What trends are driving restructuring, distressed transactions, and deal activity in Australia?
Restructuring and distressed transactions in Australia are being influenced by a number of key trends. These include but are not limited to the broader economic downturn; sector-specific challenges; access to capital; regulatory challenges; sustainability considerations; investment in technology; increased M&A activity; and continuing interest from private equity investors.
At present, I am finding that financial distress in Australia is primarily being driven by global economic challenges, ongoing inflationary pressures fuelled by higher interest rates, increased recovery action by the Australian Taxation Office (ATO), and industry-specific difficulties affecting sectors such as airlines, mining and construction.
These factors have placed significant pressure on cash flow and profitability for many businesses, particularly those with higher borrowing costs or reduced consumer demand. Despite these challenges, there are restructuring mechanisms available for companies of all sizes and across all industries. In many cases, businesses are seeking to restructure at an earlier stage in order to preserve value, protect employment and improve long-term viability rather than waiting until financial difficulties become critical.
Corporate restructures in Australia are primarily governed by the Corporations Act 2001 (Cth). These include both informal operational reorganisations, where businesses seek to improve efficiency or refinance existing obligations, and formal insolvency procedures. The Act provides the framework for solvent restructures and formal insolvency processes, including external administration, creditor rights and the conduct of administrators and liquidators. It is therefore central to how businesses assess their options when financial pressure begins to rise.
In addition to the Corporations Act, directors must remain mindful of their duties when a company is approaching insolvency, including the need to avoid insolvent trading and to act in the best interests of the company and its creditors where appropriate. These obligations often influence the timing of restructuring decisions, as directors who delay taking advice may reduce the options available to the business and increase their own exposure. This makes early assessment of the company’s financial position, creditor pressure and available restructuring pathways particularly important in the Australian context.
The principal formal restructuring options include the Small Business Restructuring (SBR) process for eligible small companies and Voluntary Administration, which is available to companies of all sizes. The SBR process is intended to give qualifying small businesses a simplified and lower-cost pathway to restructure debts while directors remain in control of day-to-day operations. Voluntary Administration, by contrast, involves the appointment of an external administrator who investigates the company’s affairs and works with creditors to determine whether the business can be rescued, restructured through a deed of company arrangement or placed into liquidation.
What are the most common triggers during financial distress, and how can businesses mitigate these risks?
The most common trigger for financial distress in Australia, for both small and large businesses, is a lack of working capital. However, even businesses with adequate working capital can be affected by broader economic issues, including a downturn in the domestic economy, ongoing global uncertainty arising from conflicts in Ukraine and the Middle East, and increasing pressure to meet taxation obligations as the Australian Taxation Office continues to take a more active approach to debt recovery.
Many businesses also experience pressure from rising operating costs, higher financing expenses and tighter lending conditions, making it more difficult to maintain liquidity and continue investing in growth.
In order to mitigate these risks, businesses should ensure that they do the following:
- Maintain adequate working capital, including by attracting new investors or additional funding where appropriate.
- Develop robust cash flow forecasts to allow directors to identify potential problems early and respond before financial pressures escalate.
- Identify operational pitfalls and address them promptly.
- Secure appropriate borrowing to assist with short-term liquidity issues where available.
- Ensure the productivity of their workforce.
- Perhaps most importantly, directors should seek professional advice as early as possible.
Australia has many experienced restructuring, legal, accounting and financial professionals who can assist businesses facing financial distress. Accessing this advice from the start provides directors with a critical range of restructuring options and significantly improves the prospects of achieving a successful outcome.
How are transaction structures and due diligence priorities evolving amid regulatory scrutiny, tax considerations, and geopolitical changes?
Australian regulatory bodies such as the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) continue to impose strict compliance requirements on transactions, particularly larger acquisitions. As a result, buyers are undertaking more detailed due diligence to assess regulatory risks before proceeding with a merger or acquisition.
As the Federal Government continues to encourage greater competition and prevent monopolistic behaviour, due diligence will now often include a strict and detailed assessment of competitive positioning, market concentration and potential anti-trust issues.
Also, with the Australian Taxation Office taking a more active approach to enforcement and implementation of laws and reforms, more careful transaction structuring is required. Ongoing reforms affecting capital gains tax and amendments to multinational taxation obligations justify businesses optimising their tax effectiveness to avoid unnecessary penalties, or worse, government intervention.
Finally, geopolitical tensions, including changing international trade relationships and shifts in international relations, continue to influence investment decisions and the attractiveness of certain sectors within Australia. These factors are shaping both transaction structures and due diligence priorities, requiring investors to take an increasingly comprehensive approach when assessing risk and long-term value.
