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Episode 78 Buy Episode

What Insolvency Tsunami? An Insolvency Market Update

Law as stated: 17 February 2023 What is this? This episode was published and is accurate as at this date.
CEO of ARITA, John Winter, joins the podcast to take a look at the last few years of the insolvency market. Including that pandemic prediction, the impact of pre-COVID reforms, and a look at what's yet to come...
Professional Skills Professional Skills
17 February 2023
John Winter
ARITA
1 hour = 1 CPD point
How does it work?
What area(s) of law does this episode consider?Australian Restructuring Insolvency and Turnaround Association (ARITA) insolvency market update.
Why is this topic relevant?With recent economic pressures like inflation many households and businesses have been struggling, especially those businesses servicing debt. Add in an acute labour shortage and a war in Europe that disrupted energy and commodity markets and you’ve got a recipe for disaster – companies entering external administration rose 23% year-on-year to the June Quarter.

Despite that extraordinary increase, the number of corporate insolvencies is still below pre-COVID-19 pandemic levels. The Parliamentary Joint Committee on Corporations and Financial Services is currently conducting an inquiry into corporate insolvency in Australia. ARITA has recently made 36 recommendations to the Committee in its submission to the inquiry, including that “the government embark on comprehensive reform of Australia’s insolvency system”. 

What legislation is considered in this episode?Corporations Act 2001 (Cth)

Treasury Laws Amendment (Combatting Illegal Phoenix Activity) Act 2020 (Cth) (Anti-Phoenixing Act)

What are the main points?
  • Successive governments got a bit lazy with Australia’s insolvency regime, with the last comprehensive review being the Harmer Inquiry in the 1980s.
  • After around 2015 and after an inquiry by the Productivity Commission, various reforms were trickled through in the insolvency space – some of which were recommended by ARITA – including safe harbour laws, the prohibition of ipso facto clauses and the creation of director identification numbers.
  • The small business restructuring process and simplified liquidation have not been effective reforms. In John’s words, they are a “disaster”.
  • Simplified liquidation was meant to provide businesses with a very low cost way of exiting as the majority of insolvent businesses never enter proper external administration due to the costs.
  • The small business restructuring process is effectively a copy of Part 5.3A voluntary administration. It is as complex and far more expensive than was intended. Both reforms require redrafting and should be simplified.
  • During the COVID-19 pandemic in 2020 multiple things happened at a government level to stem a then-predicted wave of insolvencies.
  • Insolvency statutory demands were largely suspended. JobKeeper was introduced. The ATO also stopped their wind up operations, stopped issuing director penalty notices and stopped issuing warning letters.
  • This led to the amount of companies entering insolvency to significantly decrease. As a result, the increase in zombie corporations and so-called insolvency “tsunami” also did not occur when it was predicted.
  • Very, very few registered liquidators are bad apples and encourage bad practice as they are heavily monitored and regulated. Instead, pre-insolvency advisors often coach business in avoidance strategies such as phoenixing.
  • John suggests that pre-insolvency advice should become a highly regulated profession.
  • Phoenixing activity is difficult to define, however, it is the process where you take a distressed business, cast off the debts and restart that business, not having honoured the obligations that you have to your creditors.
  • John defines phoenixing by saying; “[if] it walks like a duck, it quacks like a duck, it’s a duck.” John draws the parallel that the voluntary administration regime is a legal way to phoenix.
  • John predicts that insolvency levels will return to pre-pandemic levels. The new Parliamentary Joint Committee will make recommendations for short-term law reform and also call for a root and branch review
Show notesARITA submissions to the Parliamentary Joint Committee on Corporations and Financial Services, 30 November 2022
David Turner:

 

 

 

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Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services and Hearsay the Legal Podcast is how we’re improving the experience of CPD.

Now, it would be an understatement to say that the Australian economic landscape in 2022 was tumultuous – we had rapid inflation bringing cost of living pressures for mums and dads and increased materials and operating costs for businesses, and those inflationary pressures resulted in interest rate rises – which, what do you know, brought more pressure to households and more pressure to businesses that were servicing debt. Add in an acute labour shortage in just about every occupation and a war in Europe that disrupted energy and commodity markets and you’ve got a recipe for disaster.

So it shouldn’t surprise us then that the number of companies entering external administration – that’s companies in liquidation in its various forms, voluntary administration and receivership – rose 23% year-on-year in the June quarter. But on the other hand, despite that extraordinary increase, the number of corporate insolvencies is still below pre-COVID-19 pandemic levels.

The Parliamentary Joint Committee on Corporations and Financial Services is currently conducting an inquiry into corporate insolvency in Australia, and the Australian Restructuring Insolvency and Turnaround Association – or, as we call them, ARITA – a peak representative body for insolvency practitioners from law, accounting and lending (amongst other industries), has recently made 36 recommendations to the Committee in its submission to the inquiry, including that “the government embark on comprehensive reform of Australia’s insolvency system.

Now, joining me today to discuss what’s happening in the insolvency world, as well as maybe some predictions for the future, is the CEO of ARITA, John Winter. John, it’s a pleasure to have you here with us today.

John Winter:It’s wonderful to be here. David, thank you for having me.
DT:Such a pleasure to talk about my favourite topic on the show insolvency and with the man who knows it all.
JW:Well, that’s probably an overstatement because one of the great challenges with insolvency that I’m sure all of the listeners would appreciate, insolvency law is the most complex area of corporate law, and there’s not a lot of people who can claim to know all of it. That’s part of the challenge, and indeed that’s why we find ourselves in this very situation of an inquiry.
DT:Well, and you do have access to some fantastic experts in and at ARITA and you’ve been working with them quite closely on the submission. I read the submission again this morning. It’s a fantastic piece of work. Anyone who’s interested in this area of law or interested in law reform, generally should really have a read of it. It’s a great work on this topic, but also a great example of what a law reform submission to me should read like.
JW:Thank you.
DT: 3:00Well done. Now, before we dive into some of those recommendations, let’s talk a little bit about what’s been happening in insolvency – and the insolvency market I suppose we can call it – over the last five years or so. Because before the COVID-19 pandemic there were a few notable changes to insolvency laws, and then we saw some really remarkable interventions from the government during the pandemic, as a necessity, a necessary evil maybe, to prevent widespread business collapse. So let’s talk about what was happening before the pandemic first. We had some legislative measures that were really designed to support business turnaround and rescue. Is that fair to say?
JW:Yeah. So, I suppose, let’s step back to where the train of reform has come from over the last, as you say, five or six years. And it’s probably important to also understand where the economics were running at that point too.
DT:Good point.
JW:

