Court actions by Big Four banks against SMEs ramp up to pre-pandemic levels

The Big Four banks are ramping up their court activity against small businesses as interest rates continue to rise, with legal actions firmly at pre-pandemic levels in October.

In its latest credit monitoring service, Alares found Commonwealth Bank, ANZ, NAB, and Westpac initiated a combined total of more than 140 court actions against SMEs last month.

The figures show the greatest amount of court activity levelled against borrowers since the first months of 2020 — which preceded an extraordinary period of leniency against debtors during COVID-19 lockdowns.

Alares data shows that winding-up petitions launched by the Big Four banks are also on the rise, but are yet to reach their pre-pandemic highs.

The figures broadly correlate with surging interest rates and the Reserve Bank of Australia’s attempts to constrain inflation through monetary policy.

The underlying interest rate rose from just 0.10% in April 2022 to 4.35% in November 2023, elevating borrowing costs for businesses and households alike.

Court actions initiated by the Big Four banks. Source: Alares

NAB has acknowledged some of the business hardships represented in the Alares data and the influence of cash rate hikes on business conditions.

Ana Marinkovic, NAB Executive Small Business, told SmartCompany “small businesses around Australia are operating in a more difficult environment” and noted a “slight increase in arrears” over the past 12 months.

However, Marinkovic said many small businesses are “adapting and are proving resilient” in the face of rising interest rates, and that arrears are coming “off a very low base”.

Those rising court actions initiated by the banks are to be expected after the end of lockdown-era leniency, said Malcolm Howell, a partner at insolvency practice Jirsch Sutherland.

Some businesses come to the practice surprised the banks are chasing debts through the courts, “but I don’t know how they are surprised when I’m seeing a number of them come to me with debts that are three years old,” Howell told SmartCompany.

Banks are not the only financial institutions chasing unpaid debts.

Trade finance providers and even vehicle financiers are seeking what is owed.

“All of those organisations need to start the collection process at some point, and I guess it’s just become time: the stars have aligned with interest rates and a lack of money coming in, they need to start the collection process.”

The years-long leniency against debtors — resulting in the low base of court actions through 2020 and 2021 — means we could see a years-long “catch-up phase” where the number of new court actions surpasses pre-pandemic averages, Howell added.

Court actions initiated by the banking sector will only compound pressure levelled by the Australian Taxation Office (ATO), which stands as the biggest single creditor for many indebted businesses.

Like the banks, the ATO’s leniency to ageing tax debts has expired, with the tax office now turning to tools like Director Penalty Notices to extract years-old tax liabilities.

Businesses staring down mounting debts should not wait six or twelve months before contacting a business advisor, Howell said.

Directors should consider receiving advice “early, as it may give them better options, and they can also protect their personal assets”.

Marinkovic said businesses struggling to repay their debts should contact the bank as soon as possible.

“Our message to those who may be struggling is that we’re here to help – please call us early so we can help get you back on track.”

SmartCompany has contacted Commonwealth Bank, ANZ, and Westpac for comment.