Insolvencies tipped to increase despite drop in January numbers

Corporate insolvencies are heating up despite results showing a drop in external administration appointments in January, with experts saying higher interest rates and frugal customers are causing more small businesses to call in administrators.

The latest figures from the Australian Securities and Investments Commission show 445 companies entered external administration in January.

While this figure represents a 40% drop from December when 784 insolvencies were reported, and is slightly down from the 473 recorded in January 2010, experts say the drop is misleading and the market for insolvencies will heat up as struggling businesses fail to meet BAS payments.

Insolvency expert Jim Downey from JP Downey & Co. says the level of activity at the moment suggests many companies are in dire straits.

“There has been a healthy amount of inquiry. Speaking with other practitioners around the place, they’re reasonably busy,” he says.

“January tends to be very quiet with a lot of people away. People have an extra month to pay their BAS, which isn’t due until February. Things start heating up after that.”

Last November over 800 companies entered external administration. Higher interest rates and frugal customers are also putting pressure on many businesses in the retail sector – the collapse of RedGroup Retail is a testament to how many businesses are struggling.

Downey says he has been speaking with accountants, who say many clients are experiencing great personal financial stress.

“In the wake of corporate collapses and so on, you often find that six or nine months later those individuals either file for bankruptcy or look around for some sort of payment agreement.”

“Given what is happening I would expect that activity to increase,” he says.

Michael Fingland, managing director of corporate turnaround service Vantage Performance, says insolvency statistics won’t soften from here.

“The last two weeks have really started to pick up. The January stats and the February stats will be misleading, because we’ve already started to see an increase in activity.”

“With interest rates, there’s always a six month lag. The amount of debt that is on SME balance sheets is growing, and they haven’t been able to recapitalise.”

Fingland says even though the ATO and major banks have had a “hands-off” policy for the first two months of the year, “a payment holiday isn’t going to solve a cashflow crisis.”

He also pins the retail industry as one of the sectors in major trouble, pointing to the collapse of RedGroup.

“There’s going to be a lot more coming through – that’s the feedback we’re getting on the ground from lawyers and so on,” he says.

“Of course, that flows through to transport. A lot of transport companies make their money from supplying to the retail industry, and retailers had such a bad Christmas.”

However, he says companies that suffered from the floods and cyclone Yasi aren’t in trouble just yet.

“We haven’t seen much activity from them because they’re getting so much assistance from the Government and so on.”

“But overall, we’re going to see higher statistics in April and May, and that will be the impact of rate rises and a very bad Christmas.”

However, Cliff Sanderson, director of Restructuring Works, says the number of insolvencies has plateaued, and that smaller companies are now more likely to collapse than larger firms.

“The numbers have basically been plateauing since there was a peak in March last year, and since then they’ve stayed at roughly the same number.”

“Overall, there hasn’t been as many big ones, with a few exceptions such as Borders. But at the lower end there is more activity.”