Bring on 2015! But 2014 insolvency and bankruptcy statistics in context.

In the typical busy lead up to Christmas, it can be tricky to find enough time to reflect on the year. However, from an economic/insolvency perspective, a couple of key observations can be made:
Corporate Insolvency

1. Companies entering into external administration (“EXAD”) or insolvency decreased by almost 9% in FY14 when compared to the previous corresponding period (“PCP”). Over the past 5 years companies entering into EXAD have averaged just over 10,000 nationally.

2. We expect company insolvencies for FY15 to decrease by approximately 6-8% when compared to FY14. This is largely due to the modest financial position of the non-resource states (i.e. NSW/VIC) and the proportion of company insolvencies they represent when compared to the resource states. For instance in the September 2014 Quarter NSW company insolvencies decreased by 23% when compared to the national average of 16%. So in a sense when they are performing more strongly, there tends to be a fall back in total insolvency numbers.

3. The percentage of companies entering insolvency relative to new incorporations is currently below the long term trend of 6% as depicted below. We believe that the ratio is likely to return to trend during FY16. In this regard, we have recently heard economic commentary indicating that there are likely to be some economic challenges for the Australian economy in the next year. As a result, we believe these challenges are likely to mean higher levels of company insolvencies flowing into FY16.

Ratio of EXAD’s to new business registrations

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1 (Australian Securities & Investments Commission)

Personal Insolvency

1. In the last 13 quarters, bankruptcies nationally have decreased in all but 3 quarters (those being March 2012, September 2012 and March 2014). Whereas during the same period, debt agreements (or consumer style Part X arrangements that are actively marketed on TV/radio etc) have increased in every quarter, but 1 (that being March 2013). This is depicted in the graphs below.

Bankruptcies in Australia: % change compared to same quarter in previous year

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2 (Australian Financial Security Authority )

Debt agreements in Australia: % change compared to same quarter in previous year

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2 (Australian Financial Security Authority )

2. During the period 2004/05 to 2013/14 bankruptcies nationally have ranged annually from a low of 18,601 (FY 14) to a peak of 27,520 (FY 09). Based on an annual average of 23,377 during this period, the current numbers are well down. We expect that bankruptcies for FY15 will decrease by approximately 7-10% compared to FY14.

3. We remain cautious about the apparent growing popularity of debt agreements, particularly when considering as at FY14 approximately 40% of debt agreements entered into in FY09 were still incomplete. Or put another way, debtors had been subject to the agreement for 5 years and their obligations still not complete, whereas bankruptcy generally only goes for 3 years.

4. We continue to stress that debtors seeking to deal with their financial position should ensure that they obtain professional advice so that they can ensure they understand all the options and how they may be impacted by them – as opposed to being lured by slick advertising.

Knowledge & Expertise – We’re Here To Help!

I am continually surprised by company directors/business owners and individuals that don’t get the right advice or any advice. This quite often can be due to a state of being so overwhelmed (and in some instances a feeling of failure) that they try and deal with the crisis themselves – rather than seek assistance. Remember a problem shared, is a problem solved. As trusted advisors you can encourage clients to seek the right advice and get back on track.

My firm has the knowledge and expertise to deal with a variety of financial difficulties that SME’S and individuals may encounter and we spend the time to make sure there is a proper plan to deal with the financial stress. In this rushed world that we all live in, it is important where we have knowledge that may be of assistance that we offer this assistance to help those see that there is “light at the end of the tunnel”.

I wish you all the best for the upcoming festive season and 2015.

Why is risk-taking and entrepreneurship important to the Australian economy?


Risk is essential to the business environment. Entrepreneurship relies on creativity and imagination but with every new endeavour comes risk. The usual paradigm is that there is a direct relationship between the level of risk and return or profit attributed to that activity.

The Jones Partners’ economic research project into small to medium business (SME) Insolvencies in the Australian economy looked at the impact of risk and risk-taking on entrepreneurship. The attached video excerpt tries to answer the question -why is risk-taking and entrepreneurship important to the Australian economy? And provides an interesting narrative commentary on this issue

Most new ventures carry with them an elevated level of risk. Furthermore it is the small to medium (SME) sector that carries most of the risk burden within the Australian economic environment. It is therefore no surprise that this sector necessarily has the highest levels of insolvencies. Company Liquidations and Administrations including Voluntary Administrations and Deeds of Company Arrangement are disproportionately represented in small to medium (SME) sector. This however should not be necessarily be seen in a negative light

If we accept the value of entrepreneurship and risk-taking to the Australian economy then we must accept the consequences in terms of potential business failure.

