New report reveals insolvencies among Kiwi businesses on the rise

"With Inland Revenue showing far less leniency, many businesses are fighting against some major commercial headwinds."
"With Inland Revenue showing far less leniency, many businesses are fighting against some major commercial headwinds." Photo credit: Getty Images

A new report has revealed insolvencies or financial distress in Aotearoa is on the rise amongst Kiwi businesses and it warns things could get tougher. 

The report conducted by BWA Insolvency found a 48 percent increase in formal insolvency proceedings between the months of July and September. While liquidations were up 43 percent on the previous quarter at a total of 384. 

Receiverships were also up by 243 percent in the same period. Voluntary administrations saw a rise too, of 60 percent. 

BWA Insolvency founder Bryan Williams said the latest data shows every corner of every industry has been affected by COVID-19. 

Williams added the Government's financial assistance through the peak of the pandemic kept many companies trading that otherwise might have failed. 

"Now they're on their own, and with Inland Revenue showing far less leniency, many businesses are fighting against some major commercial headwinds."

He said the recent measures by the Reserve Bank to reduce inflation will hit businesses regardless of the industry. 

"In the short term, the blunt tool of increasing interest rates will soak up the pool of discretionary income."

Williams added Kiwi consumers will be forced to reduce spending which will have a domino effect that could be detrimental to some businesses. 

"Lowered demand will cause discounting to take place and deflation to result. Margin contraction will be unsustainable for many businesses already experiencing tough times. Taking spending out of the marketplace is effective to reduce inflation, but it will kill businesses along the way."

The BWA report found the transport and delivery sector saw the biggest hike in formal insolvency proceedings, which was up 229 percent on the previous quarter to 23. 

Williams said a shortage of drivers and the rising costs across the board is to blame. 

"Fuel costs may be able to be passed on, but if you have increasing labour costs and a layer of interest costs to a debt-burdened vehicle, then all of a sudden you've got a totally different story about viability."

The business services sector followed in second, seeing the next highest hike. The sector saw a 100 percent increase in formal insolvencies to 50. 

Williams acknowledged the sector is diverse but said the change in working conditions throughout the pandemic and working-from-home policies could be the cause. 

But its the construction industry leading the insolvency proceedings path with 107 formal insolvencies filed, seeing a 50 percent increase. 

"It's not difficult to see why the numbers are so high in this sector. Costs are up, it's hard to find workers, already narrow margins are getting vaporised, and material delays are causing friction costs." 

And while COVID-19 proved to be most difficult for the food and hospitality sector, it saw just 35 insolvencies in the quarter. 

Williams said that's down to many in the industry decision "to just walk out and turn the lights off".

"Frequently the equipment they use is leased, and they simply pass the key over to the owner of the building."

BWA saw only eight voluntary administrations in the quarter, a 60 percent increase.

"The 60 percent increase suggests that it is the option being considered by the more deliberate company owner that perceives a potential for the business to survive rather than let it continue on the dwindling spiral toward liquidation."

Williams added there "is no seasonality to insolvency" but the time before Christmas often sees an increase. 

"I suspect that's a time of the year when business owners perceive there's no hope and that the upsurge in the economy around Christmas is not going to get them out of the hole they're in, and they're probably right."