Kingsway Financial Assessments Blog 20% of all insolvencies are in the construction sector : ASIC

Each week in Australia over 200 companies enter into some form of external administration. In July 2009 there were 876 such companies, an upward trend since April this year.According to the latest ASIC data shown in Figure 1, in July 2009 New South Wales experienced the highest number of companies entering external administration (363) almost twice as many as Victoria (203) and Queensland (196).In addition to the general downturn in construction activity, the high number of insolvencies in NSW is also likely to be areflection of a higher incidence of wind up notices instigated by WorkCover in NSW.While clients who use Kingsway's service show a negligible or zero rates of insolvency amongst the contractors they select, the rate of insolvency in the construction sector is disproportionately high.A recent report by ASIC shows that the construction industry was the single greatest ontributor to the number of external administrations in the 3 years analysed, with the construction industry making up 20% of all insolvencies. ASIC cited the following as the most common reasons for Insolvency, i) poor strategic management, ii) inadequate cash flow and iii) trading losses.According to ASIC, 82% of the companies that went into external administration had less than 20 employees, 87% had assets of less than $100,000 and in 96% of cases, unsecured creditors received less than 10c in the dollar. Source: ASIC Report 132 June 2008.Commenting on these findings Kingsway Director, Robert Jochelson noted an emerging trend in 2009 of overdue monies owed to the Australian Taxation Office (ATO) for Income Tax, Withholding Tax, and GST obligations by construction firms and sub-contractors.Mr Jochelson also stated that, "In many cases construction companies have advanced loans to directors or other related parties such as development companies. These loans are frequently not properly documented and do not undergo the usual credit checking required, making them more difficult to recover in the event of an insolvency."