results Specific strategies to combat risks created by the pandemic

40% 30%

High demand in our sector

20%

Lack of enforcement

by ATO, banks and other major creditors

10% 0%

Other

Yes

Stayed the same

No - they deteriorated

Sourced from a survey of AICM CCE’s conducted in March 2022.

4

Graph 2: Contributing factors

AICM Risk Report 2022

0%

10%

20%

30%

40%

50%

Sourced from a survey of AICM CCE’s conducted in March 2022.

60%

70%

OVERVIEW

Graph 3: Companies entering an insolvency process – annual appointments 12000 10000 8000 6000 4000 2000 0 -2000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Appointments

7,277

7,737

7,521

9,113

9,437

9,601

10,481

10,632

10,821

8,794

10,164

8,505

7,811

8,044

8,324

4,943

4,511

Change

10%

6%

-3%

21%

4%

2%

9%

1%

2%

-19%

16%

-16%

-8%

3%

3%

-41%

-9%

Data sourced from Australian Securities and Investments Commission Series 1 Companies entering external administration and controller appointments.

Reproduced with permission.

Note: Series 1 data reflects the number of companies in the period that have entered external administration or had controller appointed for the first time.

Some companies may have several appointments which is captured by ASIC’s series 2 data.

Graph 4: Personal insolvencies – 1 July 2019 to 6 March 2022 1,400 1,200 1,000 800 600 400 200

10 January - 23 January 2022

7 February - 20 February 2022

13 December - 26 December 2021

15 November - 28 November 2021

18 October - 31 October 2021

23 August - 5 September 2021

20 September - 3 October 2021

28 June - 11 July 2021

26 July - 8 August 2021

3 May - 16 May 2021

31 May - 13 June 2021

5 April - 18 April 20201

8 March - 21 March 2021

8 February - 21 February 2021

11 January - 24 January 2021

14 December - 27 December 2020

19 October - 1 November 2020

16 November - 29 November 2020

21 September - 4 October 2020

27 July - 9 August 2020

24 August - 6 September 2020

29 June - 12 July 2020

4 May - 17 May 2020

1 June - 14 June 2020

6 April - 19 April 2020

9 March - 22 March 2020

13 January - 26 January 2020

10 February - 23 February 2020

16 December - 29 December 2019

21 October - 3 November 2019

18 November - 1 December 2019

23 September - 6 October 2019

26 August - 8 September 2019

1 July - 14 July 2019

29 July - 11 August 2019

0

Data sourced from Australian Financial Security Authority Fortnightly bankruptcy and personal insolvency statistics. Reproduced with permission.

AICM Risk Report 2022

5

OVERVIEW

—

Communication and team

structures being adjusted and refined to cater for remote working.

Graph 5: Corporate insolvencies – Quarterly comparison

—

Implementation of

technology and use of data

2,000

enabling segmentation of

1,800

customer databases and enabling

1,600

experienced team members to

1,400

focus on high value tasks.

1,200 1,000

The AICM also responded to

800

these demands on members

600

providing additional updates via

400

webinars and publications as

200

well as implementing additional learning opportunities via virtual

0

n 2020 n 2021 n 2022

Jan - Mar 1,747

Apr - Jun 1,203

July - Sept 946

973

1,269

1,090

1,179

1,076

-43%

-59%

-50%

n 2020

n 2021

Oct - Nov 1,047

n 2022

Data sourced from Australian Securities and Investments Commission Series 1 Companies entering external administration and controller appointments.

Reproduced with permission.

classes for Toolbox, Workshop and Qualification training.

Insolvencies continue to drop Contrary to the predictions of contributors to the 2021 risk report insolvencies in 2021 continue to decrease from the historically low-

Graph 6: Personal insolvencies – Quarterly comparison

level set in 2020.

6,000

Despite continued lockdowns, tapering-off of government

5,000

support and the end of temporary 4,000

enforcement protections corporate insolvency levels dropped a further

3,000

9% from the historically low-level 2,000

set in 2020 to remain over 50% down on pre-COVID levels as seen

1,000

in Graph 3.

0

Jan - Mar

Apr - Jun

n 2020

July - Sept

n 2021

Oct - Nov

n 2022

Data sourced from Australian Financial Security Authority Monthly personal insolvency statistics

Personal insolvencies also remained historically low with fortnightly insolvencies remaining around 400 per fortnight compared to 800-1000 prior to 2020 as seen in Graph 4.

6

AICM Risk Report 2022

OVERVIEW

However, there are signs that insolvencies

While corporate insolvencies remain low, analysis

are starting to increase. Analysing corporate

of insolvencies by industry (see Graph 7)

insolvencies (Graph 5) on a quarterly basis,

highlights some significant movements in those

we see that:

that make up the top ten industries.

z 3 of the 4 quarters in 2021 saw increases over the same time in 2020. z January to March 2021 was the only quarter down on the prior year. A surprising result considering many expected a significant spike following the end of temporary insolvency projections on 31 December 2020. z The January to March 2022 quarter has shown a slight increase on prior year indicating a trajectory of gradual increases in insolvency levels.

With many industries hamstrung by covid it is interesting to see: — Construction moved from 2nd place to take 1st place from Other (Business & Personal) services.

— Professional and scientific services consistently moved up the rankings from outside the top 10 in 2019, to 9th in 2020 and 6th in 2021.

— Rental and Hiring peaked in 2020 at 6th and just held onto a top 10 spot in 2021.

— Administrative and professional services

Graph 6 shows personal insolvencies started to show signs of increasing above the 2020 levels in

moved from 20th in 2020 to 8th in 2021.

— Financial and insurance services made the

the October to December quarter but the January

biggest move coming into 9th from 25th last

to March 2022 Quarter saw another drop.

year.

Graph 7: Corporate insolvencies by industry – Top 10 in 2021 2020

2021

2022

0 5 10 15 20 25 30 Construction

Financial & insurance services

Professional, scientific & technical services

Accommodation & food services

Other (business & personal) services

Administrative & support services

Transport, postal & warehousing

Retail Trade

Rental, hiring & real estate services

Manufacturing

Data sourced from Australian Securities and Investments Commission Series 1A: Companies entering external administration and controller appointments by industry, July 2013–January 2022. Reproduced with permission.

AICM Risk Report 2022

7

OVERVIEW

Looking forward In the current context of rising inflation and interest rates, labour

Graph 8: Collections/DSO outlook

shortages, supply chain delays and global uncertainty a lot of credit professionals are looking to the future with optimism supported by the record performance of their ledgers, very low insolvencies and improved relationships with their customers.

Improve Stay the same Deteriorate

0%

10%

20%

30%

40%

50%

60%

Sourced from a survey of AICM CCE’s conducted in March 2022.

When we asked CCE’s how they expected their collections and DSO to perform in 2022, 50% of

Graph 9: Significant losses expected when recovery actions recommence?

respondents expect to continue improvement and only 25% expect deterioration (see Graph 8).

Their optimism seems due to high current quality of their ledgers and the improvements they have implemented which will provide insulation from the growth in insolvencies. Supporting this, Graph

Yes Yes - but we don't have significant exposure Unsure but worried No

0%

5%

10%

15%

20%

25%

30%

35%

Sourced from a survey of AICM CCE’s conducted in March 2022.

9 shows only a third of CCEs expect significant losses when the ATO and other major creditors re-commence enforcement activity.

Graph 10: Risk factors in 2022 Inflation/Price rises

While the outlook is positive for credit professionals the current

Supply constraints Interest rates

environment does not allow them to

Labour shortage/ the great resignation

relax with CCE’s currently vigilant on

War in Ukraine

a range of risk indicators as listed in

Environmental disasters

Graph 10.

COVID-19 Australia's relationship with China

While inflation and supply constraints rate the highest when assessing individual customers credit professionals clearly need to weigh up the specific impacts of all these factors and many more.

8

AICM Risk Report 2022

The Federal election Property prices 0

2

4

6

Sourced from a survey of AICM CCE’s conducted in March 2022.

8

10

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Insolvency Outlook

John Winter Chief Executive Officer ARITA – Australian Restructuring Insolvency & Turnaround Association

To say that we continue to live in strange times

Of course, this doesn’t at all align with the general

would best be described as an understatement.

publics or the media’s view of what is happening

For those of us in the restructuring, insolvency and

in the economy. The perception persists that these

turnaround market, the conditions we see continue

must be halcyon days for insolvency practitioners

to defy the old rule book.

when, of course, the opposite is true.

Where did all the insolvencies go?

Indeed, you might have expected to see an increased take up of advisory work to help

The number of formal insolvencies in Australia

businesses navigate the turbulent times but

halved after March 2020. While this is a global

that didn’t transpire either. “Safe harbour”

phenomenon found across most developed

and other advisory work has also fallen to low

economies it has been driven in Australia by:

levels based on anecdotal feedback from our

z Massive stimulus (also global driver)

members. Though, we do know that a lot of

z Largely “free” money through low interest rates (also global) z Protections on enforcement especially commercial leases and loans z ATO withdrawing all enforcement activity z General “signalling” from the Government e.g. temporary insolvency protections leading directors to believe that their insolvency issues

major companies, especially listed ones, did undertake a safe harbour engagement as a risk management strategy for if market conditions worsened sharply. This use of the regime was less about actual genuine concerns about insolvency than it is simply a wise insurance policy for directors and ensured that they had a “Plan B” readily to hand if conditions worsened.

were not problematic.

Of course, the lack of formal appointments and Despite most of those measures having either

the parallel reduction in informal advisory work

been fully or largely wound down, the level of

to financially distressed businesses, implies that

insolvency activity has not recovered. We are still

directors saw stimulus and protections as a “get

at 40-50% below pre-COVID levels of external

out of jail free card” and have simply ignored

administrations.

their director obligations and kept trading.

“Despite most of those measures having either been fully or largely wound down, the level of insolvency activity has not recovered. We are still at 40-50% below pre-COVID levels of external administrations.”

10

AICM Risk Report 2022

OVERVIEW

Interestingly, COVID stimulus may well be hiding a longer-term trend. Research by ARITA revealed that insolvencies per company in Australia have been in long term decline anyway.

And the start of that decline aligns with when interest rates started their downward move towards zero. Without question, it shows that

“As the price of debt increases, businesses will need to focus on their viability. Helpfully, it should also drive a long-lost quest for productivity.”

the free availability of debt has propped up companies that probably should have ceased operating.

courtesy of that aforementioned stimulus. But that is beginning to wind down with stimulus

That being said, there are obvious signs starting to

long finished. The acceleration of that has been

emerge for a return to some level of normality. The

brought about buy “shadow lockdowns” occurring

most obvious is the expectation of interest rate

in most States that have cut into profitability and

rises. As the price of debt increases, businesses

therefore their reserves. And, of course, most

will need to focus on their viability. Helpfully, it

other protections around rent relief and the likes

should also drive a long-lost quest for productivity.

are now off, too.

Throughout the years of the pandemic

As a result we will, necessarily, start to see a

accountants in public practice continued to

progressive rise to a more natural – and healthy –

report that clients had never been so cashed up

level of insolvency.

AICM Risk Report 2022

11

OVERVIEW

But most trade creditors remain firmly out of the

their reporting affairs in order and highlighting

market for initiating major recovery actions or

that they be subject to Director Penalty Notices or

pursuing formal windups of derelict debtors. We

garnishee orders.

suspect that this is because many no longer see the commerciality in initiating wind-ups on their

This represents a huge change in signalling.

own – a view likely arising from an expectation that their creditors may likely have very large

Of course, we won’t see actual DPNs, garnishees

tax and secured debt that will wipe out possible

or windups of any significance until after the

returns.

Federal election on this timeline and that is extremely politically expedient for a government

The ATO’s disappearing act

not wishing to have bad news stories of COVID

Speaking of tax debt, this is perhaps the most

down by the ATO in that heightened election news

important and underappreciated aspect of the

cycle.

or disaster-effected small businesses being shut

pandemic. The ATO is, of course, the initiator of the vast majority of windup actions in normal times. Unlike commercial creditors, the ATO

Banks disappeared, too

needs to undertake windups regardless of the

Major lenders have also stayed well away from

commerciality of the outcome. Yet the ATO has

major recovery action since before Hayne Royal

been almost totally absent from the market since

Commission. Banks were, of course, “highly

March 2020. This has been taken as a major

supportive” of borrowers throughout the

“signal” to directors of distressed businesses that

pandemic and went to even greater lengths to

the ATO was out of play and led to using the ATO

not take enforcement action against delinquent

as a de facto lender. While there was never an

borrowers. This was backed up by regular public

official policy statement to this effect, it is clear

statements by major lenders and the Australian

that the government allowed the ATO to act as

Banking Association that borrowers would be

an informal funder to businesses throughout the

assisted by their lenders.

period. And there’s no doubt that that informal funding has been extensively taken up.

Alongside this, most banks had radically cut their teams who manage distressed borrowers over

The ATO started making noises about a return to

the last 5 years. Interestingly, there is a significant

the market early in 2022, though actual activity

scale up now happening in those teams. But

has remained close to zero until the end of March.

their approach is now profoundly different, and

Now we believe that some 50,000+ directors have

we expect there is a new normal which will see

been written to giving them 21 days’ notice to get

it remain that banks will be much less inclined to take formal enforcement.

“Unlike commercial creditors, the ATO needs to undertake windups regardless of the commerciality of the outcome. Yet the ATO has been almost totally absent from the market since March 2020.”

12

AICM Risk Report 2022

There have been wide reports of banks using a limiting of providing extra credit as a way to move poor quality/higher risk profile borrowers on. Of course, this is a completely reasonable approach given the attacks on banks around the Hayne Royal Commission about not taking greater steps to ensure responsible lending.

OVERVIEW

“There have been wide reports of banks using a limiting of providing extra credit as a way to move poor quality/higher risk profile borrowers on.”

But in this instance, it leads to those borrowers

Well, it appears that they are ghosting out of

needing to depart to second or third tier lenders

existence and avoiding the proper solvent or

instead. The banks also either compromising

insolvent shutdown processes.

debt or offering generous extensions to other borrowers.

In a normal/pre-COVID year there are approximately 10,000 corporate insolvencies

But it is important for credit professionals to

per year. We now know that there are more

note that other creditors will not be able to rely

than 40,000 companies deregistered by ASIC in

on major banks leading recovery actions against

addition to those formal insolvencies. That means

distressed companies in the future as banks will

that only 1 in 5 shutdowns goes through the

remain primarily concerned about reputational risk

“proper” process.

in their decisions.

Recently, ASIC has started to take some action

Deregistrations – the new phoenix?

against directors for false statements (i.e. that

There’s another important issue coming to the fore

deregistrations and that’s shed some light on this

through COVID and it comes from a very obvious

occurrence.

there were actually debts owing) around those

observation: we can see lots of businesses have closed their doors but they haven’t appeared in

So, could deregistrations be the new phoenix?

the insolvency statistics. So, what happened to

Well, to an extent, yes. We do have plenty of

them?

anecdotal information that dodgy advisers are AICM Risk Report 2022

13

OVERVIEW

using the ghosting out technique as their primary exit strategy. They coach financially distressed

Where do we see the strain?

directors to pay enough for key creditors to

You will no doubt see articles in this Risk Report

go away and then ignore the rest of their debt.

from other contributors who will be sharing their

They do this alongside ceasing all ATO and ASIC

data on areas of risk, but from the viewpoint of

reporting for the entity. Then they leave it to be

insolvency professionals, we are seeing five factors

deregistered.

that are really driving insolvency right now: 1.

