Insolvencies (and risk to the Hire Industry) on the rise: the warning signs and practicalities

This article was published in the Hire and Rental Industry Magazine - The unfair contract terms regime and what it means for your leases or licences', August 2024, pages 28 - 30

Recent data from the Australian Securities and Investments Commission (ASIC) and the Australian Financial Security Authority (AFSA) has proved what many of us suspected – that bankruptcies and corporate insolvencies are on the rise.

The data from AFSA indicates that bankruptcies are up 19.5% on the same time last year with 75% of those bankruptcies occurring on the east coast.

Unfortunately, the insolvency statistics released by ASIC in May 2024 paint a similar picture. There have been 9,200 insolvencies year to date representing an increase on last year of more than 20% with the construction industry and hospitality industries making up more than 40% of all insolvencies in 2024.

Reasons for the increase in insolvencies include:

• the Australian Taxation Office resuming enforcement of federal taxation debts

• government COVID-19 stimulus and protection measures (such as the 6-month period for compliance with a statutory demand) having ended

• increased costs, supply chain issues and labour shortages in the construction sector.

Warning signs for the Hire Industry

With a significant amount of hired equipment being placed into the construction and hospitality industries, the risks of dealing with a company that is, or is likely to become insolvent, is on the rise. With the majority of corporate insolvencies in 2024 being voluntary (i.e. creditor’s voluntary liquidations), it is important for organisations to be prepared and identify potential warning signs that a customer may be in financial difficulties. Some of those warning signs include:

• seeking an extension on payment terms

• increased age of debtor’s balance

• applications for extension of further credit

• general silence.

If the early warning signs are not managed effectively, this can often see debts significantly increase prior to administration or liquidation.

Whilst most equipment which is hired will have the benefit of security interests registered on the Personal Property Security Register (PPSR), this protection only goes so far. Whilst you will be able to recover the equipment rightly belonging to you, you may otherwise only be an unsecured creditor in the administration or liquidation which could yield only a partial return, if any.

What to do when a customer goes into Administration or Liquidation

When faced with a debtor who enters administration, liquidation or is facing payment or cash flow difficulties, the following can also be considered:

• whether the debt will be treated as a secured debt (such as a mortgage, caveat or PPSR registration), in which case enforcing that security is the best way to recover without concerns of any clawback

• whether a personal guarantee can be relied on to pursue recovery separate to any claim that can be made on an insolvent corporate entity, noting that the personal guarantee will survive even if a deed of company administration is entered into or the company is placed into liquidation

• whether another party against whom action can be taken is jointly liable for the debt without the need to rely solely on any liquidation dividend or payment from a voluntary administration

• where you believe a debtor may be insolvent, two key considerations arise:

  • firstly, any payment from the debtor to you up to six months before the liquidation might be a preference payment and may be required to be repaid to a liquidator on demand. Defences against this include subjective knowledge of indicators of insolvency and whether a reasonable person in your company ought to have thought the debtor was insolvent at the time of payment

  • secondly, where you believe a debtor may be facing cash flow difficulties, extending further credit may be unwise. Alternative terms such as cash on delivery, additional security or a personal guarantee can be put in place. This will provide an alternative means of recovery and also some protection where funds received are deemed a preference payment.

• if you are concerned about payment, you should ensure any contract with the debtor is strictly complied with. Contracts often contain a provision which allows one party to terminate the contract where an “insolvency event” has been committed by the other. Any wrongful termination or failure to honour the terms of the contract could give rise to a claim for damages against you. Advice on these provisions can be sought before taking action

• if you wish to continue hire arrangements with a company that is in liquidation or administration, a new agreement with the administrator or liquidator will usually be needed. Typically, the liquidator or administrator becomes the contracting counterparty, and that person will be liable to pay your invoices

• parties likely to default on their payment obligations may try to create a dispute or allege breaches of agreements to counter their obligations.

In general terms, moving quickly and decisively when the first warning sign is noticed will often place you in the best position to recover your debts, or at least minimise the amount of loss which could be suffered if supply is to continue.

Authors: Gavin Stuart and Adam Cutri