tag:theconversation.com,2011:/africa/topics/insolvency-13464/articlesInsolvency – The Conversation2023-08-21T13:47:46Ztag:theconversation.com,2011:article/2110682023-08-21T13:47:46Z2023-08-21T13:47:46ZHow rising interest rates are affecting UK businesses<figure><img src="https://images.theconversation.com/files/543717/original/file-20230821-23-2hink2.jpg?ixlib=rb-1.1.0&rect=0%2C33%2C7326%2C4858&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-business-owner-working-his-shop-2199248649">Stock-Asso/Shutterstock</a></span></figcaption></figure><p>From <a href="https://www.theguardian.com/business/2023/aug/03/were-just-treading-water-uk-small-business-owner-higher-interest-rate-taking-their-toll?utm_term=64ccabd424ac776f6436d425fc8da30c&utm_campaign=BusinessToday&utm_source=esp&utm_medium=Email&CMP=bustoday_email">chip shops</a> to <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">tech start-ups</a>, and even large, <a href="https://www.standard.co.uk/news/uk/wilko-administration-high-street-retail-interest-rates-b1098476.html">well-established companies</a>, rising interest rates have had an impact right across the business world. After <a href="https://theconversation.com/how-the-bank-of-englands-interest-rate-hikes-are-filtering-through-to-your-finances-210344">14 consecutive base rate hikes by the Bank of England</a> since 2021, this is causing particular problems for companies with a lot of debt. </p>
<p>We recently saw the chaos this can cause when English utility <a href="https://www.bbc.co.uk/news/business-66051555">Thames Water</a> nearly collapsed under the weight of its debt and had to seek emergency funding from its shareholders earlier this year. </p>
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Read more:
<a href="https://theconversation.com/how-thames-water-came-to-be-flooded-with-debt-and-what-it-means-for-taxpayers-208788">How Thames Water came to be flooded with debt – and what it means for taxpayers</a>
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<p>More recently, budget retailer Wilko’s borrowing not only affected the business and its shareholders, but also its employees when its recent collapse put <a href="https://www.wionews.com/business-economy/uk-retailer-wilko-collapses-due-to-big-debts-12500-jobs-at-risk-624323">12,500 jobs at risk</a>.</p>
<p>Similar problems could arise among many other companies and industries. Financial markets expect the bank base rate – which dictates the rates on many types of loans – will keep climbing: it’s currently <a href="https://www.thetimes.co.uk/money-mentor/article/when-will-interest-rates-go-down-uk/">forecast to peak</a> between 5.75% and 6% by the start of 2024. And the <a href="https://www.statista.com/statistics/793368/value-of-business-corporate-loans-united-kingdom/">total value of UK business loans</a> is also expected to rise to an estimated £513 billion as of 2023. This is £78 billion higher than in 2018, an increase of 18%.</p>
<p>Company insolvencies have <a href="https://www.reuters.com/world/uk/england-wales-report-40-rise-company-insolvencies-2023-06-16/">already jumped by 40%</a> over the year to May 2023 in England and Wales – the highest level since monthly records began in January 2019. And significant debt problems within an industry or even one firm can cause a domino effect across the UK economy. </p>
<p>Research shows the effects of an insolvency or bankruptcy <a href="https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/spreading-the-misery-sources-of-bankruptcy-spillover-in-the-supply-chain/B87035D235D7AA2A443B5164C28EBA5B">can spread</a> to a firm’s trading partners. Wilko started to defer supplier payments and extend the timeframe in which it settles invoices <a href="https://www.retailgazette.co.uk/blog/2022/09/wilko-delays-supplier-payments/">last year</a> to try to ease pressure on its cash flow as it struggled to manage its debts.</p>
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<a href="https://theconversation.com/wilko-is-the-latest-shop-to-be-edged-out-by-competition-but-it-doesnt-have-to-mean-the-end-for-the-budget-retailer-211161">Wilko is the latest shop to be edged out by competition but it doesn't have to mean the end for the budget retailer</a>
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<p>So, with interest rates likely to continue to rise, being able to tell if another company or industry is at risk is important for customers, employees, investors and other connected businesses such as suppliers.</p>
<h2>The rising cost of business borrowing</h2>
<p>The average cost of new borrowing from banks by private non-financial companies was <a href="https://www.bankofengland.co.uk/statistics/money-and-credit/2023/june-2023">6.36% in June 2023</a>, more than 4 percentage points above the December 2021 rate of 2.03% (when the Bank of England base rate increases began). For small and medium-sized enterprise (SMEs), new loan rates increased from 6.86% in May to a record high of 7.13% in June (compared with 2.51% in December 2021). </p>
<p>Companies already holding debt that’s not on a fixed rate of interest could also see an increase in the interest owed to their lender. This could come as a shock since UK interest rates were <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">1% or less</a> for more than 13 years from February 2009 to June 2022. During this time, the pressure of debt on borrowers was light or negligible.</p>
