Australia’s insolvency rates set to climb, law firm says
Insolvencies in Australia are expected to keep rising throughout 2025, as financial pressures deepen and become more entrenched across several key sectors, according to a new report from one of Australia’s biggest law firms.
Editor’s note: This story first appeared on Accounting Times’ sister brand, Lawyers Weekly.
Following record-breaking highs in insolvency rates in 2024, a recent report from national law firm Clayton Utz forecasts that Australia’s insolvency levels are expected to continue rising in 2025.
In its annual From Red to Black report, the national law firm attributes this ongoing trend to deepening and prolonged financial stress across several key sectors, driven by a combination of “geopolitical instability globally and continued sluggish growth domestically”.
However, the report noted that easing inflation and lower interest rates may offer some relief to vulnerable industries under this pressure towards the end of the year.
The report identified “construction, human services, resources, accommodation, and food services” as the sectors most under financial distress this year, mainly due to the “increasing margin squeeze arising from a range of factors”.
Katie Higgins, partner at Clayton Utz, explained that a combination of global and domestic pressures is compounding the challenges facing many businesses.
“Geopolitical volatility and the unsettled position around global trade have started to weigh on business and consumer confidence, while domestic factors are also taking a toll,” Higgins said.
“Individual sectors face their own unique challenges, but across the board, we’re seeing the fallout from rising costs, labour shortages, structural changes driven by technology and increasing compliance obligations.”
The report also highlights emerging and evolving risks that are reshaping the business landscape and influencing insolvency trends, most notably, the rise of private credit markets and the transformative impact of artificial intelligence.
According to Higgins, AI will be a powerful catalyst for change in how workforces are structured in the future, introducing further uncertainty into an already volatile environment.
“While there are varying forecasts around the scale, timing and impact of AI adoption, it’s clear that AI will be a significant force for change in how workforces are constituted in the future – with potential flow-on effects for consumer confidence as a result,” Higgins said.
“The potential scope of the transformative impact of AI creates further uncertainty, particularly as to what future workplaces will look like. Businesses are seeking guidance on how to prepare for a future that’s becoming harder to predict.”
At the same time, Higgins highlighted how the rising prominence of private credit is reshaping traditional financing structures and will be an essential factor to watch in 2025.
“The continued growth in private credit is bringing both opportunity and complexity. Alternate credit providers are stepping into deals traditional banks may not be willing to finance, which is creating more competitive financing and restructuring environments but also more complicated lender and intercreditor dynamics when conditions worsen.”
Looking ahead to the remainder of the year, Higgins warned that the combination of “geopolitical upheaval, technological disruption, and the diversification of credit sources” is likely to drive a continued increase in restructuring and insolvencies over the next 12 months.
To tackle these challenges, Higgins urges business leaders to prioritise early intervention and scenario planning to better navigate ongoing volatility.
“Many boards are now asking: what does AI mean for our business model and workforce? What are the private credit alternatives if we need to refinance? How do we combat continuing sluggish growth on the home front and lack of certainty around global trade abroad? These are the kinds of conversations that make a real difference.”
