Small businesses struggle as insolvent trading continues to rise: ASIC report

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Small businesses struggle as insolvent trading continues to rise: ASIC report

By Cara Waters
Updated

Insolvent trading continues to rise, according to the Australian Securities and Investments Commission's annual report into corporate insolvencies published on Tuesday.

ASIC's overview is based on 8425 administrators' reports lodged between July 2016 and July 2017, of which 63 per cent included evidence of alleged insolvent trading.

This compares with 61 per cent of reports in 2015-16 and 58 per cent in 2014-15.

Significant concern

Among the alleged insolvent trading cases, there were 3909 reports of alleged civil insolvent trading, of which 79.4 per cent estimated debts incurred while insolvent were below $1 million.

Australian Securities and Investments Commission chairman James Shipton.

Australian Securities and Investments Commission chairman James Shipton.Credit: Alex Ellinghausen

Administrators had evidence for 85 reports of alleged criminal insolvent trading and, of these, 59 estimated debts incurred while insolvent were below $1 million.

Three reports alleged a criminal breach involving more than 200 creditors. Each of these reports estimated debts incurred while insolvent of $1 million to $5 million.

"One thing that continues to be a concern is the matter of insolvent trading that goes on," says Professor Ian Ramsay of Melbourne Law School. "We can see that heading up to two-thirds of the reports allege a civil breach of the insolvent trading provisions. I'm not suggesting that turns into litigation, only a small percentage would, but it is still a significant concern."

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Ongoing problem

The ASIC report also reveals insolvent trading is continuing for a significant time in many cases.

Professor Ian Ramsay says the amount of insolvent trading is a concern.

Professor Ian Ramsay says the amount of insolvent trading is a concern.Credit: Josh Robenstone

In 2127 reports, or 54.4 per cent of alleged civil breaches, the company became insolvent more than 15 months before appointment.

Professor Ramsay identifies this as another area of concern. "You start to see not only the administrators expressing concern about the companies trading when insolvent, but again it is a significant portion of time," he says.

Impact on small businesses

The corporate regulator noted a "material decline" in reports, which were down 17.9 per cent, reflecting the 18.4 per cent fall in external administration appointments for 2016-17.

But Professor Ramsay says this is not a long-term trend and year to year there are "significant fluctuations" in the number of reports

Small and medium businesses continue to be the hardest hit by insolvencies, reflecting the sheer number of small businesses in Australia. Of the reported insolvencies, 84 per cent had assets of $100,000 or less, 79 per cent had fewer than 20 employees and 43 per cent had liabilities of $250,000 or less.

The top three nominated causes of failure for companies were: inadequate cash flow, in 46.7 per cent of reports; poor strategic management of businesses, in 45.6 per cent of reports; and trading losses, in 35.5 per cent of reports.

ASIC asked external administrators to prepare 819 supplementary reports where there were allegations of misconduct by company officers. This amounted to 12.5 per cent of all reports lodged in the financial year that alleged misconduct.

Industries impacted

The industries with the highest numbers of reports lodged were "other" (business and personal services) with 2230 reports lodged, construction with 1611 reports, accommodation and food services with 884, and retail with 596.

Insolvency practitioner Jamieson Loutit says ASIC's overview shows a big increase in insolvencies in construction and retail industries.

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"Small- to medium-size enterprises involving the construction industry are being hit," he says. "The government has put infrastructure projects in place but they are only being utilised by larger firms and smaller building companies aren't getting the work. Retail is another industry that is being hit. Retailers are finding it hard with online sales. I think in the new year a lot of retailers will go bust."

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