<p><strong>The base rate has recently climbed from low levels</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing the Bank of England base rate rising from less than 1% in 2020 to 5.25% by August 2023. by" src="https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=433&fit=crop&dpr=1 754w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=433&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=433&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Bank of England base rate from January 2020 to August 2023.</span>
<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/explainers/what-are-interest-rates">The Bank of England</a></span>
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<p>Companies that got used to being able to borrow at a low cost are now starting to feel the pinch, or even come under extreme pressure if they are heavily indebted. This is what worsened the <a href="https://news.sky.com/story/thames-water-secures-additional-750m-from-shareholders-in-race-to-avoid-nationalisation-12918285">financial position of UK utility Thames Water</a>. When the company was privatised in 1989, it had no debt. But over the years it borrowed heavily to fund new investments. </p>
<p>Generally speaking, debt is a <a href="https://www.ofwat.gov.uk/thames-debt-and-water-sector-finance/">prudent low-cost source of finance</a> with low interest rates fixed for the long term. But Thames Water borrowed too much. It had <a href="https://www.bbc.co.uk/news/business-66051555">£14 billion in debt by the end of June 2023</a>, which amounted to 80% of the value of the business and made it the most heavily indebted of England and Wales’ water companies, according to analysts. Its loan repayments were not only linked to the bank base rate, but also inflation, which has also spiked over the past year. This triggered fears about the company’s ability to continue to service its debts.</p>
<p>Thames Water was lucky, in a sense – it avoided being nationalised because it was able to secure timely funding from its shareholders. But the situation revealed the extent of the iceberg under the water in this industry. Shortly afterwards, another English utility, Southern Water, announced <a href="https://www.reuters.com/world/uk/britains-southern-water-suspends-dividend-amid-growing-debt-pile-rating-2023-07-07/">it would not pay dividends</a> until at least 2025 after its credit rating was downgraded. This shows investors, lenders and credit ratings agencies are getting more nervous about debt-related trends within industries.</p>
<p>Businesses can help to ease such concerns by being transparent.
<a href="https://onlinelibrary.wiley.com/doi/full/10.1002/bse.3055">Research</a> shows that the more firms disclose financial and non-financial information, the more likely they are to be able to secure loans and access lower rates. This also applies to companies that are <a href="https://www.sciencedirect.com/science/article/abs/pii/S0167268117302263">more open with external partners</a> by sharing resources and knowledge to enhance innovation. The more information a bank has, the more comfortable it will be about lending to a company. It also reduces the bank’s own risk rating, allowing it to lend more and offer lower rates. </p>
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<img alt="Man in suit with blue tie holding three blocks showing bank symbol, rating symbol and chart symbol with arrow and percentage, with " src="https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Credit ratings influence how much and to which companies banks will lend.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/credit-rating-concept-finance-banking-investment-2248616763">Panchenko Vladimir/Shutterstock</a></span>
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<h2>What to look out for in the current environment</h2>
<p>Business leaders that are addressing rising interest rates head-on may announce adjustments to their growth or expansion plans, especially if a plan previously relied heavily on debt. They may also consider different sources of finance. The UK water regulator, for example, has called on utilities to consider the role of equity funding (<a href="https://www.british-business-bank.co.uk/finance-hub/what-is-equity-finance/">for example, selling shares</a>) and <a href="https://www.ofwat.gov.uk/thames-debt-and-water-sector-finance/">not just debt</a> in financing new investment.</p>
<p>A company’s <a href="https://www.investopedia.com/terms/d/debtratio.asp#:%7E:text=The%20debt%20ratio%20is%20defined,that%20are%20financed%20by%20debt.">ratio of debt versus assets</a> will also tell you how much it holds in debt. A “good” debt ratio is around 1 to 1.5, but <a href="https://www.british-business-bank.co.uk/finance-hub/what-level-of-debt-is-healthy-for-business/">the ideal can vary</a> by industry. Manufacturers, for example, tend to need a lot of equipment and so may have ratios greater than 2.</p>
