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Why corporate insolvencies surged in 2024
Here, a BigLaw partner provided valuable insights into the remarkable increase in corporate insolvency rates observed in 2024 and elaborated on the underlying factors contributing to this record-breaking year.
Grace Robbie
Speaking on a recent episode of The Lawyers Weekly Show, Maria O’Brien, a partner specialising in restructuring and insolvency at Clayton Utz, discussed the dramatic rise in corporate insolvency in Australia this year. She also delved into the various interconnected factors that have contributed to corporate insolvency “really taking off this year”.
O’Brien indicated that the corporate insolvency figures for 2024 are on track to potentially “exceed” the peak levels experienced during the global financial crisis and have gone “well above” the numbers recorded pre-COVID-19.
She said: “That is notable, and that’s been slow in that, obviously, at the time of COVID, everyone had to have a good hard look at what they thought the implications were going to be for their sector.”
O’Brien disclosed that many professions within the restructuring and insolvency sector anticipated that the COVID-19 pandemic would be a critical turning point, leading to increased business failures and subsequently creating heightened activity for practitioners in this field.
“There was a perception generally in the restructuring and insolvency space that we would all be stupidly busy, and a lot of businesses would go to the wall,” she said.
Nonetheless, she indicated that the actual outcomes were less service than initially anticipated, with the unexpected resilience being largely attributed to the government support measures that enabled many businesses to weather the challenges they faced.
“That didn’t happen for a range of reasons, including, in particular, JobKeeper, and people managed to basically stockpile a pile of cash and lay off employees and sort of keep themselves whole through that period,” she said.
However, O’Brien expressed that now that the immediate relief measures have ended and the economy continues to adjust to the post-pandemic conditions, those businesses that temporarily kept afloat are facing significant challenges.
“But it’s all coming home to roost now to some extent. The driving factors behind that include inflation, which has obviously been an issue for a while. Interest rates increasing is a problem for people who borrowed when they were much lower and for corporates that are highly levered,” she said.
Additionally, she elaborated on how the construction industry is particularly experiencing considerable strain compared to other sectors due to significant challenges associated with “supply costs and supply chain [disruptions]”.
Another critical issue driving insolvency, according to O’Brien, is Australia’s “balloon[ing]” tax debt.
“Then there is the, I think, compelling factor as well that Australia’s tax debt has ballooned massively during COVID from, and these are very rough numbers, a kind of a standard, kind of $20-25 billion to sort of $45 billion of outstanding tax,” she said.
She discussed how this is a considerable driving force as the Australian Taxation Office, which had been lenient in its enforcement during the pandemic, is now taking a more aggressive approach.
“The Tax Office has, over recent months, signalled pretty clearly that they’re not going to just let that drift anymore.
“So we are seeing very proactive behaviour from the Tax Office, and that is going to drive, no doubt will drive more corporate insolvencies because once they serve director penalty notices, people have to move to do something, and I’ve been seeing that as a factor and then no doubt there’s a domino effect from that as well,” she said.
“I don’t think we’ve seen the end of, well, certainly not the ATO’s actions, but I don’t think we’ve seen the end either of the impacts of the rising interest rates and inflation more broadly.”