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So you have to remember that Australia had just gone through the longest period of economic growth of any modern economy and we hadn’t had a downturn for over two decades. That’s an extraordinary environment when you think about what’s going to happen with insolvency. It means insolvency was going to keep trending down over that period of time and it’s fair to say that even because the numbers didn’t spike that much during the GFC, I think successive governments got a bit lazy about being concerned about what the insolvency regime looked like, all the while the economy is changing. And so the last time we had a comprehensive review of Australian insolvency law was the Harmer Inquiry of the 1980s and we hadn’t had much remediation since that point of time. So around 2014, we started to take a very active stance on law reform. So this was before we were starting to see any pressure coming into the economy. And we came up with a whole series of recommendations, and it was very nicely timed for us that not long after that, the Productivity Commission did an inquiry into what was called Business Setup, Transfer and Closure, which is really looking at the life cycle of businesses. We built a very good relationship with the Productivity Commission. And they largely recommended all of our policies being made into law. And so what you saw in that period after 2015 was a series of reforms that actually did start to put a pretty good base for law reform to be driven forward. We’ve got a generally good regime – but the economy had been changing. So out of that, we’ve seen the creation of the ‘safe harbour’ laws. That was one of our recommendations, and that’s been in place for a bit over three years and, we say, is operating very effectively.

TIP: The safe harbour amendments that John refers to are found in s 588GA of the Corporations Act. The section states that directors are not responsible for any debts acquired either directly or indirectly in relation to an activity that is anticipated to bring about better results than the appointment of an administrator or liquidator.

Section 588GA(2) provides a list of factors to be considered when deciding whether an activity will bring about better results.

The 5 factors include:

  1. Sufficient understanding of the financial position of the company
  2. Taking suitable steps to ensure there is no misconduct by employees and officers of the company that may hinder the company’s ability to pay off debts
  3. Taking appropriate steps to make sure the company is maintaining verifiable financial records
  4. Acquiring advice from an entity with expertise and knowledge and is authorised to give such advice
  5. Creating a plan for restructuring of the company to improve it financially.

 

We saw changes to ipso facto clauses within contracts, ipso facto clause that if your business went into an insolvency, the ipso facto clause would trigger and release counterparties. Those were prohibited as a result of one of the changes that came in and we saw some other improvements like the creation of director identification numbers as an anti-phoenixing measure. So, all those things were rolling through, but I think we’ve still ended up with a very complex environment and it hasn’t mattered so much to be frank, because insolvency numbers have stayed low. Just prior to COVID, we started writing to all federal politicians and started to say; “look, we think that the market is going to change, and we do think that it’s time to have a better view of what’s going to happen in the regime. Is it going to be fit for purpose? Do we have all the tools that we need to try and support businesses going through distress, save jobs, all that sort of thing?” Obviously the signs were already there that we were going to see more economic stress. COVID changed all of that, David.

DT:Absolutely. Before we move into the pandemic period, you mentioned a couple of the changes that came in around 2017. Safe harbour, which it’s difficult to get data on how well safe harbour’s working, but certainly anecdotally, and I imagine you hear this from your members often, it seems to be working quite well. Similarly, the ipso facto provisions. A couple of other legislative reforms that came in pre-COVID, the small business restructuring process and simplified liquidation. Now, John, would I be putting it too far to say that maybe those aren’t working quite as well as the safe harbour defense?
JW: 8:00We’d probably go further than that, David, and say they’re a disaster. It’s really unfortunate. Again, those were ideas that came from us and conceptually they are what we need within the regime and so let’s look at them both individually if we can. Simplified liquidation is all about giving business a very low cost way of exiting. What you need around that is a bunch of protections to make sure that it’s not being used as a phoenixing tool.
DT:Yeah.
JW:And that it’s not going to hide corporate malfeasance but the reality is for a mum and dad business, a corner store that doesn’t have anything significant in the way of assets, their debts aren’t large, it’s ridiculous if that’s going to cost them 20 grand or 30 grand to go broke. It’s just not necessary.
DT:Well, and ridiculous for the practitioner as well that there’s no financial viability to that model.
JW:

 

9:00

And that’s part of the challenge is that for the vast majority of insolvencies, the practitioner doesn’t get paid for the work they do and there’s a whole discussion we can have a little later about whether or not that’s valued or whether or not it’s actually wasted effort anyway and that’s a very big part of our submission to the PJC Inquiry but one of the sad indicators is that only about 1 in 10 businesses that shuts down actually goes through a proper insolvency process. The vast majority of businesses are simply deregistered by ASIC without going through a proper external administration. So, there’s this wholesale avoidance of the regime, and that occurs for a few reasons. Number 1 is that people don’t have the money to properly shut it down, and their creditors won’t chase it because they know it’s not viable, there’s no money. The other and most significant one is that people simply don’t know that they’re meant to do it. And this again goes to what’s wrong with our insolvency regime. You shut down the corner store, people think they just hand back the keys and tell the creditors they can’t pay, and then they walk away. Clearly, every lawyer who’s listening to this knows that’s not what you’re meant to be doing.
DT:That’s right.
JW:

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But then that’s facilitated by ASIC simply going, oh, they didn’t pay their annual fee, so they’re automatically de-registered. And so this wholesale avoidance is deeply problematic. The third string to that, and the really concerning one is that’s also exploited by phoenix facilitators because they coach people to get to that point, and then to avoid having any of the interests that comes out of having a proper external administration and the inquiries that go around it. So, at its core, what we need is a really simple system to help those businesses go and shut down and put a bow around it and let everybody move on quite happily. Unfortunately, the simplified liquidation process is actually more complex than a regular liquidation process and so you end up with this bizarre situation where it will cost you more to go through a simplified liquidation than a regular one. So, that needs to be fixed. It needs to be stripped out, and the challenge here is convincing the policy drafters within treasury, within Attorney Generals, whoever has carriage of this, that they have to make it legislation light. The natural protection that comes out of Office of Parliamentary Council is build lots and lots of protections into the legislation so that you don’t get exploitation of it. Unfortunately, that doesn’t accord with streamlined arrangement.
DT:There’s a trade off isn’t there? Between clarity and, I suppose, presentiation – trying to deal with every possible outcome from the outset.
JW:That’s exactly the challenge, and I think we’ve been conditioned. Indeed, the work that the Australian Law Reform Commission is doing right now in its review on financial services legislation, and particularly looking at the Corps Act keeps bearing this out. What we’ve got is complexity layered on Band-Aid, layered on Band-Aid.
DT:Yeah.
JW:And when you look at even some of the numbering and lettering of the sections of the Corps Act, it’s immediately apparent just how much…
DT:How many capital Zs in a row could you possibly tolerate?
JW:

 

