Construction collapses lead record insolvency year

John KehoeEconomics editor

Jul 28, 2024 – 1.36pm

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Failing construction companies made up more than one in four of the record 11,049 corporate collapses in the previous financial year, and restructuring experts warn insolvencies will continue to mount.

Persistent inflation, elevated interest rates and the Australian Taxation Office chasing tax debts drove a 40 per cent jump in corporate collapses in 2023-24, according to analysis of data from the Australian Securities and Investments Commission.

It was the highest number of annual insolvencies recorded by ASIC since records dating back to 1999-2000 and surpassed the previous high of 10,757 in 2011-12 at the tail end of the global financial crisis.

However, as a share of total companies operating in the economy, the failure rate remained lower than the GFC.

Kathy Sozou, McGrathNicol partner and vice president of the Australian Restructuring Insolvency and Turnaround Association, said the construction industry led formal insolvency appointments, at nearly double the appointment numbers of the next most affected industry which is accommodation and food services.

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“Construction is being impacted by market pressures including rising inflation and labour shortages, as well as the contagion effect of business failures within the supply chain impacting project deliverables across the board,” she said.

Ms Sozou said the accommodation and food services sector continued to be affected by weak consumer sentiment. “As cost of living concerns become more acute, discretionary spend will further decrease.”

The Australian Tax Office’s pursuit of debts is also contributing to insolvencies.

“Director Penalty Notices and ATO-driven winding up applications are driving the high number of liquidations as a percentage of total insolvency appointments,” Ms Sozou said.

“I suspect we will see the current trend continue over the next 12 months as economic pressures impact consumer and household sentiment.”

There were 2975 construction companies which had external administrators or controllers appointed in the 12 months ending June 30.

Collapsed home builder Porter Davis was one of the highest-profile casualties.

Accommodation and food services had 1667 insolvencies, followed by 1039 in other general services, 768 retailers, 656 in professional, scientific and technical services, 578 in manufacturing and 281 in healthcare.

Companies running into financial trouble included discount airline Bonza, Booktopia, vacuum cleaner retailer Godfreys, transport group Scott’s Refrigerated Logistics, rapid local delivery service MilkRun, beauty and skincare group BWX and craft beer company Tribe Brewing.

Ashurst restructuring and insolvency partner Michael Sloan said building and construction continues to “bear the brunt of the economic headwinds”.

“The usual suspects of inflation, interest rates and sentiment are influencing insolvencies,” he said.

“SMEs are facing a more trenchant ATO which is no longer amenable to effectively financing struggling businesses. Property financiers are seeing increased volumes of distressed developments. The health sector is facing its own economic malaise.”

Mr Sloan said while insolvencies are on the rise, there was economic resilience such as the low 4 per cent unemployment rate, a surging share market, and low home default rates. “It is far from all doom and gloom.”

Tax office chasing debts

The ATO has uncollected tax debts of more than $15 billion, excluding taxpayers subject to insolvency or liquidation processes, and those who have disputed their debt.

The biggest single group is some 42,127 small businesses, owing a combined $11 billion.

Clayton Utz restructuring and insolvency partner Jennifer Ball said the ATO was being aggressive in the recovery of corporate debt.

“Unless inflation is controlled and interest rates decline, with growth also starting to stall, one can confidently say that this year will continue to be busier in the number of insolvencies with more smaller businesses failing all the way through to the end of the year and into 2025.”

Ms Ball said the construction industry dominated the number of insolvencies, including many small family businesses.

“There continue to be supply chain issues for the construction industry where businesses are still struggling to find materials at prices that don’t significantly eat into their profit margins.

“Many continue to be caught out by fixed price contracts only to suffer a shortage of cashflow pushing them into insolvency.”

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