Personal insolvency numbers show a continued increase in numbers but still well below past figures; on the other hand, corporate insolvencies are just approaching pre-COVID-19 levels. Compulsory (court-appointed) bankruptcies and liquidations remain low. The construction industry is prominent in both personal and corporate insolvency numbers.
The latest personal insolvency statistics for May 2023[1] show a continued increase in numbers but still well below past figures.
During May 2023, there were 1031 new personal insolvencies – rising from a low 769 in April – but compared with 1,614 personal insolvencies in February 2020, and 2,736 in July 2019. AFSA has predicted, in January 2023, that personal insolvency volumes are expected to revert towards 2019 levels over the next 2 financial years.[2] It is too early to tell whether this is a slow-moving confirmation of a trend towards AFSA’s prediction.
On the other hand, corporate insolvencies are just approaching pre-COVID-19 levels, having increased 62.5% for the current financial year to 11 June 2023 compared with the same period last financial year. [2A].
Involuntary – court-ordered – insolvencies
One consistent trend is the low proportion of bankruptcies based on creditors’ petitions. The 628 new bankruptcies in May 2023 comprised 591 based on voluntary debtors’ petitions and only 37 – or about 5% – based on court sequestration orders; it was 6.8% in April. In 2021–22, 9% of new bankruptcies were by creditors’ petition, increasing from 5% in 2020–21. Over the years, the proportion of compulsory court ordered bankruptcies has generally been under 10%.
Likewise, court appointed liquidations remain only marginally above the lows experienced during COVID.
The motivations of creditors applying to bankrupt or liquidate their debtor are not clear, or at least in going all the way to sequestration or winding up. While there will always be exceptions, the legal process can be fraught and dividend returns average just over 2c/$. Using the pre-bankruptcy/liquidation processes to persuade the debtor to pay up are no doubt more frequently used, with many more demands, notices and petitions issued than there are sequestration or winding up orders made. The courts will readily dismiss a petition or winding up application by consent, on payment by the debtor, any judicial concern about other creditors of the debtor not being paid having mostly disappeared a long time ago. [2B].
However in personal insolvency, as an outcome of the March 2023 Attorney-General’s roundtable,[3] the government is looking at restricting such debt recovery rights of creditors by way of raising the bankruptcy threshold from $10,000 up to $50,000 and increasing the period of time to respond to a bankruptcy notice from 21 days to up to 60 days. This supports but does not go as far as academic comment[4] that Australian law allows creditors too much power to apply for sequestration; rather that the power be qualified by the need for the creditor to show some prospect of a dividend for before a sequestration order is made.
“Voluntary bankruptcy sought by debtor petition is and should be the modern norm, with involuntary cases limited to the narrow range of instances where such a case actually benefits the creditor collective.”
That would be supported by a further suggestion, to prevent creditors from abandoning an application for bankruptcy once it had begun.
“There is no proper justification for allowing a creditor to initiate a bankruptcy process simply to abandon it once the creditor receives preferential payment”.
Perhaps those few bankruptcies initiated by creditors do produce a higher dividend. Over 16% of estates paid a dividend in 2021-22, with the average dividend being 9.7c/$ – which somewhat “benefits the creditor collective.”
See also Can a debtor resist a bankruptcy arising from COVID-19? – Murrays Legal
Business bankruptcies
The other interesting May 2023 statistic is the high percentage of bankruptcies coming out of a failed business – over 40%. It may be assumed that a good proportion of those involve a debtor’s company in liquidation, with current law requiring each to be handled separately. See Business bankruptcies – 6,000 to 9,000 each year – Murrays Legal.
PJC report
The parliamentary joint committee report on corporate insolvency, due on 12 July 2023, may raise law reform issues as to the winding up processes, and as to mixed personal and corporate insolvency issues in business failures, among many others. It may also report on the current purposes of insolvency generally that go beyond the more limited law reform outcomes said to have come from the A-G roundtable. It may also report on the need for better statistics on which to base law reform improvements.
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[1] Provisional personal insolvency numbers increase in May 2023 | Australian Financial Security Authority (afsa.gov.au)
[2] STATE OF THE PERSONAL INSOLVENCY SYSTEM (afsa.gov.au)
[2A] ASIC Corporate Insolvency Update – Issue 28 | ASIC
[2B] The “considerable misgivings” of the Judge in In the matter of Open Plains Wholesale Meats Pty Limited [2012] NSWSC 1156 (24 September 2012) (austlii.edu.au) notwithstanding
[3] Ministerial Roundtable on Personal Insolvency: summary | Attorney-General’s Department (ag.gov.au)
[4] Involuntary bankruptcy as debt collection: multijurisdictional lessons in choosing the right tool for the job, Jason Kilborn & Adrian Walters, 87 Am. Bankr. L.J. 123 (2013)
