Is This The Perfect Storm?

[vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][vc_column_text]Let me start this paper with a disclaimer. I am not an economist, merely an accountant with over 40 years of experience in the insolvency business.

What have I seen in the last 40 or so years?

    • Housing interest rates exceeding 15% (including on my own home);
    • The 1987 share crash;
    • A plethora of insolvencies in the late 1980s and early 1990s;
    • Failure of property developers in the early 1990s;
    • Commercial interest rates of over 20% from 1st tier lenders;
    • The 1997 Asian financial crisis;
    • The Dotcom boom & bust;
    • The constant flow of insolvency work throughout the 1980s, 1990s and early 2000s but with a change in its nature from Receiverships to Voluntary Administrations as the banks became a little skittish about making appointments especially with various politicians taking up the cudgels on behalf of their constituents;
    • Then came 2007. With an overheated financial market, hot-air-backed securities in the US housing market and large financial institutions selling financial products that I am certain their custodians, ie. the directors, would not have had a chance of understanding, we saw the start of the Global Financial Crisis. Did the financial world fall apart? Very nearly, but fortunately not, as some very astute minds managed to guide the US financial system through the crisis with minimum collateral damage and the world emerged ready to forget whatever mistakes seem to occur every 10 years or so in the financial markets.
    • In the late 2000s/early 2010s, the Australian Senate embarked on an enquiry into the banking system. The upshot of this was that banks dramatically reduced the use of receiverships as a mechanism to recover outstanding debt and by the mid-2010s insolvency appointments, both corporate and personal were in decline.
    • In the mid to late 2010s, we saw a push for a further enquiry into the Australian financial system which led to the Hayne Royal Commission. From the insolvency/bank recoveries perspective, the same old cases were wheeled out again. In the view of this insolvency practitioner, in the majority of cases, the borrowers stuck their heads in the sand and did not use the power of communication with their financiers. A definite mistake when the borrower owes the financier perhaps tens of millions of dollars and the future of the third-generation farm or other business is on the line.
    • Interest rates are at all-time lows, resulting in a property price bubble.
    • Right at the end of the 2010s, an event of pandemic proportions arose in a part of China with worldwide ramifications, including the explosion of the work-from-home policy. Have we seen the start of the end of the CBD? In 2022 the consequences remain and the financial consequences probably will affect the Australian economy for several generations.
    • Worse was to come in late February 2022, when Vladimir decided to uninvitedly annexed Ukraine. Apart from the tragic loss of life, the effects of this action are plain for all to see:
      • Shortages of timber for housing;
      • Massive allocation of funds by the West to supply armaments to Ukraine;
      • Economic sanctions on Russia, including its oil & gas sector, causing enormous problems in EU countries which were or still are reliant on Russian oil & gas; and
      • As Ukraine tends to be the wheat belt of Europe, the war is an enormous blow to Europe’s ability to feed itself.
    • Closer to home we have seen footage of the disastrous floods throughout many regions of New South Wales and Queensland. For some, particularly those in the outback of those two States, the floods have brought life back to the regions, but for many, such as the unfortunate people of Lismore, the floods wrought a disaster of epic proportions.



So What Happens Now?

I am not going to consult my crystal ball, just base the following on how I would expect the economy to perform given what I have witnessed over the last 40 years. Australians have just voted in a new Labor government which is still in a honeymoon period. Unfortunately, the things it will have to deal with on an economic front over the next 6 to 12 months will sorely test them. Consider the following:

    • Inflationary pressures on both goods & services.
    • Inflationary pressures on wages.
    • Anecdotally, many Australian families are, for the first time seeking assistance from organisations such as Foodbank to put food on the family table to feed their children and themselves.
    • Interest rates are rising both internationally and locally. Rising interest rates will have many effects on the Australian economy, including:
      • The major banks may well have an increase in non-performing loans, both housing and corporate;
      • From the homeowner’s point of view, the increase may mean the homeowner is unable to continue to pay the mortgage and the family home may be at risk;
      • Homeowners or property investors who are highly geared are expected to be the most affected;
    • We know that the banks have all been stress-testing their loan applications at much higher interest rates prior to loan approval. There have also been reports of brokers ”helping” clients pass the stress
      test by telling them to alter their living expenses so that they qualify for the loan
    • Falling house prices which, depending on the position taken by financiers, may affect those who are highly geared. Those more mature readers may remember financiers making harsh decisions when equity levels are reduced below finance lending covenants.
    • Falling share prices both internationally and locally. This will affect peoples’ retirement savings and their superannuation funds. Various pundits have been predicting a correction for some time but the high prices have been supported by very low-interest rates. Hopefully, we won’t reach margin call territory again.
    • During the period of the pandemic, the ATO has been particularly lenient in enforcing the recovery of debts owing for all forms of taxation which appears to have resulted in many billions of dollars, some say $50 to $60 billion, owing to the ATO. This is about to change. The ATO is believed to have issued more than 55,000 Notices of Intention to Issue a Director’s Penalty Notice, prior to the election. Now that most of those Notices of Intention have expired, the directors of recalcitrant corporate taxpayers can expect to receive a Directors’ Penalty Notice in the near future. Such documents are not to be ignored and we refer our readers to here. The other piece of arsenal the ATO have is the use of Garnishee Notices which can effectively freeze a company’s cash flow, vastly diminishing its ability to survive. The ATO is now well placed to commence recovery action wherever warranted.
    • The National Debt is reported to have blown out to above $1 trillion as a result of the economic measures used to ensure a financially stable Australian economy during the pandemic. Compare this to the GFC when the outgoing Coalition handed an apparent $20 billion buffer to the incoming Rudd Labor government. This time there is no buffer for any further stimulus measures required to prop up the economy.


So there we have it …. The Perfect Storm

    • Inflationary pressures on Goods & Services
    • Inflationary pressures on wages
    • Rising Interest rates
    • Falling share prices
    • Falling house prices in the major cities
    • ATO with instructions to rein in the debts due by taxpayers.
    • National Debt at previously unimaginable record levels.


What to Do?

Directors should seriously consider what effect one or all of the above will have on their business.

If the business is presently able to pay its debts, is up to date with taxation lodgements, and maintains good relations with its creditors and financiers, we would recommend that stress testing of financial forecasts, both profit & loss and cash flows, will ensure that the directors will see what to expect if, say sales drop by 20%, wages increase by 5 or 6% or a major new customer changes suppliers and subsequently suffers from financial distress. The alternative questions could be asked of what cash flow stresses will be felt if sales increase by 20%.

However, if the business is presently not in a position to pay its debts, is not up to date with taxation lodgements and/or relationships with suppliers & financiers are somewhat testy, or after stress testing their profit & loss and cash flow, there is concern that a problem is looming – then early communication with each of those parties generally assists with garnering their support.

When a DPN arrives in the letterbox, the opportunity to deal with the ATO is generally almost passed. If you have a concern as to the solvency of yourself, your company or your client, contact us to discuss the options. The earlier the problem is identified, the more options are likely to be available.


Article written by Alan Scott (Director) – Adelaide[/vc_column_text][vc_empty_space height=”50px”][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column width=”2/3″][social_share_list][/vc_column][vc_column width=”1/3″][vc_column_text][likebtn theme=”drop” dislike_enabled=”0″ icon_dislike_show=”0″ ef_voting=”bounce” tooltip_like_show_always=”1″ bp_notify=”0″][/vc_column_text][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][templatera id=”478″][/vc_column][/vc_row]

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