AVA Advisory insight report

Corporate insolvency & credit risk trends

Corporate insolvencies in Australia have reached their highest point in 35 years, exceeding levels seen during the Global Financial Crisis and the 1990s recession. Despite a recent interest rate cut by the RBA, consumer spending remains weak and insolvency risks are intensifying. This report breaks down the latest trends, identifies the sectors most exposed, and outlines how AVA Advisory can help businesses proactively mitigate credit risk.

Insolvency overview

While corporate insolvency rates in Australia remain elevated, the latest data from CreditorWatch and ASIC indicate that June 225 has seen a moderate easing from the late-2024 highs. That said, insolvencies are still trending well above historical averages, particularly sensitive to consumer demand and construction activity.

CreditorWatch's trade payment default data remains one of the strongest predictors of future insolvency. As of May 2025, business defaults and 60+ day arrears continue to rise, especially among SMEs. These defaults often precede formal insolvency appointments by several months.

Corporate insolvency data also shows:

• Appointment volumes remain concentrated among SMEs with fewer than 5 employees (65.5%).
• 78.6% of these businesses showed signs of insolvent trading prior to appointment.
• 81.5% had AATO debt exceeding $100,000.
• 68% were estimated to have been insolvent for over 16 months.
• 85% delivered no return to unsecured creditors.

The volume of Simplified Business Restructures (SBRs) has grown rapidly, with over 2,600 recorded in FY24–25 and 73% proceeding to a formal restructuring plan. This indicates that more directors are exploring restructuring as a defence against insolvency but success remains mixed.

Meanwhile, the Harris/Hall Chadwick analysis calls attention to increasing regulatory momentum for corporate insolvency reform. Emerging proposals include broader director disqualification powers, greater scrutiny over phoenix activity, and more aggressive recovery powers for unpaid employee entitlements under the FEG scheme.

Collectively, these forces point to a credit risk environment that is evolving but still fragile. AVA Advisory recommends tightening counterparty exposure limits in construction, hospitality, and small-scale retail while prioritising early credit reviews in any business showing signs of stress.

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Sector in focus
Construction

The construction sector continues to top insolvency statistics.

Key drivers include:

• Escalating materials and labour costs.
• Legacy fixed-price contracts.
• Delays in development approvals.
• Tightened lending conditions.

According to ASIC and Harris Hall Chadwick data, 65.5% of construction insolvencies involved businesses with fewer than 5 employees. 78.6% showed signs of insolvent trading, and over 81% had more than $100,000 in unpaid tax liabilities. With high leverage and low asset bases, many of these businesses are unable to recover from prolonged project delays or cost overruns. AVA Advisory recommends immediate credit reviews of construction-linked accounts with recurring cash flow issues.
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Credit risk on the rise
Professional services

Professional services, including legal, marketing, architecture, and consultancy firms are facing rising pressure, especially smaller partnerships and sole traders.

• CreditorWatch’s Business Risk Index indicates an uptick in defaults among smaller professional firms, with revenue disruption stemming from project deferrals and longer client payment cycles.
• Many boutique firms remain undercapitalised, lacking the financial buffers to absorb client churn or economic shocks.
• Demand for professional services has also become more lumpy, with businesses scaling back discretionary contracts and deferring non-essential work.

AVA Advisory recommends reviewing trade terms with firms in this sector and assessing client concentration risk, especially for agencies or consultancies heavily reliant on a few large clients.

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Stability with isolated pressure points
Healthcare

While the healthcare sector generally offers defensive qualities in a downturn, recent insolvency events highlight emerging risks:

• The voluntary administration of Toowong Private Hospital and Healthscope’s financial distress indicate pressures for private providers facing high overheads and complex funding arrangements.
• Facilities with significant debt exposure or delayed Medicare/private insurance reimbursements are vulnerable to liquidity shortfalls.
• ATO debt data shows healthcare is not immune to enforcement action, especially among mid-sized, non-government funded clinics.

Overall, healthcare remainds more stable than construction or hospitality, but AVA Advisory recommends monitoring private operators with significant debt loads, poor occupancy/ utilisation metrics, or exposure to policy change.