Away from this very dodgy usage, there is a counter argument that it’s not necessarily a bad “public good” outcome if all creditors are properly

Supply chain crunches/delays – companies being placed under strain because essential supplies delay their ability to complete their own product or service to generate revenue.

satisfied (if not fully paid), but avoids any checks and balance and all investigations. The foundation principle of pari passu may go by the wayside and ATO debt is particularly at risk if not reported on prior to abandonment.

2. Supply chain cost increases/accelerating inflation – these impacts are reducing profitability of companies especially in areas where there are fixed cost contracts or limited ability to pass on those costs.

Regardless, this issue may that become a very big

3. Lack of staff to meet demand – again causing

public policy problem as we exit COVID, start to

companies to be placed under strain because

see rising insolvencies and the return of the dodgy

they cannot deliver their own product or

advisers.

service to generate revenue.

14

AICM Risk Report 2022

OVERVIEW

4. COVID-economy shifts – some segments such as international tourism, CBD hospitality, international education and the likes will take a long time to return, if they ever do. Businesses in these areas are unlikely to make it through.

5. Weather/disaster events – the sequence of bushfires, floods, storms and so on having taken a serious toll in some regions.

In terms of sectors that we see under insolvency strain, these include:

“We are now over two years into the level of insolvencies being 50% below baseline. Insolvency firms are, of course, businesses themselves. So unsurprisingly, that reduction in work has had a profound and negative effect on the profession.”

— Supply chain costs and crunches are hitting construction and related sectors the hardest.

We are likely to see biggest rise in insolvencies there – signs already coming through with Probuild and Condev. A ripple effect is also likely.

— Supply chain also a big problem for transport – where rising fuel costs will be major factor.

This may well be a challenge when work returns as firms will not readily have the capacity. This is compounded by it being very hard to attract good junior-mid level staff with salaries for these staff being much, much higher outside insolvency (yes, despite all views to the contrary, insolvency actually doesn’t pay very well!)

— COVID-economy shifts continue to impact hospitality and tourism (e.g. tourism now

Registered liquidator numbers remain resilient,

domestic versus international) and staff issues

though, and there’s becoming quite a generational

are also most prevalent there.

change occurring. This gives us the base from which to rebuild. Firms are working to get ready

Impacts of the pandemic on the profession

for the projected increase in work – but it’s hard to

We are now over two years into the level of

So, this may lead to a squeeze of availability but

insolvencies being 50% below baseline. Insolvency

ARITA is working with ASIC and AFSA to plan

firms are, of course, businesses themselves. So

around this.

plan for alongside the scarcity of mid-level talent.

unsurprisingly, that reduction in work has had a profound and negative effect on the profession.

It comes on top of long-term reductions in staffing

Has COVID changed insolvency forever?

as work has been in decline for 8 years – a product

There’s a genuine question around whether both

initially of our long pre-COVID economic growth.

debtor and creditor behaviour has been altered.

We think that its likely that the actions of all –

When insolvency numbers collapsed in March

especially ATO and lenders – may have trained in

2020, revenue in most firms dried up as well.

new behaviours.

More than half of all insolvency practices ended up on JobKeeper. But most firms have had to

Debtors learned that they could “push back” and

significantly reduce their headcount leaving many

may now have an expectation that they do not

firms now skeleton staffed.

have to fully meet their debts. Alongside this, the AICM Risk Report 2022

15

OVERVIEW

current government is moving towards “debtor in

from our framework and that with which the PC

possession” and an expectation that creditors will

agreed.

simply compromise debts/wear the pain of losses.

Instead, the government opted for a cut And, as previously mentioned, many trade creditors

and paste” of Part 5.3A into Part 5.3B – with

may no longer have the desire to formally pursue

other oddities added – making it a complex

debts over viability concerns. Additionally, that

and therefore expensive approach. They also

exploitation of deregistrations and “informal exits”

broadened its access up to firms with a $1 million

may become part of the new normal.

in debts.

All of these observations combine to suggest that

The government claims that SBRs is one of the

we won’t be going back to the old patterns and

most major reforms undertaken in 30 years

that creditors will firmly be expecting much more

but all points to it being practically limited in

debt forgiveness in the futures

application. At this time, well over a year since commencement, still only 40 Small Business

Small business restructuring: Fizzer or slow burn?

Restructures have been engaged with only 30

While we are on the subject of “debtor in

the time you read this.

making it to a plan. Much will depend on the outcome of the election that will be known by

possession” we should consider the government’s signature legislation in the area – small business

The Morrison Government was making noises

restructuring.

that they may open up the requirements (e.g. increase debt levels to $5 million). We see this

The idea for SBRs came from ARITA in 2014. It was

as a problematic response that will lead to abuse.

a concept targeted only at micro businesses where

It’s the form and complexity of the current

there was little risk of exploitation. The concept

legislation that is the problem and there’s no

was given the approval of the Productivity

appetite to address this.

Commission in their 2014 Business Setup, Transfer and Closure Inquiry Report. And it remained “on

Lots of insolvency firms are now marketing SBRs

the books” as something the government was

as a tool, but the take-up remains low, even in

meant to respond to from that time.

recent weeks as we’ve started to see inquiry levels pickup around ATO’s renewed activity. So, while

As COVID hit the government searched for quick

use of the SBR regime may pick up, it’s our view

fixes for what was perceived as a coming tsunami

that this is a missed opportunity that is unlikely to

of insolvencies, and they landed on this concept.

be a major tool to save distressed businesses in its

Sadly, it was largely on the name that they took

current form.

“The government claims that SBRs is one of the most major reforms undertaken in 30 years but all points to it being practically limited in application. At this time, well over a year since commencement, still only 40 Small Business Restructures have been engaged with only 30 making it to a plan.”

16

AICM Risk Report 2022

OVERVIEW

The law reform landscape

liquidator. Liquidators often have to rely on

What’s coming down the pipeline in terms of

their statutory work.

change? Of course, everything is totally dependent on the outcome of the May Federal election.

There are no guarantees that the Morrison government will pursue any pre-election reform proposals even if re-elected noting that there is no significant draft legislation (just announcements).

On top of that’s, there’s absolutely no expectation that an incoming Labor Government would have the same agenda.

What does remain on the agenda of the Morrison Government are proposals around the following:

preference recoveries to fund them to do

— $5,000 “grant” for unfunded liquidations – also a Federal Budget announcement alongside the unfair preference statement. Given the complexity of work that liquidators must do under the Corporations Act, this doesn’t even begin to cover their costs, especially once ASIC fees are paid. Both above will make it unlikely for liquidators to take unfunded small jobs especially court liquidations meaning that you won’t be able to rely on the historic processes.

— Clarifying treatment of trusts – the government has budgeted for work to continue on this.

It’s a task left unfinished since Harmer Report

— One year bankruptcy – an idea which we are

of the 1980s and needs to be addressed to

vehemently opposed to for the risk that it

bring down cost of insolvencies (most SME

causes. Far better to consider enhanced early

insolvency have a trust structure).

discharge options — Push to have more people, including directors,

— Response to the excellent Safe Harbour Review Panel report – government has funded some

go down the path of Debt Agreements rather

implementations (unspecified) but stopped

than bankruptcy – also a proposal we oppose.

short of adopting the Panel (and ARITA’s)

Debt Agreements were designed mainly for

recommendation of a “root and branch” review

consumer personal insolvencies. Pushing

of insolvency laws to simplify and reduce cost.

complex personal insolvencies into them will only lead to more legislation and therefore

If there is a change of government, there is little

more cost. Everyone loses from that. In

indication from the ALP as to any interest they

addition, they juts aren’t fit for that purpose.

have in this space. ARITA will continue to push

— Free ASIC searches – this is unquestionably good for all, especially creditors. IF there is a change of government credit professionals should join us in pushing an incoming government to deliver on this Budget announcement.

— Unfair preferences – this Federal Budget announcement on a prohibition on amounts

for a “root and branch” review of our insolvency regime to be conducted by the Australian Law Reform Commission – a repeat of the 1980’s Harmer Inquiry which was the last fulsome review we had. This is a 3-5 year project but it’s essential if we want to radically reduce the cost, complexity and accessibility of our restructuring, insolvency and turnaround regime and be fit for the future.

less than $30k and more than three months prior isn’t backed up by any draft legislation.

While we know that credit professionals love the sound of this, it’s the end of pari passu and it will also leave many small business insolvencies unable to find a

John Winter Chief Executive Officer ARITA – Australian Restructuring Insolvency & Turnaround Association T: (02) 8004 4344 www.arita.com.au

AICM Risk Report 2022

17

Reform achieved by AICM advocacy Nick Pilavidis FICM CCE Chief Executive Officer Australian Institute of Credit Management

Credit professionals deploy a range of skills and

to weather temporary disruptions to their business

experience to assess and manage and respond

and cashflow. Drawing on the experience of

to credit risk and insolvencies. Their ability to

AICM Members the AICM showed how a business

make fully informed credit decisions and ensure

seeking a temporary extension to payment

maximum returns for their organisations hard

times or a repayment arrangement may face

earned sales and services is heavily influenced by

unnecessary hurdles as the credit providers seek

legislative and regulatory settings which is beyond

to mitigate risk of payments later being clawed

their direct influence.

back as an unfair preference claim.

As the only membership body for the credit

In March 2022 Assistant

professionals the AICM is a strong voice advocating

Treasurer the Hon. Michael

for its members and their organisations to achieve

Sukkar’s announced of reform

the right settings that benefit our members,

and $22 million in funding to

businesses and consumers. While much of this

simplify and make the rules

work is only seen in lengthy submissions published

governing ‘unfair preference’

on our website it also includes involvement

claims by liquidators fairer.

of AICM staff and members in numerous conversations, meetings and industry forums.

The Hon Michael Sukkar

While details are limited to a media release the intent is clear with the Hon Michael Sukkar stating,

Recently a number of noteworthy outcomes

“Creditors who act honestly and at arm’s length

have been achieved that are a significant return

shouldn’t be pursued for small payments where a

of members investment in the AICM and will be

company they dealt with enters liquidation.”

relevant to how they adjust their operation in the short to medium term.

For credit professionals once implemented, transactions will be excluded from claw back

Fairness for unfair preference payment rules

where they are made to unrelated creditors in

AICM has repeatedly called for reform of the rules

entering external administration.

ordinary course of business. And the amount is less than $30,000 or within 3 months of company

so arm’s length credit providers are not further penalised when a company is liquidated and they

To support this change the 2022 federal budget

are pursued for payments collected using normal

included $22 million in funding of the Assetless

commercial practices.

Administration Fund to provide $5,000 in funding to liquidators for assetless appointments. Many

Our submissions and direct appeals from as far

expect this funding will not be sufficient to fund

back as 2014 have highlighted the impacts this

liquidators to perform investigations and reporting

legislation has on the success of the Australian

necessary to comply with their obligations

economy and ensuring viable businesses are able

including those that protect creditors interests.

18

AICM Risk Report 2022

OVERVIEW

The AICM’s role in achieving this change is a

businesses not paying their tax obligations an

long way from complete but we will continue to

unfair advantage over their competitors that are.

represent members to achieve the right settings once draft legislation is released.

The AICM also engaged with small business

Read the government announcement

advocates to address misconceptions including that adverse information on credit reports

Disclosure of Business tax debts

prevents access to credit forever and showed that

In 2014 the AICM began a campaign to call for

businesses that are paying their tax obligations.

closing this gap is a significant benefit to small

changes to allow the ATO to disclose businesses in default of their tax obligations to credit reporting

After 6 years of consistent activity, legislation

bureaus.

commenced in March 2020 to allow the ATO to report business tax debt where a business has

The AICM engaged with Government, ATO, Industry

one or more tax debts and at least $100,000

bodies and small business advocates to show how

is overdue by more than 90 days. Further, the

the absence of this information is one of the largest

disclosures will not be made if the business is

gaps in the Australian credit system. While ATO

engaging with the ATO to manage their tax debt

is the largest creditor in most insolvencies and a

or there is an active complaint with the Inspector-

creditor of all businesses, credit decisions are being

General of Taxation Ombudsman (IGTO).

made without transparency of if businesses were complying with their tax obligations.

With the pandemic resulting in the ATO pausing recovery action, the first disclosures were not

Not only does this gap expose credit providers

made until April 2022. These disclosures followed

to make fully informed credit decisions but it

250 letters of intent to disclose being sent in

facilitates illegal phoenix activity and gives the

August 2021.

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19

OVERVIEW

Pleasingly for all stakeholders, the majority of these letters resulted in the taxpayers re-engaging with the ATO to pay in full or negotiate payment plans. From engagement with CreditorWatch,

Director identification, accurate company records and free access to information

Equifax and illion the AICM understands

As access to accurate information on companies

approximately a dozen disclosures were made in

is a fundamental requirement of accurate and

April 2022 indicating the remainder of the 250

efficient credit decisions the AICM has engaged

letters sent in August resulted in engagement with

with government and regulators to voice credit

the ATO or a formal insolvency process.

professionals’ frustrations at the lack of integrity and efficiency of company information for many

On 25 March 2022, the ATO sent out approximately

years.

29,000 letters to taxpayers who are at risk of having their debts disclosed to make them aware

Recently there has been significant advancement

of their current position and encouraging them to

in this space with the benefits starting to flow.

effectively engage with the ATO to avoid disclosure.

The mailout is being followed up with phone calls

Director Id’s

to encourage these taxpayers to work with the ATO

On November 2021, the Director Identification

to manage their debt and understand what the

Number regime commenced with directors for the

next steps might be.

first time required to prove their identify within 28 days of becoming a director. This is the first phase

For more information about the measure visit

of addressing a fundamental flaw that creates

www.ato.gov.au/disclosurebusinesstaxdebt

inaccurate credit information.

The AICM continues to support the approach

The new regime requires directors to undergo

taken by the ATO to implement this measure

identity verification in order to obtain a director

to and advocates for the criteria can be refined

ID which will ensure the integrity and accuracy of

further improve the information available to inform

company register information.

credit decisions.

The regime is being phased in until November

Financial hardship information on credit reports

2022 when all directors are expected to obtain a director ID and from 5 April 2022 new directors need to obtain an ID before appointment.

Changes to the Privacy (credit reporting) code commence on 1 July 2022 allowing clearer reporting of payment information when a creditor agrees to temporarily modify monthly repayments.

The AICM participated in consultations with Australian Retail Credit Association (ARCA) the Office of the Australian Information Commissioner

Date you first become a director

Date you must apply

On or before 31 October 2021

By 30 November 2022

Between 1 November 2021 and 4 April 2022

Within 28 days of appointment

From 5 April 2022

Before appointment

(OAIC) on this long-awaited change.

Further details of this change and what it means for credit professionals are covered in this Article.

20

AICM Risk Report 2022

OVERVIEW

For credit professionals the benefits of the director

The AICM is a member of the Business Advisory

ID’s will be seen as the Companies Register

Group to ensure credit professionals interests are

managed by ASIC migrates to the new Modern

at the core of the development of this new registry

Business Register (MBR) managed by Australian

service.

