Construction businesses a grim standout in insolvency data, as experts seek silver linings

The number of business insolvencies boomed in late 2023 and is poised to accelerate in 2024, official data shows, but industry professionals say the growing use of the small business restructuring scheme is a silver lining.

Data released by the Australian Securities and Investments Commission (ASIC) on Tuesday shows 727 companies entered external administration or control in December last year, a 16% jump from December in 2022.

At the time of writing, 5,020 companies have collapsed so far in the 2023-2024 financial year, setting a trajectory for more than 10,000 by July — a figure that would eclipse the 2022-2023 total of 7,942.

If the increase continues, more companies will enter external administration or control in 2023-2024 than in the pre-COVID financial years of 2017, 2018, and 2019.

All signs point to this year’s insolvency activity reaching its pre-COVID peaks, said John Winter, CEO of the Australian Restructuring Insolvency & Turnaround Association.

Struggling businesses temporarily propped up by COVID-19 support measures are contributing to the recent collapses, he said.

“There were so many businesses that should have normally failed in that period,” he said.

“We often talk about that long-term average of about 9,000 insolvencies a year, and we’re getting back to that.”

The end of generous commercial lease arrangements, and firmer collection tactics from the Australian Taxation Office (ATO), are now catching up with many hard-hit businesses.

“You are going to see that continuing pressure,” Winter continued.

“Those businesses that weren’t really viable during the full COVID period are going to come out the other side… You do have to play a game of catch-up.”

Construction sector still a concern

The data shows a delayed response to separate struggles in the construction sector, which has endured a particularly tough few years.

Construction businesses to the tune of 1,391 have collapsed so far in 2023-2024, far surpassing any other industry sector.

Although inflation to key materials like steel and timber moderated through 2023, “the reality is that there’s always a lag between significant events like that and when businesses finally move themselves into an insolvency,” Winter said.

“And that’s because they continue to try and survive and continue to try and trade their way out.”

Further insolvencies are expected in the sector as the cost of skilled labour remains high.

“The situation hasn’t fully righted itself,” Winter said.

“It’s definitely proven that a lot of businesses have struggled over that period.”

Small Business Restructuring a bright spot

One encouraging factor in the data comes from the increasing number of restructurings, on top of out-and-out business collapses.

ASIC data shows 489 restructurings in the financial year to December 2023, compared to just 160 in the prior corresponding period.

Source: ASIC

Some of that increase can be attributed to the growth of the Small Business Restructuring (SBR) scheme.

SBRs allow owners to maintain control of their businesses while restructuring their debts with professional help, instead of simply handing the reins to an administrator.

Analysis by Alares suggests the number of SBRs increased significantly over 2023, up from the paltry 82 SBRs registered in the scheme’s first 18 months.

The growing use of SBRs is a “really good sign” amid the dour figures, said Winter, who has previously criticised the scheme for its complexity. 

“We continue to say — and we’re working with the government on significant revisions to the Small Business Restructuring process — it remains overly complex, and therefore overly expensive to use.

“We’d like to see those numbers rise a whole lot more because we think that a lot more small businesses, particularly in this environment, could be saved where their creditors think they should be saved.”