When I tell people my age that I work in corporate insolvency, the response is often “What the hell even is corporate insolvency?”
Corporate insolvency is a crucial aspect of the business landscape and yet it often goes unnoticed by students since its rarely offered as a topic in commerce programs. I have to admit, even I didn’t completely understand the whole process when I first started a year ago as a fresh-faced Gen Z-er!
For many young Australians, the term corporate insolvency sounds dry and disconnected from their lives. But when I break it down into relatable language—explaining how we help struggling businesses avoid or manage financial distress—it suddenly clicks. Nearly everyone knows someone affected by the ups and downs of business, especially post-COVID. The pandemic hit small and medium-sized enterprises (SMEs) particularly hard, leading to a surge in insolvencies. According to ASIC (Australian Securities and Investments Commission), business insolvencies increased significantly in 2022, particularly in retail, construction, and hospitality—sectors where many youth-led businesses operate.
Gen Z’s entrepreneurial spirit is alive and well in Australia, driven by side hustles, online retail, and eco-conscious start-ups. But with high risk comes the need for smart planning. This guide breaks down insolvency in simple terms and explains why understanding it could save your business – or that of someone you know – down the track.
The Current Climate
The past few years have been a rollercoaster for Australian businesses. While government support measures like JobKeeper helped many SMEs stay afloat during the height of the pandemic, the withdrawal of that support, combined with rising inflation and interest rates, has left many businesses struggling.
According to ASIC, company insolvencies in Australia rose by over 50% in 2022, with construction, retail, and food services among the hardest-hit industries. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has highlighted that cash flow issues are the number one cause of business failure, often compounded by a lack of financial literacy among new business owners.
Despite these challenges, Gen Z is making waves in the business world. Youth-led startups in Australia are thriving in areas like hospitality, trade work and manual labour, beauty and fitness and health and. A recent Finder survey found that nearly 1 in 4 Gen Z Australians plan to start their own business in the next five years. However, without a solid understanding of financial risk and insolvency, many promising ventures could face difficulties.
Why Corporate Insolvency Knowledge Matters
Corporate insolvency may sound complex, but it’s essentially about giving businesses options when they’re struggling to pay their debts. Depending on the situation, a business may be able to restructure and continue trading or, in more serious cases, wind up and close.
If you’re dreaming of launching your own business, understanding insolvency is just as crucial as knowing how to market your product. Here’s why:
- Spotting the Warning Signs Early
Insolvency doesn’t happen overnight. Common warning signs include cash flow problems, difficulty paying suppliers, and relying on personal savings to keep the business running. Knowing when to seek help can make all the difference. - Making Informed Business Decisions
Whether it’s choosing a business structure, securing funding, or managing growth, understanding the risks involved in insolvency can help you make smarter decisions from the start. - Normalising Business Failure and Recovery
Failure isn’t the end—it’s often a valuable lesson. Many successful entrepreneurs, from Janine Allis (Boost Juice) to Ruslan Kogan (Kogan.com), have faced setbacks before achieving success. Insolvency provides a pathway for regrouping and starting fresh.
The Breakdown
Let’s break it down using a relatable example –
Imagine a local manoush shop in Sydney’s western suburbs – a family-run business serving fresh za’atar and cheese manoush, loved by locals and frequently featured on foodie Instagram pages. For a while, the business thrives, attracting regular customers and catering to community events. However, rising ingredient costs, increasing rent, and a downturn in foot traffic create serious cash flow issues. Suddenly, the shop struggles to pay suppliers and staff wages.
But what mistakes has the manoush shop made that left them vulnerable to these external factors?
- Tax
Let’s be honest – taxes are the real killers. We’ve all done it before: calculating your weekly pay and dreaming of all the things you can buy – maybe even spending before payday has arrived.
Then the payslip arrives.
PAYG tax? Gone. Super? Gone. Union Fees? Gone.
