Aussie business collapses will ‘get worse’

The latest insolvency statistics released by the corporate regulator on Tuesday showed 831 businesses went under in March, a three-and-a-half-year high and 15 per cent above the pre-Covid average of 720.

According to the Australian Securities and Investments Commission, just 464 insolvencies were recorded in March 2022 and 439 in March 2021.

Business collapses dropped to record lows during the pandemic as a result of government stimulus and an enforcement hiatus by the Australian Taxation Office.

But insolvency lawyers say a slowing economy and cost-of-living pressures including rising interest rates and inflation, along with renewed ATO activity, have now pushed those numbers back above pre-Covid trends.

Construction firms — including high-profile casualties like Porter Davis — have been by far the hardest hit, with 1601 insolvencies in the financial year to date. Accommodation and food services saw 808 insolvencies, other services 480, retail trade 373 and manufacturing 347.

Bradd Morelli, national managing partner of mid-size insolvency firm Jirsch Sutherland, said the first wave of insolvencies started in May last year and was “primarily ATO-driven” as the tax office began issuing threatening letters.

“From that point we started to see a steady climb, it’s still going,” Mr Morelli said.

“You saw a second wave there a few months ago which is more reflective of what’s going on in the building industry, which is driven by some of the broader issues — staffing, fixed pricing, price of materials, supply chain issues and the like.”

Mr Morelli added that “why I think it’s going to get worse before it gets better is we haven’t really seen the full extent of the impact of cost of living — rising interest rates, inflation, those sorts of issues”.

“They’ll hit the consumer, [but] it takes a while for consumers to appreciate they’ve got to find this extra money then it takes a bit longer to change behaviours,” he said.

“Date night might have been once a week, it might be people go out once a month. Instead of going to gold class they go to normal. They might cut out one of their streaming services, go to two instead of three. They all sound small and benign but they add up.”

Australia’s annual inflation rate declined slightly to 6.8 per cent in the 12 months to February, down from its 8.4 per cent peak in December but still well above the Reserve Bank’s target bank of 2 to 3 per cent.

The RBA paused after 10 consecutive months of interest rate rises earlier this month, leaving the official cash rate at 3.6 per cent, but warned the reprieve would only be temporary.

“The board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt,” RBA governor Philip Lowe said in his statement.

“The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook.”

Mr Morelli predicted retail would see rising insolvencies as consumer confidence weakened, with reports already coming in of softening sales.

Similarly the hospitality industry, which was “smashed” by lockdowns and Covid restrictions, may be in for a tough time again.

“Obviously now Covid isn’t as much of an issue hospitality is doing quite well but I anticipate it will come off again, purely off the back of consumers changing their spending habits due to inflation, interest rates, cost of living. They might have gone out to dinner once a week, now it’s back to once a fortnight.”

At this point Mr Morelli said rising interest rates themselves were “not a huge factor” in insolvencies “but they will become a significant reason”.

“Obviously securing funding for business, challenges in getting financing, I’m hearing that’s becoming more difficult at all levels,” he said, but added the indirect impact on consumer spending was the bigger issue.

“Here I think it’s really going to impact the SME sector when people just don’t have the discretionary money to spend that they did 12 months ago,” he said.

But Mr Morelli stressed that the current rise in insolvencies “back to trend” and likely “beyond trend” was better for the economy in the long run.

“It’s a closing of unproductive assets and a redistribution of those assets to productive areas,” he said.

“From a broader picture of the Australian economy you don’t want a business out there that doesn’t make money, doesn’t pay its taxes, struggles to pay its suppliers, that’s unproductive. You want businesses that do well, employ people, pay taxes, pay super, invest in R&D. Some of these businesses that are failing should have failed pre-Covid.”

While it was “sad when someone’s retrenched or a director has to go bankrupt”, it was important to “flush out the ones that are no good and keep the productive guys”.

“These downturns get rid of those unproductive businesses, ones that should have failed, or the cowboys on the margins,” he said.

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