What’s behind the fact of “record” insolvencies
Beware of putting your own interpretation on, attributing implications to, or drawing inferences from, a fact.
An array of negative experiences may befall people who do this. A fact is just a fact.
In last month’s newsletter article on new payment requirements for businesses’ superannuation guarantees, we drew readers’ attention to the fact that some 14,000 Australian businesses went bust in the past financial year.
Because clearly these requirements would add new difficulty to cash flow forecasting, we wanted to urge owners to look with heightened care at how they are running their businesses, how they might avoid the slippery slope to insolvency, while also encouraging them to compare how they are travelling compared with other businesses in their industry.
Certainly, it was not to spread doom and gloom and score a headline -- as people in the mainstream media have been doing by referring to those insolvencies as a “record”.
And because we also feared some readers might be tempted to interpret 14,000 insolvencies in a year as an indication the economy is heading towards collapse, we invited you at the conclusion of the article to “watch this space”.
Those 14,000 insolvencies last year include 691 SA businesses that, according to the Australian Securities and Investments Commission (“ASIC”) fell into administration, receivership or liquidation – up from 593 the previous year.
And Insolvency Australia director Gareth Gammon expects business conditions to tighten in months ahead because of instability in the Middle East, rising fuel and fertiliser costs and interest rate hikes that will put further pressure on business owners.
The story behind the fact
First, let’s look again at that word “record” -- which obviously in this context is meant to imply something bad. Not only do we suggest its use is problematic, but even if it’s correct, that number of insolvencies could be a good thing for the economy.
Media commentators have been comparing those 14,000 insolvencies in FY25, a 33% rise on the previous year, with the fact that less than 5,000 businesses collapsed in 2022. They’ve concluded that last financial year’s collapses are a “record” for any 12 months of business in Australia.
But Macks Advisory, with the greatest of respect, suggests that right or wrong, that’s a conclusion not worth reporting.
For Insolvency rates were of course artificially low during the COVD pandemic because of an array of government schemes.
The media generally has been blaming the government’s current tax and red tape regime for the collapse of companies, but we believe the prime trigger for a significant proportion of these insolvencies has been withdrawal, post-COVID, of government support programs.
Or to put it another way, these programs allowed non-viable businesses to keep operating for years (although many were illegal phoenix companies), so that when, post-COVID, they had to meet their full range of tax obligations and regulations, they couldn’t.
Insolvencies in perspective
Although 14,000 businesses failed in FY25, many of Australia’s 2.5m other businesses have survived in a challenging economy, many of them doing quite well.
Only about half the failures were corporations. The other half were personal insolvencies where people were operating as sole traders or in partnerships. These insolvencies were well below the average for the past 10 years – all of which is scarcely indicative of “record” insolvencies, or of an economy about to implode.
The reality is that members of Australia’s Productivity Commission have told a Parliamentary Joint Committee on Corporations and Financial Services, that “insolvencies play an important part in maintaining the dynamism of an economy, ensuring it is innovative and constantly changing in a process sometimes referred to as “creative destruction”.
Business collapses generally occur for obvious reasons ---failure to fulfil tax obligations, inefficiency, lack of innovation, superior competition, poor location, fraud or other illegality.
Surely, exits from the business community of companies that are a continuing drain on the economy, can only be for the nation’s good.
Their propping up by government support has for too long made it so much harder for honest young innovators and risk takers to survive, but alas removal of this support has been too late to benefit businesses and livelihoods destroyed by competitors, who’ve, for years, been able to undercut prices by ignoring tax and regulatory obligations.
At least space is now being made for better firms to enter the market and contribute to the economy.
Furthermore, as the rate of companies’ entry and exit from the marketplace slows and the use of AI increases, the rate of job switching will tend to slow and the economy, accordingly, to stabilise. Although the advent of AI initially tended to be an added factor in causing job loses, its evolution is starting to provide jobs for people who lost them because of insolvencies.
And it’ll be interesting to see to what extent 14,000 insolvencies in a year will improve productivity.
The story behind red tape
Contrary to widespread belief, red tape, that many business operators say is the curse of their lives, does not necessarily arise, as they claim, from bureaucrats’ bloody mindedness and administrative officers trying to justify their existence. We believe much of it stems from Australia’s avoidance for years of costs of compliance in issues related to anti-money laundering and modern slavery.
Much of this year’s red tape can be explained by governments’ efforts to recoup from businesses, profits earned unfairly in past years.
Red tape is also frequently generated from a deep-rooted belief by intelligent people in business that governments are obligated to establish detailed regulations about conduct relative to legislation they enact.
It’s a need highlighted by an abundance of evidence, that whether it’s in the biggest of corporations or smallest of businesses, there are people who will behave illegally at a cost to fellow taxpayers and thus to the nation. But red tape doesn’t only arise from legislation. Inefficient businesses generate it when there’s an obvious need to protect the public from consequences of their inefficiency.
We look forward to sighting the World Bank’s B-Ready review of Australian corporate insolvency law in 2026. It should show us an authoritative assessment of how our rate of insolvencies compares with those of other countries, particularly our trading partners.
