Is this the end of the insolvency drought?

reforms, spiral

It has been said that with all the stimulus measures and health restrictions that were put in place over the past two years, two industries that were unexpectedly adversely affected were those involving insolvency practitioners and undertakers.

With a decrease in insolvency appointments of up to 60 per cent, it has been a very quiet couple of years for liquidators and trustees in bankruptcy.

However, now, with the COVID Stimuli being wound back, the ATO increasing its enforcement game, and the federal election has been and gone – it may be the time for the tables to turn and for the insolvency drought to be broken. But whether we will be met with the mythical “insolvency tsunami” remains to be seen.

The ATO has definitely come out of hibernation, with 52,319 warning letters dispatched in April and 30 to 40 Director Penalty Notices (DPN) being issued every day, as well as 300 intent to disclose notices following 29,552 awareness letters concerning liabilities in excess of $100K.

This is definitely leading to an increase in enquiry level for insolvency practitioners from advisors to company directors who have either received a warning letter or a DPN.  However, whilst this had led to an increase in the “voluntary” insolvency space (think creditors’ voluntary liquidation or voluntary administration), for the insolvency drought to be truly broken, the level of court-ordered wind-ups needs to also rise.

The ATO is by far the largest single petitioning creditor in Court Liquidations, and there has been a significant reduction in winding up applications throughout the past two plus years. Depending on the time periods you look at, the ATO has historically issued between 140 and 600 winding up applications in any given month. Given that had dropped back to negligible levels during FY21 and FY22, any increase in the ATO winding up activity would have a significant impact on the insolvency landscape.

Further, an increase in ATO Winding Up activity would not only have a direct impact on the insolvency numbers. Seeing the ATO as an active regulator/creditor would also encourage some of those directors who have kept their heads in the sand over the past period to potentially take notice and seek relevant and appropriate advice in relation to possible insolvency appointments. 

The ATO’s winding up activity can also be seen somewhat as a “litmus test” amongst other creditors who may be reluctant to enter into enforcement action ahead of their peers. There can be a conscious reluctance by these lenders to pursue debt without their peers taking similar action, and risk being seen as ruthless and uncaring in an environment when their competitors or other like-minded creditors are holding back.

It wouldn’t be unusual for other institutional creditors, such as banks and other business lenders to take steps to themselves increase their enforcement activity, once they are aware that the ATO has recommenced the same. Once debt enforcement can again be seen as a by-product of doing business, rather than a callous and heartless act, it will become more commonplace, and this can start the spiral with respect to an increased level of insolvency events and appointments. But it all has to start somewhere, and the milestone may very well be the change in the ATO’s attitude towards enforcement and windings up.