12:00

And look, I mean, there’s no better indicator so we have to start to go through this process of convincing government to write simple legislation and there’s no better example of what we need in simplified liquidations but it’s also why we have to have a fairly low threshold under which you are able to go through these things if you put the threshold too high there’s lots of discussion about increasing thresholds to let more people use this. The problem is you increase the risk of exploitation. So, if you’ve got a nice simple system, it has to have low gates to keep people there that aren’t going to have a massive financial incentive to exploit it. Which then brings us onto the small business restructuring. And again, you can have no better example of poor drafting than what’s happened there. Part 5.3A of the Corps Act is the regime that brings voluntary administration to life. Where we had said the government should create a very simple system to keep small businesses alive – a debtor in possession model as it’s called – the government went; “oh, great, let’s just take 5.3A, cut, paste, drop it in as 5.3B, and then do a search and replace and say, small business restructuring instead of voluntary administration.” Now, the voluntary administration regime is a brilliant regime. It is world class.
DT:

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The comparison between the implementation of the voluntary administration regime when it was legislated and the comparison of the small business restructuring regime is one that we keep coming back to in assessing the comparative success of these models, don’t we?
JW:

 

 

 

 

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Yeah, absolutely and the Harmer Inquiry is what created the voluntary administration regime. There was about 4 years of consultation, research, etc. And the Harmer Inquiry and then the VA regime took another few years before it was finalised as legislation, so it had a long gestation but that’s also why it worked, because it was well thought out. We had 10 days of consultation time for small business restructuring and simplified liquidations together, and it was lengthy legislation, and it was done over Christmas. And so there was no chance for proper consultation and to be frank, Treasury were not that interested in listening to being told that they were getting parts of it wrong. It was a very fixated idea. So, anyway, small business restructuring ends up almost as complicated as voluntary administration. The whole idea had been that it would’ve been this very light touch process. And so the cost of a small business restructure – which the government had said in its own mind was going to be less than $5,000 – is anywhere between 20 and $75,000, which is not that much less than what a VA would cost in that space. And that is a problem. So, one of the things that people have said is; “oh, well, there’s not enough people doing this.” In fact, we’ve had less than 200 companies try and enter into a small business restructure since the regime was created and, indeed, most of those have been in the last 3 months. What we’ve said is that you need to go back and completely rethink this legislation from the ground up, where it’s a couple of hundred pages, it should be four pages. People have suggested that we should increase the thresholds from the current $1 million worth of unsecured debt to up to $5 million. Going back to what I said about simplified liquidations, what you do is then create this real risk that people are going to exploit it for nefarious purposes. We’re just again saying simplification is what’s needed. And again, pointing to what the Australian Law Reform Commission’s doing right now, they keep reminding us that the legislation needs to be understandable and approachable from the user’s end. And – I hate to break it to all the listeners – the primary user here isn’t the lawyers, and it’s not the insolvency practitioners, it’s the directors of companies. It’s the mum and dads using financial products, in terms of the ALRC’s work, that’s who needs to be able to understand it and everybody listening to this podcast would understand that it’s just not approachable to the mum and dad in the street.
DT:Yeah. I mean, sometimes it’s difficult to approach as a professional, I have to say.
JW:

 

 

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Well, look – as I conceded to the parliamentary inquiry just this week – the reality is I’m fortunate to have been ARITA’s CEO for 9 years. I’m not an insolvency practitioner by background, but I work with truly brilliant people, as you said, who understand this. I live and breathe it. I talk about it all the time. I could not run an insolvency on my own and that’s an extraordinary statement when I’m one of the key authors of our submissions. I know that my level of technical detail is not sufficient to be across, to be able to do a VA or to be running anything other than the most basic of liquidations and that’s a sad indictment on where we find ourselves.
DT:

 

 

 

 

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And we’re probably overdue for a wholesale review of the Corporations Act, which of course the ALRC is conducting. Every 20 years or so, we seem to conduct wholly a review of our corporations legislation. The Companies Act, the Corporations Law – the Corporations Acthas now been in place for 21 years. So, we are a little bit overdue but going back to the small business restructuring process, great example of a good idea implemented poorly, isn’t it? And probably too many examples of that implementation difficulty for us to discuss today. We spoke a few years ago when the bill was still at the exposure draft stage with Professor Jason Harris and Mark Wellard at University of Sydney and UTS respectively on the show to talk about some of those issues – issues with the way landlord and guarantor claims are counted in voting and dealt with, issues with remuneration of practitioners being fixed, issues with criminal responsibility for practitioners if they’re signing off on a plan that they’ve not had very much time to review in the first place. So, if you’re interested in the scheme, please go and listen to that episode. But let’s talk now about the extraordinary government intervention we saw during COVID, which I should say again, largely necessary to prevent widespread business collapse and economic disaster, but we saw really a suspension almost of insolvency laws wholesale, didn’t we?
JW:Yeah, we did. And so that happened in March 2020. And what the government came to the market with was a package around effectively suspending statutory demands. So, you couldn’t call a debt, effectively, and alongside that they pretty much suspended any insolvent trading obligations. It was an extraordinary signal to the market. The key issue though, around what they did, David, was pump a huge amount of money into the economy.
DT:Yes.
JW: 18:00

 

 

 

 

 

 

 

 

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So insolvency numbers dropped almost overnight from when they made the announcements around those insolvent trading protections and the statutory demand stuff but that was also at the time that JobKeeper was announced and so there’s been a lot of discussion about how impactful those insolvency measures were.

TIP: Pausing for a moment on this idea of public insolvency data. David mentioned it earlier in the episode in relation to the difficulty of obtaining information on the success of the safe harbour reforms, and John’s comment about raw numbers is a good point to rejoin that particular issue.

ARITA’s submission to the Parliamentary Joint Committee on Corporations and Financial Services is excellent reading. It makes a recommendation that data on insolvency be collected by a regulator and, most importantly, released for academic study.

ARITA notes that ASIC already collects a large amount of data from registered liquidators which is never aggregated or released. This more granular public data would inform assessments of the success or failure of Australia’s insolvency regime and would contribute to future and better policy development.

The reality is that the most impactful part was the massive injection of cash into the economy.

DT:Yeah. There’s a legislative intervention there, but far more importantly, there’s an intervention in terms of that cash flow.
JW:Exactly. And so people might sit there and go; “surely there was a strong impact from those changes.” The insolvency numbers globally in similar economies, so any of the first world economies, fell off the same cliff that they fell off here. You saw a halving of insolvency numbers in the US, in Canada, New Zealand, etc. And the one consistent piece across all of those economies was cash being pumped in. And there’s evidence to the fact that, at the top line, there was limited impact from those insolvency changes was the fact that when they came off at the beginning of 2021 there was almost no difference in the insolvency numbers for the following 3 months.
DT:That’s right.
JW: 20:00The cash was still in the economy so insolvency numbers stayed low. So, insolvency numbers halved in March 2020 – the end of March 2020 – and they stayed that way pretty much until the end of last financial year. So, we only started to see an uptick coming in July and August of this year. So were they a success in and of themselves? Well, yes, because they did send a strong signal to the market. They actually said to people, you need to give forbearance to those that are in distress. You need to try and support their ongoing nature and their turnaround as we come out of COVID. So, the signaling was very strong. That was also backed up by the fact that the ATO exited the market completely.
DT:Yeah.
JW:

