4 September 2008

Australian executives on notice as company failures rise

A record of court actions against a company or its directors should be seen as an important indicator of likely business failure, according to new research by leading credit reporting agency Dun & Bradstreet (D&B).

D&B's research, which reveals that a company is eleven times more likely to fail if it has a court action against it and eight times more likely to fail if one of its directors has a court action against them, comes as business failures data for first half of 2008 shows an eleven per cent increase on the same period in 2007.

The analysis shows that a business is 8.3 times more likely to fail when a director court action is present, with the dollar value of that action significantly impacting the risk of failure. The liklihood of failure increases by 33 per cent for court actions valued at more than $10,000, making the business 11.1 times more likely to fail than an organisation with no director court actions present.

The research also reveals that the risk of a business venture failing doubles for companies with a director who has been on the board of a previously failed company. 

Director Court Actions

According to Christine Christian, D&B's CEO, the importance of having a comprehensive understanding of all credit partners cannot be overstated, particularly in the current economic climate.

"Already this year close to 4,800 Australian companies have collapsed," said Ms Christian.

"That's an eleven per cent increase on the same period last year.

"With economic conditions expected to remain challenging at least in the short term, businesses cannot afford to ignore any signs that indicate a customer or supplier could find themselves facing financial distress.

"The history of a director and other adverse credit events are easy to identify and this knowledge could prevent businesses executives from a significant amount of pain."

D&B's research also reveals that other adverse events such as court actions, collections activities and creditor petitions to wind up are strong indicators of company failure.

A company with a court action against it is 10.7 times more likely to fail than a company without this adverse present, however the likelihood of failure escalates to 15.2 times if the value of that court action is more than $5,000.

Examining the number of actions reveals that a company with up to two court actions is 8.9 times more likely to fail, while three or more actions significantly increases the likelihood of failure, up by 14.7 to 23.6.

Company Court Actions

Examination of the presence of court actions in company failures for 2007 reveals that 5.2 per cent of companies that have had at least one court action against them failed. Analysing this information by state shows 8.5 per cent of companies in New South Wales with at least one court action against them failed, this figure drops to 5.25 per cent and 5.07 per cent respectively for companies residing in Victoria and Queensland.

Company age also impacts the likelihood of failure, with younger companies a higher risk. Around 9 per cent of companies up to nine years old that had at least one court action failed. This figure drops to 3.8 per cent and 2.8 per cent respectively for companies in the 10-19 and 20+ age groups.

"The best way for business to stay ahead of the pack is to develop an accurate insight into their customers' financial health and debt paying behaviour. This should include a thorough examination of the history of directors and company court actions," said Ms Christian.

"Knowing who you are dealing with can prevent significant losses and it can stop the domino effect that often occurs as a result of monies owed by failed businesses."

For further information please contact:

Danielle Woods
D&B PR Manager Australia & New Zealand
(02) 8270 2926

About D&B

D&B is the world's leading provider of business-to-business credit, marketing and purchasing information and receivables management services. D&B manages the world's most valuable commercial database with information on more than 130 million companies.

Information is gathered in 193 countries, in 95 languages or dialects, covering 186 monetary currencies. The database is refreshed more than one million times daily as part of D&B's commitment to provide accurate, comprehensive information for its more than 150,000 customers.

The Australasian operations were bought out by the senior management group in August 2001. It was the first MBO of a wholly owned subsidiary in D&B's history worldwide.

Today Lazard Carnegie Wylie owns an approximate 90% stake in DBA and the local management team a 10% stake.

Strategies for future growth include developing DBA's commercial and consumer credit referencing business; expanding its receivables management outsourcing business; maintaining its lead in the development of unique credit and risk scoring products; and developing new products specifically tailored to the Australasian market. DBA currently employs over 500 people in Australia and New Zealand.