Media Release: ATO adds pressure to increasing insolvencies says Clayton Utz R&I report

The state of the market is outlined in this year's edition of From Red to Black, Clayton Utz's annual review of Australia's Restructuring and Insolvency (R&I) market, and it's only expected to worsen over the next 12 months.

R&I National Practice Group Leader Nicholas Poole says businesses are in financial strain, with the ATO's plan to aggressively pursue tax debts and strengthen debt collection only adding further pressure. "Following a brief post-pandemic hiatus, the tax office has increased its recovery proceedings, chasing more than $34bn of debt owed by small businesses and self-employed Australians", Mr Poole said.

Regulator intervention and government stimulus packages in response to market shocks often mask underlying systemic distress and disrupt economic cycles. Mr Poole said: "With companies now largely weaned off COVID-19 support packages, the financial strain they have been under and are facing is becoming clear as insolvencies increase."

He added: "With many varied factors involved, it's not surprising that we've noticed a rise in queries from companies and boards relating to Safe Harbour protections."

"We've seen banks become more likely to take enforcement action, which is also not surprising. Private credit and non-bank lenders are not showing any signs of slowing down, continuing to take market share from traditional lenders. With significant capital to deploy, we expect these credit providers to continue playing a major role in the Australian restructuring market."

Insolvencies to continue to rise 

Looking ahead, Mr Poole predicts to see increased turbulence over the next 12 months for Australian businesses. "Persistent high inflationary pressures will keep borrowing costs elevated, further straining business cash flows. As interest rates remain high, we expect to see a continued rise in insolvencies, particularly among small to medium enterprises more susceptible to economic fluctuations. Ongoing global uncertainties may also continue to challenge businesses across various sectors", he said.

"If the ATO maintains its aggressive debt collection stance, we may see a surge in voluntary administrations and liquidations as businesses struggle to meet tax obligations. Restrictive credit conditions, coupled with a cautious lending environment, mean that Australian companies must be proactive in seeking restructuring and insolvency advice and explore restructuring options early."

This environment will likely create opportunities for private credit and non-bank lenders to play a more prominent role, providing much-needed capital to distressed businesses. Mr Poole predicts a greater reliance on alternative financing solutions, as traditional lenders become more conservative in their lending practices: "We expect the market to adapt to these challenges with innovative restructuring solutions and a potential increase in distressed asset sales as businesses navigate the complex economic terrain."

Businesses in sectors such as construction, manufacturing, hospitality and consumer services may face heightened risks. "The construction industry, already seeing insolvencies due to fixed-price contract challenges and rising material costs, will likely remain a significant contributor to insolvency cases. Similarly, the consumer services sector, including retail and hospitality, will continue to experience financial strain due to escalating operational costs, supply chain disruptions, and shifting consumer behaviours", Mr Poole said.

"As a result, the demand for restructuring and insolvency services is expected to grow, underscoring the need for companies to stay informed and be prepared for the challenges ahead."

You can read more insights in From Red to Black here.