Company liquidations rise with more debt collections

THE number of companies going to the wall surged last year amid a Tax Office crackdown on overdue debts, new figures show.

By InvestSMART · 11 Feb 2012

By InvestSMART ·
11 Feb 2012

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THE number of companies going to the wall surged last year amid a Tax Office crackdown on overdue debts, new figures show.

Australian Securities and Investments Commission statistics show that after two years of stability following the global financial crisis, the number of companies entering external administration surged by 9.2 per cent to 10,481.

Adrian Brown, ASIC's senior executive leader of insolvency practitioners, said the jump in insolvencies appeared to be driven by increased debt collection, including by the ATO.

"The ATO said publicly in 2010, 'We're in debt collection mode,"' Mr Brown said. "The anecdotal evidence we're hearing over the past two quarters is that the ATO has been very aggressive."

Mr Brown said voluntary administrations, in which a company owner retains a chance of recovering something of their business, had fallen away.

"It seems to suggest these are companies without a prospect of rescuing their business," he said.

The number of liquidations last year ordered by courts on the application of a creditor rose 12.2 per cent, while the number of liquidations called by company shareholders who realise their business is insolvent rose 12.8 per cent.

Mr Brown said that changes to the law since 2007 made it easier for company directors to put their businesses directly into liquidation when confronted with a tax or other debt that they could not pay.

The ATO can issue directors penalty notices, which make company directors personally responsible for their company's tax debt.

"If the ATO goes and issues directors penalty notices one of the director's options is to put it into liquidation," Mr Brown said.

ASIC was committed to ensuring that Australia's 670 liquidators did their job properly, he said.

"When work increases it can stretch them and we're intent on keeping them focused on their responsibilities," he said.

- Administrators appointed to deal with the close of Kell & Rigby have identified a possible investor to keep the construction company in business. Kell & Rigby announced on Thursday it was closing its doors, resulting in the loss of 500 jobs at its projects in NSW, Queensland and the ACT.

Stephen Parbery and Mark Robinson of PPB Advisory were appointed as voluntary administrators. It is understood the company had been negotiating a refinancing solution for months, but this fell through on Wednesday. The administrators said wages and superannuation for all Kell & Rigby employees had been paid up to date.

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Frequently Asked Questions about this Article…

What do the latest ASIC statistics say about company liquidations and external administrations?

ASIC data showed a 9.2% jump in companies entering external administration last year, rising to 10,481 after two years of stability following the global financial crisis. The figures point to an increase in insolvency activity across Australia.

Why did company insolvencies increase — was it linked to ATO debt collection?

Yes. ASIC’s senior insolvency official Adrian Brown said the rise in insolvencies appeared driven by increased debt collection, including action by the ATO. He noted the ATO publicly said in 2010 'We’re in debt collection mode' and anecdotal evidence suggested the ATO had been very aggressive.

How did the mix of insolvency outcomes change between voluntary administrations and liquidations?

Voluntary administrations — where owners may have a chance to rescue part of the business — fell away. At the same time, court-ordered liquidations on creditor application rose 12.2% and liquidations initiated by shareholders rose 12.8%, which suggests more companies had little prospect of rescue.

What are directors’ penalty notices and how can they affect directors and company outcomes?

Directors’ penalty notices (DPNs) issued by the ATO can make company directors personally liable for a company’s tax debt. According to ASIC, when a DPN is issued one option for a director is to put the company into liquidation, which can accelerate insolvency outcomes.

Have legal changes affected directors’ options when facing unpaid tax or other debts?

Yes. ASIC said changes to the law since 2007 have made it easier for company directors to place their businesses directly into liquidation when confronted with tax or other debts they cannot pay.

What oversight is ASIC providing for liquidators as insolvency work increases?

ASIC said it is committed to ensuring Australia’s 670 liquidators perform their duties properly. ASIC noted that when work increases it can stretch liquidators, and the regulator is intent on keeping them focused on their responsibilities.

What happened with construction firm Kell & Rigby and how are administrators handling it?

Kell & Rigby announced it was closing, costing about 500 jobs across NSW, Queensland and the ACT. Administrators Stephen Parbery and Mark Robinson of PPB Advisory were appointed as voluntary administrators, have identified a possible investor to keep the business operating, and said wages and superannuation for all employees had been paid up to date. The company had been negotiating a refinancing that fell through on Wednesday.

What should everyday investors take away from the rise in liquidations and increased debt collection?

Everyday investors should note that aggressive debt collection, especially from the ATO, can increase insolvency risk and push more firms into liquidation. It’s sensible to monitor ASIC insolvency statistics and watch company balance sheets and debt levels when evaluating investment risk.