Business Registry Service (ABRS).

Free company searches Modern Business Register

Announced in the March 2022 Federal Budget,

The Modern Business Register, managed by the

Company search fees will be scrapped as part of

ABRS, will bring together more than 30 Australian

the Commonwealth’s Deregulation Agenda and

Securities and Investments Commission (ASIC)

ASIC will forgo $64.9 million over three years in

registers in one place. The vision of the ABRS is to:

late 2022 when the new Modern Business Register

z make it easier for businesses to meet their registration obligations

is expected to go live.

z improve the efficiency of registry service transactions

Once implemented credit professionals will no

z make business information more trusted and valuable.

obtaining basic information on their current and

As one of the largest digital transformation projects in Australia, the transition to the new registry is being being implemented in phases until 2024. In late 2022, the transition of the Companies Register is expected.

longer need to make cost benefit decisions when potential customers.

Nick Pilavidis FICM CCE Chief Executive Officer Australian Institute of Credit Management T: 1300 560 996 E: nick@aicm.com.au www.aicm.com.au

Trusted Insights. Responsible Decisions.

JOIN US AT THE

2022 National Conference President’s Dinner on Thursday 20 October 2022

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21

Identifying RISK Insolvencies increase as government support ends Mark Hoppe Managing Director Oceania Atradius

During the Covid-19 pandemic, global

these countries experiencing low insolvency levels

insolvencies fell by a cumulative 32% in 2020 –

in 2021 and the withdrawal of fiscal support in late

2021. We believe generous government support

2021 or early 2022.

measures saved not only viable companies but also created zombie companies i.e. the ones that would have defaulted even in normal times.

The highest insolvency contractions in 2020

Countries with the lowest insolvency forecasts

were in Australia, Singapore, France, Austria,

Turkey and Brazil are forecast to experience some

Belgium and Italy as insolvency legislation was

of the lowest increases in 2022, at 9% and 6%

temporarily relaxed to protect companies from

respectively but not because of the pandemic

bankruptcy. There has been speculation about

related adjustment, as fiscal support was already

insolvencies rising over the last couple of years

phased out in 2020. Instead, our forecast for

but there was a question mark on when. Now

these countries reflects a deterioration of GDP

that government support is being withdrawn

growth relative to its long-term trend. The Czech

for businesses across most markets, the tide

Republic (5%), Romania (16%), Finland (24%) and

is beginning to turn and we expect a rise in

Switzerland (35%) are forecast to see insolvencies

insolvencies to occur in 2022 and 2023 for the

grow by a relatively small percentage because in

majority of markets globally.

their case most or all of the adjustment to normal took place in 2021.

Countries with the highest insolvency forecasts The highest insolvency rates for 2022 are

Countries with a decrease in insolvencies

expected in Portugal (124% yoy growth),

Two striking outliers are New Zealand and Hong

Netherlands (101%), Singapore (88%), Belgium

Kong, both are forecast to see a decrease in

(83%) and the United States (70%). This is due to

insolvencies for 2022. This is because in their case

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AICM Risk Report 2022

IDENTIFYING RISK

“During the Covid-19 pandemic, global insolvencies fell by a cumulative 32% in 2020 – 2021.”

forecasting Australian insolvencies to grow by 64% in 2022. We’ve already seen some high profile insolvencies in Q1 2022 with Probuild and Condev construction companies collapsing, with flow on effects expected so the tides appear to turning in

the fiscal support is estimated to extend until

our region.

the end of 2022. This effectively concentrates all the adjustment in 2023, therefore inflating the

You’ll also see on Chart 1 that 2023 growth rates

insolvency growth rate to the highest across all

of insolvencies are on the high side for Australia

markets, with NZ forecast to increase 188%, and

(31%), South Korea (61%), France (40%), Poland

Hong Kong 63%.

(40%) and Norway (32%), this is still due to low insolvency levels in 2021 and a later withdrawal

So how does Australia compare?

of fiscal support in mid 2022. As a result the

At this stage, the number of insolvencies in

2023 and will progressively normalise through the

Australia are well below pre-pandemic numbers

year.

insolvency levels will still be high at the start of

but we do expect insolvencies to rise in the back half of 2022 which is when we’d expect to see

Beyond 2023, we expect that insolvencies globally

the numbers reflect pre-pandemic levels. We’re

will again start to decline or remain constant.

AICM Risk Report 2022

23

IDENTIFYING RISK

This is because insolvency levels will have largely

Read the full Atradius Economic Insolvency

returned to normal and zombie firms that are

Forecast

not able to survive without support, have gone bankrupt already. In the coming years, firms Mark Hoppe

will have to adjust to an environment without

Managing Director Oceania

significant government support. For firms that

Atradius

have taken up a lot of debt during the pandemic,

T: +61 2 9201 5222

this could be a challenge.

atradius.com.au

Chart 1: Insolvency growth, year-on-year % change Spain Turkey Czech Republic South Africa Finland Romania Switzerland Hong Kong Sweden Russia Denmark United Kingdom Italy Germany Japan Canada Ireland Poland Brazil Norway United States Belgium Singapore Austria Australia France New Zealand Netherlands South Korea Portugal

-50

0

50 2022

24

AICM Risk Report 2022

100 2023

150

200 Source: Atradius

Source: Atradius

RBA slams brakes on the brakes Australia enters new cash rate cycle as inflation rises Anneke Thompson Chief Economist CreditorWatch

High inflation is currently a global phenomenon,

nations reached an average inflation rate of almost

with various structural elements combining to

eight per cent by Q1 2022. The Reserve Bank

create a perfect inflationary storm. High fuel

of Australia (RBA) appears to be particularly

costs as a result of the war in Ukraine is one

concerned about the steepness of the inflation

major factor, impacting everything from shipping,

curve, and moved to increase the cash rate on

trucking, air freight to food and manufacturing.

3 May ahead of any official data indicating wages

Ongoing supply chain disruptions and production

are starting to increase. Inflation is now well

and staffing issues associated with COVID-19

outside the RBA’s target band of two to three

are causing short term havoc. And global labour

per cent: bringing in under control will involve a

mobility has been severely impacted by the

measure of short-term pain (for borrowers) for

pandemic, with countries that typically import

long term gain as price increases are brought

a lot of labour reporting severe productivity

under control.

constraints as they make do without these employees.

Reflecting their rising risk profile due to Australia’s higher inflationary environment, the

Compared to other OECD nations, Australia’s

Food and Beverage Services, Arts and Recreation

inflationary curve was relatively modest, until

Services and Transport, Postal and Warehousing

the March 2022 quarter data was released.

Industries have all recorded an increase in their

The USA and UK are recording inflation between

Probability of Default this year. As inflation

5.5 and eight per cent. Combined, the OECD

works through the economy, it is expected that consumers will reduce spending on discretionary

“Inflation is now well outside the RBA’s target band of two to three per cent: bringing in under control will involve a measure of short-term pain (for borrowers) for long term gain as price increases are brought under control.”

items.

Combined with home loans becoming ever more expensive for borrowers, we will start seeing spending patterns change, and reduce in many areas. Indeed, this is partly the aim of the RBA when they increase the cash rate. Cafés, restaurants and the arts and entertainment sectors are all typically areas where consumers choose to spend less as their discretionary income declines.

AICM Risk Report 2022

25

IDENTIFYING RISK

Annualised Inflation

Source: OECD

What does rising inflation mean for consumer confidence?

Since then, the trajectory has been progressively

In the world’s major economies, rising prices

up. Importantly, most consumers have now come

and further interest rate rises are weighing on

to expect that their home and personal loans

consumers’ minds more than they did when

are going to get progressively more expensive,

COVID-19 first went global in early 2020. In 2020,

and this will curtail discretionary spending going

consumer confidence plummeted as the shock of

forward.

worsening, as rising prices, COVID-related supply chain disruptions and the war in Ukraine all add

the pandemic set in. However, massive amounts of government stimulus quickly reversed the trend,

Consumer confidence in Australia is sitting

and, like it or not, most consumers settled into a

above the USA, UK and OECD average, however,

life of online shopping, home renovations and lots

we are not as far into our inflationary cycle.

of cooking! In Australia and the OECD, consumer

So, expect that this indicator will continue to

confidence peaked around mid 2021, before the

worsen. Incredibly, consumers feel worse now

Delta wave arrived, and we realised that COVID-19

than when they did when COVID-19 began. This

was not going away any time soon.

is likely because both consumers and borrowers

26

AICM Risk Report 2022

IDENTIFYING RISK

Consumer Confidence Index

Source: OECD

now know that government stimulus has dried up, and central banks are going to need to wind back two years’ worth of extra liquidity injections.

What does this mean for the credit outlook for Australia’s industry sectors?

CreditorWatch’s February 2022 industry data

Most developed economies were flooded with

recorded a significant rise in the probability of

cash during the pandemic, which alleviated short

default for the Food and Beverage Services sectors,

term economic pain and certainly kept workers

which rose from 5.7 per cent to 6.7 per cent over

who were unable to work financially afloat,

the month. This was the highest probability we had

however, the cash is now showing up as higher

calculated in some time, and once again, probability

prices across the board as the world normalises

of default for this sector has risen, now sitting at 7.1

again. Australia’s money supply rose by about 22

per cent as at April 2022.

per cent throughout COVID-19, far less than some other countries, so the good news is we may have

This figure sits well above all other industries,

a smaller problem to work through than some

with the Arts and Recreation sector being the

larger economies, namely the US.

next most vulnerable at 4.8 per cent. The Food AICM Risk Report 2022

27

IDENTIFYING RISK

and Beverage Services sector is facing numerous

The April 2022 Business Risk Index shows that the

headwinds, even though turnover will be well up

three industries with the highest probability of

after years of COVID disruption. Labour, food,

payment default over the next 12 months are:

utilities and borrowing costs are all rising for this sector, while at the same time consumers are easily able to substitute eating a meal out

1. Food and Beverage

at a restaurant for eating at home. This means

Services:

that demand is likely to wane, particularly after further cash rate increases. In a similar vein, the

2. Arts and Recreation

Arts and Recreation sector will feel the burden of

Services:

consumers reducing their discretionary spending

3. Transport, Postal and

as we move through 2022.

“Most developed economies were flooded with cash during the pandemic, which alleviated short term economic pain and certainly kept workers who were unable to work financially afloat, however, the cash is now showing up as higher prices across the board...”

28

AICM Risk Report 2022

Warehousing:

7.1% (down from 7.2%) 4.8% (down from 4.9%) 4.7% (down from 4.8%)

At the other end of the spectrum, Health Care and Social Assistance maintained the lowest probability of default, at 3.3%. Agriculture, Forestry and Fishing remains the sector with the second lowest probability of default, at 3.5%.

The challenges of moving goods around the globe means that the local manufacturing sector now comes in as the sector with the 3rd lowest probability of default (3.6%), overtaking Wholesale Trade.

IDENTIFYING RISK

The April 2022 Business Risk Index shows that

Payment arrears is still a particular problem for

the three industries with the lowest probability of

the construction industry, with 11.7 per cent of the

payment default over the next 12 months are:

sector in 60 days or more arrears. This proportion is by far and away above any other sector, and partially represents almost the normalisation of

1. Health Care and

late payment in the industry. As such, even though

3.3%

Social Assistance: 2. Agriculture, Forestry and Fishing:

arrears are a problem in the construction sector,

(steady at 3.3%)

the probability of default rate is still a relatively low 3.8 per cent.

3.5% (down from 3.6%) 3.6%

3. Manufacturing:

Anneke Thompson Chief Economist CreditorWatch T: 1300 501 312 www.creditorwatch.com.au

(down from 3.7%)

Health Care and Social Assistance

Agriculture, Forestry and Fishing

Manufacturing

Wholesale Trade

Construction

Electricity, Gas, Water and Waste Services

Retail Trade

Professional, Scientific and Technical Services

Accommodation

Other Services

Mining

Administrative and Support Services

Rental Hiring and Real Estate Services

Information, Media and Telecommunications

Financial and Insurance Services

Education and Training

Transport, Postal and Warehousing

Arts and Recreation Services

Food and Beverage Services

Average Probability of Default by Industry

Source: CreditorWatch BRI April 2022

AICM Risk Report 2022

29

Dark clouds are building, the tide is turning…

Kirk Cheesman MICM Group Managing Director National Credit Insurance Brokers

Since the beginning of the pandemic the data

longer than first thought and businesses will need

that we have reported on has been very unusual

to be aware of this for some time to come.

and not what we would have initially predicted.

The Australian Government helping the economy

As a trade credit insurance broker, key indicators

financially has played a large role in reducing the

that are specific to us include the number of

amount of corporate insolvency from 2020 to 2022.

claims we receive, the overdue data that our clients are submitting, limit decisions from

It was not until late 2021 when we witnessed

insurers and our incoming collection work. These

a couple of larger failures which looked to be

factors give us an idea as to how the economy is

the tipping point. For now, it would seem that

performing around Australia.

insolvencies are on the rise, and this is because of a number of factors. Will we see a return to pre-

A subtle increase in our Trade Credit Risk Index,

pandemic insolvency levels in 2022, or will this be

which is a mixture of the abovementioned factors,

further prolonged until 2023? What we are sure of

indicates that we could expect more insolvencies

now is that the return to normality will take much

in the remainder of 2022. Although it is a relatively small increase of 9.7%, the 2 key factors of claims and incoming

NCI Trade Credit Risk Index Score 1100

Index Score

1000

collections are both up 25% and 30% respectively from Q4 2021 to Q1 of 2022. The

900

number of reductions

800

and NIL limits from

700

the insurers have

600

dropped this past

500 400

their appetite for new business and trade in general is positive.

Q

12 Q 017 2 2 Q 017 3 2 Q 017 4 2 Q 017 12 Q 018 2 2 Q 018 3 2 Q 018 4 2 Q 018 12 Q 019 2 2 Q 019 3 2 Q 019 4 2 Q 019 12 Q 020 2 2 Q 02 3 0 2 Q 02 4 0 2 Q 020 12 Q 021 2 2 Q 02 3 1 2 Q 02 4 1 2 Q 02 12 1 02 2

300

quarter, suggesting

Note: The NCI Trade Credit Risk Index score is based on an aggregate of claims data, collection activity, credit limit decisions and overdue accounts.

We have seen immediate flow on effects from some well reported insolvencies

30

AICM Risk Report 2022

IDENTIFYING RISK

in Q1 of 2022, particularly Probuild and Condev, which has resulted in an increase in the

22m

110

20m

100

18m

90

16m

80

14m

70

12m

60

10m

50

8m

40

6m

30

4m

20

2m

10

0

r r r r t y y y y y y il h ar uar arch Apr Ma June Jul gus be obe be uar ruar arc be r nu M M Au ptem Oct ovem ecem Jan Feb Ja Feb D N Se

Value

Number

Value

NCI Claims – Number and Value (01-01-2021 – 31-03-2022)

0

Number

NCI Claims by Industry (01-07-2021 – 31-03-2022) 120

10m

109

9m

98

8m

87

7m

76

6m

65

5m

55

4m

44

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33

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11m

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“Will we see a return to pre-pandemic insolvency levels in 2022, or will this be further prolonged until 2023? What we are sure of now is that the return to normality will take much longer than first thought and businesses will need to be aware of this for some time to come.”

