Insolvencies return to pre-pandemic levels as construction collapses surge 42pc in a year

Corporate insolvencies have had their worst beginning to a financial year since the pre-pandemic years, driven by a surge in the number of builders going under.

Corporate insolvencies are off to their worst start to a financial year since before the pandemic as a combination of higher interest rates, inflation and a pullback in consumer spending hurts businesses across the country.

Data from the Australian Securities and Investments Commission shows that 820 companies fell into administration, liquidation or receivership in the past month, up from 715 in July 2022 and from 425 in 2021. The result was worst start to a financial year since 2019.

It comes after 7943 companies were insolvent in the past the financial year — the most number of business failures since 2018-19.

Insolvencies dropped during the height of Covid-19 when temporary measures were put in place by the Morrison government to protect vulnerable businesses from the economic shock of multiple lockdowns.

The construction industry borne the brunt in the latest ASIC figures for July, which show insolvencies in the sector alone jumped 47 per cent from a year ago to 284. The lion’s share of building collapses occurred in NSW, which jumped 101 per cent to 177, followed by Victoria with 48 insolvent and 35 in Queensland.

Australian Restructuring Insolvency and Turnaround Association (ARITA) chief executive John Winter said there many more construction firms were in trouble and more were likely to go out of business in the months ahead.

“Construction has been very competitive for the past few years and those fixed-price contracts have not been viable as a result of inflation and supply chain woes, which have seen many bleed large amounts of money,” he said.

“Customers getting a house built and creditors such as sub- contractors in that space need to be cautious who they deal with and how much of a bill they can rack up on your behalf.”

Apartment giant Crown Grouphas been the biggest building group to go insolvent since the start of the financial year after the liquidators were appointed to the apartment behemoth and 40 of its entities.

Housing Industry Association chief economist Tim Reardon said the sector had been on a rollercoaster ride in recent years with the wash up still being felt, adding that there were a new set of challenges operators facing the industry.

“Mid-tier builders have generally been the most challenged in the current environment after coming unstuck by looking to aggressively increase their pipeline of projects during the pandemic.”

Mr Reardon said the construction sector was in a different spot to a year ago with the volume of sales at their lowest in a decade and materials price growth at more manageable levels.

“Now that there are fewer contracts going around builders are facing very different challenges now with the need to look for more customers to keep going,” he said.

Apartment developer Crown Group, chaired by Iwan Sunito, has been the highest profile company to become insolvent this financial year.

Accommodation and food services made up the second highest volume of insolvencies followed by retail as Australian households continued to tighten their belts amid the cost of living crisis. The number of insolvent retailers had nearly doubled from July 2022 and were on par with the previous month at 57.

Mr Winter said many businesses were yet to feel the full impact of 400 basis points worth of interest rate hikes by the RBA in the past year. He added that despite a pick up in insolvencies, levels were now around those seen before the pandemic.

“Zombie businesses have been allowed to run riot for three to four years now and the clear out of those inefficient businesses is a good thing.

“Right now we are moving to more healthier levels. We know that there is a 12-18 month lag before businesses really start to feel the pinch and while more businesses will go under there won’t be a tsunami of collapses.”

Originally published as Insolvencies return to pre-pandemic levels as construction collapses surge 42pc in a year