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Small firms must be wary of ‘date-night’ insolvency risks
The ATO and major banks remain a major driver of insolvencies, but cash flow issues are beginning to trigger higher numbers of business closures, with one insolvency firm saying that “cost-of-living insolvencies [are] on the rise”.
Miranda Brownlee and Jerome Doraisamy
Insolvency firms are beginning to see more closures triggered by cash flow issues. The latest credit risk data from Alares showed that the rate of insolvencies had eased slightly in August despite insolvency numbers remaining 33 per cent above average.
In its insights report, Alares said that this could suggest that the “insolvency catch-up” could finally be beginning to slow down.
Alares said the ATO remains the dominant driver of the insolvency catch-up.
“The ATO continues to use all avenues at its disposal to recover outstanding tax obligations, including director’s penalty notices, overdue tax debt reporting, and direct Court recoveries,” it said in its insights report.
The report also found that there has been no respite from the major lenders, with their Court actions continuing to rise well above historical levels.
Insolvency and business turnaround specialist Jirsch Sutherland said it has recently seen an increase in cost-of-living insolvencies, as “date-night economics” hits the cash flow of small businesses.
Navigating cost-of-living issues remains a high priority for small law firms. In a recent episode of The Boutique Lawyer Show, Legalite managing principal Marianne Marchesi reflected on the impact of the current economic climate on such practices and the practical steps that such firms can and should take.
Amanda Little & Associates managing director Amanda Little also shared her views with Lawyers Weekly about how to adapt one’s firm during periods of low client retention and cash flow.
In a special episode of The Lawyers Weekly Show, FeeSynergy founder and director Miki Simonovski discussed making improvements to a firm’s cash flow, reflected on why this is good business practice, and stressed the importance of growth via investment.
Jirsch Sutherland national managing partner Bradd Morelli said there has been a noticeable shift away from predominantly tax-driven insolvencies.
While these types of insolvencies still account for a large proportion of all insolvencies, the firm is beginning to handle more matters and receive more inquiries from businesses affected by cash flow issues.
“It’s not a seismic shift yet but these types of insolvencies are increasing, particularly as consumers cut back their discretionary spending,” said Morelli.
“I call it ‘date-night economics’, with householders reassessing what they spend their money on and, among other things, not going out as much. It’s having a real domino effect, with myriad small businesses experiencing a cash flow hit – on top of the higher cost of doing business.”
The data also showed that small business restructures are seeing increasing uptake, with SBRs accounting for almost 20 per cent of insolvency appointments, representing a significant increase from prior years.
Morelli said small business restructures (SBRs) have had a positive impact on the economy since the regime was introduced because SBRs provide much better returns to creditors than liquidations, they’re tax compliant, and they preserve jobs.
“Not only that, but with SBRs directors stay in control of their companies, and it’s a less invasive process than voluntary administration or liquidation,” he said.
According to ASIC figures, of the 573 companies that entered restructuring after 1 January 2021 and had completed their restructuring plan by 30 June 2024, 89.4 per cent remained registered.
While the majority of SBRs have been getting the green light from creditors – including the ATO, which is usually the main creditor – Morelli said he is now witnessing a perceptible change, with an increase in the ATO voting against certain SBR plans.
Morelli said there are three main reasons including director or shareholder loan accounts, trade creditors apart from the ATO being paid down prior to the appointment of the SBR practitioner, and poor compliance history.
“Having good compliance history is one of the indicators the ATO uses to determine the viability of a company,” he said.
“If it doesn’t have a good history, it can be a red flag. That’s why it’s so important to be up to date with activity statements, tax returns and superannuation returns and payments.”