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Th next wave
Retail & hospitality

CreditorWatch’s Business Risk Index data reveals rising trade payment defaults in retail and hospitality, with both sectors facing tighter margins and weakening consumer demand. The April 2025 household spending figure, up just 0.1%, underscores ongoing consumer caution.

Retailers are particularly vulnerable to high fixed costs and softening discretionary spend. SMEs reliant on Buy Now, Pay Later (BNPL) models and minimal capital buffers are reporting increased arrears and delayed supplier payments. Hospitality venues continue to struggle with rising input costs (particularly wages and rent), as well as inconsistent customer volumes.

As insolvencies in these sectors rise, AVA Advisory recommends closely monitoring debtor behaviour, revalidating credit limits, and applying shorter payment terms where applicable.

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Expert insight
ATO debt recovery intensifies

CreditorWatch and ATO data show a continued increase in tax debt defaults, particularly in cases exceeding $100,000. These defaults are a strong predictor of future insolvency businesses with ATO liabilities of this size are significantly more likely to enter formal administration within 6-12 months.

Director Penalty Notices (DPNs) issued by the ATO have surged, with active enforcement across all states and industries. The impending legislative change effective 1 July 2025, removing the tax-deductibility of interest on outstanding debts will further increase the burden on already distressed businesses.

These developments suggest a turning point where tax debt becomes both a financial and compliance liability. AVA Advisory strongly advises early engagement and negotiation strategies with the ATO to avoid escalated enforcement and protect ongoing trading capacity.
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Key credit risk signals

Early identification of credit deterioration is vital. Common indicators flagged by AVA Advisory include:

Common indicators flagged Key credit risk signals include:

• Late or missed payments
• Requests for extended terms
• Delays in financial disclosures
• Changes in company directorships
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Looking ahead
H2 2025

• Corporate insolvency volumes are likely to remain structurally high into the second half of the year, with more SMEs expected to collapse under accumulated liabilities.
• The RBA is anticipated to reduce interest rates further, with expectations of a 3.10% cash rate by Q4. Though the pace of easing will depend heavily on inflation and employment data.
• Legislative reform in corporate insolvency is gathering momentum. Proposed changes target phoenix activity, corporate group misconduct, and broader director disqualification measures.
• AVA Advisory will be monitoring the implementation of insolvency law reform recommendations from the PJC Report, especially those concerning simplified restructures, FEG misuse, and trust asset recovery.
• Credit exposure should be reviewed sector-by-sector, with caution around industries with slow capital cycles, labour intensity, or reliance on discretionary spending.

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AVA Advisory
Our view

The insolvency surge reflects broader structural issues: tightening margins, legacy liabilities, and cautious consumer behaviour. Businesses must act early with risk controls to avoid costly defaults. AVA Advisory supports clients with real-time intelligence and hands-on strategic guidance.

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How AVA Advisory helps you
Mitigate credit risk

AVA Advisory delivers strategic support and risk insight for businesses across Australia. Our approach includes:

Proactive counterparty risk reviews

We conduct in-depth, regular assessments of your customer and supplier base with a focus on high-risk sectors like construction, retail, and hospitality. This allows you to make informed credit decisions before defaults occur.

Real-time credit monitoring & alerts

Our integrated credit monitoring solutions track behavioural and financial red flags across your debtor portfolio. We’ll notify you of critical changes such as director resignations, court actions, or deteriorating payment habits, so you can act fast.

Custom cash flow stress testing

Using your existing financial data, we simulate stress scenarios (e.g., rising interest rates, revenue dips) to help you understand how clients may respond, and what it means for your receivables.

Strategic credit terms & collection planning

We work with you to implement smarter credit terms for at-risk accounts (e.g., 7-14 day terms) and introduce proactive follow-up workflows to avoid overdue blowouts.

Diversification advisory

If your revenue is heavily concentrated within a single sector or a few key clients, we’ll guide you through strategies to diversify and rebalance your portfolio, protecting you from industry-specific downturns.

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