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Thousands of unviable firms that survived on state support now face their day of reckoning, professional body says.
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‘Hopelessly insolvent’ small businesses drive wind-up numbers north
23 September 2022
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10 minute read
Small businesses sinking in the absence of government support are driving insolvency statistics back to pre-pandemic levels and the worst is yet to come, says the specialist professional body.
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Two years of COVID mean 10,000 firms that dodged an insolvency bullet had to face their day of reckoning while dismal economic conditions would put many more in jeopardy, said the chief executive of the Australian Restructuring Insolvency & Turnaround Association, John Winter.
He said the latest ASIC numbers showed almost 1,600 wind-ups to the first week of September this year against more than 1,700 for the same period in 2019, but reality was catching up with business owners.
“There’s a mood of realism where business owners, and particularly small business owners, who have been in some level of denial about the viability of their business are having to do the right thing now,” he said.
“Most of these businesses are hopelessly insolvent – they've been going for too long, they've been propped up by too much stimulus. These businesses have no chance of any significant rehabilitation and returns to creditors are going to be very low.”
The result would be insolvency numbers returning to normal but eventually going beyond, as harsh economic conditions pushed more to the brink.
“It will continue to rise progressively through the year because there is a lag between people being sent the warning letters by creditors or the ATO and when they finally confront their viability,” Mr Winter said.
“We definitely have a game of catch-up to play because there's about 10,000 businesses through COVID that didn't go into an insolvency that normally should have. They will start running out of money unless they've managed to sort their structural issues out.”
“The other part that will drive it above pre-COVID levels is clearly inflation and interest rates are adding significantly to the cost base of business, and they are going to make more marginal businesses close.
“The good news is it will be a progressive rise, not the tsunami that we first thought.”
He said the building industry was in the front line with 30 per cent of wind-ups and along with four other sectors – accommodation and food services, manufacturing, rental and hire services, and other services – was responsible for two-thirds of business casualties.
But he said forcing out unviable businesses was vital for the overall commercial good health.
“The important thing about is the businesses that can't pay are going to stop racking up debt with unwitting creditors,” he said.
“Insolvency doesn't just have victims in the business that goes broke, it has significant victims in the creditor community, and that can cause other really good businesses to be shut down.
“So when people who can't pay the bills have that moment where they go, ‘Enough is enough’, you limit the potential for a contagion risk out of those businesses.
“Creditors always have less information about the people that they're doing business with than people presume. You can have people who you think are capable of paying you racking up big bills, and they can wipe out employment and your own business.”
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