New Zealand's bankruptcy service is braced for a quadrupling of personal insolvencies because of the economic fallout from and the policy response to Covid-19.
The Ministry of Business Innovation and Employment modelled a peak of new personal insolvencies of between 2800 and 3200 in the final quarter of 2020. Cases in the same quarter last year reached 800.
The projections show three back-to-back quarters of insolvencies three or four times higher than pre-crisis levels. A decline is expected thereafter, though the model anticipates that case numbers may remain elevated for years.
Budget documents show the Government has set aside $10 million to help manage the surge.
The coming wave of insolvencies is expected to eclipse those of the Global Financial Crisis; in 2010 new personal insolvencies peaked at 1800 per quarter (up from a pre-crisis level of about 700 per quarter).
Predicting the timing of the wave, however, has proven difficult. An MBIE spokesperson said while the forecast model was useful for planning and funding purposes, it was "not possible to predict with any precision" the timing of any increase in insolvency numbers, "or the likely maximum numbers of personal insolvencies".
Indeed, the number of insolvency cases in the current quarter is already tracking well below those generated by the model.
Industry players say various factors are likely delaying the spike, which they anticipate will happen next year.
John Fisk, a specialist in restructuring and partner at PwC New Zealand, said he expects personal insolvencies to follow a similar trajectory as corporate insolvencies. He anticipates a dramatic increase, but neither has begun to rise despite the current recession.
"My sense is that it won't come until 2021. The important factors on the personal side are the unemployment rate and when that starts to pick up, and the health of SMEs [small and medium-sized enterprises] which are vulnerable to a downturn. Often owners have made personal guarantees and used personal assets as security for debt or leases. There's also an awful lot of mortgage debt that's been deferred [special provisions by the Reserve Bank allow banks to offer their customers loan deferrals until March, 2021]."
Government support for jobs, including three iterations of the wage subsidy, the most recent of which remains open to new applicants, is likely chief among measures that have delayed a surge in unemployment.
Keaton Pronk, licensed insolvency practitioner at McDonald Vague, said the IRD, as a creditor, was also a key trigger for insolvency and, "although they won't tell you this, they never push as hard in an election year. You can add to that the greater discretionary leniency they seem to be applying because of Covid-19."
Pronk also noted that courts remain backlogged because of limited operations through lockdowns: "That's having an effect as well."
Mbie used a forecast model to produce the insolvency figures. It used May economic projections from the Reserve Bank and the Treasury, as well as the experience of the GFC. The ministry is in the process of updating the work using more recent projections; the result is expected in October.
In preparation for the surge in cases, the Government has apportioned an extra $10m over four years for Mbie's Insolvency and Trustee Service (also known as the Official Assignee). The funds are spread from the current fiscal year until 2023-24 and intended to provide for extra staff and case-specific costs.
Before the additional appropriation of $2m this year, the insolvency unit's budget is $16.7m. The extra funds are drawn from the Government's $50 billion Covid-19 Response and Recovery Fund.
The assignee administers all three categories of personal insolvency: bankruptcy, no asset procedure and debt repayment orders.
The Mbie spokesperson said the ministry had not undertaken modelling for how Covid-19 would affect corporate insolvencies. Funding for the administration of insolvent corporations is largely derived from the businesses themselves.