Insolvency - Will 2023 be the year the insolvency floodgates open?

The challenges ahead for Australian businesses in 2023 must be viewed within the context of the past two years. In 2021, the federal government provided significant stimulus which helped to boost liquidity and bolster a generally supportive financial and regulatory environment – these factors resulted in historically low levels of insolvencies and a “cliff” that never eventuated.

While the availability of credit continued well into 2022, the regulatory environment began to tighten. This coupled with geopolitical uncertainty, supply chain challenges, extreme weather events and labour shortages contributed to distress within certain sectors. The construction industry bore the brunt in particular, topping ASIC’s insolvency statistics for the year.

In effect, 2023 will be the first full year where the impact of these challenges will not be buffered by government support, or the leniency afforded by lenders and regulatory institutions over the past two years. Businesses are now facing inflation levels at a 30 year high, rising interest rates, ongoing supply chain issues, increasing energy prices, prolonged abnormal weather events, increasingly acute cyber threats and sustained increases in the cost of living – amounting to a business environment that is as complex and difficult to navigate as ever.

While insolvency levels are still down, they have been increasing, and in December 2022 we saw a return of insolvencies back to pre-pandemic average levels. To date, much of this increase has been driven by businesses that were likely insolvent for a long time. This trend is indicative of a normalising of corporate failures rather than a result of the current pressures.

2023 presents a challenging outlook for businesses
In addition to a normalisation of the rate of corporate failure, we expect that economic and regulatory factors will lead to more insolvencies. Businesses experiencing distress will have less support from available stakeholders to successfully effect a turnaround.

The key question is whether the broader macro-economic slowdown and challenging environment will result in an increase in corporate failures to pre-pandemic levels, or whether the floodgates will open because of a real decline in liquidity coupled with the most challenging business conditions experienced in over a decade?