<p>More interest rate rises will pile pressure on companies, employees and the economy. But by anticipating the impact on their debt and being more open about their current state and future plans, businesses can help to minimise the pain.</p><img src="https://counter.theconversation.com/content/211068/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erwei (David) Xiang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Recent interest rate hikes are not just a problem for mortgage borrowers, many companies are suffering too.Erwei (David) Xiang, Senior Lecturer (Associate Professor) in Accounting, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1982442023-01-20T15:27:30Z2023-01-20T15:27:30ZFootball club collapses in lower leagues: how to avoid them for the good of the community<p>The <a href="https://www.echo-news.co.uk/sport/23112841.southend-uniteds-winding-petition-adjourned/">future of Southend United</a> Football Club hangs in the balance. A petition by His Majesty’s Revenue and Customs (HMRC) to have the club wound up over unpaid tax liabilities has just been adjourned by the high court until March. The court had previously granted one stay of execution from November to January, but agreed another after being persuaded by lawyers for the fifth-tier club that it may yet clear its debts.</p>
<p>It comes shortly after <a href="https://thelincolnite.co.uk/2023/01/hmrc-serve-scunthorpe-united-with-winding-up-petition/">Scunthorpe United</a>, another club from the same division, received a similar winding-up petition earlier this month. Both clubs are around 120 years old and were in recent times playing football in the Championship, English football’s second tier: Southend in 2007 and Scunthorpe in 2013.</p>
<p>Without a change in fortunes both clubs will go the same way as numerous other clubs that have been liquidated in recent years, such as New Brighton (1983), Aldershot (1992), Bury (2019) and Macclesfield Town (2020). </p>
<p>Behind every collapse is a story of people losing their jobs and investors losing money, but the community uniquely suffers too. It often has to endure a lengthy period of uncertainty, perhaps taking regular abuse from rival supporters. And when the worst comes to the worst, lots of businesses that rely on the club get hit by the fall out. </p>
<p>Supporters of a collapsed club will often start a new outfit with a similar name at the bottom of the <a href="https://en.wikipedia.org/wiki/English_football_league_system">football league pyramid</a> and start climbing again – Wimbledon, Aldershot and Accrington Stanley are examples. But by then, so much damage has been done that could have been avoided. So what can be done to keep clubs like these in business?</p>
<h2>The long failure list</h2>
<p>Football insolvency is a continual stalking horse for many clubs outside the Premier League. The table below shows just how many have succumbed to some kind of insolvency procedure over the years, with liquidations marked in bold. </p>
<p><strong>English clubs entering insolvency procedures</strong></p>
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<a href="https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Table showing which clubs have entered insolvency procedures" src="https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=316&fit=crop&dpr=1 600w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=316&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=316&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=397&fit=crop&dpr=1 754w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=397&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=397&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Procedures have included winding-up petitions, administration, receiverships, company voluntary arrangements and liquidation. Liquidations are marked in bold.</span>
<span class="attribution"><span class="source">Author provided</span></span>
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<p>Football clubs are different from the average company. They have what can be called an intrinsic viability. Fans will stick with a club through thick and thin, meaning they are very likely to have a reliable revenue stream far into the future. </p>
<p>A football club is a way of life for fans. As well as the current team and fixture list, they take an interest in everything from the club’s history to efforts to bring on youth players to social outreach programmes. For many, the club will be a central nexus point for the area. </p>
<p>Many fans are prepared to dip into their own pockets to facilitate a recovery. For example, when Wigan Athletic was struggling in 2020, supporters responded <a href="https://www.wigantoday.net/sport/football/ps500k-raised-save-wigan-athletic-now-new-target-set-2956938">by raising £500,000</a>. It’s very different to anything most consumers would do for, say, their favourite high-street store.</p>
<p>It therefore makes sense to treat football clubs differently to other businesses when they run into financial trouble. Liquidation is a costly and requires a pointless rebuilding process with a new club that should not be necessary. </p>
<h2>How the law works</h2>
