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The bureau says business wind-ups are on the rise, driven by ATO debt collection.
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Insolvencies and court action leap in July: CreditorWatch
10 August 2022
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10 minute read
Administrations and court actions leapt in July as businesses struggled to cope with economic conditions and ATO scrutiny, according to the latest figures from CreditorWatch, which predicts insolvencies will hit higher levels for the rest of the year.
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The bureau’s July Business Risk Index showed administrations rose 46 per cent and court actions 54 per cent compared with last year, as supply chain issues, declining consumer confidence, rising interest rates, inflation, and labour shortages combined with a rise in ATO activity to push more businesses over the edge.
CreditorWatch said an increase in ATO legal action, garnishees, and director penalty notices would drive the national default rate up from its current level of 5.8 per cent.
“The massive rise in external administrations is certainly a disturbing trend — now up 50 per cent since April,” CreditorWatch CEO Patrick Coghlan said. “Our data shows that court actions are back to pre-COVID-19 levels and the ATO has also stated that it is ramping up legal action for outstanding debts.”
“With business and consumer confidence declining and inflation and interest rates on the rise, this doesn’t bode well for businesses, particularly SMEs whose cash reserves were depleted during the pandemic and are now operating on much tighter margins.”
CreditorWatch said industries with the highest default probability — arts and recreation, information, media and telecommunications, and food and beverage services — all relied on discretionary spending, “which is fast disappearing”.
“The sectors where demand is most likely to fall when consumer spending eventually falters continue to have the highest likelihood of default,” it said.
“The food and beverage and arts and recreation services sectors also have a large number of relatively inexperienced, smaller operators, which further increases their risk profile.”
CreditorWatch chief economist Anneke Thompson said businesses in the capital-intensive growth phase were also particularly at risk.
“When interest rates were low and the world was awash with cash, investors were hungry for investment opportunities, and willing to move up the risk curve to find good returns,” she said.
“Now that cash is being consumed by ever-increasing prices and debt costs a lot more, the appetite for risk is dropping. Start-up businesses or those in the growth phase are always deemed riskier.
“We have already seen this phenomenon hit the tech sector, and many well-known companies are being repriced to reflect this.”
CreditorWatch said cost pressures would only increase with the RBA taking steps to reduce demand and high levels of inflation expected until 2023.
In one positive sign, trade receivables were up 3.4 per cent compared to last year, although prolonged lockdowns in NSW and Victoria last year skewed the numbers.
Healthcare and social assistance was the least vulnerable sector with a default probability of 3.2 per cent, followed by agriculture, forestry and fishing, and manufacturing.
CreditorWatch said the healthcare sector continued to experience high demand as COVID-19 and other respiratory illnesses hit large numbers of Australians.
“Our aging demographic will mean that healthcare will be a sector operating at close to capacity for the foreseeable future,” it said.
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