Australian Bankruptcy, Insolvency Time Bomb: Thousands trading while technically insolvent
Australian Bankruptcy, Insolvency Time Bomb: Thousands trading while technically insolvent; Debt collection agency Prushka says rapid deterioration is canary in the coalmine
When creditors are happy to accept an average of less than three cents in the dollar on debts owed, it is a portent of dark days.
When half the statutory demands served on small to medium-sized businesses result in no payment, it isn't too far a stretch to think those dark days are closing in.
If the rising levels of company insolvencies and bankruptcies are thrown in the mix, along with the latest NAB business survey showing business conditions sliding to a four-year low, it should be a clarion call that the economic picture is even uglier than the official statistics would have us believe.
It explains a briefing paper to Victorian Treasurer Michael O'Brien last week that is understood to show that the downturn is widespread, with the billable hours of the state's top law firms and accountancy firms down 25 per cent year on year.
Debt collection agency Prushka has been monitoring the trends for the past 12 months and likens the rapid deterioration in debt collection to the ''canary in the coalmine''.
According to Prushka's Roger Mendelson, the figures from the group's debt collection agency and legal arm show that of all the statutory demands served on behalf of Prushka over the past 12 months, 47 per cent across the country resulted in no payment. It says the amount recovered equated to 2.9 per cent of the total amount claimed. The reason? ''Creditors were prepared to accept very substantial reductions rather than face the cost and risk of proceeding to a petition to wind-up the respective company,'' according to the agency.
To put it into perspective, a year ago only 20 per cent of statutory demands resulted in no payment and an average of 20 per cent of the total debt was recovered. This indicates a significant deterioration in debt collection and confidence.
Put simply an insolvency time bomb is ticking away in the small to medium-sized sector, which is a huge concern for the broader economy as SMEs employ 70 per cent of private sector employees.
The implication is that tens of thousands of companies - or even more - are technically insolvent, but are still trading because creditors are becoming increasingly cautious and prefer to recover a small amount of debt rather than spend the money chasing the full amount.
Insolvency and Trustee Service Australia released the provisional personal insolvency activity statistics for the June quarter 2013 and 2012–13 today.
Ms Veronique Ingram, Chief Executive of Insolvency and Trustee Service Australia, said that debt agreements reached the highest annual number on record in 2012–13.
“During the last decade, debt agreements increased from 16% of total personal insolvency activity to 31% of total personal insolvency activity while Australia’s level of personal insolvency activity remains relatively stable,” she said. Personal insolvency activity 2012–13
Debt agreement activity in 2012–13 reached the highest level on record in a financial year. Bankruptcies decreased in 2012–13 compared to 2011–12 in all states and increased in the Australian Capital Territory and the Northern Territory. Personal insolvency agreement activity in 2012–13 is at the lowest level in a financial year since 2006–07.
Personal insolvency activity in the June quarter 2013
“Bankruptcies increased nearly eight percent in the June quarter 2013 compared to the March quarter 2013. To put this into perspective, bankruptcies in the March quarter 2013 were at their lowest level since the March quarter 1996,” Ms Ingram said.
Personal insolvency activity increased in the June quarter 2013 compared to the March quarter 2013: bankruptcies recorded the strongest quarterly increase since the June quarter 2008. personal insolvency agreements recorded the strongest quarterly increase since the September quarter 2011. Victoria, South Australia, Australian Capital Territory and Northern Territory recorded increases in total personal insolvency activity in the June quarter 2013 compared to the June quarter 2012.
Debtors with a business-related personal insolvency
Ms Veronique Ingram said that in 2012–13, the proportion of debtors with business related bankruptcies or debt agreements reached record proportions. “Economic conditions are the most common business related cause of personal insolvency,” she said.
Debtors with business related personal insolvencies in 2012–13: 25.0% of bankrupts 8.7% of debt agreement debtors 44.4% of personal insolvency agreement debtors. 19.8% of debtors entered a business related personal insolvency in the June quarter 2013. The proportion of debtors entering a business related debt agreement in the June quarter 2013 is the highest proportion since the September quarter 2003. The proportion of debtors entering a business related personal insolvency agreement in the June quarter 2013 is the lowest proportion on record.
Causes of personal insolvency
The most frequent causes of insolvent debtors entering a personal insolvency administration in the June quarter 2013 are: economic conditions where the personal insolvency was business-related unemployment where the personal insolvency was non-business related or it was not stated whether the insolvency was business related.
