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Early action key to saving businesses through restructuring, experts say

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Australian businesses are facing a wave of insolvencies, with court-ordered wind-ups surging 133% in the first half of the 2024 financial year.

Experts warn that the trend is likely to continue as creditors like the ATO and major banks clamp down on unpaid debts. However, there is a glimmer of hope: those businesses taking early action and exploring restructuring options, such as the Small Business Restructuring (SBR) regime, are showing greater success in weathering the storm.

In the first half of the 2024 financial year, court wind-ups increased 133% compared with the previous corresponding period – and it’s a trend that’s likely to continue as creditors like the ATO and the Big Four banks crack down further on unpaid debts, according to the latest Corporate Insolvency Index from Insolvency Australia.

In the six months to December 31, 2023, external administrator and controller appointments rose by 24 per cent compared with the previous corresponding period, the Corporate Insolvency Index shows. New South Wales had the most insolvencies over the six months, recording total appointments of 3,141; while Victoria recorded 1,564 appointments; Queensland 1,092; WA 397; SA 182; the ACT 135, Tasmania 23; and the Northern Territory 7. Creditors voluntary wind-ups accounted for the majority of appointments (2,308), followed by Court-enforced wind-ups (1,076), voluntary administrations (731), and controller appointments (416).

“The ATO and the banks, in particular, are using all the tools in their arsenals to recover monies owed – and that includes long-term, legacy debts from Covid and pre-Covid years,” says Insolvency Australia Director Gareth Gammon. “However, the number of businesses opting for the small business restructuring (SBR) regime also continued to rise, which shows that directors are acting earlier to address their debt issues.” 

Says Insolvency Australia member Scott Andersen, Principal of Worrells in Geelong, “With the exception of the Covid years, the ATO has always been a key driver of insolvency appointments and I don’t expect this to change. They have a debt book of $50.2 billion which they are trying to collect, and they have significant tools at their disposal, such as issuing Director Penalty Notices and garnishee notices. But what we have seen is that the ATO is receptive to considering an offer via an SBR. These proposals are subject to criteria eligibility and while we are not aware of any secret formula, the ATO typically views a proposal more favourably when there has been a good history of tax obligation compliance and there are no large outstanding related party asset loan accounts.”

Adds fellow Insolvency Australia member Bob Jacobs, Founding Partner of Auxilium Partners in Perth: “While we expect to see an increase in insolvencies [in 2024], we believe if directors act early there will be many opportunities to restructure their affairs through formal insolvency process and preserve livelihoods for their businesses and employees if proper professional advice is sought. Conversely, there are a lot of businesses that need to be ‘ended’ because they are no longer viable and have legacy debts no longer supported by the crown creditors. This return to a normal economic cycle will pave the way for new entrants and business ideas in the market.” 

At-risk sectors

Jacobs says key stressors this year include a further shortage of skilled and unskilled labour, which impacts business profitability and viability, as well as the tightened availability of capital and its cost from lenders and continued general cost pressures. “Given the cost-of-living pressures and increased interest rates, we are of the view that retail is a major ‘at risk’ sector, as it is largely discretionary spend,” he says. “Hospitality will face ongoing pressure because discretionary consumer spend will reduce as mortgage and rent increases bite into household budgets, which means customers decrease and business owners are squeezed in the middle by high wage costs and low availability of labour. Similarly, the construction sector will continue to face pressures, due to labour and material costs and availability, increased funding costs and tightening of available capital to support work in progress and guarantees required on construction contracts.” 

On the personal insolvency front, Andrew Smith, a Partner with Auxilium Partners, says: “We would expect personal insolvencies to increase with the failure of more businesses and directors who have guaranteed company debts or put their own capital into these businesses. The general cost of living is expected to remain a major issue – including housing affordability.”  

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