<p>UK insolvency law has <a href="https://www.legislation.gov.uk/ukpga/1986/45/contents">since 1986</a> basically prioritised rescue procedures over liquidation. This was on the back of a government-initiated investigation into this area by insolvency expert <a href="https://en.wikipedia.org/wiki/Report_of_the_Review_Committee_on_Insolvency_Law_and_Practice">Sir Kenneth Cork</a>. The 1982 Cork report said:</p>
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<p>We believe that a concern for the livelihood and wellbeing of those dependent upon an enterprise, which may be the lifeblood of a whole town or even region, is a legitimate factor to which a modern law of insolvency must have regard. The chain reaction consequent upon any given failure can potentially be so disastrous to creditors, employees and the community, that it must not be overlooked.</p>
</blockquote>
<p>The 1986 Insolvency Act duly introduced administration and company voluntary arrangements (CVAs) as ways of rescuing a company as a going concern. If this is the policy in general, it should be used wherever possible in a sport that goes to the heart of local communities. </p>
<p>Football League rules do say that clubs in financial difficulty are supposed to go down one of these two routes. <a href="https://www.companydebt.com/company-rescue-solutions/cva-vs-administration/">With a CVA</a>, the directors stay in control in exchange for reaching a deal with creditors for repaying them. <a href="https://www.realbusinessrescue.co.uk/company-administration/what-are-the-exit-routes-out-of-company-administration#:%7E:text=A%20company%20can%20exit%20company,of%20the%20business%20is%20restored.">With administration</a>, an administrator temporarily takes over to see whether the business can be rescued and how best to repay creditors. Clubs often emerge from such arrangements and get back to business as usual. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="View of the pitch at Scunthorpe United" src="https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Sorry times at Scunthorpe United.</span>
<span class="attribution"><a class="source" href="https://www.alamy.com/a-southend-united-fan-image350608719.html?imageid=281F759E-5567-4DCB-8EAD-B8E805C6F5A2&p=1262630&pn=1&searchId=17b76fb5c661d92dc82dc95020f52a46&searchtype=0">Wikimedia</a></span>
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<p>Yet creditors have to essentially agree to let them go ahead. In football, HMRC is often a club’s largest creditor so it’s often their call. When a club’s tax issues are sufficiently bad, they sometimes decide to go straight for a winding-up petition – which appears to be what has happened at Southend United and Scunthorpe. </p>
<p>HMRC always has to be careful in these situations. Without particularly commenting on these two cases, one can imagine that after several years of being relatively inactive during the pandemic, it might be tempted to make an example of some easy targets. </p>
<p>Equally, a club should be able to avoid getting anywhere near a winding-up petition by engaging with the tax authority early enough. For clubs and creditors alike, it’s vital that they remember that there’s a whole community at stake and act accordingly. </p>
<p>Clubs should also be open to alternatives. One might be some financial involvement from the local authority. For example, Wigan Council in north-west England <a href="https://wiganathletic.com/community/about-the-community-trust">took a stake</a> in Wigan FC after it ran into trouble a couple of years ago. This engagement helps with local community cohesion, particularly with local youngsters and schools.</p>
<p>Another option might be for clubs to become not-for-profit enterprises. <a href="https://www.bigissue.com/news/social-justice/fan-owned-football-clubs-power-supporters-exeter-york/">AFC Wimbledon</a> is a case in point. The supporters’ group use <a href="https://thedonstrust.org/">The Dons Trust</a> to maintain 75% ownership of the club. This is an industrial and provident society which trades for the benefit of the broader community. </p>
<p>Outside the top divisions, such structures might be more appropriate to protect a club for its community. It’s vital to remember that football clubs are a way of life, not just businesses.</p><img src="https://counter.theconversation.com/content/198244/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Tribe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More than 70 clubs from the lower leagues have entered into insolvency procedures since Accrington Stanley went under in 1962.John Tribe, Senior Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1822522022-06-08T15:40:11Z2022-06-08T15:40:11ZWhat struggling businesses can do to weather the economic storm<figure><img src="https://images.theconversation.com/files/467716/original/file-20220608-15-mi8ofs.jpg?ixlib=rb-1.1.0&rect=61%2C36%2C4016%2C2090&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/small-business-entrepreneur-female-opening-store-1952118334">Shutterstock/ReeldealHD</a></span></figcaption></figure><p>Rather than rebounding in 2022, economic conditions in the UK have deteriorated. <a href="https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022%5D">Forecasts</a> for growth in 2022 and the year after have been cut dramatically. </p>