0

Number

of claims. Without a doubt, these insolvencies will have flow on effects to other businesses in the industry,

This domino effect that we predict will mean that

not just to the 50 or so NCI clients that have

the number of insolvencies will grow, businesses

reported losses, but more so to those that deal

will experience tighter cashflow, and many will

with other suppliers.

have to seek additional work to recoup these AICM Risk Report 2022

31

IDENTIFYING RISK

120k 110k 100k 90k 80k 70k 60k 50k 40k 30k 20k 10k 0

y Jul

ust

g Au

S

r

be

tem ep

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2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Number

NCI Overdues Reported 90+ Days (01-07-2021 – 31-03-2022)

Average

“... we believe that we are at the beginning of an increase in corporate insolvencies. The external factors and pressures on businesses have been building and for many this may prove too much.”

Number

losses. Depending on the outcome, more work will

this Financial year, we believe that we are at the

need to be sourced which could mean taking on

beginning of an increase in corporate insolvencies.

more risky jobs, ultimately placing more risk on

The external factors and pressures on businesses

their business.

have been building and for many this may prove too much. A renewed emphasis by the ATO

As part of the requirements of a trade credit

looking at recouping outstanding tax debts and

insurance policy, clients must report to the

a tightened labour market will certainly play a

insurer when an account has become overdue.

part but the current pressures on the supply of

This valuable information can be collated and

materials – causing contractors to commit funds

summarised to show the total amounts that are

earlier than they otherwise would – will not only

outstanding in each band, either current, 30, 60,

make businesses more vulnerable to failure but

90 or 90 days plus.

those failures will hit harder than they would have previously.

Our data shows there has been a decline in value of seriously overdue accounts (90+ days), in

We are not just watching metaphorical boats head

the first 3 months of 2022. The number of such

out into bad weather but heavily laden boats that

accounts has stayed steady (if not increased)

have had to put off making repairs heading out

during this period. The reduction in the value of

into particularly stormy waters.

overdues could be the result of businesses taking earlier actions to recover their larger value debts at the expense of those of lower value overdues.

Considering the data we have examined from 32

AICM Risk Report 2022

Kirk Cheesman MICM Group Managing Director National Credit Insurance Brokers E: kirk.cheesman@nci.com.au T: 1300 654 500, www.nci.com.au

Construction IN FOCUS Construction insolvencies: Are small operators the canary in the coal mine?

Brad Walters Head of Product and Rating Services | Commercial Equifax

Small scale operators in Australia’s construction industry could well be the canary in the coal mine for the difficulties that lie ahead for this sector.

Rising rates of construction industry insolvency through the March quarter of 2022 put significant pressure on sole traders and small business owners, who make up 97% of construction companies 1.

Jump in insolvencies While some non-believers are sceptical about an uptick in insolvencies, recent data indicates that construction company failure is indeed on the rise.

While the overall rate of insolvencies in March 2022 was 5% up on last year, construction insolvencies jumped by 24% in March and were 28% higher than last year. This first quarter has seen 271 construction companies filing for insolvency, an increase of 21% from the first quarter last year.

AICM Risk Report 2022

33

CONSTRUCTION IN FOCUS

The beginning of the second quarter has seen this

contagion risk, creating a house of cards where

trend continue, with the number of construction

a single failure in the broader delivery chain can

insolvencies in April being 46% higher than last

have catastrophic consequences for all other

year. Creditor wind-ups have triggered the large

parties involved. When construction giant Probuild

majority of insolvencies, and the construction

collapsed (see case study), the devastation rippled

sector has grown to almost 30% of all insolvencies.

across a vast network of associated players.

Already under pressure from rising material costs,

Small operators under pressure

labour constraints, inclement weather, project delays and stretched supply chains, additional

It is not just the larger operators under strain,

stressors have recently emerged that compound

with small construction businesses increasingly

the difficulties for construction businesses. These

finding it difficult to cope with the growing slew of

include the rising interest rate environment,

pressures.

increased costs of obtaining insurance, and renewed debt recovery efforts from the ATO.

Many smaller operators support their businesses through personal loans, using assets like their

It all adds up to significant risk, particularly with

family home as collateral. Equifax data shows

the widespread use of integrated project delivery,

that these personal finances are increasingly

where several parties work together to optimise

being dipped into to keep their operations

results. This cascaded delivery model escalates the

afloat. Mortgage arrear rates for construction

800

40%

600

30%

400

20%

200

10%

0%

n Construction

34

AICM Risk Report 2022

n Total Insolvencies

22 Ja n-

1 Oc t-2 1

Ju l-2

r-2 1 Ap

1 -2 Ja n

-2 0 Oc t

Ju l-2 0

0 r-2 Ap

0 -2 Ja n

9 -1

9 Ju l-1

Oc t

9 r-1 Ap

Ja n

-1

9

0

Proportion

Proportion (%)

Number of Insolvencies

Construction v. Total Insolvencies

CONSTRUCTION IN FOCUS

“Missed mortgage repayments for construction proprietors are now twice that of the average customer.”

SME

industry sole traders have been trending up since

Sole Traders/ Proprietors

Total Construction

30%

100%

Building Construction

30%

80%

Construction Services

30%

100%

November 2021, and they are now twice that of the average consumer.

Sole traders/proprietors in building construction are 80% more likely to have mortgage arrears than the average consumer. Those in construction services are 100% more likely, and SME Directors Heavy & Civil Engineering Construction

in building construction and construction services are 30% more likely.

Par

170%

Likelihood of Mortgage Arrears vs. Consumer Average (%)

Missed mortgage repayments for construction proprietors are now twice that of the average customer.

Mortgage Arrears

Increasing sole trader arrears

Mortgage Arrears (%)

1.50%

1.00%

0.50%

0.00% Jan-21

Mar-21

l Consumer

May-21

Jul-21

l SME

Sep-21

Nov-21

Jan-22

l Sole Trader/Proprietor

AICM Risk Report 2022

35

CONSTRUCTION IN FOCUS

Director Penalty Notices

Profitless boom

The Australian Taxation Office has resumed

Rising costs, disrupted supply chains and periodic

its debt recovery activities put on hold during

lockdowns have created what many refer to

the pandemic. This includes the issuing of

as a ‘profitless boom’, with many construction

Director Penalty Notices (DPNs), which hold

companies committed to fixed price projects that

Directors personally liable for the tax debts

may no longer be financially tenable given the

of their business2. The outstanding tax debts

major price increases for building materials.

that companies have been able to accrue on their balance sheets must now be paid, further

Over half (57%) of all Australian businesses

exacerbating stress across the sector.

experienced increased costs over the three months to April 2022, with 21% reporting that

More recently, as a part of this process, the

costs had risen to a great extent3. Of these

Government is sharing with Equifax and some

businesses, 52% have not passed on these

other credit bureaus the identity of those parties

increased costs4, further eroding profit margins.

with a significant tax debt that have not otherwise engaged with the ATO on a tax payment

The knock-on effect of staff shortages from COVID

plan. This further increases transparency and,

sick days has caused delay blowouts. Nearly 1 in

when combined with the changes to the DPN

5 businesses report a scarcity of employees, with

regime, will likely see more companies put into

84% unable to find suitable staff compared to 27%

administration/liquidation.

in June 20215.

“Rising costs, disrupted supply chains and periodic lockdowns have created what many refer to as a ‘profitless boom’, with many construction companies committed to fixed price projects that may no longer be financially tenable ...”

36

AICM Risk Report 2022

CONSTRUCTION IN FOCUS

Operating expenses are trending upward too.

The proportion of businesses reporting increases

Insurance challenges

for April 2022 was the highest since the ABS first

Add to this harsh trading environment and

asked this survey question in July 2020.

rising insolvencies the challenges of maintaining sufficient insurance appetite.

These cost escalations are particularly problematic in the construction industry, where

APRA data shows that gross construction claims

credit risk is pushed down to smaller operators,

have previously trended higher than gross

constrained by fixed-price contracts from

earned insurance premiums for property-focused

passing on costs to consumers. Their ability to

insurance. In 2020, the gross loss ratio (GLR) for

contractually renegotiate is limited without rise

property-focused insurance performance was

and fall clauses or other contingencies. As the

104% nationally, before considering additional

work drags over many months and the costs of materials and fixed expenses go up, it becomes increasingly challenging to complete the project on budget.

Some operators find themselves having signed onto contracts that they must continue to progress for months to come, knowing they are trading at a loss. This is a dangerous position for thinly capitalised, cash flow dependent businesses.

This is equally true for the large operators who, when seeking to renegotiate their contracts with customers, may find they are constrained by the threat of consumer backlash and reputational damage. Last year we observed business exit

costs such as acquisition and operating expenses.

Considering that insurance premiums represent the cost of risk, this unsustainable equation has understandably seen a rise in premiums. With insolvencies trending upward and numerous government reports highlighting the prevalence of construction defects, the construction industry has taken on a higher risk profile.

Unfortunately, these construction woes come at a time when Australia’s housing shortfall dictates a need to build more, not less. Without the resources, the labour, the materials and the supply, it looks to be an uphill battle that will only worsen when our borders open once more to immigration.

rates that were double the entry rates for construction businesses with sales of more than $5m annually.

Encouraging trustworthy players Despite the real challenges the construction

Compounding the problem is the escalation in the

industry faces, it’s not all doom and gloom. There

cost of materials due to supply chain constraints.

are still operators exhibiting sufficient financial

In April 2022, 54% of construction businesses

capacity, capital, capability and resilience to

experienced supply chain disruptions, up from 35%

weather the storm. To recognise and reward these

during the same period the previous year6. With

trustworthy players, the NSW Government has put

global supply chains thrown into disarray from

a rating regime in place to enable construction

COVID and, more recently, the Ukraine/Russian

businesses to go through an independent and

conflict, there’s upward price pressure on materials

rigorous review process to obtain a star-rating

during a time of significant increase in domestic

outcome that substantiates and verifies their

building demand.

resilience.

AICM Risk Report 2022

37

Red flags to Probuild collapse Data-driven insights are a valuable early warning tool. While some may have called out concerns around Probuild a couple of months before its collapse, that is just not enough notice, and is typically too late for stakeholders to protect their position and exposure.

However businesses do not collapse overnight, there are early warning signs well in advance. Here are some of the red flags showing that construction giant Probuild was in trouble years before its demise.

2019

Clear signs of risk 2.5 bronze stars, Medium to High Risk Below "trustworthy" benchmark* Project delays impact profitability Limited working capital, dividend payouts & creditor exposure Low net asset backing and contagion risk to other parties with higher risk scores High-value litigation relating to their Abbotsford development.

Warning signs escalate

2020

2 bronze stars, Medium to High Risk Risk rating drops Brisbane Queen St development losses Reduction in net assets and equity Operating losses and limited borrowing capacity

iCIRT’s predictive capability was tested across thousands of construction firms. iCIRT was able to provide at least 12 months early warning for more than 90% of construction insolvencies, relying solely on public and proprietary data available to Equifax. These cases were shown to have achieved only one or two star-rating at least 12 months before their collapse.

Get in touch at helloAU@equifax. com or check out the iCIRT website buildrating.com to discover what to look out for, and avoid being stung by the next construction collapse.

Equifax Australasia Credit Ratings is the issuer of iCIRT.

Higher risk commercial scores: Probuild, Probuild’s officeholders, the Aust holding company & officeholders Significant funds extended to a sister entity with a high risk score.

2021

This data-driven assessment of the danger signals was undertaken using the new Independent Construction Industry Rating Tool, iCIRT, endorsed by the NSW government.

Risk rating plummets 1 bronze star, Very High Risk Lowest possible risk rating** Significant sales contraction, thin margins, concentration risk & project delays Net operating cash outflow of -$85m Lower working capital levels & significant creditor exposure Limited asset backing Funds extended to other parties that eroded capital adequacy levels Default judgement on Probuild Material court judgements on director-related parties Director commercial scores impacted by recent administration of a director-related entity.

*The NSW Government has been calling for industry to obtain and publish their iCIRT rating on the soon-to-be-released public-facing register.

Probuild would have been excluded from the register of trusted construction firms as it requires a minimum of 3 out of 5 gold stars. **This bottom rating indicates to other industry players that they would substantially increase their risk exposure by doing business with Probuild.

Copyright © Equifax Pty Ltd, a wholly owned subsidiary of Equifax Inc. All right reserved. Equifax and EFX are registered trademarks of Equifax Inc.

This data-driven assessment of the danger signals was undertaken using the new Independent Construction Industry Rating Tool, iCIRT, endorsed by the NSW government.

This data-driven assessment of the danger signals was undertaken using the new Independent

38

Construction Industry Rating Tool, iCIRT, endorsed by the NSW government.

iCIRT’s predictive capability was tested across thousands of construction firms. iCIRT was able to provide at least 12 months early warning for AICM Risk Report 2022 more than 90% of construction insolvencies, relying solely on public and proprietary data available to Equifax. These cases were shown to iCIRT’s predictive capability was tested across thousands of construction firms. iCIRT was able to have achieved only one or two star-rating at least 12 months before their collapse.

CONSTRUCTION IN FOCUS

The new Independent Construction Industry Rating Tool, iCIRT from Equifax, shines a light on the trustworthy players who are seeking to differentiate themselves from unscrupulous and

“Despite the real challenges the construction industry faces, it’s not all doom and gloom.”

high-risk operators. This improved transparency works toward developing public trust and is one of the critical pillars of the NSW Government’s reform

confidence, with insurance premiums based on

strategy for the building industry.

underlying risk profiles rather than competitive market factors. As one example, SIRA recently

“Ratings will paint a clearer picture of a

amended its guidelines to enable insurers to

developer’s trustworthiness and the predictability

adopt rating tools provided by regulated rating

of whether they are likely to construct a compliant

businesses for both eligibility and premium

and safe building and have the capacity to fix

purposes.

issues if they do arise in the future,” NSW Better Regulation Minister Kevin Anderson said last year.

Equally, they have been embraced by an industry seeking improved transparency and the

Constructors rarely collapse overnight, so

recognition of reliable and resilient constructors.

data-driven star-rating insights can be used as an

With the growing number of construction

early warning tool to cut through where risk sits

insolvencies, notably evidenced from an increasing

across the construction ecosystem. The demise

number of creditor wind-ups, credit managers will

of Probuild is one of many examples of low credit

benefit from leveraging ratings insights across this

quality constructors exhibiting increased risk.

segment.

This infographic, Red Flags to Probuild Collapse, demonstrates the trouble it was in years before it plunged into administration. Data points used within iCIRT showed its risk rating deteriorating from 2.5 bronze stars in 2019 down to only 1 bronze star in 2021.

Good news for insurers and industry on risk Insurers are among many stakeholders looking

Brad Walters Head of Product and Rating Services | Commercial Equifax E: helloau@equifax.com www.equifax.com.au

for improved transparency to restore trust. Given the elevated risks of construction insolvencies,

FOOTNOTES:

it’s no surprise we’ve seen a growing demand for

1

Small businesses – those generating <$5m in sales revenue – represent 97% of the 411k construction businesses in Australia as at June 2021

2

https://www.ato.gov.au/Tax-professionals/Newsroom/ Lodgment-and-payment/Director-penalty-notices/

3

Business Conditions and Sentiments, April 2022, https:// www.abs.gov.au/statistics/economy/business-indicators/ business-conditions-and-sentiments/latest-release

4

As above

To this end, ratings have been recognised as

5

As above

being critical in strengthening transparency and

6

As above

rating insights to strengthen insurer appetite in this market. This is especially relevant as global reinsurers have sought to deploy their capital in other segments and jurisdictions viewed with more favourable risk-return fundamentals.

