Corporate Insolvencies in Australia Surge In May

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Key Takeaways

Recent Surge in Insolvencies: From July 2023 to March 2024, 7,742 companies entered external administration, marking a 36.2% increase compared to the same period the previous year.
Insolvencies in May 2024: In May 2024 alone, 1,205 companies entered external administration.
Sector-Specific Impact: The construction and retail sectors have been particularly hard-hit due to rising costs and supply chain disruptions.
Historical Comparison: Current insolvency rates surpass the average rates of 2017-2019 and are more pronounced than those during the 2008 financial crisis.
Post-Pandemic Rebound: The end of COVID-19 relief measures has led to an increase in insolvencies as businesses face accrued debts and a challenging economic environment.
Economic Factors: Rising inflation, interest rates, and ongoing global supply chain issues are major contributors to the current trend.
Regulatory Changes: The lifting of temporary relief measures has exposed underlying vulnerabilities in many businesses.
Consumer Behavior Shifts: Significant drops in consumer spending and changes in behavior (such as increased online shopping) have adversely affected traditional retail businesses.

Corporate insolvency, a critical aspect of economic health, has seen significant changes in Australia recently. The latest insolvency data from the Australian Securities and Investments Commission (ASIC) indicates a notable rise in the number of companies entering external administration.

Recent Trends in Corporate Insolvencies

The recent ASIC report reveals that from July 2023 to March 2024, 7,742 companies entered external administration, marking a 36.2% increase compared to the same period in the previous year. This surge is significant and indicates an escalating trend as businesses deal with the weight of outstanding tax debt and a reduction in consumer spending. The construction and retail sectors, in particular, have been heavily impacted, reflecting broader economic challenges such as rising costs and supply chain disruptions.

Historical Context

Historically, the rates of corporate insolvency in Australia have varied, influenced by economic cycles and policy changes. During the global financial crisis of 2008, insolvency rates spiked as businesses struggled with reduced consumer spending and tighter credit conditions. Conversely, the COVID-19 pandemic initially saw a decline in insolvency rates, largely due to government intervention and temporary relief measures, such as JobKeeper payments, insolvency moratoriums and, perhaps most significant of all, a halt to collections activity by the ATO.

Post-Pandemic Rebound

The lifting of COVID-19 relief measures has led to a rebound in insolvency rates. Many businesses that survived the pandemic due to these temporary measures are now facing financial difficulties as they deal with accrued debts and a challenging economic environment. This post-pandemic adjustment period is contributing significantly to the current increase in insolvencies.

What is the Leading Cause of Insolvency in Australia

The leading cause of insolvency in Australia is insufficient cashflow, with businesses having insufficient resources to keep up with their obligations. While the ATO is not always the main creditor in winding up applications to court, the ATO historically is the largest initiator of wind up notices reflecting the number of businesses that have a higher than normal outstanding tax debt.

Factors Contributing to Current Trends

Several factors contribute to the recent increase in corporate insolvencies:

Economic Conditions: Rising inflation and interest rates have increased operating costs and borrowing expenses for businesses. The construction sector, in particular, is struggling with skyrocketing material costs and labor shortages.
Supply Chain Disruptions: Ongoing global supply chain issues continue to affect Australian businesses, leading to delays and increased costs.
Regulatory Changes: The end of temporary relief measures post-pandemic has exposed underlying vulnerabilities in many businesses that were previously cushioned by government support.
Consumer Behavior: Shifts in consumer behavior, such as increased online shopping, have adversely affected traditional retail businesses that failed to adapt.

Comparison to Historical Data

The current rise in insolvencies surpasses the average rates observed in the pre-pandemic years of 2017-2019, reflecting a more challenging business environment now. The financial crisis of 2008 saw a similar spike, but the current increase is more pronounced, suggesting a deeper structural impact on the economy. This trend underscores the importance of resilient business practices and adaptive strategies in an ever-changing economic landscape.

What’s Next

The recent surge in corporate insolvencies in Australia highlights significant economic challenges, the mountain of tax debt that was allowed to accumulate during COVID and a drop in consumer spending reflective of a higher interest rate environment and a per capita recession. It’s likely the impact of COVID lockdowns combined with higher interest rates has significant impacts on insolvency numbers for years to come and causes a significant change to the numbers and types of businesses operating in Australia.

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Prior to COVID, our client had a thriving commercial plumbing business. Like many in the industry, the pandemic hit hard, with reduced contracts and delayed payments leading to financial strain. However, as the market picked up again post-COVID, their numbers began improving steadily. Still, the burden of the pandemic remained in the form of costly, self-sourced loans that created a significant drain on their cash flow. On top of this, the business had accumulated $1M in tax debt. The client was faced with two potential solutions: consolidate their existing debts into a more manageable loan or consider restructuring the business entirely. With the future looking brighter for their business, consolidation became the preferred choice. Their turnover and cash flow were strong enough to support a $1.1M unsecured loan over five years. 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Why This Loan Was the Right Fit In this case, the combination of a first mortgage loan with capitalised interest was crucial in allowing the business to address its immediate challenges while providing room for future growth. Here’s why this was the ideal solution: Secured Loan with Lower Interest Rates: By securing the loan against property, the business was able to access a loan with a lower interest rate than would have been possible with an unsecured loan. This ensured that the overall cost of borrowing was manageable, despite the larger loan amount. Avoiding ATO Enforcement: The capitalisation of interest gave the business the breathing space it needed to focus on paying off its tax debt. This is significant because it helped them avoid any potential enforcement action by the Australian Tax Office (ATO), which could have included garnishing accounts or placing liens on assets. 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25 September 2024

Corporate Insolvencies in Australia Surge In May

Share This Post

Key Takeaways

Recent Trends in Corporate Insolvencies

Talk to a cashflow expert.

More To Explore

Case Study: $1.1M Private Loan to a Commercial Construction Business

Financing for Doctors: Medical Business Loans, Personal Loans, and more

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