Business Insolvency: navigating the different sectors that are leading the rise in liquidations and administrations.
Business insolvency appointments in Australia have surged to levels higher than what has been seen in over a decade. Temporary government support has masked much of the financial distress during the COVID-19 pandemic. However, with the expiry of many of those measures along with inflation, interest rate spikes, and supply chain disruptors – the vulnerabilities across many of Australia’s most prominent industries have been emphasised.
Within the last financial year, ASIC recorded over 7,942 external administrations which accounted for a 50% increase on the year prior and the most since 2012-13. This wave of business failures has not been evenly spread. Below, we explore the top five industries bearing the brunt of the business insolvency trend.
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Construction Industry: The most insolvent industry in Australia
The construction sector accounts for over 27% of all corporate insolvencies, making it disproportionately high compared to other sectors. More than 1,900 construction businesses entered external administration in the 2023-24 financial year alone. Fixed-price contracts, rising material costs, skilled labour shortages, and a cooling property market have all combined to produce a perfect storm.
High-profile failures such as Porter Davis, PBS Building and ProBuild illustrate the systemic nature of the problem. A key problem faced is that many builders have been unable to renegotiate contracts as inflation eroded profit margins, while subcontractors and suppliers have frequently been left unpaid.
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Hospitality & Tourism: Margins Under Pressure
Restaurants, pubs, cafes, and hotels are currently feeling the exposed risks of insolvency, with the hospitality industry accounting for over 1,000 insolvencies in 2023-24. According to CreditWatch, hospitality and accommodation businesses now carry the highest failure risk of any industry.
After surviving through the pandemic and its lockdowns, businesses in this sector have still not completely recovered with rising input costs, multiple minimum wage increases and slower than expected returns to pre-pandemic patronage in CBD and tourism zones.
One contributing factor that many operators have been faced with is the high cost-of-living crisis and related pressures, which have seen many customers cut back on discretionary spending, while others are weighed down by tax debts. This is a result of the ATO’s new priorities related to enforcement with over 26,700 Director Penalty Notices issued in 2023-24.
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Retail Industry: Online Competition and Discretionary Spending Declines
The traditional retail industry continues to see an elevated level of business insolvency activity, with over 460 retail businesses entering external administration in recent times.
Despite what appeared to be initial lockdown rebounds, consumers spending patterns have completely shifted on a far more permanent basis. This is largely due to the shift to online shopping, global e-commerce competition and cost-of-living constraints leaving many mid to low sized retailers exposed.
The bulk of these issues have surrounded primary constraints such as excess lease obligations, rising shipping and freight costs and stalled discretionary spending on goods. These challenges have also creeped their way into national level brands such as Godfreys and Colette with both entering administration in recent years, further emphasising the prevalent risks.
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Personal Services: Quiet Closures Mounting
This industry which encapsulates hairdressers, auto mechanics, beauticians, dry cleaners, and many other personal services, while not often making the headlines, have still seen more than 740 initial external administrators appointed in the last financial year.
The factors that lead this industry to being vulnerable are the fact that many of these businesses are small, family-run or sole trader operations with light cash reserves and are still struggling to repay the debts accumulated during the COVID-era shutdowns.
Many also failed to recover a bulk of their clientele post-pandemic, especially those within the highly competitive CBD areas. Others have simply fallen to the weight of rising operating costs and landlord enforcement actions. ASIC has reported that over 83% of all failed companies in 2022-23 had fewer than 20 employees and less than $100,000 in assets which both shine a light on the vulnerable nature of microbusinesses within a temperamental industry.
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Transport & Logistics: Squeezed by Fuel and Financing
The overall transport sector has taken a massive hit in recent years with freight, logistics and courier businesses all seeing a sharp rise in failures. More than 370 insolvencies have been recorded within recent years with many more expected.
The collapse of Scott’s Refrigerated Logistics in Early 2023, which left over 1,500 staff members jobless and disrupted supermarket supply chains, revealed the vulnerable nature of the industry.
The key factors which are placing strain on this industry are high fuel costs, increased truck financing, lease costs and long-term contractual pressure from large corporate clients.
These pressures have sparked industry advocacy from many organisations calling for legislative intervention to ensure that freight contractors are paid at more sustainable rates to reduce further failures in the industry going forward.
What this Means for Businesses and Directors
While the surge in business insolvency appointments has generally reflected a vast market recalibration after years of direct impacts, the pressure is now on directors as the dust settles for many industries.
The ATO has halted their hands-off approach which has been reflected in their sharp increase in enforcement activity including Director Penalty Notices and winding up applications becoming more prevalent. ASIC reports that for a majority of small business insolvencies, creditors are expected to recover as little as 11 cents to the dollar in some cases.
What to do if you suspect financial difficulty
It is important that your company gets professional accounting and or legal advice as early as possible. This increases the likelihood the company will survive. Do not take a ‘head in the sand’ attitude, hoping that things will improve – they rarely do. Warning signs of business insolvency include (but are not limited to):
- Ongoing losses;
- Poor cashflow;
- Incomplete financial records or disorganised internal accounting procedures
- Lack of cashflow forecasts and other budgets;
- Increasing debt (liabilities greater than assets);
- Creditors paid outside usual terms;
- Overdraft limited reached or defaults on loan or interest payments;
- Overdue taxes and superannuation liabilities; and
- Solicitors’ letters, demands, summonses, judgments or warrants issued against your company.
Practical Tips
- Review your company’s solvency position regularly, including unpaid ATO obligations which often go under the radar.
- Act early – directors have more legal options before a business begins the insolvency process.
- Consider different formal options such as
- Small Business Restructuring (for debts less than $1m);
- Voluntary Administration;
- Safe harbour protections (when actively working on a restructure) as outlined under the Corporations Act 2001 (Cth).
Need Guidance?
If your business is operating in a vulnerable industry, facing increasing creditor or ATO pressures, its important to act early. Our insolvency team here at Rostron Carlyle Rojas Lawyers has extensive experience in insolvency law, director liability and restructuring solutions.
Contact partner Paul Rojas today on 07 3009 8444 or by email at [email protected] today for tailored advice and to discuss your options confidentially to achieve the best results for you and your business.
