Insolvency data reveals ‘COVID-19 lag’ impact on SMEs

Small businesses dominated the latest annual insolvency statistics and highlighted the lagging impact of COVID-19 on small business, according to the Australian Securities & Investments Commission (ASIC).

Its recently released series 3 data, based on liquidator reports, showed more than eight out of 10 companies entering administration in the financial year 2023 had assets of $100,000 or less while just one in 20 had $1 million or more.

However, when it came to liabilities, almost one-third owed more than $1 million and almost 500 companies of the 5,440 reports collapsed with debts above $5 million.

ASIC outlined that small- to medium-sized corporate insolvencies continued to dominate external administrators’ reports with an average of three to four causes of failures for each company.

“The most common reported causes were inadequate cash flow or high cash use (52 per cent of reports), followed by ‘other’ (50 per cent) and trading losses (49 per cent),” ASIC said.

“Further analysis of the ‘other’ causes showed 19 per cent of reports identified the COVID-19 pandemic as a contributing cause.”

Other causes cited were poor strategic management of the business (42 per cent of reports) and poor financial control including a lack of records (32 per cent).

The construction industry was the single biggest contributor to the data with 28 per cent of reports, followed by the accommodation and food services industry (15 per cent) and the “other” category of business and professional services (11 per cent).

Most of the companies – 82 per cent – had fewer than 20 employees and 32 per cent had liabilities of less than $250,000.

“In this group of creditors, 96 per cent received between 0 and 11¢ in the dollar, reflecting the asset/liability profile of small- to medium-sized corporate insolvencies,” ASIC said.

Around 15 per cent of companies wound up owing wages or other entitlements to employees, although the bulk owed $50,000 or less.

The ASIC statistics were based on information contained in reports lodged by external administrators and receivers as soon as practicable (and, in the case of a liquidator, within six months), where it appeared to the external administrator or receiver: that a relevant person might have committed an offence in relation to the company, been negligent, or otherwise engaged in misconduct or, in the case of a liquidation only, the company might be unable to pay its unsecured creditors more than 50¢ in the dollar.

In terms of possible misconduct by industry, most external administrators cited multiple offences with trading while insolvent the most common, accounting for 35 per cent. Transgressions of directors duties or obligations to keep financial records were the next most common misconduct.

Most reports were received for insolvencies in NSW (41 per cent), followed by Victoria (27 per cent) and Queensland (18 per cent).

ASIC said registered liquidators continued to improve the timeliness in lodging their reports, with 77 per cent now lodged less than six months after appointment, reflecting a longer-term trend.

There have been growing concerns for the small-business sector recently, with brokers increasingly assuming a business advisory role as businesses grapple with mounting economic pressures.

Written by Philip King and Annie Kane

Last Updated: 21 December 2023

Published: 22 December 2023