Insolvency ‘tsunami’ worst since GFC as debts cripple businesses

Corporate insolvencies are heading towards their highest level since the GFC more than a decade ago as battered and bruised businesses succumb to crippling debts.

Australia’s corporate insolvencies are set to reach the highest level since the Global Financial Crisis (GFC) as a tsunami of struggling businesses fail amid crippling debt levels.

Revive Financial head of business restructuring Jarvis Archer said broken businesses were queuing up to be wound up as the predicted insolvency “clean up” year gets under way driven by aggressive debt chasing by the Australian Taxation Office (ATO).

The number of companies entering insolvency peaked at 10,757 in 2012 as the country struggled to emerge from the global financial crisis.

High interest rates, rising costs and limp consumer spending means that figure it set to be topped that by the end of the current financial year.

“With insolvencies forecast to increase, it appears they will exceed GFC levels in the coming year,” said Mr Jarvis. “A prolonged period of reduced consumer and business spending has left bank accounts dry and loaded balance sheets with high interest loans.”

Insolvencies this year are already tracking 36 per cent higher than pre-Covid levels as hard hit sectors including construction and hospitality take a hit.

Sydney pub king Fraser Short put his flagship hospitality company The Sydney Collective into administration just before Christmas owing $5.5m while national building firm St Hilliers Contracting owes creditors more than $40m after appointing administrators on February.

“The UK, which we usually follow, is experiencing its highest levels of insolvency in 30 years,” said Mr Archer. Mr Archer said the ATO had become increasingly aggressive, noticeably turning a corner in its approach to companies with tax debts.

“The options are now black and white: pay, close or restructure your debt,” he said. The ATO’s recent announcement that it would report 100,000 to 150,000 businesses to credit reporting bureaus before June 30 “shouldn’t be ignored,” he said.

St Hilliers Construction appointed administrators earlier this month.

“It will cause those businesses to lose trade credit, and possibly have finance pulled, impacting their staff,” Mr Archer said. “As a business needs to have over $100,000 in debt to be reported I can only guess this covers $20 to $25 billion in ATO debt.”

The latest ASIC data show insolvencies from July 1 to February 18 totalled 8170, compared to 6261 a year ago (July 1 to February 28). Construction insolvencies so far this financial year number 2181, up 35 per cent from 1615 a year ago, while retail insolvencies increased to 520 from 390.

The biggest increase was in the accommodation and food services sector, where insolvencies jumped 60 per cent to 1144.

Mr Archer said going by current trends total insolvencies will a reach a record 10,782 by the end of the financial year.

“Businesses are showing prolonged periods of loss-making trading,” said Mr Archer. “When you restructure a company’s debts, reducing them and giving time to pay improves the balance sheet and relieves cash flow pressures. But it doesn’t necessarily improve profitability.”

Mr Archer said it was easy to blame the ATO for their seeming aggression in collecting tax debts. “But Covid is over and we have to look at it in the context that most businesses are paying their debts,” he said, “Insolvencies halved during Covid meaning there’s a lot of underperforming zombie companies still around and the ATO sees it as their role to clean them up.”

KPMG said the Australian economy was in the middle of an inflation-induced downturn, but the worst of it was expected to pass shortly and a recovery likely in the second half of the year. NAB chief executive Ross McEwan said Australia was well-placed to recover in 2024 as Australians respond quickly to sharp cost of living increases.

But Deloitte national lead, turnaround and restructuring Sal Algeri warns that small and medium sized businesses would continue to be challenged by supply chain issues and costs.

“Many construction and those businesses reliant on discretionary spending face challenges,” he said. “Businesses can also be disrupted by other factors like regulatory change and disruptions in technology. Change will continue to impact those businesses that can’t adapt.”

Deloitte lead partner for turnaround and restructuring Richard Hughes said there was still capital available for businesses that are looking to grow. “But it will cost more and it’s more challenging in that small and medium sector,” he said.

Retailers have been hit by soft economic conditions.