Insolvencies rise as banks, ATO put more pressure on SMEs

More SMEs are collapsing due to increased pressure from the Tax Office and banks, new figures from insolvency firm Dissolve reveal, with the number of recorded insolvencies jumping 10% in the 12 months to April.

The latest figures show the 812 insolvencies recorded in April 2011 represent a 23% increase on the average of the past five years. The quarterly cost of all bad debts for Australia banks for the March quarter came in at $5.1 billion – down from post-financial crisis levels but still above the average pre-financial crisis level of $1.1 billion.

Liquidator Cliff Sanderson says while corporate insolvencies have fallen away since the post-financial crisis period, they are now trending back up as the banks and ATO start to crack down on SMEs.

“Post-GFC, both the ATO and banks adopted a lenient approach and both have hardened their stance in recent months,” Sanderson says.

“Since late 2010, the ATO has been far more active in using its recovery powers including director penalty notices, garnishee notices and winding up petitions.

“On a rolling basis we haven’t topped 2009 levels but the numbers are definitely trending back up. This is being driven by the tax office and the banks.”

The figures show Queensland’s proportion of total insolvencies grew from 14% in 2006 to 20% in 2011, while Western Australia’s portion has grown from 4% in 2007 to 7% in 2011.

“After the financial crisis we saw a number of larger collapses, and there was some fallout around the edges of that as well. But now the ATO and the banks have moved down the line, and are targeting SMEs.”

The ATO has warned over the past several months that the leniency granted to companies during the financial crisis may not be extended much longer as economic conditions continue to improve and credit loosens up.

Sanderson notes banks have become more active in taking possession of assets, with the number of insolvency appointments initiated by creditors rising from 6% of all appoints in 2007 to 14% in 2011.

“I’ve spoken with bankers who say that SME area is now becoming busier for them, so certainly the banks are focusing on that area, but more particularly the ATO.”

Sanderson says the rise in insolvencies coincides with legislation coming into effect on July 1 which will make directors personally liable for tax debts if they are not paid after three months. While Dissolve expects the rise of insolvencies to continue, Sanderson also says there could be a rush of liquidations due to the legislation.

“Whereas in the past you may have a lengthy gap between a company ceasing to trade and when they decide to liquidate, that may not occur anymore.

“If directors have debts, they should consider liquidation quicker. There may even be a rush in the first few months after the July starting date of the law.”