 

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So the ATO initiates the vast majority of wind ups – court wind ups – in the entire market and they do that because they have traditionally had a responsibility to try and wind up a business, even if it wasn’t commercially viable to do so. A lot of unsecured creditors and even the banks would rely on that occurring so that they didn’t have to be the bad boy in pushing somebody over the edge; ATO would take care of it. So ATO shut down their wind up operations in March 2020 and did not do any signaling around issuing DPNs, issuing warning letters until pretty much March 2022 and that’s when we started to see a bit of a return to activity, is when the ATO reentered. But they are the 900 pound gorilla in the insolvency world. Most interestingly, the ATO have now said that they will not return to doing windups in the way that they used to. That they’ll only start to do those wind ups if it’s commercially viable for them to do it. And so all of this comes to one point around; has what the government did in March 2020 had a long-term or permanent impact on creditor behaviour in Australia? And we would suggest it has. First of all, it’s said to regular trade creditors, unsecured creditors; “look, your chance of getting some sort of recovery here is going to be hard. So why bother? Why would you go in there? You know that it’s going to be difficult for you to get money out.” And even if you are the person who spends the $10,000 to wind up a business, what’s your potential payout at the other side? So, we think there’s been a bit of a shift in creditor behaviour that will remain permanent and I think there’s a lot of other changes coming down the pipeline, which will ensure that we are going to have to find a new way to shut down businesses because it’s not going to be banks or small unsecured creditors that initiate those shutdown processes.
DT:Well, you mentioned banks. Of course, we did see the ATO effectively ceased their enforcement action, but also because of that signaling effect of the legislation, we did see receiverships come to a halt. We saw institutional commercial landlords not taking any action on non-payment of rent.
JW:

 

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They couldn’t. That’s exactly right because there were also protections around commercial leases. That was another part of the, sort of, whole of government response to the pandemic. And so yeah, commercial landlords have seen a change in behaviour as well. And one of the interesting things is a lot of people, I think, expected that the commercial lease forbearance that was in the market was landlords giving people rent free periods for that time. That isn’t what happened.
DT:No. It’s deferred.
JW:It’s deferred. It was always backended into these leases. And so you will see an issue as some businesses get towards the end of their lease. They’re going to have a bill that they really don’t expect, even though they should expect it. And that’s going to bring some pressure in the next two to three years as you see those leases come to maturity because those businesses will really get quite a sticker shock when it occurs to them, they’ve got this big bill to pay.
DT:

 

24:00

Absolutely. Now, I remember in March 2020, early April 2020 as well, and I can say this because I have to confess, I was one of them. There were lots of people writing; “this cash injection, this suspension of statutory demands, this suspension of insolvent trading liability. This is very concerning. We’re going to have a tidal wave, a tsunami” – whatever aquatic metaphor you want to bring to it – “of zombie companies that will all fall over when this support is withdrawn.” I did, along with many others, write that at the time, but we didn’t really see that happen, did we?
JW:

 

 

 

 

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No, we didn’t. And look, I was probably one of the most widely quoted people on the insolvency tsunami that was set to hit the beach around October 2020. And the reason for that and why it didn’t occur is that all of the forbearance was originally scheduled to be pulled in October 2020. So, JobKeeper was meant to come off at that point. The temporary insolvency projections were meant to come off at that point. Commercial lease protections were meant to come off at that point, and everybody looked at it and said that much of a shock to the system is going to create an enormous problem, and businesses will panic, businesses will shut down, and they’re going to be left with really big debts. Even with hindsight, that was the right call to make. What it did do is shift government policy. So, when it finally occurred to the government that they were looking at an insolvency tsunami, you saw the extension of the temporary protections. You saw an extension to JobKeeper,. You saw an extension to the commercial lease protections. So all of those things ended up smoothing the economy, and most importantly – because they kept pumping money into the system via JobKeeper – what you found, and accountants in public practice were telling us this all over the place, they had never seen better balance sheets in their small business clients. They were cashed up. They had insulation. And so what you found is an absolute smoothing of that insolvency tsunami into something that didn’t even become a little wave. And that’s a good thing. It has helped protect the economy, but we have kicked the tin down the road. There is no doubt. We do know that there’s lots of zombie companies out there in the truest sense. And for any listener, all you need to do is walk through any CBD, look at all the empty shops that used to have restaurants or retail in them, and ask yourself, did that business ever end up on an insolvency list anywhere? And the answer is, for the vast majority, no. And this goes back to the deregistration piece that I was talking about before. A lot of these businesses will simply be de-registered. They are still technically companies, but they’re not trading. They’re never going to trade. They are the ultimate zombie.
DT:Yeah, absolutely. And this really comes back to both of our earlier points, doesn’t it? Because, absolutely, many of these companies will de-register if not voluntarily, by submitting a declaration that is false, but might never be discovered to be false, that might be another point we’ll discuss a bit later in the show, but if not simply by failing to pay their registration fee and having the job done for them by the regulator.
JW:Exactly.
DT:But also, many of these zombie companies are very small businesses with substantially no assets. So, even if they were to go through a formal process in the absence of that cheap, simple, available process and availability is something we didn’t really touch on because it’s unattractive for many practitioners to offer the small business restructuring or simplified liquidation process.
JW:Yep.
DT: 27:00But that’s another point. In the absence of that process being available, just kicking the can down the road and deregistering yourself or with the aid of the regulator seems like a more attractive option?
JW:

 

 

 

 

28:00

Yeah, and again, because people aren’t really aware of their legal obligation to properly wind the business up, a lot of them are quite blind to the fact that they’re not doing the right thing. They don’t have the money to declare themselves properly insolvent because you’ve got to be able to go to a liquidator and say; “well, here’s an indemnity to cover you to do the work.” And look, there’s a huge number of jobs that insolvency practitioners take on that are not funded but if somebody’s going to come to you and say; “I’ve got no assets, I’ve got nothing.” Well, you’re not really going to want to take that appointment. So, it is a real issue. It is one of the reasons – and this was a number quoted at us consistently throughout the current Parliamentary Joint Committee inquiry into insolvency – 92% of cases, creditors don’t get paid anything in an insolvency and despite the rhetoric out there, that’s not because insolvency practitioners are taking all the money that’s left and using it to pay their fees. In fact, there’s 650 registered liquidators in Australia. Collectively, they write off $100 million a year in WIP that they will never recover and that is because this system is inherently broken. But it’s driven by the fact that in micro and small businesses, people invariably keep trading to the point where there is much less than nothing. They’re running with the “I can’t get more broke than broke.” They’re waiting for the Powerball numbers to drop, to turn their business around and of course, by the time you get to that stage, they’re up to their eyeballs in debt and they haven’t even worked out how much they owe the ATO, which is normally the biggest debt that they’ve got outside of a secured loan. So, you end up with less than nothing to start with in the first instance.
DT:Yeah and this is the sort of perennial complaint that we have about the effectiveness of our current external administration tools for small businesses, which is that they tend to enter those processes far too late for a turnaround to occur and then on the other side of the spectrum, very large businesses sometimes end up in them far too early.
JW:Far too early. Absolutely.
DT: 29:00And erode so much value. Now, you mentioned that a lot of small business owners don’t know their legal responsibilities when it comes to closing up shop – liquidating or otherwise bringing to an end their business – and that probably brings us onto the next point that I wanted to talk to you about, which is the availability of bad advice in the market. Now, there’s two sources of misinformation for business owners when it comes to insolvency. One might be rogue insolvency practitioners. I think in your submission you acknowledge there’s always going to be a few bad apples in any bunch. Let’s start there. How common do you find these rogue practitioners to be and what sort of conduct are they engaging in?
JW:

30:00

 

 

 

 

31:00

So, the position of an insolvency practitioner brings with it enormous power. It’s a quasi-judicial role. And with absolute power there is always going to be an enticement for poor behaviour. And so we have had some very unfortunate examples and this is not a tired line. The reality is that every profession has this. We have it in the law, we have it in government, we have it in every walk of life. Insolvency practitioners, though, get an extraordinary amount of scrutiny. As I said, there’s 650 registered liquidators in Australia. ASIC has a team of 20 people reviewing those liquidators and their behaviour. ASIC gets extensive reports on every job that’s done. They have plenty of tools to be able to identify poor practice and deal with it. On top of that, 80% of registered liquidators choose to be a member of ARITA. ARITA has a code of professional practice, which is very large and it lays out all of the proper responsibilities that a liquidator should follow in their conduct and how they engage with creditors. So, we put a huge amount of effort into ensuring that there’s good quality people in the market. And I would say 98% of liquidators are extremely talented, trustworthy, and community-focused individuals. They are a really good bunch of people. It’s why I’ve stayed in this job as long as I have. But the couple of bad apples we have seen, unfortunately, some frauds where people have taken money for personal benefit and we are aware of some who do support phoenixing activity, etc. But there is a laser-like focus on trying to catch those people and ensure that they’re out of the market. So, it is a really small percentage. The bigger issue is the untrustworthy advisors that sit outside of the regulated world, and that’s a real problem for us.
DT:Absolutely. Insolvency practitioners, you’ve not only got those multiple layers of regulator and industry body scrutiny, you also have very high bars in terms of qualification requirements.
JW:Yep.
DT:And ongoing education and qualification requirements, but a sector that has none of those either in terms of scrutiny or training, is I suppose, what we’re calling pre-insolvency advisors. Tell us a little bit about pre-insolvency advice.
JW: 32:00

 

 

 

 

33:00

 

 

 

 

 

34:00

So, as you say, the one common theme around these dodgy pre-insolvency advisors, and it is important to say we support pre-insolvency advice. This goes back to the mantra of getting advice early. You should be going to trustworthy advisors though. Come and talk to your lawyer, come and talk to a qualified accountant, talk to a McKinsey’s, talk to any of those people that can help businesses navigate a better way through. But unfortunately, if you type into Google “I’m going broke” you will see a range of people who you probably don’t want to be talking to and, extraordinarily, some of these businesses used to have billboards on the M1 between the Gold Coast and Brisbane selling their services. Some of them are that out there and obvious but the one commonality between all of these dodgy pre-insolvency advisors is that they’re entirely unregulated. They don’t have professional indemnity insurance. They’re not accountants. They’re not lawyers. Often, their one shared experience is that they’ve been broke themselves, and they’ve found ways through being jaded to get around the process. What they tend to do is to coax vulnerable people through asset stripping and so they’ll go to them and say; “look, I can make sure you save your house, move this asset over here. Remove yourself as a director here.” And they coach them through avoidance strategies and, unfortunately, those people – all too often because they are vulnerable – go along with it because it’s a desperate hope. And then they find themselves in the position where they look back and they go; “actually, I know I broke the law.” And so you don’t get a lot of reporting of that. The only time that we start to hear about it is when creditors turn around and go; “hang on a minute, there were more assets here. Why am I not getting paid?” or most importantly, when an insolvency practitioner is appointed and they have to do their statutory investigations and they can see the money trail of where this has disappeared to. But this is a completely unregulated cowboy marketplace. There’s been some extraordinary media coverage of this. There was a Four Corners episode which was broadcast a few years ago of a phoenix facilitator who was actually getting homeless people and using them as directors of companies to protect dodgy directors.
DT:I do remember that one.
JW:

 

 

 

 

 

35:00

 

 

 

 

 

36:00

And unfortunately there’s been no prosecutions there.

TIP: In 2020, the ABC uncovered a multimillion-dollar phoenixing scam. This scam saw accountants manipulating the homeless and victims of drug addiction into signing documents as ‘dummy’ directors prior to phoenix activity taking place.

Roughly 200 companies in each state were involved in this activity for the past decade. Most of these companies are now defunct owing around 2.5 million in debts to creditors.

This is a really sad indictment on the regulator and on government that even some of the most obvious cases there was an extraordinary amount of work that not only the Four Corners team did – and we should acknowledge the team of Pitcher Partners in Melbourne they invested hundreds of thousands of dollars of their own money trying to chase down these crooks – and we’ve seen no regulatory enforcement. And what that does, David, is it sends a huge signal to the market that you can get away with this stuff. Now, the last few years through COVID, through the generally declining insolvency numbers, this segment of the market has quietened down a bit. Quite a few of these dodgy practitioners have exited because there was no work for them. That work’s coming back and they’re going to come back too. And the government has to focus on this. We know that dodgy phoenixing costs the economy somewhere around $3 billion a year in a normal, sort of, out of COVID environment. So, it’s a huge impact on our productivity. And if $3 billion a year was being stolen out of a bank, we’d have some serious action. But instead it’s being stolen from unsecured creditors, from tradies and other small business people, and nothing’s being done to stop it. We actually say it’s pretty easy to shut this down. First of all, the sort of advice they give comes under 1 of 3 banners where they should be regulated. The first is they’re generally talking to people about loans. That’s giving financial product advice. So, they should have an AFSL. They’re certainly talking to people about what their tax obligations are and what the ATO’s going to do. That means you have to be a registered tax practitioner with the TPB. They’re not doing that. And the third common denominator in all of this is they are unquestionably giving legal advice when they are not lawyers. And obviously insolvency practitioners have a carve out around that. You can give the advice as a registered liquidator, but it really should only be a lawyer who’s giving this type of advice around what to do and what your legal options are. So, there are three ways that these people can be shut down, absent the fourth and most obvious one, which is regulate the space. If you are giving insolvency advice, you must be registered. That fixes everything.

