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Insolvencies at a record high for small businesses

INSOLVENCIES across Australia's small business sector are soaring, with the number of companies placed into external administration in February at the highest level since the statistics were introduced in 1999.

Australian Securities and Investments Commission statistics show 1123 businesses were placed into administration in February, compared with 518 in January, with the next highest figure on record in March 2009 when 1095 businesses went into administration.

Behind the latest surge is a sharp rise in the number of businesses being wound up through the courts, which also reached a record of 449 in February compared with 79 the month before. This represented 40 per cent of the total number of businesses placed into administration.

According to insolvency industry experts, the rise in court wind-ups is mainly being driven by the Australian Tax Office seeking to recoup unpaid tax debts.

"The data is clear that in terms of companies entering external administration, the month of February 2012 had the highest number of companies in that position on record," said Denise North, chief executive of the Insolvency Practitioners Association of Australia.

"What's interesting is the mix of appointments in the financial year to date, and what you can see there is that there's the highest number of court liquidations by type of appointment since 2009," she said.


"What you have with court liquidations is you're frequently talking about an appointment where there's very few assets left and the company may not be trading. Many court liquidations are driven by Tax Office activity and by workers compensation insurers who need to wind up businesses for legal reasons."

ASIC's data shows businesses with fewer than five full-time- equivalent employees accounted for more than half of those placed into external administration in the year to June 30, 2011, with the construction sector accounting for almost 24 per cent of the 4963 smallest businesses wound up.

The biggest nominated cause of failure by external administrators was poor strategic management, followed by inadequate cash flow, trading losses, poor financial control and poor economic conditions.

"There's a strong sense of paralysis out there in the general business community at the moment," said Morgan Kelly, a partner at national insolvency firm Ferrier Hodgson.

"The larger companies and businesses appear to be in pretty good shape. A lot of them are de-leveraged and are going well. But not surprisingly the SME [small, medium enterprises] sector is in the grip of paralysis."

However, Mr Kelly said that business conditions in the insolvency sector itself had slowed in recent times because banks were reluctant to force companies into receivership.

" … You've still got a lot of Tax Office liquidations and companies going into official liquidation and the court lists are still busy, but in terms of enforcement the insolvency market itself is slowing.

"The reason for that is that with the reduction of available liquidity in the SME sector there is obviously a less-active market for most assets. And when there's a less-active market for most assets, generally receivers aren't going to be able to sell anything any better than anyone else. The banks are leaning more towards work-outs and negotiated outcomes than actual enforcement."

Mr Kelly said banks were now much more likely to generate a tailored solution to keep a business running rather than move quickly to wind it up.

Another trend was that more and more older Australians who owned businesses were choosing to hold on to them in the current economic climate rather than selling out at deflated valuations.

"What we're also seeing at the moment is probably an unprecedented number of self-employed baby boomers who have businesses and don't want to sell them because the market is so slow. It's a massive problem.''

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