Please note the quarterly provisional personal insolvency activity statistics are released at the state and territory level. Only and we do not provide additional statistical commentary or analysis.
Personal insolvency activity fell in the year to June 2013, after a flat year in 2011/12.
According to figures released by Insolvency and Trustee Service Australia yesterday, there were 30,822 personal insolvencies in the year to June – down two per cent on the previous year.
Bankruptcies, which make up the bulk of insolvency activity, fell six per cent, from 22,163 in 2011/12 to 20,876 in the year to June.
Personal insolvency agreements were down 24 per cent, while the number of Part IX debt agreements rose by eight per cent, to 9652.
The number of debt agreements has increased steadily since 2007, when changes to the Bankruptcy Act made it easier for people to use them as an alternative to bankruptcy.
The Australian Government has welcomed this development. Earlier this year the then Attorney-General, Nicola Roxon, issued a statement saying: "Debt agreements give many Australians in financial distress an alternative option to get back on their feet sooner than bankruptcy."
A debt agreement allows debtors to provide a plan for paying outstanding debts over a number of years. Lenders may forego some of the debt.
However, this is a controversial area. The Consumer Action Law Centre issued a report this year which criticised the promotion of debt agreements by administrators and credit repair companies.
It said many people who have entered into debt agreements under Part IX of the Bankruptcy Act were unaware of the serious consequences of such a decision.
A Part IX agreement will be listed on a credit report for seven years and is likely to be viewed by creditors as an act of bankruptcy. And if a creditor does not agree to the debtor's proposal it can apply to a court to make the debtor bankrupt.
The debtor's name is also recorded on the National Personal Insolvency Index, which is a public record.
Consumer Action looked at advertising by administrators of debt agreements and found that many businesses appear to overstate the differences between debt agreements and bankruptcy, or to understate the consequences of entering a debt agreement.
It said that in some cases the debtor would be better off going into bankruptcy. If the debtor is below the income threshold required for contributions, bankruptcy may mean that they don't have to pay anything to creditors.
ITSA said in a statement that the most common cause of personal insolvency was unemployment.
CORPORATE insolvencies are at record highs as the mining boom continues to unravel, leaving other sectors exposed in conditions almost as bad as the global financial crisis.
According to the corporate regulator, the Australian Securities & Investments Commission, 900 businesses across the nation collapsed in June.
FTI Consulting, in a report analysing those figures, said it was the longest spate of collapses since records began in 1999.
“It is the first time 900 or more companies entered external administration over five consecutive months,” it said.
“So far in 2013, 5321 companies have entered external administration, a record for the first six months of a year.”
AMP Capital chief economist Shane Oliver said manufacturing, retail and tourism were “really struggling” in the economy and were driving insolvencies.
Mr Oliver said the market was expected to deteriorate further in coming months.
it was the case during the great depression, statistics said that the number of bankruptcies did not go up. The cost of going bankrupt was to much for people to pay, so there you go. Rinse and repeat. Peter :pop:
the longest spate of collapses since records began in 1999.
“It is the first time 900 or more companies entered external administration over five consecutive months,”
“So far in 2013, 5321 companies have entered external administration, a record for the first six months of a year.”
AMP Capital chief economist Shane Oliver said manufacturing, retail and tourism were “really struggling” in the economy and were driving insolvencies.
Mr Oliver said the market was expected to deteriorate further in coming months.
Well that's all inspiring news. And people call me an idiot for putting some of my investment savings into gold. I should have converted all my savings, and my superannuation into gold.
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
Well that's all inspiring news. And people call me an idiot for putting some of my investment savings into gold. I should have converted all my savings, and my superannuation into gold.
Balance i think is the approach. Peter :pop:
foxbat101
29 Aug 2013, 02:12 PM
Balance i think is the approach. Peter :pop:
The issue that i see coming is the cost base, it continually rises, shire rates, water rates, land taxes, they go up , insurances go up. Strange when the cost of manufactured goods goes down. If there is a down turn in spending in an area it leaves certain business high and dry. So being in the right property is the key, a bit like having a chair when the music stops. Or being on the other ship when the Titanic goes down. I have found it is often the asset i least thought would outperform that does. Peter :pop:
Where are the wreck less and idiot Bulls on this one......silence
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
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