Insolvencies up 23%, but worst is yet to come

Insolvency firms are bracing for a surge in the number of companies entering voluntary administrations and liquidations after new figures from the Australian Securities and Investments Commission revealed the number of insolvencies leapt 23% in February.

The figures show that 1236 companies become insolvent in February, up from the 1000 recorded in the same month last year. A total of 796 companies entered into administration in February, an increase from 706 in the previous year.

Small business expert Greg Hayes of Hayes Knight says insolvencies will increase over the next 12 months as more businesses experience the effects of the downturn.

“A 20% to 25% uplift over a year is not surprising. Our view is that the number of businesses that are in the ‘at risk’ category has increased by 50% and about 30% of the market is now in ‘at risk’ situation. The increase will also mean you’ll have businesses tipping over,” he says.

“In SMEs, insolvencies have a lag period of about six to nine months. You’d expect to see solvencies on the increase right through this year, probably into the first quarter of next year.”

Bryan Collis, partner at insolvency firm O’Brien Palmer, says that while economic conditions are worsening, “it’s still early days yet”.

“There’s usually a lag between when conditions become unfavorable and the time when companies and businesses start going to the wall,” he says.

“I think insolvencies will go up and peak towards the end of this year and early next year. It will happen over time, because businesses will find means of hanging on.”

Collis says it is important to monitor the type of insolvency action that is being undertaken.

“If there’s a big jump in companies going into voluntary administration, it’s a sign that the economy is starting to tighten up and economic conditions are worsening.

“If it’s an increase in liquidations, then the tax department is just cleaning up. Most of those court liquidations are companies that don’t have any assets that are just being wound up because there’s a statutory obligation there.”