Jones Partner

Corporate Insolvency Statistics – Does Danger Lie Beneath?

19/01/2018 by Bruce Gleeson

As we get stuck into 2018, a review of the corporate insolvency statistics for 2017 provides some useful insights about the trends in Australian corporate insolvency levels. I have also made some forecasts about how I think 2018 and beyond will play out. Whilst forecasts are simply that, I have taken both a pragmatic and conservative perspective in reaching such conclusions.

BTW: let’s remember that in the Australian jurisdiction the word “insolvency” is used with reference to corporates, as opposed to in other jurisdictions, such as the United States where the word “bankruptcy” is used.

What are the National Statistics Telling Us?

my forecast

Based on the above, it is evident that corporate insolvencies did spike post the Global Financial Crisis (GFC) in 2007. However, since a high point (10,757) in the 2011-12 year, corporate insolvencies have dropped to 8,031 in the 2016-17 year, a reduction of approximately 25%. What has driven this reduction? Some possible explanations are:

  1. Increased volumes of construction and infrastructure works in the Eastern States of Australia, particularly NSW and Victoria. Empirically we know that the construction and infrastructure sectors are significant contributors to corporate insolvency levels. However, with the record number of cranes in the skies of NSW and Victoria and no shortage of truck movements on the roads, insolvency work from these sectors has been lower than is usually the case.
  1. Accessibility to / the cost of funding – although recently the banks/financiers have started to reign in funding (i.e reduction in interest only loans) and scrutinise LVR’s more closely etc, the cash rate continues to be at an all-time record low, 1.5%! When was the last time you remember it was equal to the United States Cash Rate? As such with rates at record lows, corporates are better placed than at other times to fund debt obligations.
  1. Strong property price movements – SME’s in particular have benefited from this momentum. SME business owners that have a property investment(s) [including the family home] are wealthier and have had more scope to deal with any short term financial needs, as opposed to scenarios where property prices are depressed and/or interest rates are higher.
  1. Australia’s economy has continued to grow albeit at a slow rate. In particular, we have had 26 years of continuous economic growth which has seen us navigate through the Asia Financial Crisis (1997), the Dotcom Crash (2000) and the GFC (2007).

What about NSW Corporate Insolvency Statistics?

Looking within NSW, a comparison of the five months July to November for 2016 and 2017 reveals:

In broad terms, NSW still accounts for approximately 33% of all corporate insolvencies in Australia.

What about 2017 – 18 and beyond?

The following graph shows the percentage of companies entering some form of insolvency administration relative to new company registrations. 

Ratio of EXADs to new business registrations (to August 2017):

Source: ASIC

Relevantly around 2011 – 12 the number of new company registrations has steadily increased to date whereas the number of companies entering into some form of insolvency administration has decreased, particularly in 2014 onwards. As a result, the ratio is trending below the 4% marker. The ratio was last at this mark around the GFC. Interesting isn’t it!

I believe given the current economic and trading conditions in Australia (absent of major economic events/geopolitical events) that corporate insolvency levels are likely to decline in 2017–18 and steadily lift in 2018–19. However, this does not mean corporates, in particular SME’s can sit back and relax. SME’s must still ensure that their business strategy is “fit for purpose” and documented, as well as being regularly evaluated. SME’s also need to truly consider how to embrace the continuation of digital disruption advancement and the opportunities and threats this brings.

One real sleeper that is likely to be awoken from its sleep this year relates to the ATO reporting company tax debts to credit agencies in certain circumstances where corporates have not actively engaged with the ATO regarding the outstanding debts. I believe once this occurs, that this will enliven directors (particularly SME’s) to more readily needing to deal with quite often significant tax debts in the business which will flow through to an increase in corporate insolvencies. Accordingly, one message for SME’s is to get your ATO house in order. We know that the ATO debt is often a significant creditor in SME corporate insolvency – however with proper planning, professional assistance and early engagement with the ATO there is a good chance that better outcomes will be achieved.

I welcome any enquiries readers may have about my forecasts and / or what readers believe the impact of the ATO reporting to credit agencies may be.