Listed: New South Wales’ company failures for January

The nation’s “zombie” companies are on notice that their day of reckoning will come soon, after a year of record low business failures.

Construction firms tend to be particularly vulnerable to downside risks.

The number of company failures in New South Wales is expected to surge this year with the number of firms entering external administration sitting stubbornly at lows not seen for more than two decades.

Just 74 NSW-registered companies were placed under external control in January, compared with 141 in the last comparable pre-pandemic period - the same month in 2020.

During the most recent complete financial year, just 1586 NSW companies entered external administration compared with 2616 the previous year, and a high of 4487 in 2008-09 as the effects of the Global Financial Crisis washed through the economy.

This most recent figure for the full financial year is the lowest contained in ASIC records which stretch back to 1999-00, when the next-lowest figure of 1652 was recorded.

Construction and hospitality companies dominated the companies which were placed under external control in January, including Industry Glass, Site Engineering Group, FGS Construction Corp and Out of Africa Restaurant Pty Ltd, which traded as Darna in Manly.

Darna chef Hassan M’Souli took to social media this week to thank the patrons of the Moroccan restaurant.

“It is with great sadness we have had to make the incredibly difficult and challenging decision to close our latest restaurant Darna in Manly,’’ he says.

Chef Hassan M'Souli.

“The reality is that this latest pandemic took over just after we opened our doors and has pushed the odds against us, we have done our best to try and persevere but with the situation as it has been the past 2 years we had to consider what the best and wisest decision to make would be and although it goes against all my best hopes and wishes I had to make the call.’’

Mr M’Souli said when the timing was right, he would open a new venue.

National numbers for company administrations and liquidations have remained low due to the Australian Taxation Office taking a light touch with enforcement during the pandemic, and also because of more lenient rules around company financial management.

But insolvency experts warn that it’s crunch time for the country’s so-called “zombie companies”, saying they expect company failures to return in large numbers in 2022 following two years of record lows.

While fears of a “tsunami” of business failures appear to have subsided, trade credit insurer Atradius expects the number of insolvencies to rise by 138 per cent this year — the second highest rate of growth predicted among 30 countries tracked.

That would be 33 per cent higher than the pre-pandemic figure in 2019.

Jirsch Sutherland national managing partner Bradd Morelli said a catch-up in the number of insolvencies was inevitable at some stage, with the “cleaning out” of companies propped up by government stimulus and temporary insolvency protections implemented at the height of Covid-19 in 2020.

“Without those ‘lifebuoys’, we’re expecting an increase in insolvencies as many zombies finally reach the end of the line,” he said.

“In August, the number of business loan deferrals increased nearly six-fold, from 600 to 3500, with business owners unable to make their repayments.

“Some business owners have taken on more debt to survive the pandemic. And now, with the ATO starting debt collection again, it’s important to be on the front foot.”

According to the ASIC figures, the number of business failures nationally fell by 42 per cent in the year to June, down from 7362 in the previous year to just 4235. Insolvencies are down nearly 50 per cent on the 2019 figure.

While the ATO recently signalled it was recommencing debt recovery actions “after a general pause during lockdowns”, most insolvency practitioners are expecting a softly-softly approach in the lead up to this year’s federal election.

However, Oracle Insolvency Services partner Dominic Cantone said it would be crunch time for many businesses in the next few weeks, particularly for those operating in the Omicron-hit hospitality industry.

“The danger point for these businesses comes at the end of January, usually the quietest month of the year, when businesses face paying their suppliers for goods received in November and December,” he said.

“Then the ATO comes calling. To help businesses through the Christmas break, the ATO traditionally gives them until the end of February to meet the December quarter BAS payment.

“However, the next quarterly BAS payment, covering January to March, is then due at

the end of April, just two months later.”

Mr Cantone said the quick turnaround in BAS payments would test the cash flow of many businesses.

The construction industry is seen as one of the most vulnerable sectors heading into 2022 following the high profile collapses last year of Queensland builder Privium and Melbourne’s ABD Group.

The construction sector typically accounts for 25 per cent of all insolvencies nationally.

And according to credit reporting agency, CreditorWatch, industry payment times have blown out during Covid-19, with a record high 12.6 per cent of payments to suppliers and contractors now more than 60 days overdue — the highest rate of any industry.

While materials shortages, site shutdowns and project delays caused by the pandemic have all put further pressure on the industry, Eakin McCaffrey Cox special counsel Nelson Arias-Alvarez believes many builders were already operating at the slimmest of margins through fixed price contracts that made it difficult to absorb unexpected cost increases.

“The Covid-19 pandemic caught out contractors and subcontractors who had accepted poorly negotiated contracts,” he said.

“Unable to meet contractual obligations, contractors and subcontractors have had to wear the costs of Covid-19 in terms of cost and time.

“Our fear is that these potentially terminal businesses may infect their directors, owners, employees and stakeholders if action is not taken to address the financial imbalance.”