Small business restructuring plans have tripled for the first half of the year, according to the latest Corporate Insolvency Index from Insolvency Australia.
According to the report’s author and Insolvency Australia director, Gareth Gammon, more and more business owners are seeking early intervention to improve their financial positions.
“Collaboration and restructuring are now being prioritised over ‘traditional’ liquidation,” says Gammon, “This change in mindset has positioned liquidators as pivotal advisers for distressed businesses – and it will have positive implications for long-term economic stability.”
Why the shift toward restructuring?
Liquidator Jarvis Archer attributed the rise in restructuring to the Small Business Restructuring (SBR) scheme, introduced in 2021 by the Morrison Government.
“It’s hard to understate just how transformative SBRs can be for small business owners,” said Archer.
The SBR scheme was designed to afford SMEs a cheaper and quicker restructuring process, allowing directors to remain in control of the business.
“A business trading to the bitter end, or shutting down, causes losses and doesn’t result in creditor returns,” Archer explained. “Despite its critics that say SBRs are just delaying inevitable failure, we’ve seen strong success, with less than 5 per cent of over 200 SBR proposals accepted by creditors being terminated before completion.”
Insolvencies rise as post-COVID leniency ends
Operating conditions remain tough in the post-COVID climate, as reflected in the Insolvency Index findings. This latest report found a 53 per cent year-on-year increase in formal insolvency appointments.
“This surge reflects the ongoing impact of tightened credit conditions and economic pressures, particularly on smaller businesses,” Gammon explained.
The ATO’s strong focus on recovering tax debt is another contributor, he said.
“Covid and difficult trading conditions are no longer being accepted by the ATO and other creditors for unpaid debts and insolvent trading,” said Archer. “The very high level of unpaid ATO debt means a lot of businesses are trading that can’t pay their debts as they fall due. This means they can’t pay the debts they’re incurring every day, which is trading while insolvent. The ATO very clearly intends to stop this happening.”
