‘Insolvency armageddon’: The number of collapsing companies is surging

Australia is in the grip of an “insolvency armageddon”, with the number of failing businesses almost doubling in a year due to tough economic conditions and the withdrawal of government pandemic support.

There were 828 insolvencies in March, surging from 359 in January and 692 in February, the Australian Securities and Investments Commission reported. In March last year, there were 464.

Last month, 243 construction businesses were put into insolvency, defined by ASIC as the first time a business enters external administration. In the same month, 140 accommodation and food businesses were made insolvent, 68 in retail, 62 in other, 41 in manufacturing and 30 in transport. There were 334 insolvencies registered in New South Wales and 237 in Victoria.

Some of the most high-profile recent business failures include construction companies Porter Davis and Mahercorp, while on Friday, fine-dining meal-delivery service Providoor collapsed.

CreditorWatch chief economist Anneke Thompson said the industry with the highest insolvency rate was food and beverage at 0.97 per cent. Construction, where many small-sized businesses were created during the pandemic, was at 0.7 per cent, up from about 0.4 per cent during the pandemic but not yet up to its pre-pandemic rate of 0.9 per cent.

Scott Taylor, partner at insolvency and reconstruction law firm Taylor David Lawyers, said that nearly 5000 firms had avoided insolvency because of government support programs including JobKeeper.

Taylor described the situation as an “insolvency armageddon”.

“The situation is dire. We’re seeing industries across the board starting to feel the pinch of the economic headwinds,” he said.

“Now that these concessions and support mechanisms have ended, from October 2022 to March 2023, there was a 61 per cent rise in insolvency compared to the same period last year, with 3632 cases reported this year compared to 2257.”

Victorian Chamber of Commerce and Industry chairman Paul Guerra said rising inflation and the end of COVID-era subsidies were contributing to the rapid increase in businesses going under.

“But we’ve also had a couple of big organisations fail – Porter Davis and a couple of other home builders,” he said.

“So there’s nervousness now in the market, and we are starting to take calls from businesses that have noticed a significant slowing in spending. And that is playing out in the viability of businesses.”

Between 2017 and 2019, the average annual number of insolvencies was 8060. But during the pandemic, between January 2020 and September 2022, insolvencies fell 53 per cent to 5259.

This suggests some construction businesses had traded through the pandemic that otherwise would not have survived, said Patrick Coghlan, chief executive of CreditorWatch agency.

“These business are now appearing in insolvency numbers due to more expensive inputs, higher interest rates and rising labour costs, as well as the absence of ongoing government handouts,” Coghlan said.

Food and beverage businesses are among the hardest hit in insolvencies.Credit: iStock

Federal Treasurer Jim Chalmers said the government was determined to help small businesses with rising cost pressures.

He said next month’s budget would include a $314 million tax incentive to help small and medium businesses save on energy bills.

“Small businesses are the engine room of the economy and will be front and centre of the May budget,” Chalmers said.

McGrathNicol chairman Jason Preston, who has more than 20 years of restructuring and insolvency experience, said Australians needed to understand the reality of insolvency.

McGrathNicol chairman Jason PrestonCredit: Dominic Lorrimer

“The attitude in Australia towards insolvency needs to change. To some extent, there’s quite a stigma towards insolvency,” Preston said.

“Business can fail and that’s the reality. Voluntary administration can actually support business and enable it to restart and continue on. Restructures can provide businesses with the ability to continue to operate out the other side.

“We are seeing property developers, construction companies ranging from home builders to those that build large projects experiencing a higher level of insolvency,” he said, adding it was due to rising costs putting pressure on contracted prices.

Construction projects often involve a chain of developers, head contractors and subcontractors, with each of them looking to offload the risk of rising input costs and delays down the chain.

“Typically, the end customer doesn’t want to wear that risk,” Preston said.

He offered this advice to struggling businesses: “The first thing is not to put your head in the sand. Think in a clear way about what the environment looks like for your business over the next three to six months. Focus on cash management.”

Aged care and transport and logistics were two sectors that were feeling the pressure, Preston said.

“Aged care is really going through challenges. There is an increasing cost of operating and more challenging regulatory requirements. While many are not for profit they still need to wash their face.

“Increasingly, we will see smaller operators sell to larger operators which can run at scale.”

Transport and logistics were also hit by costs, he said. “And there is an oversupply of capacity in some areas and a difficulty in making margins.”

Preston and other advisers said that another pressure on business was that the Australian Tax Office was “catching up” with many businesses that were treated leniently during the pandemic. One expert said the tax office was in “full enforcement mode”.

Taylor said: “I’m not certain the true extent of the real economic situation has even been realised. Insolvency appointments appear to be approaching their highest since the GFC and will likely surpass.

”Additionally, what we’re seeing now is the daily ‘wind-up rate’ for businesses increasing substantially. This is the list where creditors actively seek to close businesses down due to outstanding debts. It’s a sure sign that people waiting to be paid have run out of patience,” Taylor said.

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