Insolvencies on the decline, but pockets of risk remain

SYDNEY, Tuesday 10 April, 2018 – The number of Australian companies entering external administration (ex-ad) decreased by 20 per cent year-on-year in Q4 2017, but there are still pockets of concern according to newly released data from Equifax, the global information solutions company and the leading provider of credit information and analysis in Australia and New Zealand.

This decline in insolvencies is a continuation of an overarching downward trend over the past three years.

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Instances of ex-ad dropped significantly in the construction industry between Q4 2014 and the same period in 2017, supported by the surge in building development seen in several major cities across this time period. The manufacturing, financial and insurance services, wholesale trade and professional, scientific and technical services industries also saw significant reductions in instances of ex-ad over the past three years.

Neil Shilbury, General Manager, Commercial and Property Products at Equifax, said: “The reduction in insolvency levels nationally over the past several quarters has been influenced in considerable part by the performance of the mining states, as they continue to recover and stabilise following the end of the mining boom, coupled with improved economic conditions overall.

“On a state-by-state basis, however, Queensland, Western Australia and South Australia all saw instances of insolvencies trend upwards over the past three years, suggesting there is still some way to go before the impact of the mining boom is completely behind us,” Mr Shilbury added.

Despite the overall decrease in instances of insolvency, there are several industry sectors bucking the trend. The accommodation and food services, education and training, and retail trade industries have all seen an increase in businesses entering ex-ad over the past three years to Q4 2017.

Small businesses also fell on harder times recently, with instances of ex-ad in businesses with 1-4 and 5-9 employees increasingly significantly over the three years to the end of 2017.

“The industries seeing an increase in insolvency are, in many cases, also those facing disruption from new market entrants,” Mr Shilbury said.

“Traditional retailers are being threatened by the consumer shift to online shopping and the entrance of global giants, such as Amazon and Alibaba, to the local market. Similarly, the accommodation and food services industry has been grappling with the impact of peer-to-peer sites such as Airbnb, or tech-first delivery services like UberEats and Deliveroo. These kinds of disruptors put a lot of pressure on the industry, and particularly on small and independent businesses.”

Impact of phoenix behaviour

Although illegal phoenix behaviour – where there is a relationship between the failed company, via directors, to another previously failed company – makes up only a portion of external administrations each year, it is estimated to cost the Australian economy between $6 billion and $14.2 billion a year.

According to Equifax data, 20 per cent of phoenix companies are created in the 12 months prior to the original company’s ex-ad event, with the 6 months prior to ex-ad seeing the largest spike in the creation of phoenix companies (11.9%).

“Both businesses and lenders need to be able to identify a phoenix company in order to avoid being left without goods or payment should the company go under,” Mr Shilbury said.

“While it is common for businesses in financial distress to experience a drop in their credit score before entering ex-ad, companies that had an affiliated phoenix company created within 12 months of becoming insolvent show an adverse rate at least 2.5 times higher than the bureau average.

“Being armed with the right data to identify a company in financial stress, determine if the company is legitimate or involved in phoenix behaviour, and adjust payment terms accordingly is vital to businesses and lenders wanting to mitigate risk and maintain a successful partnership,” he concluded.

Disclaimer
The information contained in this release is general in nature and does not take into account your organisation’s objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your organisation’s circumstance before acting on it, and where appropriate, seek professional advice where appropriate.