At the present time however there appears to be a much greater cloud on the horizon. Recent observations indicate that Australian small to medium (SME) sector business leaders are becoming increasingly risk averse. Moreover it is becoming apparent that consumers themselves are becoming more cautious. In relation to consumers in particular we are observing and increased conservatism in the use of consumer credit as a consequence (having regard to the fact the Personal Bankruptcies have a direct relationship to the volume of consumer credit) Bankruptcies are for the first time in a decade levelling off and there is some indication that they may be in decline. This is not as a result of a more favourable Australian economic environment but rather the reluctance of consumers to borrow money.

In relation to the business investment there is a similar level of conservatism. Banks are reporting difficulties in finding suitable prospects and there has even been some recent evidence that in relation to the public company sector corporations are adopting a more generous dividend policy and in some cases even returning significant amounts of capital to shareholders. In short the corporate sector is saying to investors “we can’t find enough investment opportunity to use your money”

Jones partners have embarked on an economic research project that will see an annual report on the state of the Australian economy with respect to the level of insolvencies. The initial report was launched in July 2014 and made a number of key observations in relation in particular to the small business sector of the market

One relevant, if not obvious, observation is that the level of insolvencies does have an inverse relationship to Australian economic activity however there appears to be an important complicating factor. The number of SME insolvencies also has a direct relationship to the overall number of small to medium (SME) sector businesses that exist in the economy. When the economic mood is one of caution and when investors are reluctant to take risks economic activity will slow. There will be fewer new ventures. As a consequence it is possible to observe a reduction in the SME insolvency numbers whilst at the same time economic activity is subdued

These Australian economic indicators are being further research is part of the Jones Partners Economic research project which is aimed at enlightening the professions and business leaders on the impact of insolvencies have on the broader economic environment.

Jones Partners is keenly interested in investigating these issues .Jones partners specialises in providing professional advice and practical solutions. We can advise on a range of solutions that assists companies in difficulty Including Voluntary Administration, Receivership and various forms of Liquidation. In relation to personal insolvencies Jones partners has 4 registered Bankruptcy Trustees who are extremely active in assisting individuals resolve their personal financial difficulties using various parts of the Bankruptcy Act including Part 10 (Personal Insolvency Agreements) and Annulments pursuant to section 73 Of the Bankruptcy Act.

The effect of the environmental movement on Insolvencies in Australia


There are three major contributors to Australian insolvency statistics

Obviously the overall health of the Australian Economy is important and this was clearly demonstrated in the Jones Partners Report on Insolvencies in the Australian Economy launched in July 2014. In that report it was clearly demonstrated that there is an inverse relationship between the level of GDP and the number of Insolvencies. This was more pronounced with respect to Company Liquidations, Voluntary Administrations and Receiverships than with Personal Bankruptcies.

It’s important however to realise that the management of individual businesses is more important. In fact the major reason for Australian company failures as articulated in a report by the ASIC is lack of strategic management. In fact of the top 4 reasons for Australian companies going into Liquidation, Administration or Receivership – the state of the economy does not even appear.

The third major contributor to the level of insolvencies in Australia relates to structural changes within the Australian economy itself

Advancing technology is a good example of these structural changes and wherever structural changes do occur there will be winners and losers. Think of what happened to the businesses that made buggy whips when the horse and cart was replaced by the automobile.

At present one of the major structural changes happening within the Australian economy and indeed the World is the impact of the environmental movement. The attached video excerpt on the effect of the environmental movement on insolvencies in Australia provides an interesting narrative on this topic.

Specifically there is some uncertainty about the future of energy. There is robust debate about climate change and in Australia previous governments with a more leftist leaning have been more inclined to provide subsidies for Australian industries developing alternative forms of energy. At present policy seems to have shifted away from subsidising any form of inefficient industry. A good example of this is the impending closure of the car industry. Those industries such as solar and wind generation that have relied heavily on government subsidies are also clearly at risk.

