Insolvencies off to ‘rocky’ start in new FY, warns Insolvency Australia
The latest Corporate Insolvency Index has revealed that while insolvencies are likely to remain at high levels for a while, more businesses are considering restructuring as an option.
The 2024 financial year was a "wild ride" on the insolvency front with the ATO turbocharging its debt collection activities while economic headwinds such as the cost of living crisis created new challenges for businesses, Insolvency Australia said.
In its latest Corporate Insolvency Index report, Insolvency Australia noted 11,049 insolvencies nationally, a 39 per cent increase from the previous year.
The index indicated a 99 per cent increase in court-initiated liquidations at 2,167 while restructuring matters soared by 219 per cent to 1,424.
Insolvency Australia director Gareth Gammon said while the results were astonishing, they were not surprising.
“The ATO has gone into overdrive to collect debts, particularly from small businesses – and directors are faced with the ongoing cost-of-living crisis, the spectre of higher interest rates due to stubbornly high inflation, and micro- and macro-economic and political headwinds," Gammon said.
"It has resulted in a surge in Court-initiated windings-up, but conversely it has also prompted more directors to take action to save their businesses.”
Insolvency Australia warned that the new financial year is also starting rockily, with high levels of insolvencies expected in the near term.
The latest ASIC insolvency statistics revealed over 700 insolvencies for the first three weeks of the year.
Business Reset founder Jarvis Archer said there are strong indicators that business insolvencies will continue to increase or remain at elevated levels for the foreseeable future.
"This will particularly impact small business; however, there are signs that medium and large businesses will experience a knock-on effect,” Archer said.
Archer noted that the ATO issued 26,702 director penalty notices (DPNs) on $4.4 billion worth of debt in FY24, an increase of 50 per cent from the 2023 financial year.
"That’s debt that isn’t on a payment plan, where business owners aren’t engaging with the ATO," he said.
"The Tax Office will continue to work through its debt book to restore a compliant tax environment in accordance with its public interest duties to ensure a level playing field for business."
Archer said business owners need to make a call about whether they see better times ahead or whether they should cut their losses and close.
"With challenging financial conditions expected to continue to at least mid-2025, it will be difficult for some business owners to see the light at the end of the tunnel.”
Worrells principal Scott Andersen said while the ATO has been using DPNs to encourage directors to decide the financial affairs of their company, it's only one method they've been using.
"I’ve seen and heard that with increasing consistency, the ATO is reporting debtors to the creditor reporting agencies and issuing garnishee notices to companies’ debtors and their banks," Andersen said.
"It's clear that if the ATO isn’t satisfied with the level of engagement by the taxpayer, they will then issue statutory demands for payment to collect.”
Archer said one of the more promising trends emerging is the number of businesses choosing to restructure.
"Compared to just one in five companies opting to restructure to survive in FY23, that number has increased to one in four in FY24," he said.
"Small business restructuring has become very effective for viable small businesses to repair their balance sheets and cash flow, allowing them to operate sustainably in the future. Of the around 150 SBRs undertaken by my firm, none have defaulted on their payment plans to date.”
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