<p>The reasons for this are well documented. Take your pick from soaring energy costs, supply chain disruptions, the impact of COVID-19 and post Brexit difficulties. All of these have led to rising uncertainty. And nor is the UK unique; all G7 economies have had their <a href="https://www.oecd-ilibrary.org/sites/62d0ca31-en/index.html?itemId=/content/publication/62d0ca31-en">growth forecasts cut</a>. </p>
<p>Such a strained economic environment is challenging for everyone. But prospects for small and medium sized enterprises (SMEs) are particularly bleak. </p>
<p>These are the builders, florists, design companies, coffee shops and countless other businesses which provide vital employment, services and tax revenue to the places where we live. There were 5.5 million SMEs in the UK at the <a href="https://www.fsb.org.uk/uk-small-business-statistics.html">start of 2021</a> accounting for 99.9% of all businesses, 60% of UK employment, and around 50% of private sector turnover. </p>
<p>A <a href="https://www.begbies-traynorgroup.com/news/business-health-statistics/critical-corporate-financial-distress-levels-jump-as-cocktail-of-threats-start-to-take-their-toll">recent report</a> suggests the number of businesses in “critical financial distress” is up by 19% in the first quarter of 2022 compared to 2021. Construction (up 51%) and hospitality (up 42%) are the two sectors struggling the most. </p>
<p>Government <a href="https://www.gov.uk/government/statistics/company-insolvency-statistics-january-to-march-2022/commentary-company-insolvency-statistics-january-to-march-2022">data</a> backs this up. Company insolvencies in England and Wales are up 112% for the first three months of 2022.</p>
<p>SMEs as a rule tend to be particularly vulnerable to economic pressures. Typically they do not have large cash reserves and find it difficult and expensive to raise new capital. They also have limited options when it comes to weathering a financial storm. </p>
<p>One obvious and common response is to raise revenue by selling assets and making staff redundant. But <a href="https://www.springerprofessional.de/en/sme-insolvency-bankruptcy-and-survival-an-examination-of-retrenc/17539654">our research</a> challenges this conventional wisdom, and suggests they are not the best route to a business’s survival. </p>
<p>When it comes to selling off assets, the most attractive ones are the most likely to find buyers. A breakdown service, for example, may have no problem selling off its newest recovery truck for a quick cash boost. But holding on to that truck is likely to be key to the business’s long-term survival. </p>
<p>Likewise, we found that cutting labour costs, either by reducing wages or the number of employees is likely to potentially improve cashflow in the short run, but be damaging to morale and reduce the staff expertise required to build recovery in the long term. </p>
<p>A restaurant which lays off its head chef may make an immediate saving on its wage bill, but will also be left without leadership in a critical area when the business environment improves. They may also find that chef difficult to replace if the labour market subsequently becomes more competitive. </p>
<h2>Bespoke approach</h2>
<p>So what does work? We found that the most positive step a business can take to ensure its survival is to reduce debts – not by quickly raising emergency cash, but through careful management. There is wisdom in the “automatic stay” approach, common in many <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics#:%7E:text=A%20case%20filed%20under%20chapter,court%20approval%2C%20borrow%20new%20money.">insolvency procedures</a>, where a business is granted a period of grace during which their dept payments are paused. </p>
<p>Ultimately, this also benefits the business’s creditors who are more likely to be paid (albeit later than planned) if the business survives than if it fails.</p>
<p>This approach is supported by some in the UK business community, including one insolvency specialist which has <a href="https://bmmagazine.co.uk/news/number-of-firms-in-critical-financial-distress-rises-sharply/">urged the government</a> to extend COVID loan repayment schedules to ease pressure. The Federation of Small Businesses meanwhile, is <a href="https://www.fsb.org.uk/campaign/recovery-ready.html">advising SMEs</a> on steps they can take to deal with problematic debt, which might involve the business owner seeking external expertise – before a court appointed insolvency practitioner becomes involved. </p>
<p>But knowing what to do and what not to do is only part of successful recovery from impending insolvency. The way you do it is also important. </p>
<figure class="align-center ">
<img alt="Car ready to be loaded onto a breakdown lorry." src="https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/467719/original/file-20220608-302-fs4cf2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Avoid a business breakdown.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/loading-broken-car-on-tow-truck-275048402">Shutterstock/Nejron Photo</a></span>
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<p><a href="https://www.tandfonline.com/doi/abs/10.1080/08985626.2013.870236?journalCode=tepn20">Research suggests</a> that SMEs facing temporary financial distress are better advised by “turnaround” business experts rather than those who specialise in insolvency. Turning a situation around before insolvency occurs requires broader expertise and involves a <a href="https://www.cbi.org.uk/articles/saving-shareholder-value-by-avoiding-insolvency/">sophisticated approach</a> to saving the businesses we all rely on in our day-to-day lives. </p>