It’s no different when you start your own business, in fact it gets even worse: now you’re responsible for managing your own tax obligations such as PAYG instalments and quarterly Business Activity Statements (BAS), and anyone whose dealt with the ATO knows that they don’t make it easy to understand their expectations. Complex jargon and pre-assumed knowledge is why tax professionals and accountants go to school for years to professionally help clients. - Hidden Costs
But that’s not all – the manoush shop hasn’t yet taken into consideration their net income vs their gross income.
When your fortnightly pay hits your bank account, it’s easy to forget all the costs you took on throughout the workday. Petrol to get to work, a coffee for you and the manager whose good books you’re trying to get into, a takeaway lunch because you couldn’t be bothered to make it at home. All these little inconsequential costs add up.
The same can be said for a business. Insurance, utilities, legal and registration fees, maintenance and repairs – all the boring and mundane business costs that widen the margin between their gross and their net take home pay. - Technical Understanding and Education
Business degrees exist for a reason – there are very real technical aspects of running a business that requires time and focus to become educated on. However, most small businesses are run by people who are passionate about their business operations, not the technical side.
The manoush shop owner didn’t open his shop for his love of taxation accounting, he did it for the love of his craft! He is a chef and server first and foremost, the same for a plumbing business owner or a beauty salon director respective to their services.
Perhaps the manoush shop owner wasn’t fully aware of their obligations as a business owner, having never studied accounting at university. To stay afloat, the manoush shop owner might either absorb the rising costs or pass them on to customers, turning a once affordable $5 manoush into a $10 luxury. As expenses climb and revenue falls, insolvency becomes inevitable, leaving the business unable to meet its obligations to creditors. It often starts small—they neglect tax obligations to cover essential business expenses. Then, a director’s penalty notice arrives in the mail, and the situation snowballs until the owner becomes personally liable, eventually facing bankruptcy despite having a steady stream of customers.
But don’t worry, there’s help out there!
Here’s how insolvency could help:
Company Voluntary Arrangement (CVA):
A CVA allows the shop to negotiate a formal payment plan with creditors, usually over a period of a few years. This arrangement enables the business to continue trading while gradually repaying its debts from future profits. It protects the shop from legal action by creditors, provided the business adheres to the agreed-upon terms.
Administration:
Entering administration places the business under the control of a licensed insolvency practitioner. Their role is to assess the shop’s viability, restructure operations, and explore potential solutions, such as refinancing or finding a buyer. During this period, creditors cannot pursue legal action, giving the shop a chance to stabilize and potentially avoid closure.
Liquidation:
If the debts become unmanageable and recovery is no longer feasible, liquidation may be the only option. This process involves closing the business, selling assets like kitchen equipment and inventory, and using the proceeds to repay creditors as much as possible. Once liquidation is complete, the company is formally dissolved. Each of these options offers a structured way to manage financial distress while exploring opportunities for recovery.
Conclusion
Depending on the business lifecycle stage you are currently in while reading this, you will have different reactions to this breakdown of a business’s vulnerability to the need for insolvency. Perhaps you’re still in the establishment phase and your head is swimming with concerns about the risk of opening your business, or you’re a seasoned business owner shaking your head and smirking about all these lessons you had to learn the hard way and are in the process of trying to fix. Regardless, the best way forward is by getting in touch with insolvency professionals.
So where do we come in? No matter what stage of the business you’re in or what industry you operate in, understanding the risks and options available can set you up for long-term success.
Here at dVT, we specialise in business turnaround, corporate and personal insolvency, business strategy, and forensic investigations, combining expertise with a personal touch to help clients achieve the best outcomes.
In an effort to help SME’s affected by the rise in business struggles, we will be hosting information sessions and one on one consultations with our senior ranking professionals.
So, what’s your next step? For expert support in navigating insolvency or if you would like to discuss your situation, contact our experienced team at dVT Group on (02) 9633 333 or by email at mail@dvtgroup.com.au.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.
By Sebastian Migliaccio
February 2025
