Insolvencies soar, and more bad news on the way

Insolvency practitioners are bracing for a wave of company collapses after new figures showed the number of companies entering administration climbed almost 40% in January.

Data from the Australian Securities and Investments Commission shows 517 companies entered external administration in January 2009, compared with 372 in January 2008. There were 846 insolvency appointments in total in the month, up from 641.

What is particularly worrying is that January is typically a quiet month for insolvency action, due to the holidays. That indicates the worst is yet to come.

Melbourne insolvency specialist Jim Downey is bracing for a sharp rise in February and throughout the rest of 2009.

“We’re seeing a lot more inquiry and a lot of it seems to be directors considering personal bankruptcy as a result of their companies failing,” Downey says. “That’s not necessarily logical – usually personal bankruptcies lag behind insolvency actions, so perhaps we are seeing a lag from the last six months.”

A potential tipping point for many companies is problems meeting their tax obligations. Most companies were required to lodge their Business Activity Statement for the December quarter by the end of February, and Downey is watching the law notices closely to see whether the tax office starts lodging applications to wind companies up.

Another indicator of a looming increase in insolvency actions come from the practitioners themselves. A number of firms have increased staffing levels in their insolvency divisions (through new hires and internal redeployment) and the Insolvency Practitioners Association of Australia has reported record enrolments in its education courses.