Written by Robert Kite in August, 2008

Readers may or may not be aware that for every Company that goes into Liquidation which pays a dividend of less than 50 cents in a dollar to Ordinary Unsecured Creditors, the Liquidator is required to lodge a Report with ASIC pursuant to Section 533 of the Corporations Act.

Such Reports were formerly lodged by long and lengthy written reports to ASIC. In the last three years, ASIC has introduced a system to enable such reports to be lodged electronically.

The electronic lodgement of such documentation has allowed ASIC to record certain statistics regarding failed companies, and the purpose of this article is to discuss some of the findings of such statistics.

All of the statistics referred to within this article, are by reference to the financial year 1 July 2006 to 30 June 2007, for which reports were lodged electronically with ASIC. It is noted that such statistics are not only recorded for Liquidations, but they are also required for Voluntary Administrations and Receiverships, where the External Administrator believed it was necessary to lodge such a Report. Reports by Voluntary Administrators and Receivers are prepared pursuant to different sections of the Corporations Act. For ease of reference in this article, these reports will also be referred to as Section 533 Reports.

This industry for which the most Section 533 Reports were lodged relate to the Constructions Industry. The Construction Industry accounted for 20% of all the Reports lodged.

The next most prominent industry was the Services to Business industry which accounted for 13% of the submitted Reports.

The most common causes of failure for all industries related to the poor financial control including lack of records, poor management of accounts receivable, poor strategic management of the business, under capitalization, inadequate cash flow or high cash use, and trading losses.

Of all the companies for which the Section 533 Reports were lodged with ASIC, 37.8% of these companies had less than one dollar of realisable assets.

For the same period, across most industries, 75% of all the companies for which the data was recorded had liabilities in the region of zero to $250,000 owing to the Australian Taxation Office.

8.5% of all Companies for which the data was recorded, had debts to the Australian Taxation Office of between $250,000 to $1 million. To put that into perspective, there were approximately, 15,600 Section 533 Reports lodged with ASIC during the period July 2006 to June 2007.

That equates to approximately 1,326 companies who owed in excess of $250,000 to the Australian Taxation Office at the time of being placed into Liquidation. If one then calculates that if the debt was only $250,000, and not a figure exceeding this amount, this equates to approximately $331 million in lost revenue for the Australian Taxation Office in this statistic alone. When one considers this sum, it becomes easier to understand why it is difficult to get the support of the Australian Taxation Office to accept proposals for a Deed of Company Arrangement.

Of the approximately 15,600 entities for which data was collected, 7,000 of those entities have Registered Offices in New South Wales, 4,100 had registered offices in Victoria and 2,357 had registered offices in Queensland. This equates to approximately 87% of insolvent entities being based on the Eastern Seaboard of Australia.

One of the more important statistics to be gained from this information is that the Construction Industry, and Industries which serve businesses could be some of the more vulnerable industries at this time.

It is further noted that should such entities have poor financial control including a lack of records, poor management of accounts receivable, etc, such clients may be requiring more input or guidance from their professional advisers in the immediate future.