AICM Risk Report 2022

39

Elements vital to effective risk mitigation - construction industry Wayne Clark MICM, MAICD Executive Director, Building Industry Credit Bureau Construction is the third largest industry in

historical numbers. However, insolvency experts

Australia based on the number of people it

are warning that the construction industry

employs and its contribution to GDP (Gross

is a “bubble waiting to burst”, and that more

Domestic Product). However, construction is

companies will go under in the coming months 1.

the second largest industry when it comes to

This is probably accurate, but just how many will

corporate insolvencies, with a pre-pandemic five-

go under is the burning question.

year average of 1,590 per annum. Understanding the nature of the industry is extremely important

There is no doubt that insolvency numbers have

for effective credit management.

started to rise again, with average insolvencies per month up by almost 14% on last financial year.

Overview of current risk in the Building & Construction industry

However, this is still 29% lower than the five-

Despite the spate of high-profile company

also increased by around 6% during the Covid era.

year average pre-Covid. Construction industry insolvencies as a percentage of all insolvencies has

collapses over the last few months, which have sent shockwaves through the industry, overall insolvency numbers remain low compared to

What is actually happening?

Debt Above 60 Days Trend BICB’s data clearly shows how

Average Insolvencies per month – Construction

the debt percentage above 60 days in the construction industry has decreased during the Covid era. This trend is more than likely a legacy of the stimulus measures. Recent feed-back from BICB members suggests that payments are continuing to be paid within the agreed terms, or close to terms in most cases. This anecdotal information is reflected in the payment data, below.

It is also interesting to look at

Source: ASIC Insolvency Statistics

‘construction insolvencies against the number of Australian private dwelling commencements. During

40

AICM Risk Report 2022

CONSTRUCTION IN FOCUS

Construction Industry as % of ALL INSOLVENCIES

Source: ASIC Insolvency Statistics

the pre-Covid period 2014 to 2019 insolvencies as a percentage of dwelling commencements (IAPDC) averaged 0.73%. During the Covid era, January 2020 to December

Construction Industry as % of ALL INSOLVENCIES

2021 insolvencies as a percentage of dwelling commencements dropped to 0.51%. However, there was a sharp increase in insolvencies in the fourth quarter of 2021 resulting in the (IAPDC) rising back to 0.65%.

Factors contributing to this elevated risk While current payment trends and overall insolvency numbers are looking ok, there are multiple heightened risk factors still at play. We know that the industry is currently under tremendous

Source: ASIC Insolvency Statistics

pressure due to the elevated level of demand that has driven up material AICM Risk Report 2022

41

CONSTRUCTION IN FOCUS

and labour costs, and extended build times by around thirty percent. Also, many builders on

BICB Total Consolidated Debt Above 60 Days Comparison

fixed-price contracts have made substantial losses. There is no doubt these issues are putting many businesses at risk.

It is expected that the recent spate of high-profile construction business failures, which include Probuild, Condev, Privium, and B. A. Murphy, will lead to further insolvencies. These businesses owe around 2,000 creditors an estimated $1.5 billion.

The big unknown factor, of course, is the extent of the unpaid corporate tax debt. The

Source: Building Industry Credit Bureau Payment Trend Data

ATO’s softly, softly approach over the last two years is a major reason for the lower insolvency numbers. The Tax Office

Australian Private Dwelling Commencements -v- Insolvencies (per Qtr)

has recently warned tens of thousands of directors to act on company tax debts or face the

70,000

600

60,000

500

495 470

50,000

423 416

407 384 357

40,000

369 376

378 374

404

402

388

355

354 303

400

401 328

341 302

30,000

293

255

255 224

181

20,000

187 181

0 2014

2015

2016

2017

n APDC

2018

2019

2020

2021

again begin to pursue delinquent tax debts through the Supreme

300

second half of 2022.

200

Tips on how to manage risk in the current environment

237

100

10,000

It is expected that the ATO will

and Federal Courts during the

371

309

risk of full enforcement action.

0

Insolvencies Source: Australian Bureau of Statistics & ASIC

Know Your Customer – Front and centre of managing your risk is having a strong understanding of your customers. This is essential for any business

42

AICM Risk Report 2022

CONSTRUCTION IN FOCUS

looking to succeed in creating reliable credit risk management processes. Assessing any customers’ credit risk profile is only possible with

The value of good credit management data systems and procedures

access to data that is comprehensive, accurate

Key elements of good credit management systems

and up-to-date. ‘Credit Risk Management’

incorporate risk polices with dynamic reporting

techniques and models that are supplied with

and alerts that highlight customers at risk and

rich data sets will help significantly improve

ensure real-time risk profiling. Systems that

credit risk processes.

incorporate real-time analysis with early warnings of potential issues to keep you on the front foot

Assessing Risk – Whether onboarding new

and provide greater insight on trends in customer

customers or, reviewing existing customers,

behaviour. These systems should:

access to meaningful data is critical. This

z Incorporate data from sources that provide

information is generally sourced through Credit Reporting Agencies and Industry Trade Bureaus that provide online access to current and historical trading data, comprehensive Court action reports and alerts, ASIC data,

— current and historical payment patterns (a customer may be paying you, but are they paying other suppliers), Court actions, both current and historical, industry licencing regulators, ASIC information, defaults.

Licencing Regulators and Trade References from other suppliers. Both of these sources provide their own unique valuable data to feed into a comprehensive risk management process

z Create automated alerts when adverse information is detected. z Incorporate risk policies and strategies

that enables the credit team to make the most

that monitor change in characteristics and

informed decisions.

automate credit limit reviews.

ASIC National Insolvency Data Construction Industry

Source: ASIC Insolvency Statistics

AICM Risk Report 2022

43

CONSTRUCTION IN FOCUS

z Include pre-defined risk policies along with the flexibility to create new policies if required.

sources are retrospective in nature and provide great clarity after the fact, but these have limited value as situations evolve. Fortunately, there are

The value of data for successful risk mitigation

a number of other excellent tools available to

We live in a world where data is king. And with

of eventual business failures. Use of these tools

so much information available, the most effective

within your credit management processes can add

risk mitigation systems will pull data from multiple

significant value to your business.

credit managers that can identify deteriorating trends and potential red flags months in advance

different sources as no single source is able to Wayne Clark MICM, MAICD Executive Director, Building Industry Credit Bureau E: wayne@bicb.com.au, T: 0402 244515

provide the complete picture.

However, for data to be useful in managing risk it needs to be accurate, comprehensive and, most importantly, early enough to provide advanced warning so you can be on the front foot to mitigate your risk in real-time. Some data

Acknowledgements Co-contributor Patrick Schweizer, Director Alares Systems Graphs supplied by Building Industry Credit Bureau FOOTNOTES: 1

S Sharples News.com.au 25 Feb 2022

Introducing ‘RiskTracker’

The most advanced credit risk management tool for the construction industry

Proudly developed by Building Industry Credit Bureau and ALARES The earliest and most comprehensive due diligence reports and alerts – stay informed and manage your risk in real-time Combining $billions worth of trade data with the industry’s most comprehensive dataset on Court and Tribunal actions To find out more and arrange a free trial please get in touch: Wayne Clark wayne@bicb.com.au

44

AICM Risk Report 2022

Patrick Schweizer patrick@alares.com.au

Coverage of more than 100,000 construction businesses, ranked by risk of insolvency and risk of late payment

How to MANAGE RISK Making the most of your upcoming renewal Barbara Cestaro MICM Client Manager, Credit Solutions

Barbara Cestaro MICM

Dan Chapman MICM

Dan Chapman MICM Director, Credit Solutions At the start of the COVID-19 pandemic insurers

To help your organisation get the best possible

were quick to perceive significant risk (with

outcome from your upcoming renewal, some key

flashbacks to 2008), and responded with a

considerations are outlined below.

contraction in risk appetite and increased policy premiums.

Estimated Turnover

As we now know, 2020 and 2021 didn’t see the

Insurable turnover is one of the key pieces of

cascade of insolvencies that many had predicted.

information in the renewal form which helps the

In fact, government stimulus and temporary

insurer to price your policy. Typically, a higher

changes in insolvency laws ultimately resulted in a

turnover drives a rate reduction, and vice versa,

benign loss environment.

but it is important to remember that all turnover isn’t equal.

Whilst insurer appetite has largely recovered from the initial shock of the pandemic, with premium

Consider what else you might want to disclose

rates falling and risk acceptance rates back at pre-

about your sales that could also impact your

pandemic levels, peak renewal season approaches

insurer’s underwriting. For example, has the

and insolvencies are once again slowly increasing.

distribution of your risk changed? If you have a

“Whilst insurer appetite has largely recovered from the initial shock of the pandemic ..., peak renewal season approaches and insolvencies are once again slowly increasing.”

AICM Risk Report 2022

45

HOW TO MANAGE RISK

“Check your current list of limits on your insurer’s portal, noting each of your clients will have an assigned rating. Make sure that well-rated clients have full approval and investigate the others...” greater proportion of your revenues with well-

have increased your debtor monitoring, shortened

rated and known customers this has an impact on

payment terms with your low-rated clients, started

your risk profile. Your policy has a maximum TOP,

using the PPSR or have tightened up your T&Cs. If

but that doesn’t mean you are using this with all

properly outlined to your insurer, all these factors

clients. Where you have clients on shorter terms

could have an impact on your renewal rate.

make sure the insurer is aware.

In many cases, your organisation won’t have Other disclosure considerations could include

experienced any losses in the past few years.

plans to exit poor-performing countries, buyers or

However, don’t let the insurer think that was all

lines, or your sales team’s strategy for the coming

down to macroeconomic factors. Demonstrate

year.

your management of your debtors’ book and how these actions have impacted your results.

Loss performances and future risk exposure

Risk acceptance

If your insurer has paid your claims, these will be

Check your current list of limits on your insurer’s

considered as part of the underwriting process.

portal, noting each of your clients will have an

Insurers expect to pay claims (that’s what they

assigned rating. Make sure that well-rated clients

are there for) but when you have incurred losses,

have full approval and investigate the others, as

especially large ones, it is important to show

you may be able to provide further supporting

the insurer what you’re doing to ensure it isn’t a

information. Ask your broker to benchmark your

regular occurrence. Perhaps you have exited a

buyer grade and risk acceptance with the market

market, implemented new credit management

and your sector, so you know where you stand

procedures and your DSO has reduced. Maybe you

relative to your peers.

46

AICM Risk Report 2022

HOW TO MANAGE RISK

Reviewing your limit listing is important to make sure you are maximising coverage.

Work with your broker

Increasingly, insurers are factoring the limits

Finally, work closely with your broker. Your broker

you hold (not just aggregate turnover) into

shouldn’t simply pass information between you

your policy rate. Reducing or removing

and the insurer. Their role should be that of a

unnecessary limits will breed goodwill with the

trusted advisor, supporting your business, sharing

insurer who can allocate capacity elsewhere,

insight about the market, maximising coverage

reduce your premium rate and remove

and optimising your policy structure to fit the

unnecessary limit fees.

evolving needs of your business. Take advantage of your pre-renewal meeting to discuss how your

Meet the insurer

business is going to change over the next three

Insurers are always available to meet their

are, and let them guide you on how your insurance

clients. If you haven’t met your insurer in person

program can be adjusted accordingly.

years, what your risk tolerance and premium goals

(or video call) yet, take the opportunity to do so.

Underwriters genuinely appreciate the chance to

Barbara Cestaro MICM, Client Manager, Credit Solutions

know more about your business, and the more

Dan Chapman MICM, Director, Credit Solutions

they understand, the better they can support

AON

you.

T: (02) 9253 7000, www.aon.com.au

Optimise Working Capital And Mitigate Your Organisation’s Credit Risk Find out how Aon’s innovative credit solutions can help - talk to our experts today.

AICM Risk Report 2022

47

Strategies to reduce risk with the right contract terms and conditions

Christopher Hadley MICM, Partner Andrew Tanna MICM, Special Counsel Commercial Recovery & Insolvency Holman Webb Lawyers Christopher Hadley MICM

Andrew Tanna MICM

As all credit professionals know – credit, cashflow

A failure to pay can quickly result in insolvency

and collections all work together to protect the

and loss, and depending on your exposure, and

lifeblood of many businesses. Without a proper

other liquidity concerns, the impact of lumpy and

functioning credit team, businesses run the risk

sometimes ‘difficult to collect’ credit can be a

of significant impacts on ongoing profitability

huge headache to the business.

and viability. Unfortunately, risk is an unavoidable part of the credit function, and well considered credit terms can often provide risk mitigation and safeguards to the business.

What’s the worst that can happen?

No business wants to unnecessarily litigate to collect. Put simply, it is desirable to work

What are the impacts of the risk you take on?

collaboratively with customers to address any

Risk takes various forms – but in the credit

However, if your customer’s cash-flow problems

and collections world the biggest risks include

are affecting your business, you may need to

customers failing to pay creditors in accordance

consider litigation and other enforcement options.

with trading terms, and the inability to collect

There are a number of prudent steps which can

through standard collection processes.

be taken to put creditors in the best position to

non-payment outside of payment terms.

successfully deal with credit risk.

“Risk takes various forms – but in the credit and collections world the biggest risks include customers failing to pay creditors in accordance with trading terms, and the inability to collect through standard collection processes.”

48

AICM Risk Report 2022

Why does this matter?

Economic data indicates that the economy could be in for a rough ride in the coming months.

Those in the credit industry have long suspected the ATO of having taken, for some time, a “softly, softly” approach with respect to pursuing recalcitrant taxpayers.

HOW TO MANAGE RISK

These suspicions are borne out by the publicly

the ATO’s recent aversion to pursuing large-

available information which shows that record

scale enforcement, it is likely that insolvencies

debts are owed to the ATO, and that the ATO’s

will increase if the ATO reverts to its pre-COVID

total debt book has grown to about $60 billion.

practices.

Further, winding-up and bankruptcy petitions initiated by the ATO are at lows for modern times.

Statistics show that about 25% of insolvency activity occurs within the building and

Could increased ATO activity bring about more insolvency?

construction industry. Many readers will

Since the pandemic began in 2020, the ATO’s

that industry.

themselves have either direct involvement in the building and construction industry, or exposure to

overt collection activities (i.e. winding-up and bankruptcy petitions) have been almost non-

The building and construction industry otherwise

existent, although there have been some recent

has significant impacts on other parts of the

indications that the ATO’s collection activity is

economy, and can result in a domino effect

set to ramp-up. In April 2022, the ATO wrote to

impacting many suppliers and other contractors.

over 50,000 directors giving them 21 days’ notice

Recently, there have been some very high-profile

to pay their tax liabilities, failing which a Director

insolvency appointments in the building and

Penalty Notice (DPN) may be issued. This has

construction industry (including, Probuild and

been seen by some as a ‘warning letter’ on the

Condev).

part of the ATO and precursor to further action being taken.

