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ASIC reveals reasons behind business insolvencies

Jotham Lian and Adam Zuchetti
Jotham Lian and Adam Zuchetti
15 November 2018 2 minute readShare
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Inadequate cash flow and poor strategic management of business were the biggest causes of failed businesses in the last financial year, with over 5,000 reports alleging insolvent trading.

Small to medium-sized corporate insolvencies dominate external administrators’ reports, with 84 per cent of failed companies having estimated assets of $100,000 or less, according to ASIC’s report of corporate insolvencies based on statutory reports lodged by external administrators for the 2017-18 financial year.

Of the 7,613 reports lodged, external administrators reported alleged misconduct for 6,577 reports.

The top three alleged possible misconduct came from insolvent trading (69 per cent); care and diligence – directors’ and officers’ duties (54 per cent); and obligation to keep financial records (44 per cent).

Inadequate cash flow or high cash use came top for the most nominated cause of failure, accounting for almost half (49 per cent) of reports, with poor strategic management of business (46 per cent) and trading losses (39 per cent) rounding out the top three.

“It is important to note that an external administrator’s report of misconduct is an allegation and may not be substantiated by sufficient evidence to warrant action,” said ASIC.

“We will not take action in every instance an external administrator reports alleged misconduct and we obtain a supplementary report.

“External administrators advised that they had either commenced or were contemplating initiating recovery actions for insolvent trading for 1,987 reports, compared to 5,265 reports alleging a civil breach for insolvent trading.”

After assessing the reports, ASIC asked external administrators to prepare 897 supplementary reports where external administrators alleged company officer misconduct. This amounted to 13.6 per cent of all reports that alleged misconduct lodged in the financial year.

More than a quarter of the cases identified as “analysed and assessed for no further action” resulted from ASIC having insufficient evidence to warrant commencing a formal investigation and it being considered unlikely to obtain further evidence.

In another 20 per cent of assessed cases, ASIC requested a further report from the external administrator.

Insolvent trading allegations

When it came to allegations of insolvent trading, ASIC said that the vast majority (81 per cent) of the reports it received related to non-payment of statutory debts.

Increasing inability to meet outgoings – as evidenced by letters of demand, recovery proceedings and a blowout in the age of accounts payable – were prevalent in 63.3 per cent of the reports.

Meanwhile, more than a third (39.2 per cent) involved financial statements revealing a chronic shortage of working capital and/or unprofitable trading.

However, despite the 5,265 reports of alleged civil breaches of insolvent trading rules, just 115 reports related to criminal breaches.

Additionally, not all of those reports included evidence to support the allegation being raised. Evidence was presented in 4,505 of the alleged civil breaches and 79 of the alleged criminal breaches.

Which industries see the most insolvencies?

Unsurprisingly, small businesses – those with fewer than 20 employees – make up the vast majority of businesses falling into insolvency.

But what is noteworthy is that while small businesses had made up 79 per cent of all insolvencies in the 2016 and 2017 financial years, this proportion dipped slightly to 78 per cent in 2017-18.

The value of outstanding liabilities appears to be steadily increasing each year. According to ASIC’s figures, the proportion of companies that collapsed with liabilities of $250,000 or less has steadily fallen in recent years: down from 46 per cent of all failures in 2015-16 to 39 per cent in 2017-18.

A breakdown of the figures show that construction businesses made up 22 per cent of all failures, while those in the accommodation and food services sector made up another 14 per cent.

Yet the largest volume of failures came under the “Other (business and personal services)” category, which last financial year accounted for more than a quarter (28 per cent) of all business insolvencies.

All three sectors have held their respective rankings for the past three consecutive years.

The release of ASIC’s figures comes after the annual Shop Small campaign by American Express found that one in three SME operators are fearful of becoming insolvent in the near future.

ASIC reveals reasons behind business insolvencies
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Jotham Lian and Adam Zuchetti
Jotham Lian and Adam Zuchetti

Adam Zuchetti is the former editor of MyBusiness and a senior freelance media professional, specialising in the fields of business, personal finance and property. In 2020, he also embarked on his own business journey – inspired in part by the entrepreneurs and founders he had met through his journalistic work – with the launch of customised pet gifting and subscription service Paws N’ All.

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