Insolvency Outlook for FY 2025

Tadhg Schultz, Accountant

It’s no secret that Australia is experiencing an increasingly precarious economic outlook.

Headlines throughout the last financial year (“FY”) have been filled with reports of increasing rates of corporate insolvencies. The Australian Securities & Investments Commission (“ASIC”) has reported that as of 2 June 2024 nearly 10,000 companies had entered a form of external administration. That volume is already 25% higher than the numbers for the entire 2022-23 FY.

As recently as May, ASIC reported that more than 1,200 companies were declared insolvent, a rate that is 44% higher than the same period in 2023 and 122% higher than in the 2022-23 FY. 

Increased input costs, decreased consumer spending, shifting economic priorities and world-wide geopolitical unrest have all played a role in creating an uncertain landscape for businesses small and large.

While the future can never be certain, we expect this trend to continue and escalate in the next 12 months. In this article, we look at some of the key trends that we expect to see in the coming months.

Pressure on Small and Medium-Sized Enterprises (“SMEs”)

SMEs, have and will continue to see increased pressure on their operations during the foreseeable future. Anecdotally the Australian Taxation Office (“ATO has recently significantly stepped up its recovery actions. calling up overdue debts, more frequently issuing Director Penalty Notices agreeing to fewer payment plans and disclosing significant debts to credit agencies.

These trends are likely to continue in the future in line with the strategic objectives of the ATOs 2023-24 Corporate Plan.

Data from Creditor Watch also indicates that a record high was set for trade payment defaults in May 2024surpassing the previous records set in February and April of 2024 respectively. It is expected that the mounting cash flow pressures faced by SMEs as evidenced by these increasing default rates will lead to steep rises in insolvencies in the coming FY.

Industries to Watch

While much of the last FY has centred around insolvencies in the construction industry ASIC data from May 2024 indicates that while construction makes up 27.1% of all insolvencies, this is consistent with a figure of 28.1% only a year earlier.

While this may be considered a minor sign of pressures on the construction industry easing, another interpretation given the overall increasing number of insolvencies, is that other industries are now forming a more significant part of the increased number of insolvencies.  

Of note, figures from the same period in May 2024 indicate that hospitality related insolvencies now comprise approximately 15% of all insolvencies.

As this sector continues to face negative converging pressures in the form of increased wages and operating costs, produce and supply costs deceased consumer discretionary spending many restaurants will be forced to undertake significant restructuring steps or be unable to continue operating. Accordingly, we expect hospitality sector insolvencies to continue to increase in the near future.

Another significant increase in insolvencies is evident in the agriculture, forestry and fishing sector. Company insolvencies in these industries have nearly doubled from the same time last year, rising approximately 89%.

What Should I Expect?

As the trends of this year have shown, not every industry is affected by the same financial pressures and certainly face their own challenges. It’s also important to note that the impact of insolvencies is not felt evenly across Australia. Regions with well established business have and will continue to prove more resilient to financial pressures. Newer business in regions and states with incongruent government support for their sector will face a far more challenging financial environment.

Overall, we expect that insolvencies will continue to increase into the 2025 FY. Increased pressure from a weakened economy will likely continue, and businesses will need to be adaptable and willing to change where necessary to weather the storm.

We’re Here to Help

If you or your client are facing financial distress, it is crucial now more than ever that you seek assistance from one of our insolvency experts. Early intervention is key to giving a Company the best possible chance of recovery and avoiding potential personal liability.

If you have any questions on insolvency or have a client that is currently facing financial difficulty please contact the Hamilton Murphy team by telephoning (03) 8866 7600 or via email to info@hamiltonmurphy.com.au