2020 & beyond
Just as Schumpeter suggested, there must be revolution or absorption in order to spur business cycles and innovation, strengthen market selection and reduce the withholding of resources by "zombie companies". Creative destruction is an important part of the economic cycle in that it enables those resources to be redistributed, for example by redirecting capital to legitimate restructures.
Insolvency regimes therefore carry important implications for the stability of financial systems and the economy generally, where the reallocation of capital is the centrepiece of enabling long-term productivity growth through efficient labour and financial markets.
While quantitative easing measures in Australia have arguably propelled market activity, the efforts could be identified as limiting economic efficiency by failing to cure, and instead prolonging, the ails of many beleaguered companies. Notwithstanding this observation, the interruption to the creative destruction process presents an opportunity for businesses to engage in a strategic restructure, whether it be by way of urgent capital raising, enacting the safe harbour provisions or by way of a voluntary administration.
One benefit of the voluntary administration process is that it affords the company and its administrators a moratorium period whereby potential restructuring options can be explored and considered. To the extent the appointment can precede a liquidity shortfall, there will be a greater chance of a successful restructure.
As to whether the relief packages will lead to a rush for voluntary administration appointments right before the informal safe harbour window closes, it remains the case that with appropriate advice and action, well-developed restructuring plans can deliver long-term benefits and protection. The benefit of an early restructure is avoiding a crowded market following the inevitable failure of some of the less productive entities that have survived in recent years due to, among other factors, ultra-cheap debt.
While these temporary measures can be praised for allowing the business community to pause to assess the implications of the current world events, in our view the measures should be lifted as soon as reasonably possible in order to allow the natural economic process of creative destruction to occur.
Having said that, in a market replete with private equity firms scouting acquisition opportunities following steady growth and low interest rates in previous years, businesses should give serious thought to taking advantage of this moment in time to effect a legitimate restructure or turnaround. This should be done sooner rather than later to avoid the potential bottleneck that may occur in 2021, which may see a spate of insolvencies causing lenders to become more conservative. Early strategic decisions will enable businesses to weather the storm that will be upon us once the relief packages transition into a thing of the past.