What Businesses Need to Know to Avoid Insolvency

Navigating the ATO’s Renewed Focus on Debt Collection

After several years of stagnant activity through the pandemic period, businesses benefited from government initiatives, bank leniency, and patience from the ATO and creditors. It seems now change is on the horizon and we are set to move back to the pre-covid conditions.

Recent reports estimate that the Australian Taxation Office (ATO) is owed approximately $52 billion in unpaid taxes. In response, the ATO is accelerating its recovery efforts with a more decisive approach. The same operatives who previously handled COVID-related payments are now:

• Conducting audits and reclaiming overpayments.
• Actively pursuing arrears, especially from those who are not current with their filings, with less leniency for negotiation, though there remains some flexibility on interest and penalties.

Last year, the ATO issued tens of thousands of Director Penalty Notices (DPNs) weekly as a means to compel compliance. This year, after a period of inactivity, the ATO has resumed filing winding-up applications in all jurisdictions, signalling an expectation of increased insolvencies in the coming months.

Increasing Inter-Agency Coordination and Market Pressures

Several factors are amplifying the pressure on businesses:

1. Inter-Agency Coordination: The ATO is collaborating more closely with the Australian Securities and Investments Commission (ASIC) and credit rating agencies, enhancing their collective efficiency in identifying and addressing non-compliance.
2. Supply Chain Disruptions: Ongoing global supply chain issues continue to affect businesses, complicating financial stability.
3. Higher Interest Rates: Rising base interest rates are impacting lending, tightening financial conditions.
4. Volatility in Mezzanine Finance: Subordinated debt is becoming more vulnerable as balance sheets show increasing signs of impairment.

These challenges are further exacerbated by media scrutiny of the building and construction industry, cost-of-living increases, and reduced consumer confidence and spending, particularly in the retail and hospitality sectors.

Rising Insolvency Appointments

Insolvency appointments have surged significantly, with the trend continuing this year. Comparing the first halves of fiscal years 2022, 2023, and 2024 reveals substantial increases across various insolvency processes:

(Source: ASIC, consolidated by Insolvency Australia, Q2 and H1 FY24 – Corporate Insolvency Index)

These figures do not account for numerous other companies that should be undergoing formal processes but are currently managing to avoid it, potentially leading to more severe consequences such as insolvent trading and illegal phoenix activity.

Opportunities Amid Challenges

While the situation might seem bleak, early identification and intervention can mitigate risks significantly. Tools such as safe harbour provisions, voluntary administration, deeds of company arrangement, and small business restructures can help businesses navigate financial distress.

For companies with strong capital reserves, a robust balance sheet, or access to finance, there will be opportunities to acquire assets and consolidate market share. Therefore, it’s not all doom and gloom if you can recognise the signs and act promptly.

How Can We Help?

At Greenhalgh Pickard, our team of Solicitors and Accountants can provide professional advice about business recovery and insolvency matters. We understand the need for accurate commercial advice and fast action when personal or business finances are at risk. If you find yourself at risk of insolvency or in a dispute of this nature, give our team a call today!