Insolvency figures up 5.9% as tough conditions take toll

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Almost 10,000 companies entered external administration in the 2011 financial year, with SMEs among the hardest hit, with a Tax Office crackdown and the strong Australian dollar blamed for a rise in failures.

 

According to the Australian Securities and Investments Commission, 9,829 companies entered external administration in the 2011 financial year, up 5.9% on 2010.

 

In June alone, 1,027 companies entered administration, registering the worst month in insolvency terms since early 2009 when the global financial crisis was at its peak.

 

Taylor Woodings partner Quentin Olde says the rise in insolvency figures in June was higher than expected – it represented a 26% spike from the May figure of 817.

 

Many factors were at play, including money moving slowly through the economy, a tough trading environment and lack of liquidity.

 

Olde says the June jump is a warning sign, claiming bankruptcies are likely to continue rising unless these factors stabilise.

 

ASIC was quick to lay some of the blame on the Australian Taxation Office, which is cracking down on tax-evading small businesses as it seeks to recover millions in debt.

 

“The feedback we’ve received from insolvency practitioners is that they’re seeing an increase in activity in the SME sector as the Australian Taxation Office tightens up in debt recovery,” ASIC head of insolvency Adrian Brown said in a statement.

 

In 2010, the Tax Office initiated 1.4% of bankruptcies and 5.3% of wind-ups. Meanwhile, voluntary administration figures were down nearly 3%.

 

Luke Targett, a partner at accountancy firm PKF, says directors are beginning to realise it is often better to place a company straight into voluntary administration.

 

“If a business can’t be saved, it can be cheaper and quicker,” he says.

 

“Retail, exports, manufacturing – they’re all plagued by the same problem, which is not being competitive in terms of the strong Aussie dollar.”

 

In addition to the ATO’s tough stance and the strong Australian dollar, the smaller companies that make up the bulk of insolvencies depend on bank finance.

 

Brown says smaller businesses are finding it increasingly difficult to borrow.

 

“For example, you continue to see not as much finance available for property development… while for more blue chip properties, you’ll see there’ll be market finance available,” he says.

 

Ferrier Hodgson partner Morgan Kelly says SMEs struggling to borrow have also been hit by changes to workplace laws and the looming impact of the carbon tax.

 

“While the credit criteria haven’t been tightened, it’s a lot harder to meet them,” Kelly says.

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