Jones Partner
 

SME insolvencies continue to dominate corporate liquidation statistics

09/10/2014 by Bruce Gleeson

A report released by ASIC in September 2014 [Report 412 – Insolvency Statistics: July 2013 to June 2014] further reinforces the research and commentary provided in the recent Jones Partners Insolvency Report that the “predominance of SME related insolvencies is longstanding and structural in nature”. A copy of report 412 can be obtained via the following link https://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Reports . When reviewing the recent ASIC report, some key trends continue to dominate and have relevance in considering the current insolvency law settings (and whether they are adequate), as well as in discussing insolvency options with SME clients.

  •  For 2013/14, based on liquidator’s reports filed with ASIC, 81% of corporate liquidations involved companies employing less than 20 employees. This is materially the same as the statistics for 2011/12 and 2012/13 and adds support to the long term trend that reveals that SME’s or family owned businesses comprise the bulk of externally administered companies.
  • Additionally, for 2013/14, the construction and business/professional services industries comprise 23% and 26% respectively of all corporate liquidations – or 50% in combination. This is similar to the statistics for 2011/12 and 2012/13. Certainly in terms of the construction industry it supports a long term trend that this industry accounts for a significant portion of corporate liquidations.
  • Further, for 2013/14, 43% of all corporate liquidations involved companies with estimated liabilities of $250,000 or less. Such statistic has not changed materially over the past few years. Similarly for the 2013/14 year,  65% of corporate liquidations had an estimated deficiency of $500,000 or less.
  • Approximately 81% of liquidator’s reports filed for the 2013/14 revealed that there are unpaid taxes and charges of $250,000 or less.
  • In 97% of corporate liquidations for 2013/14 the dividend payable was less than 11 cents in the dollar. This is materially in trend with previous years.

So What Does All This Mean?

  1. Over the past 5 years, externally administered companies have been around 10,000 per year. Given the long term trend approximately 80% represent failures of SME or family owned businesses. From SME failure we know that larger numbers of people become unemployed than is the case from larger / high profile insolvencies that tend to dominate the media, ie most recently the external administration of Fund Manager, Van Eyk.
  2. The deficiency for 65% of failures involves an amount of $500,000 or less. Again this supports the above long term trend that it is SME’s that end up running out of cash.
  3. Poor strategic management was identified as a key factor in approximately 42% of corporate liquidations. Typically this should not surprise us because SME’s tend to be under resourced in key management areas / skills. Whilst there are a multitude of external options for SME owners to get additional access to such skills, incorrect priorities and also an unwillingness to properly budget and invest in these key areas continues to be a typical feature.
  4. The Tax Man continues to be batting way down the order when it comes to the SME owner!! Whilst this may not be overly surprising, SME directors need to be cognisant that under the ATO DPN regime [specifically the lockdown provisions] they can become automatically personally liable for a company’s PAYG and SGC debts if they remain unpaid and unreported for more than 3 months after the due date. Such changes were introduced in July 2012 and I continue to be surprised at how many directors still are unaware of such changes.
  5. For smaller trade creditors of SME’s the message is clear.Manage the terms of trade actively because the rate of dividend in a liquidation scenario will still leave a significant shortfall. Don’t get caught in the domino effect that can sometimes happen when companies enter into external administration. A good example of the domino effect was seen when Beechwood Homes went into external administration some years ago and many subcontractors and trade creditors were adversely financially impacted forcing some into liquidation themselves.
  6. There is no substitute for SME owners getting proper advice as soon as the hint of financial difficulty arises. This doesn’t mean searching around for answers / service providers solely based on the internet either!! Each SME business will have different issues and as a result the implications need to be carefully discussed and considered. This should not and cannot be readily done in my view via the internet. My Firm has a free initial consultation so that SME owners can make an informed decision about how best to deal with their financial position. Jones Partners Insolvency & Business Recovery specialises in SME insolvency and personal insolvency. We have done this for over 30 years and it continues to be a core focus.

Corporate external administration numbers for the current financial year are likely to follow (absent of some unforeseen external shock to the economy) a similar trend to that for 2013/14, ie down a few percent on the previous FY. I think beyond that we will most likely see insolvency levels (both corporate and personal begin to climb) as certain economic factors start to impact on SME profitability and the household balance sheet. Remaining ever vigilant to changes / opportunities within the industry in which you operate and carrying appropriate levels of debt for your business remain key aspects even though there seems to be a view that there is a bit more free cash in the economy at present.