Business Failures in Australia: Causes and Considerations

Dr Stephen van der Mye, Honorary Adjunct Professor, Faculty of Law, Bond University

Godfreys’ Collapse

After nearly a century in operation, Godfreys Group, the large vacuum retailer, went into administration in late January 2024.

PwC, acting as administrators in Australia and New Zealand, faced the task of keeping the brand afloat while closing numerous stores and laying off many employees.  PwC cited three primary reasons for Godfreys’ financial distress:

  • Lower consumer demand due to cost-of-living pressures
  • High operating costs
  • Increased competition

An old-fashioned retailer, Godfreys had seen competitors like JB Hi-Fi (owner of The Good Guys), Harvey Norman, and online retailers erode its market share. Its failure to sell popular Dyson cordless vacuums further hindered competitiveness. The company’s woes worsened in 2022 when it breached a covenant on an overdrawn $31.3 million debt.

Insolvency Trends

Godfreys represented just one of many business failures in 2023 and 2024. According to an ASIC media release in December 2023:

  • Small to medium-sized corporate insolvencies dominated
  • There were 5,520 liquidations and administrations nationally in 2022/2023
    • A 17.2% increase from the previous year
  • The highest number of insolvencies were in:
    • Building and construction (28%)
    • Accommodation and food services (15%)
  • Most cases were from:
    • New South Wales (41%)
    • Victoria (27%)
    • Queensland (18%)

In most small and medium business failures, creditors recovered only minimal amounts owed.

Construction Industry Impact

The building and construction industry felt an acute impact in 2024. Montego Homes went into voluntary administration on January 15, owing $2.5 million to unsecured creditors and leaving customers without insurance protection. Alpha Building Group entered administration on January 24, owing over $3.5 million to 100 creditors.

Causes of Business Failures (2022-2024):

  1. Continued COVID-19 impact on consumer shift to online shopping that some businesses couldn’t adapt to.
  2. Reserve Bank’s aggressive interest rate hikes from 0.10% to 4.35% in 18 months to curb spending and inflation.
  3. Cost-of-living pressures on households from interest rates, fuel, food, insurance, and taxes.
  4. Supply chain disruptions and challenges moving goods and materials, like issues in the Red Sea.
  5. Skilled labour shortages due to COVID-19 immigration restrictions.
  6. Building industry’s fixed-price contracts vs. variable material/supply costs squeezing profits.

Small and medium businesses operating on slim margins were the first impacted in this volatile environment. As this turbulent period demonstrates, comprehensive enterprise governance education is crucial for today’s directors and officers to safeguard their organizations.

Considerations for Directors & Officers

Directors and officers should closely monitor their companies’ health, given penalties for trading while insolvent under the Corporations Act (section 588G).

Key considerations include:

Cash Flow Monitoring

  • Ensure reliable, detailed cash flow forecasts (potentially weekly/daily)

Stakeholder Negotiations

  • Negotiate better supplier payment terms
  • Accelerate customer receivables
  • Arrange ATO payment plans

Cost Cutting

  • Thoroughly review budgets, cancel unnecessary expenses

Debt Management

  • If leveraged, negotiate with lenders early for better outcomes

Inventory Strategies

  • Consider discounts on old stock
  • Restructure pricing for slow movers

Business Strategy Evaluation

  • Assess shifting to online sales if appropriate

Employee Engagement

  • Maintain engagement through training programs

Transparent Communication

  • Open communication with stakeholders

Compliance

  • Ensure legal, regulatory and standards compliance
  • Address any outstanding legal issues promptly

Contingency Planning

  • Develop plans for prolonged downturn scenarios

Professional guidance from accountants or business advisors is invaluable when facing insolvency risks. They can assist with restructuring plans and establishing a “Safe Harbour” from insolvent trading liability – areas covered in-depth through Bond’s first-of-its kind Enterprise Governance courses.

However, once a company’s financial stress becomes known, stakeholder confidence can erode rapidly, making administration or liquidation a self-fulfilling nightmare despite efforts.

Signs of Hope

Not all stories end in failure though. Sara Lee Foodservice Australia received a lifeline when sold in January 2024 to Klark and Brooke Quinn’s company after entering voluntary administration in October 2023.

With the challenging conditions unlikely to improve soon, forward-thinking directors are turning to Bond University’s industry-leading Enterprise Governance programs to elevate their strategic decision-making capabilities. The Advanced Credential in particular provides proven frameworks for navigating periods of uncertainty and is an excellent educational experience for both lawyers and non-lawyers who want to learn more about corporate governance.

Those interested can explore these innovative offerings by clicking the links below:

Master of Laws in Enterprise Governance

Advanced Credential in Enterprise Governance

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