DT:

37:00

Yeah. There’s really three heads there where it’s an example of regulatory failure where a number of different professional bodies are not unwilling to regulate this area but, I suppose, these dodgy opportunists are really finding themselves a space between other regulated professions where they can operate with impunity, where they sit outside the perceived margins of a profession. And I suppose that’s a concern about that fourth solution there, which is to regulate the profession itself. That’s one of the recommendations in ARITA’s submission to require pre-insolvency advisors to be licensed and regulated. Of course, aren’t these dodgy opportunists going to try and find a way to rebrand themselves, remarket themselves in a way that falls outside of even that form of regulation? How do you address that difficulty where really these bad actors are intentionally framing the services that they provide in a way that avoids characterisation as a regulated activity?
JW:

 

38:00

And, look, you make an incredibly valid point. What you’ve got to do from a regulatory perspective is just make it too damn hard and if it is as simple as saying, if you are giving advice about insolvency and you aren’t a registered liquidator, or a subcategory thereof, – and we’d suggest you could have a subcategory of advisor or a lawyer – it’s going to be pretty obvious in any written advice you give to people in any of the coaching you give that you are giving that type of advice and you can shut it down. If you make it hard for the majority of these dodgy operators, and most of them I have to say are not very sophisticated people themselves. If you simply make it too hard and make it easy for any regulator to walk up and go; “David, shut down. You’re not doing this anymore.” Then you are going to marginalise that and that’s what we want to do. We’re never going to extinguish it totally but what you want to do is take from the 3 billion a year of down to maybe 30 million.
DT:Yeah.
JW:And that’d be really good and obviously that would then give greater confidence in the regime. It would help people make better decisions and you actually end up taking a massive harm out of the economy.
DT: 39:00Yeah. It is an incredibly important area to get right because I think when we think of director misconduct around phoenix activity, the traditional narrative is about a dodgy director who knows that they’re doing something wrong and is trying to defraud their credit, where as often, they’re acting on advice and acting on advice that they believe is valid.
JW:Absolutely.
DT:It’s so important to get this area right and these dodgy opportunists, if there’s less of an opportunity to make an easy buck, if we do make it difficult, then I suppose many of them will exit the market.
JW:That’s exactly right. And I guess we do also then need to talk about those that use phoenix as a business model, and we know that exists in a number of industry areas.
DT:Yeah.
JW:One is labour hire, where it’s rife because it is really easy to shut down one of those businesses, not pay your obligations, and then start up again. And the other is construction.
DT:Yeah.
JW:There’s been many media reports of significant construction firms who use this as a business model, and almost universally we’ve seen no action by the regulator to take those people on and pursue them.
DT:Yeah.
JW: 40:00I challenge anybody who’s listening today to find a case of where a phoenix operator has been actively pursued. In almost every case, the phoenix operators are found out by liquidators, who then often get litigation funding to go and chase these people down themselves. Regulators doing it on their own almost never happens.
DT:Yeah. Let’s talk about phoenix activity now. We’ve referred to it a few times throughout the episode. This is really the product that dodgy pre-insolvency advisors offer. Let’s quickly define phoenix activity for our listeners. We’ve spoke about it a few times on the show, but for those who haven’t heard those episodes well, look, it might be best to define by way of an example, right, John?
JW:Yeah. So, it is hard to define it because it has many leagues to it. There are many ways that you can conduct a phoenix, but a phoenix is quite simply the process where you take a distressed business, cast off the debts and restart that business, not having honoured the obligations that you have to your creditors.
DT:Yeah.
JW: 41:00

 

 

 

 

42:00

There’s legal ways to do that. That’s called the voluntary administration regime. Small business restructuring is indeed a legal phoenix. It’s taking your debts, going to your creditors, laying out a plan and saying, “I’ll pay you all 20 cents on the dollar over the next two years. I’ll keep going and therefore you can do business with me.” That’s a good thing. Where it’s not a good thing is where you have this dodgy operator stripping it out, ignoring their creditors, and then just starting up again with absolute impunity. So, it’s easy to explain in that way. It’s very hard to explain from a legal perspective and indeed we had this discussion with the Australian Law Reform Commission a couple of years ago when we were trying to help them define it as part of some of the work they were doing and as we were sitting there, chatting to them, and this was a chat, we said, “look, it walks like a duck. It quacks like a duck. It’s a duck.” And they said, “yes, but how do you do that legally?” And what we did was actually get a 9 piece children’s puzzle of a duck and we recorded 9 different indicators of phoenix activity, which I’m sorry to say, I don’t remember off the top of my head, but we laid out what those 9 indicators were. That duck puzzle now hangs in the ALRC’s offices in Brisbane, I’m very pleased to say! But you can actually say if it ticks these boxes, David, it is a phoenix. You see the behaviour, you can see that they are trying to – as we use the language now – undertake a creditor defeating movement of the funds, a disposition and that’s now what it’s called, legally a creditor defeating disposition. So, you can see that behaviour and you can come and close it down. What happens in a construction business when they phoenix is they shut down just at the penultimate moment of the completion of a project. They leave little bits to do. They will then not pay their subcontractors. So, the subbies get hit pretty hard, but most particularly, they won’t pay their tax debt. So, they won’t have paid their employees entitlements around super. They won’t have paid any of the GST that they’ve been withholding, etc. They put in straw directors or before director identity numbers, they could register their dog. I can’t tell you how many Fidos there are on ASX’s Director register.
DT:You’re kidding.
JW: 43:00It’s got holes all over it or the other thing that they did quite cleverly because of the way that very little requirement to prove who you were was put into the director registry. I could be John “Winter”, I could be John “Winters”, I could be “Wynter” spelt with a Y, I could be all these different things. It was just an accidental typo when I didn’t get it right and so that’s all about just trying to obfuscate the process. That’s how it works.
DT:Yeah. That term you used, John, “creditor defeating disposition”. Of course, that’s the one we see in the Treasury Amendment (Combatting Illegal Phoenix Activity) Act or we can just call that the Anti-Phoenixing Act colloquially.
JW:Although, most amusingly – and this goes again to some of the drafting problem that I was talking about before – the first draft of that did not use the word phoenixing in it at all.
DT:Which is so important to signal that this kind of conduct can’t be tolerated.
JW:Exactly. So it was in the name of the act, but there was nothing in the act itself that said this is what phoenixing is. It did define creditor defeating dispositions, but it didn’t define phoenix.
DT: 44:00Now, creditor defeating dispositions are now a new kind of voidable transaction. They involve disposing of a company’s assets for no value or below market value, or below the best price reasonably obtainable. For that purpose, it defeated creditors. In your submission, or in ARITA’s submission to the inquiry, you say that doesn’t really go far enough in terms of combating illegal phoenix activity. What would you like to see in this area?
JW:

 

 

 

