In a stark wake-up call for Australian businesses, the latest insolvency data from the Australian Securities and Investments Commission (ASIC) paints a grim picture of the corporate landscape.
With a staggering 36.2% increase to 7,742 companies entering external administration from 1 July 2023 to 31 March 2024, it’s clear that the aftershocks of the pandemic and the current economic climate are taking a heavy toll on businesses across the nation.
It’s important for business owners like you to stay informed about these trends and understand the implications they may have for your own enterprise.
In this blog post, we’ll take an in-depth look at the recent ASIC insolvency data, analyse the hardest-hit industries, project insolvencies for the coming months, and investigate the underlying causes of this surge in company failures.
Industries Hit the Hardest
The construction industry has borne the brunt of the recent wave of company failures, accounting for over a quarter at 27.7% of the total. With 2,142 construction companies entering external administration in the nine months to March 2024, it’s apparent that this sector is facing significant challenges.
Close behind is the accommodation and food services industry, which made up 15.2% of the total failures, with 1,174 companies impacted. Other industries that have seen significant numbers of failures include retail (536), professional, scientific and technical services (439), and manufacturing (401).
Industry | Number of Failures | Percentage of Total |
Construction | 2,142 | 27.7% |
Accommodation and Food Services | 1,174 | 15.2% |
Retail | 536 | 6.9% |
Professional, Scientific and Technical Services | 439 | 5.7% |
Manufacturing | 401 | 5.2% |
Restructuring and Liquidations on the Rise
In addition to the overall increase in company failures, the ASIC data reveals a worrying trend in the types of external administration appointments. Restructuring appointments have skyrocketed by 294.6% compared to the previous corresponding period, while court liquidations have seen a 218.8% increase.
These figures are even more concerning when compared to the full-year data for 2022-2023. The 878 restructuring appointments and 1,593 court liquidations recorded in just nine months of 2023-2024 have already surpassed the totals for the entire previous financial year (447 and 1,081, respectively).
Projected Insolvencies Reaching 2012-2013 Levels
If the current trend continues, ASIC expects the number of companies entering external administration to exceed 10,000 by June 2024. This would mark the highest level of insolvencies since the 2012-2013 financial year, when 9,254 companies met the same fate.
However, it’s important to note that the ratio of failing companies to total registered companies is still lower than the 2012-2013 levels. While the projected 0.3% to 0.33% failure rate for 2023-2024 is concerning, it’s below the 0.53% seen in 2012-2013. This difference can be attributed to the significant growth in the number of registered companies over the past decade, from just over 2 million to 3.3 million.
Factors Contributing to the Surge in Insolvencies
The recent surge in company failures across Australia can be attributed to a combination of factors:
1. Winding Back of COVID-Related Government Support Measures
The winding back of COVID-related government support measures has left many businesses vulnerable, particularly those that were relying on initiatives like JobKeeper to stay afloat. As these support measures were withdrawn, businesses that have not fully recovered from the impact of the pandemic are finding it challenging to survive without the additional financial assistance.
2. ATO’s Resumption of Debt Collection Activities
The Australian Taxation Office (ATO) has resumed its debt collection activities, actively pursuing outstanding debts of $100,000 or more. This has put additional pressure on businesses that may have fallen behind on their tax obligations during the pandemic.
3. Tighter Lending Conditions and Correction of Inflated Valuations
Tighter lending conditions and the correction of inflated valuations from the COVID period have made it harder for businesses to access the capital they need to survive and grow. Banks and other financial institutions are being more cautious in their lending practices, making it difficult for businesses to secure the funds they need to invest in growth or cover short-term cash flow issues.
4. Inflation and High Interest Rates
Economic pressures like inflation and high interest rates are squeezing profit margins and making it more difficult for companies to meet their financial obligations. As the cost of goods and services rises, businesses are finding it harder to maintain their profitability without passing on these costs to their customers. At the same time, high interest rates are increasing the cost of borrowing.
5. High Operating Costs
High operating costs, including increased energy prices, supply chain disruptions, and rising wages, are putting immense pressure on companies’ bottom lines. These costs are eating into businesses’ margins, leaving them with less room to manoeuvre in the face of other financial pressures.
6. Reduced Consumer Spending
Reduced consumer spending, driven by the rising cost of living and higher interest rates, has led to a decrease in discretionary spending, directly impacting industries such as retail, hospitality, and tourism. As households tighten their belts in response to these economic pressures, businesses in these sectors are seeing a decline in revenue.
Experts Give Insights and Advice for Business Owners
In light of the increasing rate of company failures, experts are urging business owners to be proactive in engaging with creditors and considering formal insolvency procedures.
Danielle Funston, a partner at the national law firm Maddocks and the recipient of the Lawyers Weekly Partner of the Year Award for Insolvency in 2023, emphasises the importance of directors understanding their working capital needs and risks to future cash flow.
Funston says:
“Insolvency processes can provide really innovative solutions to right-size businesses for better future success, but there is, at times, a reluctance to accept the reality of the situation.”
She stresses the need to engage with true restructuring and insolvency specialists, as this area of practice is highly technical and requires proper, qualified advice.
Two key restructuring options to consider are Safe Harbour and Voluntary Administration. Safe Harbour provisions can provide protection for directors while they work to turnaround the business, while Voluntary Administration allows for the appointment of an independent administrator to manage the company’s affairs and explore restructuring opportunities.
However, Funston cautions that action “can’t be left too late,” and that directors who are proactive in their engagement with creditors and insolvency procedures are better placed for successful restructures.
Stay Afloat Amidst Rising Company Failures
The latest ASIC insolvency data serves as a sobering reminder of the challenges facing Australian businesses in the current economic climate. With company failures surging to levels not seen since 2012-2013, it’s clear that proactive financial management and seeking expert advice have never been more important.
As we look to the coming months, it’s likely that the trend of increasing insolvencies will continue. However, by staying informed, monitoring their financial position closely, and engaging early with creditors and insolvency specialists, companies experiencing financial stress can position themselves to weather the storm and emerge stronger on the other side.
If you’re concerned about the financial health of your business or would like to explore your options, don’t hesitate to reach out to our Gold Coast-Based Accounting Firm KeyPoint Accountants. We’re here to provide the expert guidance and support you need to navigate these challenging times and achieve the best possible outcome for your business.
