Spotlight on Sector: Insolvency Snapshot and Warning Signs

In this episode, Chris covers:

• Current challenges across key sectors
• Evolving corporate and personal insolvency trends
• The changing nature of insolvency appointments
• The ATO’s increased focus on enforcement and debt recovery
• The role of Safe Harbour provisions
• The rise of Small Business Restructuring
• Key financial, operational, and behavioural warning signs of distress

The numbers tell a story:

• Corporate insolvencies reached approx. 11,000 in FY24, up around 40% on the previous year.
• FY25 appointments are forecast to increase to 15,000.
• Small Business Restructuring now accounts for nearly one in five appointments.
• Personal insolvencies are expected to rise to 13,500, a 15% increase.
• The ATO is pursuing over $50 billion in collectable debt, including $35 billion from small businesses.
• More than 26,000 Director Penalty Notices (DPNs) were issued in FY24—up 50% year on year.

Sectors under pressure:

Construction, hospitality, food services, and retail continue to be heavily impacted.

Emerging risk is also evident across healthcare, social services and the not-for-profit sector—an area that includes approximately 300,000 organisations, that contributes 8% of Australia’s GDP, and employs as many people as retail.

How to identify financial distress / insolvency 

The infamous ‘Water Wheel case’ also known as ASIC v Plymin dealt with a director’s duty to prevent insolvent trading, and the personal liability of directors for the debts incurred whilst trading a company that was insolvent.
Notably, the case helped establish a series of key indicators to help identify whether or not a company may be insolvent.  A modern adaption of those concepts is presented below:

Financial Indicators:

• Continued trading losses - indicates the organisation is not generating sufficient revenue to meet expense, and raises the question as to how these loses have been funded
• Poor cash flow - delaying payments to creditors, expanding aged payables outside credit terms, reaching overdraft facility limits, difficulty paying wages or superannuation on time, dishonoured EFT payments are all examples of poor cash flow
• Balance sheet insolvency - liquidity ratios below 1, working capital deficiencies, net asset deficiencies are all indicators that there are insufficient assets to meet liabilities
• Overdue statutory obligations - ATO and State Revenue Offices (payroll tax, or land tax) are ordinarily common examples

Operational Indicators:

• Loss of key customers – usually an indication of financial pressures impacting on product or service quality
• Increase in inventory levels or obsolete inventory – an indication of increased cash usage and reduced cash inflows, or deteriorating revenue position
• Supply chain issues - revocation of credit terms, and demands for cash on delivery are two such examples
• Inability to produce financial information in a timely manner – indication of lack of control, oversight, and understanding of financial performance and position of the organisation.

Behavioural Indicators:

• Directors not taking a salary – indication of precarious financial position of organisation, and cash flow constraints 
• Special arrangements with certain creditors - unusual payment arrangements, round sum payments, payment plans are common examples
• Poor relationship with current financial institution – a denial of further finance facilities, or a request to refinance with an alternative financier are common examples.