Insolvencies reach record high numbers

Insolvencies recorded a record high in May, with the cost-of-living crisis and more-aggressive action by the ATO and big-four lenders being key drivers.

Much of the insolvency activity being reported is in the SME space, as businesses deal with higher interest rates, a fall in consumer confidence and tight profit margins. The payment leniency shown to struggling businesses during the pandemic is disappearing as creditors, such as the ATO and the big banks, play catch-up on their debts, according to the latest Alares Monthly Credit Risk Report.

The Alares report found that in May, insolvencies were more than 50 per cent above pre-pandemic levels, with winding-up applications reaching their highest monthly total in years – many initiated by the ATO. The report also found Small Business Restructuring (SBR) appointments increased, accounting for 16 per cent of all insolvency appointments.

Alares Director Patrick Schweizer says the record insolvency numbers have come about as the ATO works through a record backlog of outstanding tax debt. “Winding-up applications spiked in May, highlighting the payment amnesty is over,” he says. “However, non-ATO initiated winding-up applications also increased, reflecting a rise in the debt recovery activity more broadly.”

Construction takes a hit

It’s a gloomy situation across the board as the cost-of-living pressures continue to bite, more so for particular industry sectors. May 2024 now holds the record for the most insolvency appointments since the Australian Securities and Investments Commission (ASIC) first started to publish figures in 1999. The latest ASIC figures show there were 1245 insolvency appointments in May 2024, a 44 per cent increase on the previous year, and 122 per cent more than 2022. Construction again had the highest number of insolvencies: 313 in May, which puts the figure to 2711 this financial year to June 2, 2024. Construction costs have risen by up to 40 per cent since the pandemic, putting pressure on Australian homebuilders, which are dealing with labour and materials shortages. This sector was followed by accommodation and food services (177 appointments), and retail trade, with appointments rising 61 per cent in May.

Meanwhile, the latest CreditorWatch data found the total number of insolvencies has increased 34 per cent year on year and is currently 41 per cent above the pre-COVID record of 978, reached in July 2019. Anneke Thompson, CreditorWatch’s chief economist, says that record-high payment defaults indicate there are increasing cash flow issues for Australian businesses. The credit reporting agency found the construction sector has had the highest proportion of late payments, with 10.46 per cent of businesses having payments that are 60 or more days overdue.

CreditorWatch says insolvencies in the retail sector are set to increase, particularly for smaller, discretionary businesses – a situation being attributed to falling consumer confidence as well as the cost-of-living crisis.

SBR plans on the increase

The insolvency landscape is reflected in the work Jirsch Sutherland has been undertaking recently. In May, its Voluntary Administration (VA), SBR and Creditors Voluntary Liquidation (CVL) appointments were across a range of sectors, but the majority were in retail and construction.

Jirsch Sutherland Partner Trent Devine says the fact insolvencies in May reached a record high is significant. “Within Jirsch Sutherland, our work is following the overall trend in this area,” he says. “Much of the work Jirsch Sutherland has been doing has been in the construction, wholesale food and retail trade sectors and involves VAs, along with CVLs and SBRs.”

The number of SBRs Jirsch Sutherland is being appointed to is increasing as more people become aware of how they can assist struggling small businesses. Introduced in 2021, SBRs are designed to help SMEs with less than $1 million in liabilities to continue trading, while allowing directors to remain in control.

Devine says the ATO looks on SBR plans favourably as they generally provide better outcomes for creditors when compared to voluntary administration or liquidation. “It’s also advantageous to have a good compliance history or at least clear communication with the ATO when needed,” he says.

Solutions such as SBRs, he adds, means while insolvencies are at record highs, if a company is struggling financially, it doesn’t have to be the end of the road.

“There is a number of rescue solutions, including SBRs, which have turned businesses around, got them back on track and provided acceptable results for creditors and owners,” Devine says. “What is important is that if a company is experiencing financial difficulties, contacting an insolvency professional as soon as possible is crucial. We provide obligation-free consultations because we understand early action is usually the best chance of a business finding a workable solution.”