Why does this impact on trade creditors?

The ATO’s involvement in the insolvency space is well known, and historically, together with the major banks, the ATO has been a major driver of insolvency activity in the economy. Given

“No business wants to unnecessarily litigate to collect.

Put simply, it is desirable to work collaboratively with customers to address any non-payment outside of payment terms.”

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What are we expecting to see in the coming year?

worked together to create a degree of recent

Historic low levels of interest rates have enabled

We are expecting to see a wave of increased

borrowers to borrow more, which has impacted on

insolvency activity over the coming months.

record high housing prices and inflation. Recent

This presents businesses with increased risk, and

data has confirmed that inflation has surged to

credit managers with challenges. Prudent credit

5.1% – the highest level since 2001. Those in the

managers will take early steps to mitigate that risk

building and construction industries have been

and implement numerous strategies to deal with

particularly hard hit. More broadly, at the time

that risk head-on.

economic uncertainty.

of writing, there are strong indications that the Reserve Bank will raise the official RBA cash rate from the current 0.1%.

What can you do now, to mitigate this risk?

There is otherwise severe pressure on supply

Whilst this does not form a bullet-proof list for

chains, energy markets, increased global inflation

every client in every situation, we consider the

and debt – all on top of a war taking place in

clauses set out below to be very important in any

Europe. These factors, amongst many others, have

credit professional’s arsenal.

“Statistics show that about 25% of insolvency activity occurs within the building and construction industry. Many readers will themselves have either direct involvement in the building and construction industry, or exposure to that industry.”

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What is the simplest, and most effective way to protect your credit risk?

CLAUSES TO INCLUDE IN CREDIT TERMS & CONDITIONS

We cannot emphasise enough the importance of having appropriate terms and conditions in place with respect to credit agreements and supplier

Personal guarantee and indemnity

agreements. Having appropriately worded terms and conditions can mean the difference between

Enforcement costs and expenses

a successful recovery and a write off. We are often surprised to see that many businesses do not pay

Contractual interest

enough attention to this very important aspect of the credit management framework.

Charging

Important terms and conditions

Retention of title – PPSA

Depending on the type of credit risks you are

Certificate

facing, it may be wise to consider including the following in your company’s terms and conditions

Privacy

(T&Cs): 1. Personal guarantee and indemnity. When dealing with incorporated customers, credit agreements could include a personal guarantee

See for example, Kyabram Property

and indemnity to be provided by the directors

Investments Pty Ltd v Murray [2005] NSWCA

of the creditor and/or other third parties (for

87 at [12]. There are many instances where

example, those who have real estate holdings).

courts have criticised the wording of cost

The inclusion of a properly formulated personal guarantee can mean the difference between a successful recovery and a write-off. Care should be taken in the drafting of a personal guarantee to ensure enforceability by a court (including whether it takes the form of a deed and is properly executed by the parties).

2. Enforcement costs and expenses. Creditors may wish to include in the T&Cs a clause allowing for the recovery of all legal costs and

clauses and have refused to order the losing party to pay costs on an indemnity basis under a poorly or ineffectively worded clause.

3. Contractual interest. Creditors may wish to include in the T&Cs a clause allowing for the charging and payment of reasonable interest at a contractual rate. Depending on which State you are operating in, the statutory rate of interest can be quite low. Currently, in NSW it is only 4.1%.

expenses from the debtor. It is important that

However, with an appropriately worded clause,

the wording of such an indemnity clause is

the parties can agree between themselves for

compliant with court and judicial expectations.

a contractual rate of interest which is higher

In particular, courts typically require that

than the rate provided by statute. We regularly

the subject clause is “sufficiently plain and

observe credit T&Cs including interest rates

unambiguous”.

exceeding 12%.

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“Having appropriately worded terms and conditions can mean the difference between a successful recovery and a write off.”

4. Charging clause. Creditors may wish

with regard to defending a preference claim on

to include in the T&Cs a clause by which the

the basis that the creditor is a secured creditor

customer or guarantor charges his or her real

and not an unsecured creditor (which is a

property to secure all amounts outstanding

necessary pre-condition of a preference claim).

to the creditor, and for the creditor to lodge a caveat over any such real property. Regularly,

6. Certificate clause. Creditors may wish to

we observe credit agreements and guarantees

include a clause whereby an authorised

which do not include such a clause, or include

representative of the creditor can issue a

a poorly or ineffectively worded clause which

written certificate specifying various matters,

does not adequately protect a creditor’s

including the amounts outstanding under

interest in real property.

the credit agreement, the delivery of goods

In addition to the ability to lodge a caveat, the inclusion of such a clause can, in some cases, have a dual purpose with regard to defending a preference claim on the basis that the creditor is a secured creditor and not an unsecured

under the credit agreement, the legal costs incurred and interest accrued, and that such certificate will be treated as conclusive proof of the matters stated therein (including the customer’s indebtedness to the creditor).

creditor (which is a necessary pre-condition of

Such a clause is very useful in a litigation

a preference claim).

context which requires the plaintiff/creditor to prove various aspects of its case. See,

5. Retention of title – PPSA. Creditors that supply goods on credit may wish to include

Dobbs v National Bank of Australasia Ltd [1935] HCA 49.

a clause by which the customer grants a security interest to the creditor/supplier for the purposes of the PPSA. Depending on the

to include a clause enabling the creditor

circumstances, a creditor may wish to require a

to undertake credit worthiness checks at

PMSI and/or an ALLPAP.

the time of opening the account and on an

Further, the T&Cs may, in appropriate circumstances, also include a clause pursuant

52

7. Privacy clause. Creditors may also wish

ongoing basis (for example, at the time of an application to increase a credit limit).

to which the supplier retains ownership of the

A properly worded privacy clause will also

subject goods until such time as payment for

enable a creditor to report any credit defaults

those goods has been received. The inclusion

to the relevant credit authorities and to

of such a clause can also have a dual purpose

otherwise be aware of any such defaults

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impacting its customers. The absence of such a

of implementing suitable credit agreements and

clause (or a poorly drafted clause) will prevent

terms and conditions.

a creditor from lawfully undertaking the necessary searches and exposing the creditor

Chris Hadley (Partner) and Andrew Tanna (Special

to claims under the Privacy Act.

Counsel) are on call for AICM members requiring assistance with reviewing, drafting or updating

8. Other form of security. Depending on the

credit agreements and terms and conditions.

nature of the customer and industry, creditors If you have any questions regarding the content of this article, please don’t hesitate to get in touch today:

may also wish to incorporate more stringent security clauses as a safeguard measure.

Such further might include the granting of a mortgage in favour of a creditor, the provision of a bank guarantee, or a guarantee to be provided by third part (such as a parent or holding company).

Andrew Tanna MICM, Special Counsel E: Andrew.Tanna@holmanwebb.com.au NSW: 02 9390 8309

Holman Webb’s Commercial Recovery and Insolvency Group has decades of experience in the credit industry, and understands the importance

Christopher Hadley MICM, Partner E: Christopher.Hadley@holmanwebb.com.au NSW: 02 9390 8303 VIC: 03 9691 1206 M: 0417 491 041

Holman Webb, Level 25, 56 Pitt Street, Sydney NSW 2000 www.holmanwebb.com.au

REGISTER NOW

AICM Risk Report 2022

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Managing credit risk for improved cash flow in the digital age Nikki Dennis MICM Managing Partner/Co-Founder SalesCRED

We live in an increasingly complex and digital

Within the current credit risk climate, the timing

driven society. If you’re like most people, you

couldn’t be better to explore how this new and

spend on average 5.5 hours of your day looking at

emerging digital technology may be applied

your phone screen. Think about that for a second;

for more effective cash flow and collections

taking the average life span, that’s 17 years of your

management.

life spent on your phone! Yet despite this, digital receivables and collections technology is still very

And for those who question, is the market ready

much underutilised within Australia, and in fact,

for this? Let’s reflect on how ready for this we are!

around the world.

At a time when we are facing emerging credit risk

Living in the digital age

from the largest quarterly and annual increase in

From the minute we wake up most of us are on

inflation we’ve seen in Australia since 2000. Not

our phones turning off our alarms and checking

to mention rising fuel prices from the ongoing

our news feed or messages. Digital communication

crisis in the Ukraine, labour shortages from the

is everywhere. We use our phones to check

continuing pandemic fallout, and recent figures

the weather so we can dress appropriately, to

from the Australian Energy Regulator showing

get us to work quicker by dodging traffic hold

average debt for gas and electricity rose 12% in

ups. We are emailed with updates on our child’s

the past year alone – it is essential that as credit

day at school, get reminded when our dentist

professionals, we review and keep abreast of new

appointment is due, when our account is going to

ways in which we can respond to, and better

be debited with the latest phone bill, and when our

manage these risks.

evening curry is being delivered. No wonder we are on our devices for roughly 33% of our waking

Ask many credit professionals what they think

life.

digital communication is and they will usually say SMS and email. But that is at its most simplistic

How many of us receive regular letters now or

and missing the real advantage of advanced digital

answer phone calls from unknown numbers? If

solutions. We now find ourselves on the brink of

you’re like most people, the answer is very rarely

an explosion in digital capability across the credit

or never. According to a recent study, 87% of

industry that incorporates AI, machine learning

people won’t answer the phone any more to

and other popular platforms such as whatsapp,

numbers they don’t recognise and Australia post

live chat bots, and conversational AI, to take

have reported over a 50% decline in letters being

communication with customers to the next level.

sent since 2008.

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On the other hand, according to recent marketing

Many digital solutions provide the option to

statistics conducted by Swift Digital, the SMS

speak with someone. The customer can have

open rate for Australia is 94%, 86.1% of recipients

the opportunity to choose a preferred time to

open SMS messages within 30 minutes of receipt

receive a call when it’s convenient for them to talk,

and 54% of people claim significant frustration if

or they can choose a warm transfer through to

they can’t send a business an SMS.

inbound staff. This is a much more cost effective and efficient use of resources and will make for a

And yet, how many times as a customer have you

much better experience for your staff and for your

received a bill or a reminder digitally that you can

customers, who are less likely to have to wait in

click on and pay seamlessly, without having to

long inbound queues to speak to someone.

scramble to find a letter/invoice with an account number on or other details you may need to key

Similarly, traditional letters sent by mail still have

in? Or, where you can quickly and easily propose

their place with older generations for example

a payment arrangement on or lodge and resolve a

or for compliance purposes but are becoming

dispute without having to spend a lifetime on hold

less and less relevant as an effective way of

trying to speak to someone?

communicating in today’s digital age. What if, instead of waiting potentially days for a letter to

What if?

be posted, received, and actioned, using digital

Instead of making monotonous outbound calls to

invoices and correspondence via their device?

communication your customers can easily access

distracted customers who would rather the option of settling their account in their own time – your

With smart digital solutions, payment can be

staff can have more effective conversations with

actioned much sooner for credit teams at a

customers who have chosen to speak via phone

fraction of the cost of sending hard copy letters

and prefer to settle their account that way?

and making phone calls.

“According to a recent study, 87% of people won’t answer the phone any more to numbers they don’t recognise” AICM Risk Report 2022

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HOW TO MANAGE RISK

The market is ready Particularly relevant research conducted by Global Management Consultants, McKinsey and Company on 1000 customers, and reported in ‘The Customer Mandate to Digitize Collections strategies’, focuses in detail on the customer experience of credit delinquency. Here are their findings:

“Essentially, customers told us that their contact preferences and responses are guided by personal considerations that bear little relationship to the risk categories and contact protocols worked out by

methods. From these findings, we have concluded that issuers need to better understand their customers’ diverse preferences and then design a sensitive multichannel contact strategy to address them.”

Interestingly, the study found that most lenders still predominantly used traditional contact strategies based on customer balance, risk profile, and days delinquent. Those that did utilise digital strategies, did so predominantly on the low-risk accounts and largely abandoned this practice past the 30 days overdue mark, in favour of phone calls and letters.

lenders. Most customers prefer to be contacted and act through digital channels, while a smaller segment

However, a key takeaway from this research

remains more responsive to traditional contact

shown in the diagram below, was that customer

Contacting customers through preferred digital channels improves effectiveness most significantly in the 30-plus days past-due segment

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preferences for digital channels remained pronounced throughout delinquency, most significantly in the 30+ day segment, and were not aligned to or affected by issuer-assigned risk profiles. These findings shine a very clear light on the path that creditors need to take to achieve more effective responses to credit risk factors and improved collections.

So, now we know our customers are ready to embrace digital communication in all stages of

“Improved customer engagement and communication at all stages of the credit process from billing right through to late-stage collections are paramount in addressing credit risk effectively.”

their credit delinquencies, let’s explore what these latest digital technologies are and how they can be

and responding to cash flow issues and potential

applied to respond to credit risk more effectively.

insolvency, payment difficulties, customer vulnerability, disputes, or simple evasion or

How AI driven digital technology can be applied to respond to credit risk more effectively

avoidance, so that the appropriate measures can

Globally there is a continued surge of investment

Current digital solutions incorporate popular

in AI research and applications. Research firm IDC

platforms such as SMS, Email, What’s App and

estimates the worldwide AI market will exceed

Online chatbots to communicate seamlessly with

US$500 billion by 2024. There is a lot of talk

your customers. Messages can include QR links to

currently about AI and machine learning in digital

advanced payment portals which allow customers

engagement but how can it be effectively applied

to make frictionless re-payments through a variety

to follow up on customer delinquencies?

of convenient channels and with flexible re-

be taken to ensure prompt payment or provide the right assistance.

payment options.

At its most basic, AI is intelligence demonstrated by machines. Machine learning is a subset of AI

Such portals can also have inbuilt dispute

that is concerned with how that intelligence is

management and hardship solutions to help

acquired. It analyses patterns in existing customer

customers at find a solution in their own time at

data and applies that learning to predict future

their convenience, enabling a much-improved

decision outcomes. Outlined below are some ways

customer experience. Improved engagement

in which AI and machine learning are incorporated

at any stage of the delinquency process drives

within some of the leading digital engagement

higher collection rates and reduces the risk of

solutions to respond more effectively to credit risk.

default.

1. Improved Customer Engagement through Digital Platforms

2. Intelligent receivables management

Improved customer engagement and

workflow situation – currently different

communication at all stages of the credit

workflows may be typically set up for varying

process from billing right through to late-stage

credit risk profiles based on factors such

collections are paramount in addressing credit risk

as dollar value, age of debt, industry type,

effectively. Early intervention is key in detecting

geographical regions, and previous payment

Think of a standard automated collections

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“AI and Machine Learning algorithms within digital solutions can identify customers with a higher risk profile and target tailored messaging to particularly vulnerable customers or businesses.”

history. As such, for businesses who currently

This ‘learning’ is then applied to determine the

automate workflows, there may be 5-10 different

next communication, curating messaging, and

workflows set up for customers based on their

timing to maximise re-payments. With machine

credit risk profile with different messaging and

learning there are potentially hundreds of

methods of contact.

different workflows that could play out dependent on how your customer prefers to engage with you,

AI driven digital engagement technology takes

resulting in much more effective and intelligent

your receivables management to the next level. It

driven outcomes.

not only allows for automated workflows, tailored messaging, and segmentation, but analyses how

3. Prioritising credit risk

a customer responds to these messages, in what

AI and Machine Learning algorithms within digital

timeframe, what platform they prefer to engage

solutions can identify customers with a higher

with you on (SMS, email, Whatsapp) and what

risk profile and target tailored messaging to

time of day they engage.

particularly vulnerable customers or businesses.

