Company wind-ups and bankruptcy: where is the SME sector heading?

Roger Mendelson

Through constantly monitoring company wind-up and personal bankruptcy figures, we can learn a lot about the health of the SME sector and the Australian economy. What do the figures say?

Company wind-up trends

The largest source of wind-ups comes from both the ATO and other government organisations, such as State Payroll and Workcover. For the last quarter, 57 per cent of total wind-ups were initiated by them and this figure has been consistent over many years.

There were 953 notices of wind-up issued by businesses in the December quarter. This figure represented an increase of six per cent compared to the previous December quarter.

Is there an SME insolvency problem?

Considering these figures account for the whole country in the months from October to December, these figures are still very low. However, there does seem to be a trend for increases in wind-up applications.

For businesses, the reality is that it’s expensive to wind-up a company, largely due to high government fees with the overall cost upwards of $8000. A high volume of businesses aren’t wound up officially, they simply cease operations without external involvement.

Often, the time and cost to creditors of attempting to wind up a company aren’t worth it, so these figures are only the tip of the iceberg. But will these wind-up figures keep on increasing?

Bankruptcy figures looking positive

According to figures released by the Australian Financial Security Authority (AFSA) the number of bankruptcies last quarter were down 10.6 per cent in comparison to the previous year at 3385 – suggesting bankruptcies are at their lowest level in almost 26 years.

One reason for this is that many large corporations are wary of bringing bankruptcy actions due to the concern about adverse publicity. Another reason is simply the cost. An SME pursuing a defaulting customer would spend approximately $7000 to pursue the bankruptcy process. In most cases, this will be the only option available to them and will only proceed if the defaulting customer has sufficient equity in real estate. This ensures the bankruptcy claim costs would be covered, and the process would be financially worth it. However, the major reason is that there are indications that the economy is in a sound state.

The most important takeaway is despite continued uncertainty, the economy is sound – confirmed by both company wind-up figures and bankruptcy figures. It makes sense – unemployment rates are low at 5.3 per cent, RBA is keeping interest rates historically low at 0.75 per cent, the commonwealth budget is heading into surplus and Australia’s export values exceed the cost of imports.

What should SME owners do?

Winding up a default customer or bankrupting an individual customer (or Guarantor) is expensive and time-consuming and results are not guaranteed.

For SMEs to safeguard their business, it’s imperative to be cautious about giving credit to the wrong people in the first place.

An important step is to get your new customers to complete a new customer application form and check all their references. Also, if your new customer is a company, you can consider a director’s guarantee to ensure you will always get paid – as this will make the director of the company personally liable.

Using business trading terms prepared by a lawyer will also ensure your business is protected. In the case of a default – it’s important to act very quickly, don’t let the account fall into arrears. Falling behind in defaults will negatively impact your cashflow and overall business performance. Make sure to refer the debt to a no recovery no charge collection agency, at no later than 90 days overdue.

Roger Mendelson, CEO, Prushka Fast Debt Recovery