More SMEs likely to face insolvency: report


Cost of insolvencies on Australian banks in the year to June 2009 has topped $32 billion, says Restructuring Works

October 1, 2009

The cost of insolvencies on Australian banks in the year to June 2009 has topped $32 billion, with SMEs forecast to contribute to the upward trend albeit with smaller debts.

The fourth Restructuring Works Business Stress report released today reveals the number of appointments of receivers by Australian Banks has increased to 1,320 for the year to July, which is almost triple the average of 468 from the previous five years.

Similarly, the number of companies entering some form of insolvency administration has topped the 10,000 mark for the first time.

According to Restructuring Works spokesperson Cliff Sanderson, the latest numbers show the cost of insolvencies in the banking system has resumed its upward trend and is now hitting new peaks.

"In response, the Banks have been far more active in appointing receivers and taking possession of assets than ever before," Sanderson says.

He says there are two possible factors at play in relation to skyrocketing figures.

"Firstly, it simply takes a long time for either the directors of a company in financial trouble to deal with the issues or for the creditors to lose patience and take legal action.

"Secondly, the key driver of insolvency numbers in small and medium sized companies is the ATO but in the past six months the ATO has actively encouraged repayment arrangements with businesses rather than pursuing insolvency proceedings."

Putting these two factors together, Sanderson says there is likely to be a change in the mix of companies facing insolvency.

"We’ve seen large companies with large debts fail. Going forward we are likely to see an increase in the number of companies facing insolvency but they will be small and medium sized companies with correspondingly smaller debts," he says.

Comparing these latest statistics to the 1987 share market crash, Sanderson says recovery is still in its early phases.

"This time around the number of insolvencies is up around 37 percent, which is in line with post-1987, but the cost of insolvencies has already increased six fold, which is well ahead of post-1987."

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