<p>It means there is business potential in seeking outside assistance to create a bespoke recovery plan, which takes individual circumstances into account, and carefully designing operational improvements that reduce costs and improve liquidity that don’t endanger a business’ core activity. Businesses should also exploit opportunities to increase revenue and maintain close contact with creditors. </p>
<p>These kinds of timely and specific actions are more likely to gain the support of creditors, employees and customers, on which successful recovery hinges. </p>
<p>SMEs are a vital engine of the economy. But they are also fragile by nature. Financial and tactical support are what many facing temporary difficulties will need – for their sake, and the sake of a much needed wider economic recovery.</p><img src="https://counter.theconversation.com/content/182252/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Naresh R. Pandit does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Selling assets and shedding staff is not the a recipe for survival.Naresh R. Pandit, Professor of International Business, University of East AngliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1765802022-02-20T05:55:30Z2022-02-20T05:55:30ZGhana’s debt makes development impossible: here are some solutions<figure><img src="https://images.theconversation.com/files/445584/original/file-20220210-27-186mld.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ghana's economy is in dire straits</span> <span class="attribution"><span class="source">Wikimedia Commons</span></span></figcaption></figure><p><em>By the year 2000, the government of Ghana had borrowed so much that the country was in <a href="https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr0211">debt distress</a>. It then subscribed to the <a href="https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr0211">Heavily Indebted Poor Countries initiative</a> of the International Monetary Fund and World Bank. Consequently, much of the country’s external debt of over US$4 billion was written off by creditors. By the time the initiative ended in 2006, Ghana’s total public debt stock was US$780 million (25% of GDP). The debt stock has since risen by 7000% to <a href="https://www.ghanaweb.com/GhanaHomePage/business/Ghana-s-public-debt-stock-now-GH-341-8-billion-as-of-September-2021-1406452">$54 billion, which is 78% of GDP</a>. The current debt to GDP ratio is 78%, while the average for developing countries is 60%. Economist, Adu Owusu Sarkodie, explains how this happened, why it’s a problem and what can be done.</em></p>
<h2>How did Ghana get into this situation?</h2>
<p>After the Heavily Indebted Poor Countries initiative ended in 2006, the public debt stock has largely been driven by the continuous accumulation of budget deficits (48.6%), the currency deprecation (28.2%), and off-budget borrowings (23.2%). Between 2017 and 2019, Ghana’s debt stock grew astronomically for three main reasons, beyond the normal drivers. </p>
<p>First was the country’s <a href="https://www.fitchratings.com/research/sovereigns/energy-sector-debt-is-key-risk-to-ghana-post-pandemic-debt-trajectory-03-03-2021">energy sector debt</a>. This is debt owed to the country’s power producers and suppliers. It has been accumulated largely by Ghana’s state-owned enterprises, that struggle to generate enough internal revenue to pay their loans. In 2021, for instance, the government has so far provided a $3 billion bailout. </p>
<p>Second was the financial sector <a href="https://isd.gov.gh/topstories-isdnews-authentic-government-news-at-every-corner-of-the-nation/764/">clean-up exercise</a> undertaken by the country’s central bank. Between 2017 and 2019, the Bank of Ghana revoked the licences of some banks, savings and loans, micro-financial institutions, finance houses, and investment institutions due to their insolvency and financial malpractices. The government had to raise another <a href="https://isd.gov.gh/topstories-isdnews-authentic-government-news-at-every-corner-of-the-nation/764/">$3 billion in bonds</a> to pay customers of the defunct banks and financial companies.</p>
<p>Thirdly, like many countries in the world, COVID-19 has had a <a href="https://www.emerald.com/insight/content/doi/10.1108/IJSE-08-2020-0582/full/html">serious impact</a> on the Ghanaian economy due to lockdowns, border closures, restrictions in movement, and the fall in crude oil prices. The economic restrictions resulted in a fall in revenue of US$2 billion, while COVID-19 expenditures increased total government expenditure by US$1.7 billion, giving a total fiscal impact of almost US$4 billion in 2020.</p>
<h2>How bad is it?</h2>
<p>The current rigidity in the Ghanaian budget makes it impossible for the government to do anything without borrowing. Rigidity refers to those statutory payments in the budget over which the government has no control. Just two of the statutory payments (compensation of employees and debt service) consume the total revenue and grants. In 2020, debt service alone (paying interest plus amortisation) consumed 70% of revenue. That’s close to the level of 72% before the country subscribed to the Heavily Indebted Poor Countries initiative. </p>
