Back to the future? The latest on director liability and insolvency

Significant emerging factors and trends are increasing pressure on directors. After several years of relative stasis induced by the pandemic (when many businesses were supported by various government initiatives and bank flexibility, whilst also enjoying ATO and creditor patience), there is a distinct whiff of change in the air. This year, we might see a move back to a more ‘normal’, pre-COVID setting. If so, there will be pressures for some, and opportunity for others.

Although reports vary, prevailing views suggest the taxman is owed ~$52billion, and the ATO now appears to be moving more quickly and decisively on recovery activities.

  • Those ATO operatives who were once responsible for approving and processing COVID-induced payments are now:
    • undertaking audits and taking steps to recover overpayments; and
    • actively chasing arrears (particularly from those that are not up to date with their lodgements) and are permitting far less wriggle-room to negotiate a deal (although there does still seem to be a willingness to possibly negotiate a compromise on interest and penalties).
  • Last year, as a more politically palatable way to force directors’ hands, at times, tens of thousands of Director Penalty Notices (DPNs) were being issued per week.
  • This year (after a long hiatus), in addition to an ongoing flow of DPNs, the ATO has returned to Court and is once again filing winding up applications in all jurisdictions.
  • Based on its recent experiences, the ATO is forecasting larger numbers of insolvencies in the coming months.

In addition to the ATO’s refocus on debt collecting, there are various other developments and pressure points, such as:

  1. increasing inter-agency coordination (ASIC, ATO and credit rating agencies are talking to each other and coordinating their activities more than ever before);
  2. ongoing supply chain disruption;
  3. higher base interest rates and the impact on lending; and
  4. greater activity (or volatility) in the mezzanine finance space, where subordinated debt is more exposed to increasingly impaired balance sheets.

These factors are compounded by the media’s focus on the building and construction industry as well as cost-of-living spikes and reduced consumer confidence & spending (particularly in the retail and hospitality industries).

Much of this is manifested by the instances of insolvency appointments that jumped significantly last year and has continued to increase this year. For example, see below comparisons of the first halves of FY22, FY23 and FY24:

FY22 (H1)FY23 (H2)ChangeFY24 (H1)Change
Creditors Voluntary Liquidation1,3182,22969%2,3084%
Voluntary Administration33764291%73114%
Court Liquidation38746219%1,076133%
Source: ASIC (as consolidated by Insolvency Australia, Q2 and H1 FY24 – Corporate Insolvency Index)

These statistics do not capture those numerous other companies that probably should also be undertaking some sort of formal process but are managing to avoid doing so (at least for the moment), with potentially more significant consequences to follow (think potential insolvent trading and possibly even illegal phoenix activity, etc). Not to mention those companies that have sought safe harbour protection for their directors whilst attempting to navigate choppy financial waters and remain afloat.

Admittedly, it can all feel a little grim, especially given the obvious potential for a broad contagion if any one or other of these factors turns septic.

However! Our experiences suggest that early identification and intervention can help significantly. That is, if problematic issues are identified and addressed early, there are available tools to mitigate risk and leverage outcomes such as safe harbour, voluntary administration, deeds of company arrangement and small business restructures.

For those that have maintained capital reserves, have a strong balance sheet and/or have access to finance, we expect to see good opportunities in the future to acquire assets, consolidate market share, etc.

So it is not all doom and gloom, if you know what to look for and can take action when you see it.

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