“Backlog” of business insolvencies will only increase in months ahead, Creditorwatch says

The rate of Australian small businesses facing insolvency is predicted to rise in the months ahead, as the Australian Taxation Office (ATO) gradually resumes its enforcement efforts and economic trends batter the profitability of many industry players.

The number of Australian business insolvencies collapsed in 2020, as government agencies, lenders, and the ATO took a lenient approach to businesses struggling to stay afloat in the COVID-19 pandemic.

ASIC data shows 8105 companies entered external administration or controller appointments in pre-pandemic financial year of 2018-2019, compared to just 4235 in 2020-2021.

But the rebounding Australian economy has seen regulators and creditors resume their enforcement efforts.

Court actions against Australian businesses rebounded in the final months of 2021.

At the same time, rampant inflation and long-awaited interest rate hikes threaten to eat away at the profitability of at-risk firms.

Supply chain shortages and the labour crunch have become a particular concern in hospitality and construction, where already-thin margins are being pushed to the brink.

Patrick Coghlan, CEO of Creditorwatch, told SmartCompany he expects the number of insolvencies to “get worse before it gets better”.

“The one thing we know, through the pandemic, insolvencies were down sort of 40%, probably on average, compared to pre-COVID numbers,” he said.

From that “record low”, Australia is now facing a “backlog” of insolvencies that will “need to take place over probably the coming 12 to 24 months”.

“That’s usually when the ATO and the big banks start to get back into their their late-stage collection rhythms, where they actually wind companies up,” Coghlan said.

Enforcement on the rise

The ATO recently confirmed it is now sending up to 40 new director penalty notices (DPNs) a day, making current and former company directors personally liable for unpaid company debts including pay as you go withholding, GST, and the super guarantee charge.

The rising number of DPNs being issued may be a canary in the coal mine for struggling businesses, as the number of traditional court actions filed by the ATO remained far below pre-pandemic levels in April.

The tax office will also soon disclose overdue company debt over $100,000 to credit reporting agencies, with CreditorWatch first in line to access those figures.

However, experts say the ATO remains accommodating to firms which proactively come to the tax office with their concerns. Insolvency experts have advised companies behind on their repayments to contact the ATO as soon as possible.

Beyond regulatory pressures, global economic trends are also projected to hammer construction firms.

As rumours of financial struggles among major developers become headline news, “insolvency numbers are going to increase, and specifically in the construction industry,” Coghlan says.

CreditorWatch data shows construction firms are far more likely to have payments in arrears of 60 days or more compared to any other sector.

Australia has been late to observe inflationary pressures, he added, suggesting Australia’s inflation rate of 5.1% could tilt towards the latest UK inflation of 9%, driving input prices even higher.