<p>Based on the estimated revenue and expenditure figures in the 2021 and 2022 budgets, the debt service burden is expected to worsen in 2021 at 82%, before improving at 45% in 2022. </p>
<p>For the government to be able to meet the remaining statutory expenditure and all other discretionary expenditures, it will have to borrow. If the government does not instil discipline and raise revenue domestically, or cut down some expenditure (or both) to create fiscal space, it will have to seek help in an International Monetary Fund programme.</p>
<p>Recently, some international credit rating agencies have downgraded Ghana’s economy, citing the country’s inability to raise enough revenue to service its debt. The signal this sends to investors is that Ghana’s sovereign bond is not profitable and its default risk is too high. </p>
<p>The implication of this is that the government may not be able to raise money from the international capital market. The options are to either borrow domestically and crowd out the private sector, or borrow from other countries. If this option is exhausted, it will have to seek an International Monetary Fund programme.</p>
<h2>What has been the impact on the economy?</h2>
<p>The impact of the huge public debt and the slowed growth of revenue is that the country has to borrow to finance its spending every time. Until the government borrows it can do virtually nothing. This has slowed down the government’s ability to implement its programmes and policies to grow and transform the economy and create jobs. </p>
<p>Over a 16-year period (2006-2021), the country’s economic growth was largely driven by the extractive sector. This sector is capital intensive: it uses more machines than human beings. The effect is that, though there is some economic growth, the source of growth is not from sectors of the economy that can generate employment. This is why unemployment has <a href="https://www.bloomberg.com/news/articles/2021-12-19/ghana-unemployment-rate-has-tripled-in-10-years-census-shows">increased</a> from 5% to 13%. </p>
<h2>Are there any solutions?</h2>
<p>Ghana finds itself in difficult position. The only way out is to raise enough revenue to finance its development. Even if the government succeeded in borrowing, it would still have to raise revenue domestically to service the debt. Therefore, there is no substitute for domestic resource mobilisation. The projected budget deficit for 2022 is $6 billion. The government will have to raise revenue through taxes (without overburdening the taxpayers) and non-tax sources.</p>
<p>The Institute for Fiscal Studies <a href="https://www.ifsghana.org/the-role-of-the-extractive-sector-in-ghanas-comparatively-low-public-sector-revenue-mobilization-policy-brief-no-11/">researched</a> the sources of revenue to the government in 2018 and made the following recommendations as the possible additional revenue to Ghana’s public finance annually:</p>
<ul>
<li><p>Personal income tax of the workers in the informal sector – $47 million </p></li>
<li><p>Property tax – $157 million</p></li>
<li><p>Tax exemptions – $790 million </p></li>
<li><p>55% share of the extractive sector – $4 billion</p></li>
</ul>
<p>According to the Ghana Statistical Service, there are about <a href="https://statsghana.gov.gh/gssmain/storage/img/infobank/2021%20PHC%20Provisional%20Results%20Press%20Release.pdf">7.7 million workers</a> in the informal sector but it is difficult to measure their incomes. There is a difficulty in taxing incomes that are unknown. That is why there seems to be a good economic justification to tax them using the <a href="https://www.uncdf.org/article/7408/ghana-electronic-levy">proposed e-levy</a>. But the levy must be designed to achieve the objective of taxing the incomes of workers in the informal sector. </p>
<p>In addition to raising revenue, the government must also plug all loopholes, and ensure prudent management of public finance. The Auditor-General department and Public Accounts Committee of Parliament usually identify financial irregularities in their reports. </p>
<p>The recent Auditor-General’s <a href="https://www.myjoyonline.com/12-85bn-irregularities-committed-by-state-institutions-in-2020-auditor-general-report/">report</a> identified about $1.8 billion worth of irregularities in public finance. When these irregularities are checked, the government will gain the confidence and support of the citizens.</p>
<p>If the current growth in the public debt stock continues, then the country is likely to find itself in debt distress, which might lead to seeking an International Monetary Fund bailout.</p><img src="https://counter.theconversation.com/content/176580/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adu Owusu Sarkodie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ghana’s economy is in its most precarious state in decades.Adu Owusu Sarkodie, Lecturer, Department of Economics, University of GhanaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1557442021-03-10T19:07:37Z2021-03-10T19:07:37ZHard bump ahead? Drop in insolvencies and bankruptcies is a ticking time bomb<p>The vast arsenal of fiscal, monetary and legal measures used by Australian governments to offset the COVID-induced economic crisis have worked well. They did not prevent a recession (popularly defined as two quarters of negative GDP growth) but things could have been much worse.</p>