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Champion challengers can be set up within

provide deep insights into campaign performance

these intelligent systems to scientifically track

and re-payment tracking.

the outcome of this different messaging against standard content.

New digital technology means you can know when customers are clicking on messages, what

Results can then be analysed to determine

times of day they prefer to engage with you, what

whether this new strategy has increased customer

platforms they prefer and how this ultimately

engagement levels, improved response rates,

drives improved collection rates. This enables

improved payments, and increased arrangement

much more informed decisions around credit risk

or PTP’s.

profiles in the future.

4. Conversational AI

Human element versus digital methods for responding to credit risk factors?

Conversational AI combines natural language processing (NLP) and speech analytics with online chatbots, interactive voice recognition systems, or live phone calls to analyse a

There is no doubt that digital communication has

customer’s language, tone, context, and

changed the world. But personally, I don’t buy into

sentiment. When used in a credit risk context this

the human versus digital, one or the other debate.

can help to pick up red flags that may indicate

I don’t think digital engagement will replace

imminent or future risk of default.

human interaction and leave many in the credit profession without jobs. As with many things in

This learning can be utilised during a live

life I believe the answer lies not in extremes but

conversation where agents can be provided

somewhere in between. Yes, roles will change

with suggestions on how to approach the call

but the use of AI will also create more jobs. The

or online chat, or in reviewing recorded calls

World Economic Forum estimates that by 2025,

and online chat. Thereby providing feedback to

85 million jobs may be displaced by a shift in the

agents and suggesting improvements for future

division of labor between humans and machines,

communication.

but also importantly that 97 million new roles may emerge.

5. Real time reporting dashboards Advanced digital solutions incorporate live activity

With current credit risk factors making it hard for

feeds and intuitive dashboards which capture

customers to meet their financial obligations, there

all outcomes for different credit risk profiles and

is more need than ever for effective empathy and problem solving to take place and in most cases

“New digital technology means you can know when customers are clicking on messages, what times of day they prefer to engage with you, what platforms they prefer and how this ultimately drives improved collection rates.”

that is done more effectively in a conversation with a real person. Assessment for hardship programs, customer advocacy and effective complaints resolution all rely heavily on human interaction for this reason.

Additionally, depending on the industry you’re in, your customers may have challenges communicating digitally. Certain mass market consumer portfolios for example can often include AICM Risk Report 2022

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“Even with advanced credit risk and machine modelling available to help us assess credit risk, we are still not too familiar with how to respond to identified credit risks with AI driven receivables management technology.”

high levels of customer illiteracy, elderly customers

we are still not too familiar with how to respond

or those experiencing disabilities. This is another

to identified credit risks with AI driven receivables

example of where skilled human intervention

management technology. With that in mind, when

comes into its own talking people through their

exploring some of the current and emerging

options and guiding them towards a better

digital receivables technology companies to

outcome.

partner with on this exciting journey, how do you know what to look for and whether they are the

Similarly, commercial portfolios will require

right fit?

skilled human review and portfolio management at all stages of the process to analyse data and

Here are some key questions to consider:

assess risk of default due to cash flow issues and potential insolvency, with prompt referral

z Are they recognised as leaders within

to collection agencies and/or lawyers for

Fintech or AI Digital Receivables Solutions?

further follow up and potential for legal action,

Ground-breaking technology often attracts

bankruptcy proceedings and caveats.

awards, accolades, client testimonials and case studies. What can they share with you in this

The key lies in better understanding the respective strengths and limitation of humans and machines in a collection’s context so we can draw the maximum benefit from both emerging technologies and the skills of our staff. AI and machine learning can free up mundane, repetitive and data crunching tasks so humans can be used for higher value activities that require empathy, creativity and problem solving.

regard? z Do they measure the customer experience?

One of the key outcomes of more intelligent driven communication is improvement of the overall customer experience. Do they measure this and if so, what does that look like? Do they use the international standard of measuring customer experience ‘Net Promotor Score (NPS)’ and if so, can they share details of that with you?

Questions to ask when exploring digital receivables solutions and companies to partner with

z Do they understand the receivables industry in Australia? Many digital solutions companies either don’t originate from within Australia or

This is unchartered territory for many of us. Even

don’t specialise within Credit. As such, they

though we live in a digital age, the credit industry

may not understand the nuances of our local

is far from being digitalised.

credit industry and associated regulation and compliance. Can they demonstrate

Even with advanced credit risk and machine

understanding of your challenges and pain

modelling available to help us assess credit risk,

points?

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z Do they offer other value add receivables

In summary, the introduction of AI driven

solutions or partner with someone who does?

digital technology is enabling much more

Some leading digital receivables companies

informed and intelligent responses to identified

also offer other outsourced engagement

credit risk factors. All of which will ultimately

solutions such as overflow management for

result in improved cash flow for Australian

arrangement monitoring, hardship assessment

businesses.

and monitoring and live customer engagement campaigns. Maybe they can offer a seamless

On that note, for those who may still be struggling

transition to 3rd party digital collections

with the bigger concept of AI in credit or for those

solutions as well?

who think we’re not quite there yet, I’ll leave you with this thought from the Global Technology

z Can they clearly communicate how they use AI effectively? AI is a bit of a buzz word now, as such it can be thrown around a bit too easily. Many may attest to using it but make sure you understand how AI and machine learning is utilised within their solution.

Consultancy, Thoughtworks: “By 2023, businesses will… … understand that AI is not the art of trying to force value out of historical data, but actually the art of creating new data and insight by interacting with the world.”

– Jarno Kartela Global Head of AI Advisory

How customisable is the payment portal?

Advanced payment portals can be developed

What an exciting time to be within credit!

to streamline a range of inbound queries from incorporating FAQ sections, capturing common complaints or additional required information from customers. Flexibility in customising a portal to your requirements should be key in your decision to partner with someone.

Nikki Dennis MICM Managing Partner/Co-Founder of SalesCRED (specialists in credit management solutions) T: 0437 652 562 E: nikki@salescred.com.au www.linkedin.com/in/nikki-dennis

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Current economic conditions, customer behaviour and mitigating risk Daniel Greenhoff MICM COO Recoveriescorp

At the end of last year, it was thought Australia’s

In theory, these factors should be having a positive

economy would be hitting a sweet spot around

impact on income and affordability and boost

now. However, the current instability says

debt repayments. However, the other side of the

otherwise.

affordability coin is causing uncertainty.

At the crux of this fragility are many factors. These

Impacts to expenditure

include strong economic expansion, inflation increases, reduced stimulus, debt program

Median weekly advertised rental rates increased

resumption, soaring energy and food prices,

4.7 per cent over the three months to December

Russia’s invasion of Ukraine, a low unemployment

2021 – the largest of any period over the past five

rate, and a demand for higher wages.

years.

To help you identify specific credit risks in the

Household spending increased in seven categories

midst of this, we have identified several monetary

in 2021 – the largest in recreation and culture

factors currently impacting consumer incomes and

(+11.3%), food (+9.7%), and clothing and footwear

expenses and ultimately affecting their behaviour

(+9.6%). The Consumer Price Index (CPI) also rose

and ability to repay debt.

2.1% this quarter and 5.1% over the 12 months to the March 2022 quarter. With the Eastern Europe

Impact to incomes

conflict further driving up prices, inflation will

Right now, unemployment is down to 4 per

outpace wage growth.

continue to steadily increase next quarter and

cent, with many predicting a further drop in Q4.

Between January and February, the number of hours people worked also increased by 8.9 per cent in seasonally adjusted terms.

The resulting credit risk Given the economic instability, customer sentiment and confidence are being affected, leading to

The national Wage Price Index (WPI) rose by 0.7

credit risk.

per cent in Q4 21, with the annual rate now at 2.3 per cent. Meanwhile, the March 2022 flood

We are seeing a consistent downward trend in

disaster relief and support packages banks and

Arrangements and Promise to Pay in Full values

the government provided led to pockets of money

as consumers are hesitant to commit to larger

coming in.

amounts.

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“Household spending increased in seven categories in 2021 – the largest in recreation and culture (+11.3%), food (+9.7%), and clothing and footwear (+9.6%). The Consumer Price Index (CPI) also rose 2.1% this quarter and 5.1% over the 12 months to the March 2022 quarter.”

In April 2021, the average payment value of

Meanwhile, while Arrangements were beginning

Arrangements was $170, while Promise to Pay in

to recover after the December period, they

Full were around $1,400. Jump forward to March

noticeably dropped in March due to external

2022, and these have dropped to $160 and $1,100,

factors.

respectively – with further drops expected.

This drop in Arrangements comes alongside a While payment arrangements have remained

rise in hardship referrals and in costs of living and

consistent in banking and utilities, transport,

uncertainty. Customers either do not have the

telecoms, and insurance has seen a notable

funds or are concerned about the future and want

increase given the rising CPI.

to retain as many funds as possible.

Promise to Pay in Full kept rates have remained

The rise in hardship referrals is also due to the

low during Q3 quarter given the rising costs but

external economic factors we are seeing, including

appear to be trending upwards heading into the

inflation increases, rising rental rates, energy

next quarter.

disconnection resumption, and soaring prices.

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We know that currently, only one per cent of the

continue to tap into self-serve options, with the

population is accessing corporate hardship loans.

exception of government.

Unfortunately, those not applying risk falling further into hardship and have a bigger chance of

Generally arrangements via portals rose from

long-term hardship.

60 to close to over 300. Insurance increased from 60 to 100, while telco and utilities arrangements

How to mitigate the risk

grew from 200 to over 300.

With these conditions and trends in mind, what

Not only is self-serve convenient, but it can also

can you do to reduce the risk for your business

be a way for those suffering from mental health

and your customers?

struggles, or embarrassed about their situation, to deal with their debt as it avoids the need for direct

Firstly, many customers will settle their accounts

human contact.

if they are contacted early which has seen an increase in organisations choosing to partner

The most effective channels we are seeing driving

with collection specialists in a first party capacity

customers to self-serve across our industries

who have both the resources and technology to

(banking and finance, government, insurance,

achieve this.

utilities and telco) are SMS, letters with QR codes, and interactive voice response. So focus on these.

Therefore, make sure you introduce earlier collection programs and engagement as early as

Secondly, you could consider introducing

1-7 days past due date, especially with high-risk

incentives for customers to drive repayments. For

customers. This action can lead to a significant lift

example, you could offer a 5 or 10% discount for

in repayment. It can even improve relationships, as

early payment, or pay this month and don’t pay

customers appreciate you reaching out to remind

next month (2 for 1 mentality).

them.

While this may seem like an outlay, the costs To support customers earlier in their credit

associated with this are usually recouped by not

lifecycle, a strong digital engagement strategy

having to chase payment.

is essential. Giving customers the opportunity to self-serve and contact their provider 24/7 via online portals has never been more important.

Summary We anticipate 2022 will be financially stressful for

In fact, our research shows that portal

customers and SMEs as the economic conditions

arrangements are up this quarter as customers

above roll on and bushfire and flood seasons approach. Customers will need increased financial

“We anticipate 2022 will be financially stressful for customers and SMEs as the economic conditions above roll on and bushfire and flood seasons approach.”

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AICM Risk Report 2022

support and customer service, and if you don’t get ahead with engagement campaigns, your nonrepayment risk will be higher.

Daniel Greenhoff MICM COO Recoveriescorp T: 0420 802 763 www.recoveriescorp.com.au

Insolvency Simplified debt restructuring – should credit managers embrace this new insolvency reform?

John McInerney MICM Partner, Restructuring Advisory Grant Thornton Australia

Why introduced

“new normal” whilst at the same time are having

On 1 January 2021 the Federal Government made

lockdown rules, staff shortages, poor weather

some significant changes to Australia’s insolvency

conditions along most of the East Coast, price

framework to better serve small businesses, their

escalation, the uncertainty of a change in

creditors and employees, namely the introduction

Government and looming interest rate rises.

of the Small Business Restructure process

All of this before even a mention of the ATO’s

as a streamlined way for a small business to

bad debt problem. If we turn to that and just

compromise debt. If you aren’t familiar with the

focus in on the ATO’s bad debt provision that

changes then you are not alone.

relates to Small to Medium Businesses, that has

to put out spot fires as a consequence of COVID

increased over the past 5 years from $19.2Bn Why? Well at the time the changes to the

to $34.1Bn as at 30 June 2020 (18 months ago,

insolvency framework were announced, most

before the effects of COVID have been factored

if not all businesses were relying on the COVID

in). That’s an increase of $14.9Bn or 178% over a

relief measures introduced by the Federal and

large number of taxpayers. As a credit manager,

State Governments to survive, and in some cases

imagine this is the predicament you now face

prosper. The main support being in the form,

with a large proportion of your customers…..

of JobKeeper, SME Recovery Loan Scheme,

what steps would you be taking to collect this

Temporary Rent Relief and let’s not forget the

debt and not put your own company out of

Temporary Relief from Insolvent Trading. Whilst

business in the process.

the insolvency reforms were announced as part of these COVID relief measures, it’s easy to see how

Now cue the Small Business Restructure

they were overlooked when the offer of “free cash”

Process or SBR for short. An SBR provides small

was available to just about any company that

businesses with a tool to compromise creditor

complied with their tax reporting obligations, even

claims and restore business viability, while allowing

if they couldn’t pay the tax debt.

business owners to remain in control of their business, and the reason why it was introduced,

Fast forward to where we are today, most if

being to allow more businesses to go on continue

not all stimulus measures have come to an end,

trading, meaning better outcomes for the

businesses are trying to move forward with the

businesses, their creditors and their employees.

AICM Risk Report 2022

65

INSOLVENCY

Key features

and whether the company is likely able to meet

The key features of an SBR for a company director

sent by the RP to the company’s creditors the

include:

company must be up to date with the payment of

z Director protection - Directors can be

entitlements to creditors that are due and payable

its obligations under the Plan. Before the Plan is

protected from personal liability either for

(essentially wages and superannuation) and be up

Insolvent Trading and/ or Director Penalty

to date with tax reporting obligations.

Notices issued by the ATO. z Creditor moratorium - Creditors are prohibited from taking any action against the company to recover money and/or property, terminating contracts, enforcing and security interests, the pursuit of personal guarantees and formal debt recovery proceedings. z Business as usual - Directors retain control of

Once a plan is issued by the RP, creditors have 15 business days to vote to accept or reject the plan.

A plan is accepted, and is binding on all unsecured creditors, if more than 50% of creditors by value that vote, vote to accept the plan. Related party creditors are not entitled to vote on a restructuring plan. Unlike other insolvency processes there are no meetings of creditors in an SBR.

the business throughout the process and the company continues to trade under instruction

During the SBR, a company may continue to trade

of the existing directors in accordance with

in line with its normal, day-to-day operations. All

normal day to day operations.

unsecured debts incurred prior to the company

z Streamlined - It is a simple, low cost process aimed to maximise the dividend return to creditors in an expeditious timeframe, at best 45 business days and out to 3 years if required.

