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Insolvency is big business for liquidators and trustees. When a company goes into liquidation or voluntary administration or a person goes into bankruptcy it is usually due to business failure or over borrowing. But if you know your options and the rules of the game it can be used to help you to a better life. True. Unfortunately most companies and individuals don’t. That represents a lot of lost wealth and unnecessary stress.
Remember, companies go into liquidation, voluntary administration or receivership (collectively called ‘administration’). Individuals go bankrupt, or enter debt agreements or personal insolvency agreements (collectively called ‘going broke’).
The rate of insolvency for companies (administrations) is increasing. About 10,000 companies go into administration each year. The rate of individuals going broke decreased in 2011. About 25,000 individuals go broke each year.
The number of companies entering some form of insolvency administration in the year ended April 2011 was 9,747. It is an increase of 16% on the average of the previous 5 years and an increase of 6% over the immediately prior year.
There were 1,356 appointments by Secured Creditors (usually banks) in the year to April 2011 which is up 73% on the average of the previous five years.
Total administrations for the first seven months of 2011 is 5,852, an all time high for the period, outpacing insolvencies during the Global Financial Crisis (“GFC”) which totalled 5,735 in January to July 2009.
The number of companies entering some form of insolvency administration in the month of June 2011 was 1,027. That figure is the highest June on record and the second highest monthly figure ever, the highest being 1,095 in March 2009.
This continues the trend of record insolvency numbers this year with March 2011 and April 2011 also being the highest March and April ever.
There are three main reasons for the increase:
- the more aggressive approach of the ATO over the last six months. Many appointments are being triggered by a company’s inability to pay tax debts from 2008 through to 2010
- extra administrations occurred just prior to 30 June as a result of new legislation on Director Penalty Notices that was to become effective as at 1 July 2011 –the draft legislation and the new laws are dangerous for directors, and
- problems in the building and construction and related trades.
Analysis by appointment type – Financial year to date*
Companies entering external administration 11 Months to May 2011 and % change v previous year
Court liquidations (1) 2,409 8.6% – where the creditor seeks a wind up order
Creditors Voluntary 3,835 7.6% – where the directors declare the company insolvent
Receiverships (2) 1,219 1.6% – where the bank appoints a ‘receiver’ over its security
Voluntary Admin 1,332 5.6% – where the directors may propose a settlement to creditors
(1) includes Provisional liquidations
(2) includes Receivers, Receivers & Managers, Controllers and Managing Controllers
*excludes Scheme Administrator and Foreign/RAB wind-ups
*excludes Members Voluntary Liquidation appointments as these relate to solvent entities
How big are the companies that go into administration?
- 77% of insolvency reports lodged with ASIC concerned companies with less than 20 employees
- 85% of failed companies had estimated assets of $100,000 or less
- 46% of failed companies had estimated liabilities of $250,000 or less
- 66% of failed companies had an estimated deficiency of $500,000 or less
- Construction was the industry with most lodgements, followed by “Other (business & personal) services”
Should creditors expect a big dividend from insolvent companies?
In 97% of cases, the dividend estimated to be payable to unsecured creditors was less than 11 cents in the dollar.
What are the main causes of insolvency for companies?
The top three nominated causes of business failure were poor strategic management of business, inadequate cash flow or high cash use and poor financial control including lack of records.
Companies reported as failing due to poor economic conditions increased from 16.6% to 26.8% from 08/09 to 09/10 financial years.
Is the ATO always involved for large amounts?
87.6% of reports indicated that the amount of unpaid taxes and charges was $250,000 or less
What is the most common form of director misconduct?
The most common area of alleged possible misconduct was a breach of section 588G(1)-(2) of the Corporations Act 2001 being insolvent trading. 45.8% of reports lodged included this as an area of possible misconduct.
If your business is suffering what should you do?
Review your products and services. Undertake a thorough analysis of your profits and gross margins and be ruthless in culling products and services that are not meeting your benchmarks.
Be ruthless with customers tell them “I can’t afford to carry your debt”. Business owners under pressure themselves must take that hard step.
Be prepared for the worst – no one can predict the future of the economy – start protecting your business assets and wealth. Ask us how. It may be the most important decision you ever make. Read “Our Story” and find out why.
Official figures show bankruptcy levels have fallen to a five-year low.
There were 17.4 per cent fewer bankruptcy cases in Australia for the March 2011 quarter, compared to the same period in 2010.
There were 5422 new bankruptcy cases recorded this year which is the lowest number recorded in nearly six years.
However, in 2009, there was a 13.66 per cent increase in bankruptcy levels for the March 2009 quarter, compared to the same period in 2008.
Why the lower number of bankruptcies?
Australia does not have the same exposure to sub-prime mortgage markets (granting housing loans to individuals who may have difficulties repaying them) like in the US and Western Europe, which led to a crisis within their financial sectors.
The Government’s stimulus and Australia’s stable employment rates were an important factor in decreasing bankruptcy levels since the March 2010 quarter.
Unemployment rates have dropped from 5.9 per cent in 2009 to 5.1 percent in 2010 and to a tight 5 per cent in 2010-2011 and 353,000 jobs were added between 2010-2011. However, any increasing interest rates for housing loans might continue to influence the bankruptcy figures in Australia.
If bank interest rates continue to increase dramatically, middle-class Australians drawing an annual income of $30,000 to $50,000 currently struggling with debts might be forced to declare bankruptcy.
The big role the ATO plays
The number of Australians failing to lodge a tax return has blown out to about 4 million and small businesses have racked up a crippling $9.4 billion in Tax Office debts.
In a grim picture revealing many families are doing it tough, about 700,000 taxpayers entered into special repayment plans with the Tax Office in 2009-10 – an increase of 32 per in four years.
And while big business posts record profits, the Tax Office expects 260,000 small business owners – many of them struggling corner-store operators – to default on these repayment deals.
This represents an increase of 100,000 in just two years, reinforcing concerns of a “two-speed economy”.
A Daily Telegraph investigation shows that small business, the so-called engine room of the economy, is saddled with a growing tax burden and many are struggling to meet their tax obligations on time.
The complexity of Australia’s self-assessment tax system is also baffling. Many taxpayers are simply not lodging tax returns, triggering an unofficial “cash economy” that could run into tens of billions of dollars.
As many as one in four taxpayers could be failing to file a return, according to the Tax Office’s own statistics.
Documents show 4.3 million individual taxpayers have “not yet lodged” a tax return for 2008-09 – a staggering 26 per cent increase on 3.4 million in the previous year.
The Tax Office snapshot was taken in October 2010 and experts say that tens of billions of dollars could be “leaking” from government revenues because of the dramatic hike in non-lodgment.
About 13 million individual taxpayers lodge an annual return with the Tax Office. While the big banks and giant mining companies are enjoying record trading conditions, many of Australia’s 2.3 million small and medium sized enterprises are facing much tougher times. Reinforcing concerns of a “two speed economy”, about 450,000 “micro” enterprises are expected to enter into special “payment arrangements” with the Tax Office in 2009-10.
You are not alone. Let Rebuild Now help you deal with present challenges and make a new start.