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The outlook for insolvency is looking more promising for 2026, but it will depend on a range of domestic and global factors.
The insolvency landscape: 2025 mid-year review and beyond
13 June 2025
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10 minute read
As we reach the midpoint of 2025, Australia's insolvency landscape remains challenging, shaped by persistent economic pressures, regulatory shifts, and global uncertainties. While some sectors exhibit resilience, others continue to grapple with financial distress. Looking ahead to 2026, cautious optimism prevails, tempered by a recognition that recovery will hinge on a range of domestic and international factors.
From an enforcement perspective, anecdotal and firm-level observations suggest that the ATO has become increasingly assertive. There has been a noticeable uptick in the issuance of director penalty notices, statutory demands, and winding-up petitions.
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Current state of insolvency in Australia
The first half of 2025 has seen a continued rise in insolvency appointments. According to ASIC data, over 7,400 companies entered external administration by 31 December 2024, marking a 47 per cent increase from the previous year. If current trends persist, Australia is on track to exceed historical records for corporate insolvencies by the end of the financial year.
The construction and hospitality sectors remain the hardest hit, accounting for a disproportionate share of insolvencies. In South Australia alone, over 650 businesses became insolvent in 2024, including 148 in the hospitality sector and 102 in construction. Escalating operational costs – particularly wages, energy, and insurance – combined with a reduction in consumer spending, have significantly impacted these industries.
Key drivers of financial distress
Several interrelated factors continue to place pressure on Australian businesses, including:
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Aggressive tax collection: The ATO is pursuing recovery of more than $35 billion in debt from small businesses, and has adopted a firmer stance on restructuring and repayment arrangements, making it increasingly difficult to negotiate lenient terms.
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Rising costs: Elevated input costs – especially in labour, utilities, insurance, and supply chains – combined with sustained high interest rates, are eroding margins for many SMEs.
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Softening consumer demand: Inflation and elevated interest rates have led to reduced discretionary spending, particularly affecting sectors such as hospitality and retail. Reduced revenue and cash flow constraints are making it harder for businesses to service debts and maintain operations.
Global context and comparisons
Australia’s insolvency trends mirror global patterns. The Allianz Global Insolvency Report predicts a 6 per cent increase in global bankruptcies in 2025, following a 10 per cent rise in 2024. Contributing factors include high interest rates, geopolitical instability, and tepid consumer demand.
In Europe, France has seen a marked increase in insolvencies, particularly among private equity-backed companies. The UK has also experienced elevated activity, with 1,971 registered company insolvencies in England and Wales in January 2025 – an 11 per cent rise from January 2024.
Outlook for 2026
Despite prevailing challenges, forecasts for 2026 point to a possible decline in insolvency rates. Atradius anticipates a 5 per cent drop in global insolvencies, with the Asia-Pacific region – including Australia – expected to lead this decline. Contributing factors include:
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Easing monetary policy: Central banks are expected to reduce interest rates, easing borrowing pressures.
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Stabilising inflation: A cooling of inflationary pressures could help reduce operational cost burdens.
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Government support: Continued fiscal interventions in select jurisdictions may offer temporary relief to vulnerable sectors.
However, risks remain, particularly from geopolitical instability and global trade tensions. In this volatile environment, businesses should continuously review their financial position and adapt structuring, risk, and growth strategies accordingly.
Legal developments in Australian insolvency law
Several important court decisions have shaped the insolvency and restructuring landscape in 2025:
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Cross-border insolvency recognition: In a notable decision, the Federal Court recognised the US Chapter 11 proceedings of Exactech under the UNCITRAL Model Law on Cross-Border Insolvency. This highlights Australia’s commitment to international cooperation in cross-border restructuring (York, Exactech, Inc (No 2), Re [2025] FCA 73; BC202501263).
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Unreasonable director-related transactions**: In CEG Direct Securities Pty Ltd v Cooper as Liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025] FCAFC 47, the Full Federal Court clarified that for a transaction to be voidable under section 588FDA of the Corporations Act 2001 (Cth), the benefit to the director must be both direct and identifiable. This provides vital guidance to secured creditors and insolvency practitioners.
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Personal insolvency agreement scrutiny: In Inspector-General in Bankruptcy v Hartnett [2025] FCA 111, the Court set aside a personal insolvency agreement for being unreasonable and not in the creditors’ interests, marking the first successful challenge of its kind by the Inspector-General in Bankruptcy.
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Trustee indemnity rights: In Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1, the High Court held that successor trustees do not owe fiduciary duties to former trustees in respect of indemnity rights. This places the onus on former trustees to protect their interests – potentially by seeking receivership or injunctive relief.
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Unfair preference claims – costs risk: In Badenoch Integrated Logging Pty Ltd v Bryant [2025] FCAFC 31, the Full Court held that the company was liable for the liquidators’ appeal costs, reinforcing the financial exposure entities face when contesting preference claims.
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Unpaid present entitlements and Division 7A: In Commissioner of Taxation v Bendel [2025] FCAFC 15, the Full Court held that an unpaid present entitlement does not constitute a Division 7A loan, challenging the ATO’s longstanding view and prompting reassessment of tax strategies involving trusts.
These decisions underscore the dynamic nature of insolvency law and the need for practitioners, creditors, and boards to remain alert to changes in judicial reasoning and statutory interpretation.
Conclusion
Australia’s insolvency environment at mid-2025 reflects a complex mix of domestic challenges and global headwinds. While key sectors continue to feel the strain, there are emerging signs that a recovery is possible in 2026, particularly if inflation moderates and monetary policy loosens. However, uncertainty remains, and directors, creditors, and advisors must continue to adapt.
Legal developments this year have also clarified several key principles, reinforcing the importance of timely advice and careful structuring. In a fluid landscape, proactive planning and professional insight will be critical to navigating the path forward.
By Trevor Withane, insolvency and litigation lawyer, Ironbridge Legal
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