What’s going on?
Corporate insolvencies were lower than normal during COVID-19 because the federal and state governments provided a helping hand to businesses, there was an abundance of cheap credit in the financial system and the tax office forked out substantial payment repose.
Now, with economic issues proliferating because of higher (perhaps for longer) interest rates, insolvency numbers are escalating, shining a light on the delayed effects of the coronavirus on small businesses.
According to ASIC’s latest insolvency statistics issued in December 2023, covering the financial year ending 30 June 2023 (FY23), SMEs dominated corporate insolvencies with 80 percent controlling assets of $100,000 or less, employing fewer than 20 employees and around 68 percent of those SMEs with liabilities lower than $1 million.
Unsurprisingly, the building and construction industry recorded the largest number of insolvencies with 28 per cent, followed by the accommodation and food services industry with 15 per cent.
ASIC’s data indicated that the most common causes of failure were inadequate cash flow or high cash use (52 per cent), trading losses (49 per cent) and COVID-19 (19 per cent). More than 80 per cent of insolvencies were concentrated in three States, being NSW (41 per cent), Victoria (27 per cent) and Queensland (18 per cent).
ASIC statistics indicate that corporate insolvencies for the FY23 totalled 10,366, the highest level since 2019, when there were 11,224. From our perspective, we believe that corporate insolvencies will continue to increase in 2024 because interest rate spikes are going to squeeze consumers/businesses, especially the ones who borrowed too much money when credit was cheap.
Further issues include the rising cost of living, access to credit and aggressive recovery action from the Australian Taxation Office (ATO) to claim an eye watering level of unpaid small business tax estimated to be about $30 billion.
What can we do?
In recent years, the government has introduced small business restructuring (SBR) and insolvency safe harbour provisions to provide business owners/directors the opportunity to restructure their affairs whilst remaining in control of their business.
SBR in recent times has become more favourable and a greater number of small businesses were utilising this strategy, which grants a mechanism for eligible small businesses to engage with a restructuring practitioner to craft and put forward to creditors a restructuring plan that would give back more than a liquidation scenario. To qualify, businesses need to have liabilities of no more than $1 million, pay all outstanding employee entitlements (wages and superannuation) and have lodged all tax returns.
Safe harbour can be access by a director if:
- The director begins to suspect the company is or may become insolvent.
- The director then commences to develop one or more course of action reasonable likely to lead to a better outcome for the company than an immediate voluntary administration or liquidation.
Like the SBR process, you need to have your employee entitlements (superannuation and wages) and tax lodgements up to date, however, there is no liability threshold. Saying that, from our experience safe harbour is generally accessed by the big end of town whilst the SBR process by the small end of town.
Recently, we have helped craft restructuring plans that renegotiate with creditors, or we find some new funding, or we implement some adjustments to how the business operates. We have worked on plans that involve a wide array of fit for purposes strategies.
How can Charles & Co. help you?
Our Team with more than 50 years combined experience is well placed to help businesses and individuals in a range of challenging and distressed situations. We encourage anyone experiencing financial and/or operational distress to contact us to discuss your options.