The Australian Financial Security Authority (AFSA) has released its personal insolvency figures for the March quarter 2016. They show a fourth consecutive rise in personal insolvencies - the first time that there have been four consecutive rises in quarterly figures since 2009. Increased collections activity from the Australian Taxation Office and tough economic conditions have certainly had an impact on the rate of insolvencies nationwide.

At the same time the Federal Government has released a discussion paper recommending that there be a reduction in the current default bankruptcy period from 3 years to 1 year. The Federal Government's proposal paper suggests that reducing the duration of bankruptcy “…will encourage entrepreneurial endeavour and reduce associated stigma”.

Whilst it may be that making bankruptcy a less disruptive event for individuals will encourage entrepreneurship, it will also make prudent businesses more cautious in their dealings with customers and suppliers.

A key supplier entering into insolvency can have a disastrous impact on work flows, particularly when orders remain undelivered. The loss of a key customer due to insolvency has the obvious effect of reducing the market in the short term. Many businesses are unaware that it can also give rise to a lead to a “clawback” of payments made by the customer for as much as six months prior to their being made bankrupt.

The Insolvency and Restructuring team at Matthews Folbigg Lawyers are seeing an increasing number of businesses seeking assistance from us on the impact of bankruptcy, whether it is personal financial difficulties or the impact of a bankrupt customer or supplier.

Strengthening your terms of trade is a proactive step that can dramatically reduce the adverse consequences of a customer or supplier going broke. The effectiveness of any strategy to minimise the impact of insolvency is greater when advice is sought and change implemented early.