Half of all companies placed in administration accused of trading while insolvent

Half of all companies that were placed in voluntary administration over the 2010-11 year were accused of trading while insolvent, according to the latest figures released by the Australian Securities and Investments Commission.

The figures, which come in the worst year for corporate insolvencies on record, also show the construction and retail industries had the most lodgements, while most collapses were attributed to poor strategic management and inadequate cashflow.

The results of the new report, which are compiled based on administrators’ reports filed during the 2010-11 year, show reports alleging an insolvent trading breach increased from 45.8% to 49.4%, although reports alleging criminal misconduct fell from 15.2% to 11.5%.

Cliff Sanderson, founder of insolvency firm Restructuring Works, says the figure isn’t surprising and indicates more small businesses are suffering and falling into administration.

“These figures don’t surprise me much at all, but what it does indicate is that the vast majority of company failures are smaller, or small to medium businesses.”

While small businesses make up the majority of businesses operating in Australia, it is noteworthy that the percentage of companies accused of trading while insolvent has continued to rise. 

The figures show 78% of reports concerned companies with less than 20 employees, up from 77% in 2010 and 75% from the year before, while 84% of failed companies had assets worth $100,000 or less.

Sanderson says most directors are hesitant to enter voluntary administrations (VA) and would prefer trading while insolvent to escape the cost.

“For small businesses, there is no real great incentive to do what the law says you should do, and that is appoint an administrator and come up with a deal. A VA is just not an attractive proposition for many companies.”

“Secondly, the other factor a director has on his mind is that they’re already on the hook for large creditors, and have a personal liability. The director thinks that if a VA isn’t going to work, and he’s personally liable anyway, he might as well just try and trade his way out of it.”

The figures show most of the administrations were in the business and personal services category, at 23%, while construction and retail trade took 23% and 11% respectively.

Poor strategic management was listed as one of the top three reasons for failure in 44% of cases, along with inadequate cashflow use at 41% and trading losses at 33%.

Inadequate cashflow was actually attributed as the highest reason for failure in the construction industry, with 783 out of 4,553 administrations, followed by poor strategic management. Retail trade, however, saw poor strategic management attributed to the highest proportion of failures.

In one encouraging sign, however, the figures show reports alleging criminal misconduct decreased from 15.2% to 11.5% of reports.

Sanderson says the figures are a clear sign smaller companies are beginning to fail.

“Most of the ones we see here are smaller companies, as they’re the most likely to be trading while insolvent. In a larger company, they’re not going to be prepared to take that risk.”