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ASIC reveals reasons behind insolvencies in FY17-18

ASIC reveals reasons behind insolvencies in FY17-18

Inadequate cash flow and poor strategic management of business were the biggest causes of failed businesses in the last financial year, with over 5,000 reports alleging insolvent trading.

Business Jotham Lian 15 November 2018
— 1 minute read

Small to medium size corporate insolvencies dominate external administrators’ reports, with 84 per cent of failed companies having estimated assets of $100,000 or less, according to ASIC’s report of corporate insolvencies based on statutory reports lodged by external administrators for the 2017–18 financial year.

Of the 7,613 reported lodged, external administrators reported alleged misconduct for 6,577 reports.

The top three alleged possible misconduct came from insolvent trading (69 per cent); care and diligence - Directors' and officers' duties (54 per cent); and obligation to keep financial records (44 per cent).

Inadequate cash flow or high cash use came top for the most nominated cause of failure, accounting for 49 per cent of reports, with poor strategic management of business (46 per cent) and trading losses (39 per cent) rounding up the top three.

“It is important to note that an external administrator’s report of misconduct is an allegation and may not be substantiated by sufficient evidence to warrant action,” said ASIC.

“We will not take action in every instance an external administrator reports alleged misconduct and we obtain a supplementary report.

“External administrators advised that they had either commenced or were contemplating initiating recovery actions for insolvent trading for 1,987 reports, compared to 5,265 reports alleging a civil breach for insolvent training.”

After assessing the reports, ASIC asked external administrators to prepare 897 supplementary reports where external administrators alleged company officer misconduct. This amounted to 13.6 per cent of all reports that alleged misconduct lodged in the financial year.

More than 25 per cent of the cases identified as 'analysed and assessed for no further action' resulted from ASIC having insufficient evidence to warrant commencing a formal investigation and it being considered unlikely to obtain further evidence.

In another 20 per cent of assessed cases, ASIC requested a further report from the external administrator.

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ASIC reveals reasons behind insolvencies in FY17-18
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