The insolvency landscape in Australia has been experiencing notable shifts recently, with insolvency numbers returning to pre-pandemic levels. The initial post-COVID period saw a rise in construction-related insolvencies, but more recently, the issue has become widespread, affecting various industries. This resurgence can be attributed to the Australian Taxation Office (ATO) resuming its aggressive collection processes, which had been temporarily put on hold during the pandemic. The ATO has been issuing Director Penalty Notices (DPNs), initiating recovery actions, and sometimes opting for winding-up proceedings. As a result, company directors are increasingly left with no choice but to take action and appoint administrators and liquidators to address these financial challenges.
As the ATO has become more active in pursuing Director Penalty Notices, they have also increased their participation in creditors’ meetings. They are now more cautious about approving Deed of Company Arrangements, reverting to a more conservative approach in evaluating the cents on the dollar before approving. On the other hand, banks have maintained their shades of grey as they are wary of the PR implications of appointing receivers. Nevertheless, this could change as the economic landscape evolves, especially if businesses cannot refinance bank debts due to financial distress, increasing interest rates and reduced borrowing capacity.
Why Now?
One of the catalysts for the ATO’s renewed focus on insolvencies may have been the intersection of the post-COVID recovery period and the last federal election. While the ATO maintains that political considerations do not influence its actions, once the political dust had settled, they began issuing DPNs in earnest, with the effects becoming pronounced around this same time last year.
Although the cost of living crisis has not significantly impacted businesses thus far, some sectors are beginning to feel the pinch, with one notable case, Sara Lee, a major insolvency in recent times. Traditionally, restaurants and retail have been prone to insolvencies, but these have not been as prominent recently. Nevertheless, as discretionary spending items come under pressure, more businesses in these categories will likely face insolvency challenges in 2024.
What’s happening in the Tech Space?
Businesses like Milk Run and Providoor have experienced financial difficulties in the tech space. Milk Run, a food delivery service, and Providoor, a specialty food delivery platform similar to UberEATS, faced capital challenges due to their high startup costs. Woolworths acquired MilkRun and a Melbourne restauranteur acquired Providoor, both recognising the value of their respective customer lists and intellectual property. However, it’s worth noting that all existing debts at the time of acquisition remain with the liquidators, which can lead to complications, such as the case of Providoor, which has approximately $4 million in gift cards in circulation with no responsibility taken by the new owners. Such situations can lead to customer dissatisfaction, potentially tarnishing a brand’s reputation and affecting business outcomes.
Small Business Restructuring
Additionally, the small business restructuring plan, introduced by the government a couple of years ago, is growing in popularity. This plan allows for renegotiating debts with creditors to save struggling businesses. To qualify for this simplified methodology, businesses must meet stringent criteria, including updating all tax filings and having debts of up to a million dollars. Those who meet these conditions can potentially negotiate with creditors and secure a fresh start for their enterprises. The number of cases is still relatively limited, and we have yet to see an uplift here at RRI.
The insolvency landscape in Australia is evolving, with the ATO playing a more active role in debt collection and creditors becoming less lenient in approving restructuring plans. The ever-changing business environment requires proactive financial management to navigate these challenges successfully.
The Key Takeaway
The key takeaway from these evolving insolvency trends in Australia is the importance of seeking professional advice early when financial issues arise. Waiting until it’s too late can limit your options and lead to detrimental consequences. To mitigate risks, businesses and directors should proactively address financial challenges and align their actions with key milestones and future events.
If you want to discuss what proactive steps you can take to safeguard your business, email enquiries@rriadvisory.com.au for an obligation-free insolvency consultation.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to RRI Advisory’s clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.