Not with standing foregoing and whether or not Australia has a Carbon Tax or some form of Emissions Trading Scheme it is clear that in the medium to longer term energy prices will continue to rise. Accordingly Australian companies that are high energy users must seek efficiencies or they too will be at risk. It is therefore likely that company insolvencies in Australia including Liquidations, Administrations and Receiverships will have a much greater representation statistically from industries that are not able to adapt to this changing energy environment.

Irrespective of government policies Australia and the World are becoming far more respectful of the environment .It is also evident that things like energy efficiency is much greater driver for business changes than any form of government policy. This is an example of how free market forces can and will have a positive effect on the environment.

One example of this relates to light globe technology. New LED lighting provides light globes that last for several thousand hours as opposed to the old incandescent technology which last less than 100 hours. In addition the energy usage of the new technology is a fraction of the old .Clearly any company retailing or wholesaling old technology will find it difficult to survive and Australian businesses that don’t move relatively quickly to reduce their energy usage by adopting this kind of technology will be at a major disadvantage.

Australian companies not able to address these structural changes are at risk of closing altogether. Whilst it is difficult to implement a turnaround program using Voluntary Administration or any other procedures for that matter if the underlying business model is not addressed , if the underlying business model is sound then turnaround is a viable option notwithstanding the level of debt or the extent or previous losses.

Jones Partners is expert at investigating these issues and providing professional advice and practical solutions. We can advise on a range of solutions that assists companies in difficulty Including Voluntary Administration, Receivership and various forms of Liquidation. In relation to personal insolvencies Jones partners has 4 registered Bankruptcy Trustees who are extremely active in assisting individuals resolve their personal financial difficulties using various parts of the Bankruptcy Act including Part 10 (Personal Insolvency Agreements) and Annulments pursuant to section 73 Of the Bankruptcy Act.

Is Small Medium Enterprises — the heartland of the Australian economy?


It is clear that SMEs are the back bone of the Australian economy and at a recent function launching the Jones Partners Report into insolvency administrations in Australia Craig James, chief economist of the Commonwealth Bank said that 97% of Australian businesses employ less than 20 employees. It is therefore not surprising that over 80% of companies that fail are in this category. The businesses that dominate the corporate failure statistics roughly parallel the businesses in the SME sector and are very highly represented amongst construction, retail and professional services.

The Jones Partners Report looked in some detail at the effect on the Australian economy of the failure of companies in the Australian SME space. The report demonstrates the remarkable fact that this sector contributes substantially more to unemployment than the failure in relation to large companies which often gets much more media attention. The attached video excerpt on the significance of small medium enterprises (SMEs) provides an interesting narrative on the role they play both in respect to the Australian economy and corporate and personal insolvencies.

In the SME sector it is impossible to separate the ownership of the business from the management. Having regard to the fact that we now know that management failure is the major cause of company liquidations it is clear that these issues need to be addressed before any effective turn around program can be implemented.—Turnaround is nevertheless still achievable—

One method used in the turnaround management of companies is the Voluntary Administration process found in part 5.3 A of the Corporations Act

This process usually involves creditors accepting a compromise in relation to the outstanding debt potentially including extended payment terms

Voluntary Administrations are a formal process involving the appointment of an Administrator who prepares a report to creditors and convenes meetings the purpose of discussing the future of the company

Creditors then vote on whether or not to accept the proposal and this vote is based on numbers and value so clearly not all creditors are required to agree for the proposal to be binding

The procedure is very effective in the Australian SME sector but it does require a clear and accurate identification of the underlying problem together with a credible argument that the problem has been rectified or that the very least there is a convincing plan to achieve that end

If this cannot be done liquidation may be the only alternative

This of course does not always mean that the business is closed. It is possible in some situations of the business to be sold as a going concern to new owners. This preserves the goodwill of the business and can have the effect of saving jobs

Jones partners handle many turnaround assignments particularly using the voluntary administration process. Jones Partners is expert at investigating these issues and providing professional advice and practical solutions. We can advise on a range of solutions that assists companies in difficulty Including Voluntary Administration, Receivership and various forms of Liquidation. In relation to personal insolvencies Jones partners has 4 registered Bankruptcy Trustees who are extremely active in assisting individuals resolve their personal financial difficulties using various parts of the Bankruptcy Act including Part 10 (Personal Insolvency Agreements) and Annulments pursuant to section 73 Of the Bankruptcy Act.