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Less forgiving creditors and a focus on tax debt mean last year’s rising trend looks set to continue, Jirsch Sutherland says.
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Insolvencies ‘off to fast start’ after post-pandemic record in 2023
18 January 2024
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11 minute read
Insolvencies soared above their pre-pandemic peak last year to 9,159 and 2024 has begun with a “bang” as wind-up inquiries come “thick and fast”, Jirsch Sutherland says.
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Partner Andrew Spring said if January was any guide struggling companies could be in for a difficult year with a focus on debt collection and a less forgiving mood among creditors.
“Usually January is a quiet month due to the holiday season and court closures, but we’ve rolled into 2024 with insolvency enquiries and appointments coming thick and fast,” he said.
“We have many active appointments and strong demand for our services and we’re likely to see a lot more as creditors’ attitudes are likely to begin to change.
“Since the pandemic, empathy and compassion have been front and centre for a lot of creditors when assessing financially distressed debtors; however, because the spike in insolvencies impacts creditors’ businesses, we anticipate seeing a more robust and active credit collection environment.”
ASIC data for 2023 showed the construction and food sectors were most vulnerable with almost 2,200 wind-ups in the last six months alone, up 73 per cent on the same period in 2022.
Research by Alares Credit Risk Insights showed total insolvency numbers in 2023 surpassed their 2018–19 peak, with court recoveries and winding-up applications on an upward trajectory in the final quarter.
Alares director Patrick Schweizer said it would be clear if the trend were going to continue by February to March, but the signs were ominous.
“Outstanding tax obligations remain a key challenge for Australian businesses, with the ATO committed to collecting on overdue tax debts. In December, the ATO remained active in the court, continuing its push to recover unpaid tax debts.”
He said that court action by banks was also well above historical levels in December as higher interest rates undermined the serviceability of loans.
Mr Spring said tax obligations would push many more businesses to the edge this year with pressure on the ATO to return debt levels to historic norms.
He said business owners should act quickly to avoid becoming one of this year’s casualties.
“Address any legacy debt positions in your business as soon as possible by seeking independent expert advice,” he said. “Some holes are too deep to fill, you need someone to throw you a rope to help you climb out.”
He said business owners should focus on costs rather than sales and avoid “robbing the future to pay for the past”.
“This isn’t an uncommon pitfall for businesses, but the current market is forcing even experienced operators into making this mistake,” Mr Spring said.
“We often say that ‘chasing sales is vanity, chasing profit is sanity’.
“However, in the current environment we know some business owners are feeling the pressure to maintain price points or even discount to maintain top line performance, while the costs of doing business continues to grow, strangling and suppressing their profit margin.”
For businesses with a precarious working capital position or – worse – legacy debt, this was a recipe for disaster, he said.
“Often the business owner is swimming so hard they do not have time to even take a breath, starving their commercial brain of what is needed to make sensible decisions.”
He cited the case of one e-commerce retailer that entered voluntary administration blaming margin squeeze and an inability to catch up financially.
“The director has told me that he felt trapped in a cycle of loss-making decisions simply to keep the lights on.
“Margin squeeze is tricky to come back from; it can ultimately turn what was a profitable business into an unprofitable one. This can seriously impact cash flow because you then have to fund that loss from working capital.
“That’s why it’s so important to understand your business’s costs and cash needs versus what its true performance looks like.”
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