Market overview

Regulator intervention and government stimulus packages in response to market shocks often mask underlying systemic distress and disrupt economic cycles. With companies now largely weaned off COVID-19 support packages, insolvencies have significantly increased.

In May 2024, a further 992 companies entered external administration (or had a controller appointed), totalling 9735 this financial year; a ~14.5% increase on the same period in 2023 with March, April and May all seeing the largest number of monthly insolvencies since October 2015. It appears that we are on track to exceed 10,000 insolvency appointments this financial year. This would be highest number since 2012-13 (following the Global Financial Crisis).

In line with the ATO's Corporate Plan to aggressively pursue tax debts to strengthen debt collection, the tax office has increased its recovery proceedings following a brief post-pandemic hiatus, chasing more than $34bn of debt owed by small businesses and self-employed Australians. This is a further pressure point for businesses already suffering financial strain.

With the above factors in mind, it is not surprising that we have observed that banks are more likely to take enforcement action and also noticed a rise in queries from companies and boards relating to Safe Harbour protections. We have also seen that private credit and non-bank lenders are not showing any major signs of slowing down. They continue to take market share from the traditional banks. With significant capital to deploy, we see these credit providers continuing to play a major role in the Australian restructuring market.

In this edition of From Red to Black:

• Maria O'Brien and Suami Campos discuss privacy issues in relation to creditor information, in the face of external administrators, and examine recent Federal Court caselaw concerning the tension between creditor empowerment and privacy protection in these circumstances;
• Cameron Belyea focuses on the strategies and practices in distressed workouts, explores the role of traditional Australian banks and distressed investors in the restructuring market and highlights the challenges businesses face due to financial distress and the various restructuring options available;
• Alistair Fleming comments on the legal considerations of transferring company shares under a deed of company arrangement focusing on temporal limits and regulatory approvals involved;
• Paul James, Jonathon McRostie and Jackson Macaulay consider the rise of construction insolvencies in NSW, in their review of new legislative powers for external administrators, including compliance notices and potential expenses incurred as a result;
• Nicholas Poole, Anthony Burke and Aran Haupt examine the increase in insolvencies among startups and early-stage technology companies, discussing the unique risks they face and the protections offered by the “Safe Harbour” under the Corporations Act; and
• Jennifer Ball and Alana Dunn discuss the impact of current economic conditions on businesses and insolvency forecasts, as well as offering a comprehensive overview of Australian corporate insolvency laws, reflecting on the effectiveness of recent reforms and the and the potential areas for insolvency law reform by way of a holistic review.