Australia is now seeing a surge in business insolvencies since the COVID-19 pandemic, indicating significant economic distress. Accordingly, Matthews Folbigg Lawyers are increasingly acting for insolvency practitioners, creditors, and debtors involved in insolvency administration.
Not all of this is doom and gloom however, and it is important to understand the context in which this increased insolvency activity is taking place.
COVID-19 Safeguards
COVID-19 created a challenging economic environment for businesses due to a limited ability to operate, fluctuations in demand, supply disruptions, and labour shortages. In recognising this, the Australian government introduced significant measures to alleviate the potential for economic catastrophe. The ATO effectively ceased debt recovery and gave significant concessions in amounts payable and time for payment. In addition, the government introduced small business restructuring, a new form of external restructuring that allows directors to maintain control over their business, reduce costs and shorten turnaround times, whilst developing a plan to restructure the businesses affairs.
The Current Insolvency Landscape
The effects of the ATO concessions in particular led to a massive surge in collectible debt – around $50 billion by the end of 2023. The ATO is now focussed heavily on collecting this debt. This (among other economic factors) has led to a significant increase in the number of insolvency appointments since COVID-19.
The increase in insolvency activity can be seen in the Australian Securities and Investment Commission (“ASIC”) reporting that more than 11,000 companies entered external administration for the first time in 2023-24. This is a 39% increase from the number of companies in 2022-23. Likewise, the number of small business restructuring appointments have increased by over 200% in 2023-24 and now represent 12.9% of all external administrations. These statistics are representative of economic conditions that have not been witnessed since 2012-13 in the years following the Global Financial Crisis in 2007-2008. However, it is also important to bear in mind the significant increase in the number of companies which are in existence now (around 3.4 million now compared with around 2 million in 2012).
Industries Most Affected
The industries most affected by the upsurge in insolvency appointments, according to ASIC, include Construction, Accommodation and Food Services which represent 42% of all external administrations in 2023-24.
The Construction sector has been significantly affected, with construction firms leading industry insolvencies in every quarter since mid-2021. Hence, accounting for approximately 25% of all insolvencies during this period.
Additionally, the Food and Accommodation sector has also experienced an influx in insolvencies. In March this year, cafés, restaurants, and takeaway businesses accounted for 5.5% of total corporate insolvencies, the highest rates in the last three years.
Key Factors Contributing to Surge in Insolvencies
One of the key factors contributing to this influx in insolvencies can be attributed to the Australian Taxation Office (“ATO”) pursuing around $34 billion worth of debt owed by small businesses and self-employed Australians that had previously been put on hold during the COVID-19 pandemic. Accordingly, the ATO has become an extremely active, yet paradoxical, participant in the insolvency space, both aggressively pursuing the uncollected debt whilst also actively supporting small business restructuring, including in matters where the ATO is the only creditor.
Consequently, the ATO’s intensified debt collection practices have exacerbated economic pressures, particularly amid rising interest rates and increased cost-of-living pressures, which have decreased consumer spending. This shift has contributed to a resurgence in corporate insolvencies to pre-pandemic levels, as many sectors are struggling to cope. The resulting economic strain impacts not only businesses but also customers and suppliers, who are increasingly at risk of financial instability due to unpaid debts.
With insolvencies on the rise, being alert to increased stresses on customers and having effective and proactive debt collection processes is an essential part of the new economic landscape for all businesses.
Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery.
If you have been affected by market conditions or customer or supplier insolvency, contact Jeffrey Brown on JeffreyB@matthewsfolbigg.com.au or Stephen Mullette at StephenM@matthewsfolbigg.com.au of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group. Alternatively, you can telephone Matthews Folbigg on 02 9635 7966.
