Insolvencies Continue To Rise In New Zealand, According To Latest Data

As the economy stagnates, latest quarterly data shows insolvencies continue to rise, up 34% on Q1 and 69% on the same time last year.

Insolvency practitioners have been kept very busy over the past year as business failures continue their upward trajectory, but BWA Insolvency’s Bryan Williams says the rise in demand for his services has not come as much of a surprise given the state of the economy and the headwinds facing many businesses.
 

According to the Q2 2023 New Zealand Insolvency Market Report (Apr 1 – June 31), there were a total of 475 formal insolvency proceedings lodged in New Zealand compared to the corresponding period in 2022 when there were 281. That’s an overall increase of 69%.

BWA Insolvency, which produces the report, has been tracking the data on liquidations, receiverships and voluntary administrations since 2012. The Registrar of Companies Office records the filings of companies that have gone into a formal state of insolvency. BWA then does a deeper investigation into each company and categorises them to show trends across different industries and regions.

Williams, just the second person in New Zealand and one of just over 200 people worldwide to be named a fellow of global insolvency association Insol, says that while this increase may seem high, it was expected - and he has a very full diary as a result.

“With rising interest rates to counter inflation and the rising costs of consumer goods ever present in the media, business uncertainty is an obvious outcome of an unstable market.”

While a global recession appears to have been fended off, with the International Monetary Fund predicting a small amount of economic growth this year as inflation is brought under control in most developed markets, businesses – particularly small to medium enterprises – are still walking into stiff post-Covid headwinds.

The sectors to fare worst in the year-on-year comparison were manufacturing, retail trade and construction.

Manufacturing had the biggest increase in insolvencies, up from 14 to 30 (114%) when compared to the same time last year.

“The costs for raw materials continue to go up, as do labour costs. In some cases, demand is dropping and as supply chain issues are ironed out, import prices are dropping. This lethal cocktail could explain the steep rise in this sector.”

Retail trade was second, up 95% on last year from 19 to 37, and Williams says the same supply and demand factors are at play.

“As the cost of living steadily increases, belts have been tightened and purchasing decisions – especially for more expensive items – are being delayed. This cooling of the economy has taken longer than most anticipated, but we are starting to see the effect on the retail sector now.”

Once again, construction had the highest number of formal proceedings in the quarter (123), up 78% year-on-year. Overall demand in the building industry has dipped considerably since Covid, especially in the residential market, and already tight margins in this sector have become even tighter.

At the other end of the spectrum, the food and beverage sector was the only one to record a year-on-year decline in insolvencies, down 21% from 33 to 26.

“The industry struggled over Covid, with reduced customers and areas such as Auckland that were affected by long and sudden lockdowns. This drop in insolvencies is likely a result of businesses returning to normal."

Each one of these failures is hard for business founders to take, Williams says, but it is a natural part of the economic cycle. Williams says it’s even more important for businesses to keep evaluating their operations during tough times and many companies that are at risk of failure can recover if business owners act quickly to reduce expenses and adapt their approach to fit the current market.

“Just as you should trust health professionals to diagnose and treat your health issues, you should trust business professionals to diagnose and treat business issues. All businesses that are confronting failure are capable of rehabilitation if three vital elements are present: viability, human capital and economic capital. When we are appointed, we go back to the kernel of the business and find out what made it successful at the outset and then employ current business practices and new technologies to get it out of strife.”

Judging by the data, more businesses are seeking help. Voluntary Administration – where experts are brought in the run the company for a short time in an effort to get it back to viability – has seen a 200% rise in appointments, year-on-year.

“Businesses are opening up to the idea of alternatives to liquidation and seeking help before it is too late.”

Receiverships were also up by a similar percentage when compared to Q2 last year, which may indicate creditors' aggressive approach in claiming their debt, Williams adds.

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