45:00

Well, first of all, you again need something that simply articulates what it is. If you can do the simple articulation of what it is, then you can try and grab it and you can try and deal with it. But more than anything what we need is a tough cop on the beat. So, liquidators can only go so far in trying to pursue dodgy directors and the phoenix facilitators and, indeed, there’s a strong contention that using creditor’s money to keep chasing down these people for the public good is not a fair use of the creditor’s money either. So, the regulator needs to be hooking into this space. Companies House in the UK are an aggressive pursuer of dodgy operators and dodgy directors. Every day you’ll see press releases coming out of Companies House saying they’d pinged directors for poor behaviour. We don’t have that here. And indeed, that’s part of what allows those poor quality advisors to flourish because they actually say to the people that they’re dealing with, the vulnerable people or the ones who are actually looking to exploit it, they say; “look, your risk of getting caught is next to nothing.” Indeed, where you do see successful outcomes, the fines and the penalties are tiny. So somebody who’s phoenixed away a business where they scored $1 million, gets a fine of $5,000. It’s a cost of doing business and that needs to change. And this isn’t the sort of normal push where everybody says; “oh, we just need stronger laws, we need bigger penalties.” There has to be something that lines up to the amount of benefit that’s being obtained improperly. Instead of a paltry fight, it needs to be an adequate disincentive to stop people wanting to go, my return on investment here is obvious and I’m going to do this illegal activity.
DT: 46:00And, again, it really has to capture the advisors. We saw a notable phoenix activity prosecution in telecoms recently.
JW:Absolutely.
DT:But that judgment, all over it is the complicity and the culpability of the advisors in that case, in intentionally bringing about this offense. No prosecution.
JW:

 

 

 

 

47:00

 

 

 

 

 

 

48:00

No, and the judge was quite scathing in the view around what that advisor did. And yet you’re quite right. This long after the Intellicomms decision, we’ve seen not one move against that very high profile insolvency advisory business and that insolvency advisory business does not have a registered liquidator in there or lawyers. So they are “walks like a duck, quacks like a duck”.

TIP: Intellicomms was a translation company based in Australia and New Zealand. In 2021, Intellicomms sold its assets to Tecnologie Fluenti Pty Ltd for approximately $20k. On the same day, the sole director of Intellicomms placed the company into liquidation. The sale value of Intellicomms to Tecnologie was substantially less than the amount that creditor and major shareholder, QPC, was willing to pay to acquire the business.

The Court held there was no evidence available that upheld the apparent best price reasonably obtained for Intellicomms’ assets. The Court held that the sale was “negotiated in secret” to deprive QPC of an opportunity to make an offer. As Tecnologie had shown no prior interest in purchasing Intellicomms and Intellicomms’ director did not contemplate appointing voluntary administrators instead of the sale, the Court held that, on balance, the $20k sale was in breach of both limbs of s588FDB. Further, this unlawful sale was for the purpose of stripping assets from Intellicomms and placing them “beyond the reach” of its creditors.

Associate Justice Gardiner described the transaction as including all the hallmarks of a classic phoenix transaction because “it involves the transfer of assets of an insolvent enterprise to an entity controlled by persons closely associated with it, leaving behind significant liabilities with no means to satisfy them.” So, as John said, walks like a duck, quacks like a duck.

DT:Now, it surprises me that the regulator in this area is not, according to your submission, doing very much to combat illegal phoenix activity when ASIC – and the ATO and the AFP, I believe, have stated for a number of years that phoenix activity is a regulatory priority. The Illegal Phoenixing Task Force publishes data on its successful identification and prosecution of phoenix activity. Why is it slipping below the radar?
JW:

 

49:00

Because it’s being run entirely wrongly. It’s not a fit for-purpose solution. So, the Phoenix Task Force has something like 20 odd government agencies on it, including some ones that are truly bizarre. It has no industry connection. So, we’ve tried to work with the task force and they have no interest. It’s also led by the ATO. Why the ATO leads it is inexplicable. The ATO is not a regulator. It’s definitely not a regulator of corporate behaviour. It’s a revenue agency. It should be driven by the corporate regulator. But for whatever reason, the corporate regulator ASIC has little or no interest in doing this. ASIC will contend that it’s about resourcing, etc, etc. But as I said before, if we’ve got $3 billion a year of phoenixing occurring, how this isn’t something that has a significant team within ASIC – it just defies explanation. So it is regulatory laziness. There is no other way to describe it.
DT:

 

 

50:00

It is so important that we address phoenix activity. I think for people who don’t regularly deal with illegal phoenix activity, it can seem like not such a great evil. We talk about the importance of business rescue, of keeping businesses operating, of keeping people employed, of keeping money moving through the economy. We think; “oh, well, great, if a business continues to operate, maybe that’s not such a bad thing”. But it is theft really, isn’t it? $5 billion, I think, PWC estimated this costs the economy every year and it’s not just lost revenue for the tax office, it’s not just unpaid creditors, it’s also unfair to competitors, isn’t it?
JW:Yep.
DT:You get an unfair competitive advantage by not paying your tax, by not paying your subbies.
JW:

 

 

 

 

51:00

And that was one of the mantras. The ATO used to have a very worthwhile mantra. It was: “right amount, right time. No unfair advantage to non-payers.” And the no unfair advantage to non-payers to me should be stuck up in lights around every regulator or policymaker’s rooms because what you do see is that if you think about construction, you’ve got an honest construction business who’s paying their bills as and when they fall due, they’re doing the right thing by their suppliers, by their subbies, by their staff, and then you’ve got the other one right next to them whose business model is around phoenixing, they’ve immediately got a 20% better margin return than the good guy because they’re not paying that much tax, because they’re not paying their people. That’s the profit margin and that’s how they do it. So the consequence is that the good operator is being forced to push down their prices because on the top line, they’ve still got to compete with the dodgy guy.
DT:Yeah.
JW:When they’re offering that price to build the new house of half a million dollars, you’ve both got to say it’s half a million dollars in order to get the business, but dodgy guy’s got a 20% profit margin built in, courtesy of illegal phoenix.
DT:Yeah.
JW:And that unfair advantage is what has to stop.
DT:And we see that activity, as you said, in businesses like construction and labour hire, because there’s not really any of those physical assets that are difficult to move out of the ownership of the company. Not many registered assets are there.
JW:Correct.
DT:Tends to be contracts that can be terminated sometimes with ipso facto provisions so the ipso facto legislation’s important there, but tend to be terminated on insolvency. Signed up again with the new phoenix and off you go.
JW:

 

