03 Re-Organisation

A rise in ‘situational-specific’ insolvencies

Targeted government support, readily available capital sources and the reopening of Australia’s borders is providing renewed optimism for many businesses. However, new and emerging threats suggest we will see a ‘situational specific’ rise in insolvencies across 2022.

So which ‘situations’ do we see as drivers of insolvencies this year?

Supply chain challenges: Businesses heavily reliant on scarce supplies to meet customer demand will experience challenges, with the Construction and Manufacturing sectors most at risk. Recent high-profile insolvencies in these sectors suggest that we will see the ongoing impact to:

  • the costs of raw materials and supplies (supported by increased inflation at 3.5%);
  • supply shortages and limited logistic capacity, creating substantial input backlog and delays; and
  • an inability to pass on increased costs to end users and customers due to fixed price or inflexible contracting arrangements.

Labour shortages: Businesses dependent on customer-facing staff will be more susceptible to operational disruption caused by COVID-19 isolation requirements, staffing shortages and turnover arising from a highly competitive labour market facing wage inflation. Retail, Event and Hospitality players are most at risk.

Structural industry reform: Aged Care industry operators, especially those with less sophisticated operational and capital structures will continue to struggle to meet pandemic care requirements and significant industry reform post the Aged Care Royal Commission. Businesses in the ever-changing Crypto industry will also face tough planned new regulatory reform.

Ineffective governance frameworks: Businesses with corporate governance policies and procedures that fail to appropriately address key business risks will likely suffer financial loss due to fraud, Cyber Attacks and cryptocurrency threats.

Shareholder disputes: Likely to arise where parties have differing views on core strategy, financial obligations and/or monetising interests in a highly accessible and liquid capital market.

Statutory creditor collections: The re-emergence of statutory creditors and regulators (post the Federal Election) will pursue outstanding obligations, targeting those businesses with delinquent lodgements, substantial arrears, and ‘zombie’ companies that are so indebted that they have been insolvent for some time.