ATO gets tough as 21 firms enter voluntary administration since start of March

Insolvency experts say a more aggressive approach from the Australian Taxation Office and banks is behind a jump in the level of insolvency actions, with ASIC records showing 21 companies have been placed in voluntary administration since March 1.

The carnage has been widespread, with childcare operators, engineering firms, printing companies, consultancy groups, pub operators and communications businesses calling in administrators.

While most of the companies are very small, there are few prominent names, including Gold Coast-based commercial laundry company Wright Industries and national steel distribution group 7Steel Distribution falling into administration since the start of the month.

Neil Cribb, turnaround and insolvency expert at RSM Bird Cameron, says the SME sector is feeling pressure from a number of sources as the fallout from the global financial crisis washes through the sector.

“For much of the last 12 months there hasn’t been a focus on pursuing distressed debts,” he says.

“In the case of the financiers, while they might have distressed debts on their books, they’ve taken the loss and the hit, but they haven’t actually dealt with the distressed debt.”

Cribb also says the ATO is taking a much more proactive approach to debt collection, with a sharp increase in the use of director penalty notices, which often force directors to call in administrators.

“In March 2009 they just shut the doors on pursuing debts and that door opened again in November,” Cribb says.

“That puts pressure on companies and facilitates the needs for directors to appoint voluntary administrators.”

D&B director of corporate affairs Damian Karmelich, says cashflow problems are also contributing to the increase in insolvencies.

“During the last recession, the dotcom bust, what is interesting is that the business failure rate actually peaked during the downturn and as the economy returned to growth – it doesn’t peak during the downturn itself,” he says.

“The key issue is a cashflow one, not a sales issue, most businesses fail because they can’t collect cash. During the downturn people may cut staff, delay investments, but during the upturn firms see a quick and significant spike in costs as a result of a growth in new orders. Businesses have to increase costs to fulfil orders, which means more labour and so on.

“But the problem is they don’t get paid for those goods in a best case scenario until 30 days later, but we know the average is really 55 days. The gap between when the company incurs its costs and when they ultimately collect their cash results in negative cashflow. This is a clear trend.”

Cliff Sanderson of Restructuring Works also points to increased ATO activity as a reason for more insolvency activity, put points out that insolvency appointment numbers from late 2009 and early 2010 remain well under the peak level seen in March 2009, when more than 1,000 companies saw insolvency action.

He says conditions in the insolvency industry remain patchy, with some practitioners saying they are frantic and others reporting a quiet period.

However, he has also seen an increase in activity from the ATO in terms of more directors penalty notices.

“These really focus the minds of directors.”