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Insolvency practitioners should not have to do government’s job gratis

20 March 2024

If you are a taxpayer fulfilling your tax obligations, the following situation won’t please you.

For decades a countless number of taxpayers has been well served by the diligence and willingness of the insolvency sector to uphold public interest, a situation now threatened by its inability, in many instances, to afford to keep doing what is essentially the government’s job. 

The genesis of what has evolved into a major issue for insolvency practitioners began when thousands of companies, already badly managed, were nonetheless kept afloat during the pandemic by government support programs funded substantially by the timely tax payments of viable companies. 

Post-pandemic withdrawal of these programs has seen the inevitable sinking of pre-pandemic non-viable companies in increasing numbers.

They now owe the Australian Tax Office (ATO), by far Australia’s biggest creditor, more money than they have or are ever likely to have, and therefore the ATO has stepped up its debt recovery campaign with an increasing number of legal actions, which also in recent times they have been increasing the personal liability burden that falls on Directors when companies become insolvent and go into liquidation.

This is resulting in courts ordering the liquidation of hundreds of companies that have no money to pay liquidators (who refer to them as “no-funders”).

So, what’s likely to happen?

Macks Advisory is aware that insolvency practitioners in rapidly growing numbers are declining court appointments because rising costs of operating their firms has reached a level where it’s uneconomic to undertake liquidations of many no-funders.

Practitioners’ collective view is that it’s unreasonable to expect them to, in these circumstances, continue upholding public interest which is a prime responsibility of government and its agencies.

Accordingly, we expect in coming months to see pressure from the insolvency sector brought on the federal government to provide support for handling liquidations resulting from ATO actions.

Its job is to support improved community and financial outcomes for consumers and business. 

Background to all this

The ATO estimates it has $26.6b owed to it in collectable tax.  It’s owed a total of $45.6b in a variety of taxes.

Accordingly, the ATO initiated 476 wind-up proceedings in the first seven months of last year (compared with 14 in the same period of 2022).

By August last year collectable tax stood at $44.8b, up $18.3b (69%) since June 2019.  No wonder the ATO is intensifying its recovery campaign.

Latest figures available from Insolvency Australia show 1076 companies – close to a quarter of all external administrator and controlled appointments – were wound up by court orders in six months to December last year, a 133% increase on court-led appointments in the previous corresponding period.

ASIC figures show 9159 insolvencies were reported last year, up from 6446 in 2022.

Overall, Insolvency Australia’s Corporate Insolvency Index shows administrator and controller appointments rose 24% to 4531 in six months to December 2023, and the organisation’s director Gareth Gammon says insolvency rates are likely to increase in coming months when the ATO’s debt book will almost certainly exceed $50b -- despite strenuous efforts to reduce it.

While these efforts are commendable, Macks Advisory believes it’s understandable so many insolvency firms resent being expected to fund aspects of what is essentially a government responsibility.

Viewing the road ahead

We believe it’s likely court ordered liquidations and corresponding court liquidator appointments will increase this year, due mainly to shortages of skilled and unskilled labour, higher costs of doing business, and rising interest rates.

Last month when the Reserve Bank of Australia (RBA) maintained the cash rate at $4.35% it nonetheless warned mortgage holders it could not rule out further rate increases while economic uncertainty remains high.

It seems to us, in the face of cost-of-living pressures and likely higher interest rate charges by commercial lenders, that the retail sector will be at increasing major risk this year because of an economic situation that’s having significant negative affect on the discretionary spending of its customers.

Similarly, hospitality businesses will remain financially stressed in circumstances exacerbated by high labour costs and low availability of labour.

The construction and building sector has seldom if ever faced more formidable financial challenges. It now gives rise to between 22% and 24% of all company collapses in Australia, and this seems likely to increase.

Adding to this likelihood, is that pandemic-triggered government financial assistance and accompanying legal protection for directors of companies operating in problematic circumstances, has been withdrawn.

Also pushing increasing numbers of building companies into insolvency and subsequent liquidation is non-availability of materials and labour, increased funding costs, and tightening of both provision of scarce capital to support work in progress and guarantees required on construction contracts.

There’s a glimpse of a silver lining in this gloomy landscape that emanates from a government-funded small business restructuring regime that lights pathways to survival for viable financially stressed companies with debts of less than $1m.

For the first two years of its availability the regime was poorly accessed, but it’s now become an increasingly common way for directors to restructure their debts with creditors, while continuing to trade.

Anything that will help ease current financial pressures on liquidators has to be a good thing.  

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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