Reduced Corporate Insolvencies: Is It Time to Rejoice?

As published in CK Momentum Issue 6  (Click here to download)

ASIC’S December 2015 insolvency statistics show that corporate insolvencies in the second quarter of the 2014/15 financial year were down 20% on the same period last year.

Associate, Adam Khan, queries whether this is a reason to rejoice or a reason to look ahead with trepidation.

When reviewing the economic outlook for 2015, the Organisation for Economic Co-operation and Development (“OECD”) has pointed to growth over the next year in various major economies. However, it has warned that growth was based on low borrowing costs and low inflation. In other words, the growth might be based on access to easy money rather than business profitability.

The report by the OECD provides one explanation for the reduction in the number of insolvencies. If businesses can more readily borrow money and have access to easy money they must be less likely to become insolvent. There are other explanations why the number of insolvencies might be down, not all of which are positive.

Insolvency is an expensive process to initiate and to follow through. If you are a financier or other creditor, are you more likely in these times to spend money on an uncertain insolvency procedure or are you better off waiting it out to see if there is a turnaround? The reduced number of insolvencies, explained at least in part by a lack of funding from creditors, might suggest a wider lack of confidence in the market.

The reduced number of insolvencies year on year between 2013/14 and 2014/15 might, at first glance, seem like a sign of growth. However, if the real reason is access to easy money, low interest rates and a lack of confidence in the market, it might not yet be time to rejoice.

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