The race to vaccinate Americans is likely to bring an end to the pandemic in the months ahead, but the outlook for the U.S. economy is far less certain. On Friday, the Federal Reserve Board delivered its Monetary Policy Report to Congress. While providing statistics suggesting that U.S. businesses could rebound when the pandemic ends, the report noted significant risks of business bankruptcies as well as a steep drop in commercial real estate prices.

The torrid pace of bankruptcy filings by U.S. businesses has ebbs and flows, but the tide is not receding. The economy continues to struggle under the weight of the COVID-19 pandemic.

There has not been any substantial change in the fundamentals of the business cycle and Washington has been unable to produce another round of stimuli. So, we need to be careful about drawing conclusions from any short term variance in the rate of bankruptcy filings.

Since the end of the first quarter of 2020, bankruptcy professionals have been planning for a substantial increase in business bankruptcies. The newest statistics tell us that the wait is over. These bankruptcy filings follow the sustained economic contraction rooted in the COVID pandemic. But it would be too simplistic to say that COVID is the sole cause of this trend. Most of the businesses that have filed faced other challenges, such as heavy debt burdens, deteriorating markets or strategic missteps.

The number of so-called mega-bankruptcies filed during the first half of the year tells only part of the story. The pain is not just at the top, but spreads across multiple sectors of the economy. Overall, business bankruptcy filings are 30% higher than they have been at any time during the last 5 years. And, with attempts to re-start the economy already sputtering, the news during the second half could be worse.

Introduction

The concept of winding up does not exclusively apply to insolvent companies. Solvent companies can also be wound up, on the initiation of the company’s directors and shareholders (for example, as part of a corporate reconstruction or to close down non-operating or redundant entities). 

An overview of the two key procedures to effect the dissolution of a solvent Australian company, being Members’ Voluntary Liquidation and Deregistration, is set out below. 

In brief

Even with the fiscal stimulus and other measures taken by the Federal and State governments in Australia, corporate insolvencies are likely to increase in coming months.

Under Australia's insolvency regimes, a distressed company may be subject to voluntary administration, creditor's voluntary winding up or court ordered winding up (collectively, an external administration). Each of these processes raises different issues for the commencement and continuation of court and arbitration proceedings.

In summary

In our previous alert we discussed how Justice Markovic in the Federal Court of Australia had granted the administrators of retailer Colette Group relief from personal liability for rent in respect of 93 stores.  

The Australian Federal Court has made orders relieving the administrators of retailer Colette from personal liability for rent in response to the COVID-19 crisis and the current uncertainty in respect of government policy about rent relief for tenants: see

What you need to know

Amendments to the Corporations Act 2001 (Cth) (Corporations Act) to implement the measures announced by Treasurer Josh Frydenberg on Sunday, 22 March 2020 to provide temporary relief for financially distressed businesses due to COVID-19 have now come into effect.

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (CERPO Act) amendments were passed by the Parliament on 2 March 2020. They will apply for a 6 month period, but may be extended or have impacts beyond that timeframe.

The Treasurer, the Honourable Josh Frydenberg MP, has today announced proposed temporary changes to Australian corporate insolvency laws which will vary the minimum requirements for statutory demands and provide some relief for directors from insolvent trading. These announcements form part of the Australian Government's measures to support otherwise profitable and viable businesses due to the economic impacts of COVID-19.