A debt recovery agency has claimed there was a noticeable spike in the number of businesses winding up last financial year, in a warning about rising cost pressures and financial stress.
Citing figures from insolvency firm Rodgers Reidy, Prushka Fast Debt Recovery said there had been a “worrying spike” in the number of applications to wind up a company in the 2018–19 financial year.
It suggested that 3,794 wind-up notices had been issued over the year, and that this constituted a 26 per cent rise on the previous year.
According to Prushka, Victoria accounted for the steepest increase, up by 34 per cent year-on-year.
“A spike like this is generally a sign of increasing financial stress in the sector and is not necessarily representative of the entire scope of insolvent businesses. Rather, it is merely the tip of the iceberg,” Prushka’s CEO, Roger Mendelson, said.
“Given the high costs associated with winding up a business, creditors will generally only proceed to an application in the event where they anticipate they will receive a return through liquidation, so we anticipate this number to be much higher.
“That is a real concern, as there are likely a large number of insolvent companies that are still trading and incurring debts; however, they are yet to be caught by anti-phoenixing laws and regulatory bodies.”
Mr Mendelson said that the ATO is easily the biggest petitioner for wind-up orders being issued.
Official figures on the number of companies wound up in the 2018–19 financial year are yet to be released. An ASIC spokesperson told My Business that it expects to have the data publicly available by mid-August.
What has happened to insolvencies in recent years?
This month, ASIC published a review on insolvency figures between the 2013–14 and 2017–18 financial years. This data shows that the pace of business failures actually slowed.
In FY2014, a total of 9,822 Australian businesses were declared insolvent. That figure stayed fairly stable for two years, with 9,177 recorded the following year and 9,848 marking the high point in 2015–16.
But in the two most recent financial years for which data is available, the numbers were noticeably smaller: 8,031 insolvent businesses were recorded in 2016–17 and even fewer (7,747) in 2017–18.
NSW saw a consistent decline in insolvencies over the five-year period, and most states and territories had fewer insolvencies in the most recent year than five years earlier (with some fluctuations from year to year).
ASIC’s full breakdown of business insolvencies by industries over the five-year period can be accessed from the ASIC website.
The ASIC spokesperson cautioned that its figures only count a company entering external administration once, regardless of whether it subsequently enters into a different form of external administration – unless a company leaves and subsequently re-enters administration at a later date.
Manage debt collection carefully
The alert on business wind-ups comes as the head of the Australian Institute of Commercial Recovery warned businesses to be cautious in their approach to collecting outstanding debts.
Brian Carter said that household debt-to-income ratios have soared, suggesting hardship may be increasing, but that overly pushy attempts at debt recovery, or outsourcing recovery action to less reputable third parties, can be “very damaging” to the overall reputation of the business.
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