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Insolvency booms as large firms collapse

Insolvency booms as large firms collapse

It may not be news to overworked insolvency lawyers facing a daily and interminable grind, but a new report has confirmed a growing need to insolvency and re-structuring advice in the economic downturn.

IT may not be news to overworked insolvency lawyers facing a daily and interminable grind, but a new report has confirmed a growing need to insolvency and re-structuring advice in the economic downturn.

The latest insolvency data from the Australian Securities and Investment Commission shows 829 companies entered external administration in May, compared with 780 the same time last year.

The trend is a result of large and small-to-medium sized businesses falling into external administration.

Year on year, the number of firms becoming insolvent between January and May has increased 26 per cent, the data shows. A total of 3,206 firms were made insolvent in the first five months of 2008, compared to 4,047 in the same period this year.

One insolvency partner, John Evans, who is the head of banking restructuring and insolvency at law firm Henry Davis York, said he has seen a significant increase in the number of large firms falling into external administrators' hands.

“Over the last 12 months the number of firms re-structuring or becoming insolvent has significantly increased,” he said.

“Last recession, there was more of the small to medium sized enterprises coming through first, but this time the global financial crisis has seen the larger corporations going down first.”

Evans, who has worked in the insolvency area for more than 20 years on cases such as the collapse of HIH, said the changes to the credit market was the main concern for SME’s.

“I think the SME market has not been affected to the extent that people probably expect,” explains Evans. 

“But if unemployment increases and credit remains hard to come by- we expect the SME market will come under increasing amounts of stress. The banks have notched up their requirements for credit lending, while a lot of the second tier lenders have exited the market, making it more difficult.”

Evans is currently working with the receivers of the ABC Learning Group and said the amount of legal work involved on a re-structure case or insolvency case depended on the type of business, the size, the assets and the structure.

DLA Phillips Fox partner, Scott Harris, agrees that a greater number of smaller operators are likely to start falling into liquidation. 

“Current market conditions show that a lot of businesses are suffering, and there is the expectation that this will continue for some time,” he said. 

“It’s not clear whether the numbers from ASIC are small or large enterprises, but there has already been some very high profile collapses, and the expectation is that in the SME’s market there will be an increase in insolvency work, particularly the property area.” 

According to Harris, developers are particularly susceptible to insolvency as they struggle to find buyers for their developments, and financiers seek back their investment. 

“A lot of businesses may have had debt maturing on June 30, which means they have to finds the funds or ask for an extension. As company’s review their circumstances, it’s likely some will need to re-structure, call in financers or fall into liquidation.” 

The DLA Phillips Fox expert said that in the past year there was a noticeable jump in the in the number of clients seeking advice relating to suppliers and leases in financial distress. 

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Insolvency booms as large firms collapse
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