Court actions against Aussie businesses rose 58% last quarter: CreditorWatch

Court actions against Australian companies have risen sharply over the past quarter, with credit reporting agency CreditorWatch warning a return to normal debt collection activities signals that business insolvencies will increase throughout the year. 

While court actions remain relatively low compared to pre-pandemic levels, there was a 58% increase over November, December and January, compared to the same quarter the year before, which CreditorWatch says is a “strong indication” that large creditors, including the big banks and the Australian Taxation Office, are calling in more debts from firms carrying COVID-induced losses. 

CreditorWatch’s latest Business Risk Index shows trade receivables are also down close to 50% compared to pre-COVID levels, having dropped by 45% last quarter, compared to the same period a year earlier.

Average B2B trade receivables per data supplier. Source: CreditorWatch

Meanwhile, the number of external administrations increased by 1% in the January 2022 quarter and is up 1.4% over the past year. Administrations dropped significantly in January, although CreditorWatch noted this is a trend that is usually observed at this time of the year. 

“These are hardly figures to shoot the lights out but, like court actions, the latest outcome sheds light on the prospect of businesses needing to operate in a more normal credit environment as we proceed through 2022,” the reporting bureau said in a statement. 

Court actions against businesses increased last quarter. Source: CreditorWatch

The monthly CreditorWatch index also ranks regions and industries where businesses are most at risk of default, with the results showing Victoria and New South Wales are continuing to feel the effects of lockdowns and the Omicron outbreaks in late 2021.

According to the January index, Bankstown and Canterbury in NSW are the regions where businesses are at most risk of defaulting, while the Glenelg and Southern Grampians region in South Australia tops the list of regions where businesses are least at risk. 

Of the top five locations with the highest risk of defaults, four are located in NSW. 

Nationwide, businesses in the accommodation and food services sector have the highest probability of defaulting (5.69%), followed by information, media and telecommunications firms (4.61%) and those in financial and insurance services (4.39%). 

Industries with the lowest risk of default include healthcare and social assistance (3.16%), mining (3.23%) and agriculture, forestry and fishing (3.39%). 

The national probability of default rate is sitting at 5.7%, which is down slightly from 5.8% in December.

Overall, the January results “paint a grim picture” and show Australia’s economic recovery still has some way to go, says CreditorWatch, which is expecting to see business insolvencies grow throughout the year, even if the Reserve Bank doesn’t increase interest rates.

In particular, the continuing downward trend in trade receivables is a “worrying trend”, said CEO Patrick Coghlan. 

“The RBA’s view last week was that Omicron hadn’t derailed the economic recovery and when case numbers go down, the floodgates will open and consumers will rush out and start spending this $200 billion hoard of cash,” he said. 

“I’d love that to happen so businesses can get back on their feet more quickly, but there are a lot of ‘ifs’ about that assumption. Pressure is mounting for interest rates to rise. If that happens, it will be another hit to small businesses.”

Regions where the probability of default is highest: 

• Bankstown: 7.54% (NSW);
• Canterbury: 7.69% (NSW);
• Gold Coast — North: 7.70% (QLD);
• Bringelly — Green Valley: 7.81% (NSW); and
• Merrylands — Guildford: 7.84% (NSW).

Regions where the probability of default is lowest:

• Glenelg — Southern Grampians: 3.56% (SA);
• Murray River — Swan Hill: 3.68% (VIC);
• Limestone Coast: 3.72% (SA);
• Grampians: 3.73% (VIC); and
• Lachlan Valley: 3.79% (NSW).

Source: CreditorWatch January Business Risk Index