The Current State of Insolvency in Australia
The latest insolvency data released by the Australian Securities and Investments Commission (ASIC) in April 2024 paints a concerning picture.
Here, Disputes + Litigation Lawyer, Hayley Warren, comments on the continuing increase in the number of Australian companies entering insolvency and what businesses can do to shield themselves now.
Disputes + Litigation lawyer, Hayley Warren and her colleagues, Jacqueline Wilcock (pictured) and Natalie Markovski, are helping businesses navigate the rise in corporate insolvencies.
Rising Corporate Insolvencies
Between 1 July 2023 and 31 March 2024, ASIC recorded 7,742 companies entering external administration. This represents a 36.2% increase compared to the same nine-month period ending 31 March 2023. The construction sector was the hardest hit, with 2,142 companies entering external administration, accounting for nearly 28% of the total. The accommodation and food services industries followed, with 1,174 companies (15.2%) affected.
The data also shows a significant rise in creditors petitioning for companies to be wound up, particularly by the Australian Taxation Office (ATO) and trade creditors. Court liquidation appointments and restructuring activities have surged by over 200% which Hayley believes indicates “a more aggressive stance from creditors seeking to recover debts, particularly debts which may have been unrecoverable during Covid.”
Aggressive Debt Recovery Stance
The ATO has become increasingly active in pursuing overdue tax liabilities, which accumulated during the COVID-19 pandemic. As of January 2024, the ATO began referring debt cases to external debt collection agencies, such as Recoveriescorp, to recover more than $34 billion in outstanding debts owed by small businesses and self-employed Australians.
“Businesses failing to meet their tax obligations or holding onto accrued tax liabilities are at heightened risk of facing external debt collection actions,” cautions Hayley.
Clarity for Insolvency Assessment
A recent landmark NSW Supreme Court case, In the matter of Pacific Plumbing Group Pty Ltd (in liq) [2024] NSWSC 34, has also provided clarity for assessing whether a company is solvent, or not. The decision in the case confirms that the "cash flow" test is now the primary method for assessing a company's solvency, relegating the "balance sheet" test to a subsidiary role.
The specific case involved Mr. Hurst and Mr. Sampson, who were appointed as voluntary administrators of a plumbing company in November 2020. The Court ruled that insolvency should primarily be determined based on a company’s ability to pay its debts as they become due.
The ruling aligns with the commercial realities businesses face and means Directors must be objective in assessing whether the business is fit to trade. Hayley explains: “The decision underscores the importance of real-time financial health over static balance sheet figures. In this case, the court found the plumbing company to be insolvent during the relevant period because it could not meet its debts as they fell due.”
Personal Insolvencies Also on the Rise
Savings accumulated and reduced spending due to lockdowns during the COVID-19 period, which helped buffer financial pressures, will soon be exhausted; a factor Hayley says goes some way to explain recent Australian Financial Security Authority (AFSA) data showing an increase in personal insolvencies. From a peak in January 2024 of 1,015 new personal insolvencies, the number has slightly decreased to 982 in February and 980 in March, but the trend remains concerning.
Personal insolvencies, particularly bankruptcies, are most common in the construction, healthcare and social assistance, and retail trade industries. This coincides with the data reported for corporate insolvencies and is likely a result of directors’ personal guarantees.
Hayley says: “The increased cost of living, including significant rent increases and reduced credit availability, is putting additional financial strain on individuals. Many are also facing higher interest payments as low fixed-rate mortgages transition to variable or higher rates in 2024.”
Looking Ahead
The current economic environment suggests the trend of corporate and personal insolvencies will continue. “There’s a real risk that businesses operating at a loss or merely just holding on will be unable to sustain themselves for another six - nine months under the current economic conditions,” warns Hayley.
For businesses, proactive financial management and close attention to debt obligations is recommended. “Ensuring timely tax payments and exploring restructuring options early can help mitigate the risk of insolvency,” says Hayley.
In addition to performing due diligence checks on clients’ prospective customers, Hayley recommends: “Working with clients to put guarantees in place where necessary and ensure they have appropriate protections in their terms and conditions to secure priority positions ahead of other creditors where necessary.”
And where a business believes a supplier or customer is at risk of failure, Hayley urges quick action: “It’s important to act early to avoid a company being placed into liquidation, prior to a recovery being made or before any assets are depleted.”
For those individuals or companies concerned about mitigating their own insolvency, Hayley recommends seeking advice early as to whether your business can meet its liabilities when they become due and payable, consistent with the “cash flow” test.
Hayley’s closing advice for businesses is to: “Stay informed, take proactive financial management steps and ensure you have the appropriate protections in place.”
For more advice and support on insolvency matters, please reach out to our experienced Disputes + Litigation lawyers via [email protected]