Construction sector seen as the most vulnerable to business failures in 2022
It’s crunch time for the country’s so-called “zombie companies”, according to insolvency experts, who are expecting company failures to return in large numbers in 2022 following two years of record lows.
While fears of a “tsunami” of business failures appear to have subsided, trade credit insurer Atradius expects the number of insolvencies to rise by 138 percent this year — the second-highest rate of growth predicted among 30 countries tracked.
That would be 33 percent higher than the pre-pandemic figure in 2019.
Jirsch Sutherland national managing partner Bradd Morelli said a catch-up in the number of insolvencies was inevitable at some stage, with the “cleaning out” of companies propped up by government stimulus and temporary insolvency protections implemented at the height of Covid-19 in 2020.
“Without those ‘lifebuoys’, we’re expecting an increase in insolvencies as many zombies finally reach the end of the line,” he said.
“In August, the number of business loan deferrals increased nearly six-fold, from 600 to 3500, with business owners unable to make their repayments.
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“Some business owners have taken on more debt to survive the pandemic. And now, with the ATO starting debt collection again, it’s important to be on the front foot.”
According to ASIC figures, the number of business failures fell by 42 percent in the year to June, down from 7362 in the previous year to just 4235. Insolvencies are down nearly 50 percent on the 2019 figure.
Source: The Australian, 31/1/2022*
While the ATO recently signaled it was recommencing debt recovery actions “after a general pause during lockdowns”, most insolvency practitioners are expecting a softly-softly approach in the lead up to this year’s federal election.
However, Oracle Insolvency Services partner Dominic Cantone said it would be crunch time for many businesses in the next few weeks, particularly for those operating in the Omicron-hit hospitality industry.
“The danger point for these businesses comes at the end of January, usually the quietest month of the year, when businesses face paying their suppliers for goods received in November and December,” he said.
“Then the ATO comes calling. To help businesses through the Christmas break, the ATO traditionally gives them until the end of February to meet the December quarter BAS payment.
“However, the next quarterly BAS payment, covering January to March, is then due at the end of April, just two months later.”
Mr. Cantone said the quick turnaround in BAS payments would test the cash flow of many businesses.
The construction industry is seen as one of the most vulnerable sectors heading into 2022 following the high-profile collapses last year of Queensland builder Privium and Melbourne’s ABD Group.
The construction sector typically accounts for 25 percent of all insolvencies nationally.
And according to the credit reporting agency, CreditorWatch, industry payment times have blown out during Covid-19, with a record-high 12.6 percent of payments to suppliers and contractors now more than 60 days overdue — the highest rate of any industry.
While materials shortages, site shutdowns and project delays caused by the pandemic have all put further pressure on the industry, Eakin McCaffrey Cox's special counsel Nelson Arias-Alvarez believes many builders were already operating at the slimmest of margins through fixed-price contracts that made it difficult to absorb unexpected cost increases.
“The Covid-19 pandemic caught out contractors and subcontractors who had accepted poorly negotiated contracts,” he said.
“Unable to meet contractual obligations, contractors and subcontractors have had to wear the costs of Covid-19 in terms of cost and time.
“Our fear is that these potentially terminal businesses may infect their directors, owners, employees, and stakeholders if action is not taken to address the financial imbalance.”
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