52:00

And, particularly in construction, you have lots of businesses that are created around a single project and so that business already has a life cycle. There is an expectation that business will be wound down as part of the project, and so you have this unique opportunity. So most people set up a business for it to keep going into the future. In the construction space in particular, you set a business up with a limited lifespan already intended. And so you’re thinking about closure. And so at that point you can sit there and go, if you’re a dodgy operator; “well if I don’t pay these bills at the end, that’s an even better outcome for me because I’m going to start another one of these businesses anyway to go onto the next project.” And so that’s why it’s particularly rife in construction, the natural environment of what you do in building and how you limit your risk in each of those construction projects requires a temporary business facility.
DT:

 

53:00

Now, our time together this morning’s gone really quickly, John. I had so many other things to ask you, but we’re nearly out of time. I might ask you then about some of your predictions for the future. We’ve talked about the insolvency market and the economy pre, during, and post COVID now. We’ve talked about some of the regulatory reforms and legislative reforms that have come in over that time too. What do you see coming into 2023 in terms of both market trends and also legislative reform that we might expect?
JW:

 

 

 

 

54:00

 

 

 

 

 

55:00

So, insolvency numbers did start to pick up July and August. As I said, they’ve since settled back down again. That was around ATO activity, that was around ATO issuing director penalty notices and warning letters to directors but the signaling has stopped again. As we are clearly on the brink of a global recession, we are going to see more pressure coming on in the Australian economy. We necessarily have to get back to a natural level of insolvency, which has historically been around 10,000 businesses a year in Australia, and we’re still sitting at an average of about 6,000 right now. So, we’ve got to come back to that number and that’s actually really important for the productivity of the economy. Business exits contribute significantly to productivity. You don’t want unproductive businesses still sucking capital out of the market so it has to happen. It’s a good thing, even though it’s difficult at an individual level. So that will come back up. We think that there’s quite a bit of backed up activity that we’ll need to go through as well. So those businesses that didn’t shut down because they had lots of cash stimulus. If their business was structurally broken in the first place, it’s still going to end up broken once that cash runs out again. So they will work their way through the system. Whether or not they go through a deregistration rather than a proper insolvency is a whole other discussion. But you will see those numbers start to trend up, and particularly as pressure comes in from the global economy. I expect out of this parliamentary inquiry, we are going to see some recommendations for both short-term law reform and what we’ve called for as a root and branch review for the last four or five years. So, I think you will see improvements to the safe harbour regime. There was a very comprehensive report and review done on the safe harbour regime with some very sensible recommendations. We are strongly advocating for the government to finally fix trusts in insolvency and we didn’t get to touch on this, but trusts in insolvency are a perennial problem because they’re in almost every SME that goes broke and it costs a liquidator 20k to go to court or 10k to go to court at the very minimum to actually bring those assets back into the insolvency.
DT:Yeah, would’ve loved to have time to talk about the recommendations on trusts. They are fascinating for someone who works in this area. In brief, we’re talking about a register of trust interests so that the relationship between trustee and beneficiary is transparent.
JW:Yep.
DT:We’re talking about regulating trusts as entities in the way that they are accounting entities, they should be treated as legal entities for this purpose and also that liquidators of trustee entities should not have to go to court to obtain an order that they can deal with trust assets.
JW:

 

56:00

Absolutely, because in almost 100% of cases, the moment a liquidator walks into court to ask the judge to push those trust assets over to the liquidator’s control, authority is granted. So, it’s a legislative anomaly. There were recommendations to fix this in the Harmer inquiry in ‘88 and they have not been implemented. And it’s interesting because it’s a sensitive thing. People think their trust should give them some protection, but this is where you’ve got assets which are unquestionably the business’s assets and they need to be brought back in. So I think we’ll get some traction on that. We hope to get some traction around a radical simplification of the small business restructuring and simplified liquidations piece. And then we think that the ALRC will be able to go and do the really big picture stuff so we can have an absolutely honest discussion with the entire community about what we want to get out of insolvency laws. And Australia is a bit of an outlier, we should say as we wrap up, in our approach to insolvency. We have one of the strongest creditor focus regimes in the world. In the US it’s very much debtor, so their focus more on keeping the business going than they are around getting creditors paid. UK is about halfway in between, and other regimes sit within that spectrum as well. So, we do need to have a discussion as an economy, as a community, about what we want to get out of insolvency laws. What’s our goals? Who should get paid? Who should get penalised? From one extreme, from the old debtors prison back to letting people have a pretty free run. We need to have an honest discussion about where we sit.
DT: 57:00The question that always comes up when you talk about comparative insolvency, I’m sure you’re very sick of hearing it, so I won’t ask you why don’t we just have Chapter 11 in Australia.
JW:

 

 

 

58:00

So, the lawyers would love us to have Chapter 11 because it is a multi-stakeholder process. So, in the US they have bankruptcy courts, so specialised courts with experts in insolvency sitting as the judges. They make all of the decisions, which in Australia are primarily made by liquidators. The real difference is that means that every creditor group requires legal representation and you end up with this entire pyramid structure of advisors coming in. So everybody’s got their insolvency advisor, everybody’s got their lawyers. And the cost of a Chapter 11 is eye watering. If Australia had bigger businesses in it, then a Chapter 11 style piece would work but, as I would say to any listener here, unquestionably, the outcome that we had when two of our largest businesses went broke, being ARIAM and Virgin was a really good, really effective outcome. The town of Whyalla got saved because of a really good use of the voluntary administration regime. We have a second airline in Australia because of a really good use of the voluntary administration regime, and it shows that for large businesses in Australia, we have the tools. We can do it through schemes of arrangement, we can do it through VA, so we don’t need it.
DT:Looking a bit further back, Ansett as well.
JW:

 

 

 

59:00

Absolutely. Despite the fact that there’s pain attached to these, the actual process of rehabilitating the business, or in the case of Ansett, having to shut it down, worked reasonably efficiently. And that’s where we can be really proud of our voluntary administration regime and some of the tools we’ve got. So when we ask for root and branch review, we’re asking that there be a question around, is it still fit for purpose? What can we do to fix it up? But recognising that we have some really good tools and we still have a balance that says; “if you take off with somebody’s money, there should be a penalty for that.” And so a root and branch review doesn’t mean throwing the baby out with the bathwater. It means checking to see if we are world’s best practice. It means checking to see whether or not the tools that were created in ‘88 where we had a very bricks and mortar style economy, whether or not that’s fit for purpose in what is now predominantly a service-based economy. And if you think about things like all of the sort of jobs for Uber drivers and things like that, you’ve got business models that were never even thought of in 1988 and we’ve got a question whether or not the tools that we’ve got are going to cover those into the future.
DT:Absolutely. Well, John, it’s been a privilege having you here. Thanks so much for joining me today on Hearsay the Legal Podcast.
JW:Absolute pleasure.
Ross Davis:

 

 

 

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As always, you’ve been listening to Hearsay the Legal Podcast. I’d like to thank our guest John Winter from ARITA for coming on the show! If you’re keen to hear more insolvency – check out Paulina Fishman’s episode on the meaning of abuse in Part 5.3A of the Corporations Act.

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