Eligibility & process To be eligible to access the SBR process a company must have less than $1M in total liabilities on the day it resolves to appoint a Small Business Restructuring Practitioner to oversee

entering SBR are included in the Plan. Debts incurred after the company enters SBR are not part of the plan and must be paid off outside the Plan.

Once a plan is made, the RP manages the disbursement of payments to company creditors based on the terms of the Plan. Where funds are available “upfront” the disbursement of funds could occur within 10 business days or alternatively, collected and paid over time for up to a period of 3 years.

the restructuring process. The Restructuring

If the restructuring plan is not accepted, the

Practitioner (RP) must be a registered liquidator.

restructuring process ends and creditors are no longer prevented from enforcing their rights and

The role of the RP is to work with the company’s

a director is no longer protected from liability for

directors to develop a restructuring plan. The

insolvent trading.

restructuring plan sets out how creditors will be repaid as a proportion of the debt owing to them, which is essentially expressed as what “cents in the dollar” a creditor will receive if they accept the

ATO attitude to SBR’s as largest stakeholder

Plan. Within 20 business days of entering into the

Statistics produced by ASIC indicate that the

process, the RP circulates the restructuring plan

10 years to 2019 (pre-COVID), approximately

to the company’s creditors and certifies whether

10,000 companies per year entered into external

or not the company qualifies for the SBR process

administration and around 76 per cent of those

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AICM Risk Report 2022

INSOLVENCY

“Once a plan is issued by the RP, creditors have 15 business days to vote to accept or reject the plan.”

agency the ATO is better off accepting a “cents in the dollar” return, as opposed to forcing a company into liquidation.

ATO statistics also disclose the top 5 types of

companies had less than $1M in liabilities. So by deduction, in any normal year c. 7,600 companies should be eligible to use the SBR process.

A review of external administration matters conducted by Grant Thornton indicate the ATO is the largest creditor in approximately 70% of all insolvencies. Again, by deduction, the ATO should be the largest creditor in 5,320 of the 10,000 insolvencies per year.

To date the take-up of the use of the SBR has been low but is on the increase. Some key statistics produced by the ATO disclose that as at 31 January 2022: z 34 SBR’s had been conducted z c. 95% of SBRs where ATO was a creditor z 85% of SBR Plans had been approved

business who have used the SBR process are in the Hospitality, Retail, Construction, Labour Hire and Media industry.

In March 2022, 52,000 letters were issued to 45,000 companies to inform them of their obligation to pay their tax debts to avoid the directors being personally liable pursuant to a director penalty notice. At present, all the ATO seeks in return is engagement so that they have visibility of the taxpayers affairs with the benefits of engagement including a tailored approach to help get taxpayers back on track, tailored payment plans, additional time to pay and supporting businesses via a formal restructure or exit.

As a credit manager Perhaps the ATO has caught up with the credit community when it comes to debt collection. That

As a stakeholder group the ATO has advised the

said, there is no reason why the credit community

SBR process is a 2nd chance for genuine business

shouldn’t continue to support genuine business

owners. The ATO has advised they will support

owners on a pathway to returning to normal,

companies who have:

particularly when it comes to voting on SBRs (and

z A history of engagement with the ATO (essentially via lodgement of returns and communication on the status of payments etc.) z Whose Plan is better than what could be

DOCAs). In fact, most of the time, the decision will be made by the ATO as the largest creditor and all other creditors will be bound by that decision.

Don’t dismiss SBR’s as a restructuring process. I

available in a liquidation scenario. This takes

expect there will be an increase in the use of SBR

into consideration any uncommercial related

over the remainder of 2022 and into 2023. It has

party transactions

been discussed that a further reform could be to

z Encountered cash flow difficulties over the past

extend the eligibility criteria to $5M of total debt,

few years (pre- and post-COVID) and have a

instead of $1M. As these processes increase in

viable business to save and jobs to preserve.

popularity credit managers should be alert to any contagion risk amongst its smaller customers in

If you think of the alternative, approximately 95%

high-risk industries. By deduction, being exposed

of all liquidations don’t pay a dividend, so as long

to 50 SBRs where you are owed $50k is a

as the taxpayer exhibits the above criteria, as an

potential bad debt exposure of $2.5M. AICM Risk Report 2022

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INSOLVENCY

Consider what debtor in possession (DIP) means to you when being asked to extend credit to a company during the SBR process. A DIP model means the existing directors remain in control and continue to trade in the ordinary course and the supply of stock will likely continue to be on credit terms unless credit terms are renegotiated post commencement of the SBR process. Under these circumstances, the RP is not in control and is not personally liable. As a credit professional, at this juncture you will need to consider the ongoing risk profile of any client subject to the SBR process. Demanding COD could result in the process failing and you not getting a dividend in 95% of matters. Supporting an SBR that fails to pass the vote, could mean that further credit has also been exposed to turning bad. My recommendation here is to register the supply of all goods on the PPSR. In fact, this should happen regardless, if not already doing.

Set new credit limits on companies entering the SBR process and deciphering which companies to support based on their history of dealings with you. Openness and transparency is key.

Security interest registrations and personal guarantees cannot be enforced during the SBR

“It has been discussed that a further reform could be to extend the eligibility criteria to $5M of total debt, instead of $1M. As these processes increase in popularity, credit managers should be alert to any contagion risk amongst its smaller customers in high risk industries.”

process. In this instance it’s time to revisit the terms and conditions of trade. Do those terms allow you to dictate how the proceeds from the sale of your goods are to be handled i.e. paid into a separate account on account of payment of those goods. If yes, you should seek to have the company confirm their practice.

Engage with the RP. Share your concerns and tell them what you will need to see in their communications to allow you to vote for the

not to support the business via the supply of goods on credit (or COD as the case may be) during the period of the SBR and when voting on the Plan.

If all of this sounds like a leap of faith, then I think your right. Keep alert to the SBR process and how it unfolds. If in doubt, please contact an insolvency practitioner you trust for support.

Plan. Unlike other forms of insolvency, there is no opportunity to remove and replace a RP from office. If faced with the prospect of a customer going into an SBR process, you will need to form your own view on the integrity of the RP and customer and use this to determine whether or 68

AICM Risk Report 2022

John McInerney MICM Partner, Restructuring Advisory Grant Thornton Australia T: +61 2 8297 2400 E: john.mcinerney@au.gt.com grantthornton.com.au

Simplified liquidations and changes to liquidator preference payments Henry McKenna MICM Director Vincents Insolvency & Reconstruction

Simplified Liquidations

Creditors in a Simplified Liquidation can still make

Simplified Liquidations came into effect from

liquidator.

reasonable requests for information from the

1 January 2021, although from looking at recent ASIC statistics, it appears that less than one

If funds will be available to pay a dividend to

percent (1%) of Creditors’ Voluntary Liquidations

creditors, the liquidator is only able to make one

are adopting the streamlined process – most likely

dividend payment. This is likely to be near the

because they don’t meet the eligibility criteria

end of the administration and there is no ability to

(which is outlined further below).

make an interim dividend distribution.

What is a Simplified Liquidation?

The liquidator in a Simplified Liquidation is

How is the Simplified Liquidation process different

still required to report alleged misconduct to

to a full creditors’ voluntary winding up?

ASIC if:

Meetings of creditors are not held in a Simplified Liquidation. Matters determined by creditors are decided without a meeting via the ‘proposal without a meeting process’. Also, creditors cannot form a committee of inspection.

z in the opinion of the liquidator, there are reasonable grounds to believe conduct constituting an offence under a law of the Commonwealth or a State or Territory in relation to the company may have occurred; and

A liquidator in a Streamlined Liquidation must

z that conduct has, or is likely to have, a material

report to creditors within three months of the

adverse effect on the interests of creditors as a

liquidator’s appointment, about:

whole or a class of creditors as a whole.

z any work performed to date by the liquidator; z the liquidator’s opinion on when the liquidation may be finalised; and z the likelihood of a dividend being paid to creditors.

There are no other mandatory reports to creditors

Importantly for AICM members, in a Simplified Liquidation, unfair preference recoveries by liquidators, from non-related entities are limited to claims greater than $30,000 that occur 3 months prior to the relation back day (usually the date of

and the report that is sent has far less detail than

appointment). Previously there was no minimum

in a standard liquidation.

and the time frame was 6 months.

AICM Risk Report 2022

69

INSOLVENCY

Overall, the purpose of a Simplified Liquidation

voluntary winding up must not exceed

is to reduce time incurred by the liquidator to

$1 million;

hopefully increase the return to creditors where there are recoveries by the liquidator; and also, to reduce time and costs being incurred by liquidators where there are little or no assets to pay them for tasks they might otherwise be required to do for no real benefit to the creditors.

3. the company will not be able to pay its debts in full within 12 months; 4. the directors must within five business days (after the day of the meeting of the company at which the resolution for voluntary winding up was passed) give to the liquidator:

What are the eligibility requirements?

a. a report on the company’s business affairs

A Simplified Liquidation is a streamlined creditors’

b. a declaration that they believe, on

voluntary winding up for companies that have

reasonable grounds, the company meets

liabilities less than $1 million. To be eligible for the

the eligibility criteria for the Simplified

simplified liquidation process:

Liquidation process will be met;

1.

the company must be in a creditors’ voluntary

5. no person who is a director of the company,

winding up where the event that triggers the

or who has been a director of the company

start of the winding up occurs on or after

within the 12 months before the date a

1 January 2021;

liquidator was first appointed, has been a

2. liabilities of the company on the day a liquidator is first appointed in the creditors’

director of another company that has been under restructuring or subject to the simplified

“Overall, the purpose of a Simplified Liquidation is to reduce time incurred by the liquidator to hopefully increase the return to creditors where there are recoveries by the liquidator...”

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AICM Risk Report 2022

INSOLVENCY

liquidation process within the period of the

The liquidator must not adopt the Simplified

preceding seven years;

Liquidation process if, before the liquidator adopts

6. the company has not undergone restructuring or been the subject of a Simplified Liquidation process in the preceding seven years;

it, more than 25% in value of creditors provide a written statement to the liquidator requesting the liquidator not to follow the process.

statements, applications and other documents

When must a liquidator cease to follow the Simplified Liquidation process?

required under the Income Tax Assessment Act

The liquidator must cease to follow the Simplified

1997.

Liquidation process if:

7. the company has given all returns, notices,

A recent government review of the process has

z the eligibility criteria for the process are no longer met; or

acknowledged that the definition of “restructuring” in bullet points 5 and 6 above needs to be more

z the liquidator believes on reasonable grounds that the company, or a director of the

clearly defined.

company, has engaged in conduct involving fraud or dishonesty and that conduct has had,

Can a liquidator adopt the Simplified Liquidation process for a creditors voluntary winding up?

or is likely to have, a material adverse effect on

The liquidator in a creditors’ voluntary winding up

the interests of creditors as a whole or a class

may adopt the Simplified Liquidation process if:

of creditors as a whole.

z they believe on reasonable grounds the eligibility criteria are met; z not more than 20 business days have passed since the liquidator was first appointed; z the liquidator has given each member and creditor at least 10 business days before adopting the Simplified Liquidation process written notice of:

creditors when they find themselves faced with a Simplified Liquidation scenario. The two key questions for members then are: 1.

Do they anticipate they will benefit from the Simplified Liquidation process because of either less liquidator fees or a reduced ability for the liquidator to make preference recoveries due to the reduced relation back

grounds the eligibility criteria for the

period and the minimum quantum of a claim

Simplified Liquidation process will be met;

(being $30,000)?

an outline of the Simplified Liquidation

a statement they will not adopt the Simplified Liquidation process if at least 25% in value of creditors direct the creditor in writing not to adopt the simplified liquidation process; and

AICM members will most likely be acting for

a statement that they believe on reasonable

process;

Considerations for AICM members

2. Do they think that the Simplified Liquidation might be an abuse of process by the company’s director(s) and that a standard liquidation with more extensive investigations might lead to better prospects of dividends being paid to creditors?

After those questions are considered, members

prescribed information, if any, on how the

can decide whether they want to support the

creditor may give the direction in writing not

process or actively oppose it when they receive

to adopt the Simplified Liquidation process.

notice from the liquidator.

AICM Risk Report 2022

71

INSOLVENCY

Changes to liquidator preference payments

With this in mind, AICM members might wish to consider dropping credit limits to below $30,000 where it’s possible to do so.

The federal government plans to further simplify and streamline insolvency law, building on the recent introduction of the Simplified

Other changes coming

Liquidation process and the Small Business

From 1 July 2023, the Government is also

Restructuring process. It also follows a

providing an additional $20 million of funding over

government review of the Safe Harbour process.

two years to the Assetless Administration Fund,

The intention of the changes is to enable viable

which is a grant administered by ASIC from which

businesses which are facing financial challenges

liquidators will be able to apply for a grant of up to

to have an opportunity to restructure and

$5,000 per assetless liquidation, without needing

continue trading.

to provide evidence of potential misconduct.

This recognises the high number of “Zombie

One of the reforms proposed is to make fairer

Companies” that need to be wound up often years

rules governing ‘unfair preference payment’ claims

after they ceased trading.

by liquidators for all liquidation types. In summary, creditors who act honestly shouldn’t be pursued

The Government is also clarifying the treatment

for small payments where a company they dealt

of trusts with corporate trustees under Australia’s

with enters liquidation.

insolvency law by introducing a legislative framework for the external administration of trusts.

Payments received by creditors that either

The framework will allow for greater efficiency

total less than $30,000 or are made more than

of the external administration of corporate

3 months prior to the company going into

trusts, ultimately supporting better outcomes

liquidation will no longer be able to be clawed

for distressed companies and their creditors. The

back by the liquidator, provided those payments

reform reflects the outcomes of the Government’s

are not to related creditors and are within the

2021 consultation, which demonstrated there is

ordinary course of business. This proposal mirrors

broad stakeholder support for reform.

what is already being done through the Simplified Liquidation process.

Finally, the Government is backing in reforms that provide greater certainty for company directors

“One of the reforms proposed is to make fairer rules governing ‘unfair preference payment’ claims by liquidators for all liquidation types. In summary, creditors who act honestly shouldn’t be pursued for small payments where a company they dealt with enters liquidation.”

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AICM Risk Report 2022

seeking to save financially distressed but viable companies as part of the Government response to the Review of the Insolvent Trading Safe Harbour.

These reforms have been commented on by Government, but the detail of the changes is not yet known.

Henry McKenna MICM Director Vincents Insolvency & Reconstruction E: hmckenna@vincents.com.au T: (02) 8224 8219 M: 0437 808 023 https://vincents.com.au/

2022

National Credit Team of the Year

Recognising credit excellence in 2022

The National Credit Team of the Year Award is an opportunity for credit teams to be recognised for the outstanding work, results, culture and learning they undertake.

PAST WINNERS

Nominating your credit team has many personal and professional benefits including the chance to: l Demonstrate best practices in credit management l Gain team and individual recognition within the credit industry and internally within your company l Develop personal presentation skills l Build team spirit.

Past participants rate this process as one of the most rewarding and fulfilling times in their careers when they take the time to reflect on their team’s achievements.

2021: Synergy

2020: Woolworths

Applications will open in June 2022, applications close 30 July 2022.

Equifax has been sponsor of Credit Team of the Year since its inception in 2008.

For more information and entry requirements CLICK HERE or phone 1300 560 996

2019: AGL

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