<p>What is particularly interesting is that the expected consequences have not shown up in the official statistics for financial distress – insolvent companies entering administration and individuals declaring bankruptcy. </p>
<p>Indeed, a misleading impression of 2020 being one of “economic good times” could be gained from the statistics. </p>
<p>The big question is whether these statistics show government relief measures have averted economic pain or simply deferred it. As measures are wound down and withdrawn, will the private sector be willing and able to pick up the resulting slack?</p>
<h2>Companies entering administration</h2>
<p>There are, of course, “lies, damn lies, and statistics”. The figures hide what is likely to be actually happening in terms of financial distress.</p>
<p>Impacts on businesses and individuals have been quite varied. Some large corporations have come through in good shape, much better than might have been imagined. But the tourism, hospitality, entertainment and higher education sectors have taken significant hits and face an uncertain and drawn-out recovery.</p>
<p>The following graphic, <a href="https://download.asic.gov.au/media/5946060/asic-insolvency-statistics-series-1-published-february-2021.xlsx">using data</a> from the Australian Securities and Investments Commission, shows the number of companies entering external administration (quarterly from 2010 to 2020). </p>
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<a href="https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graphic showing company insolvencies, 2011 to 2020" src="https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Notable is the decline in business collapses in 2020 – the opposite of what one would expect in a time of economic stress. </p>
<p>A number of policy actions contributed to this. </p>
<p>The most obvious contributors to keeping failing businesses alive were JobKeeper payments as well as changes increasing “<a href="https://asic.gov.au/about-asic/news-centre/articles/directors-duties-in-the-context-of-covid-19/">safe-harbour protections</a>” to reduce the risk of prosecution for trading while insolvent. These changes also reduced the ability of creditors to speedily force a debtor company into insolvency.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/government-will-reform-insolvency-system-to-improve-distressed-small-businesses-survival-chances-146774">Government will reform insolvency system to improve distressed small businesses' survival chances</a>
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<p>In many cases it is quite possible these simply put off that day to some time in 2021.</p>
<h2>Individuals declaring bankruptcy</h2>
<p>At the personal level, which includes owners of small unincorporated businesses, a similar pattern can be seen. </p>
<p>The next graph uses data from the <a href="https://www.afsa.gov.au/about-us/statistics/quarterly-personal-insolvency-statistics">Australian Financial Security Authority</a>. It shows the number of individuals entering into insolvency (bankruptcy, debt agreements etc) on a quarterly basis. The latest data is for the September quarter of 2020. The number had fallen to about half of what it had been prior to 2020.</p>
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<a href="https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graphic showing personal insolvencies in Australia 2011 to 2020." src="https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>Notably, the number of personal insolvencies began falling in early 2018. There is no obvious single explanation for this trend, though good economic conditions and low interest rates are probably part of the story. </p>
<p>The further decline in 2020 (in contrast to expectations of an increase) is most likely due to legislative changes introduced in March 2020 and extended in September 2020. These include increasing the size of debt owed before a creditor can initiate action from A$5,000 to A$20,000, and allowing debtors six months (rather than 21 days) to respond to creditor demands. Mortgage repayment deferrals by banks also would have helped.</p>
<h2>A difficult balancing act</h2>
<p>What to make of these unexpected declines in official indicators of financial distress when economic conditions have surely increased the reality?</p>
<p>The more optimistic interpretation is that various government support measures have prevented both business and individuals sliding into insolvency. </p>
<p>The less optimistic interpretation is the measures have simply deferred the final outcome – with the statistics soon to show a bounce in business failures and personal insolvencies.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/were-facing-an-insolvency-tsunami-with-luck-these-changes-will-avert-the-worst-of-it-146833">We're facing an insolvency tsunami. With luck, these changes will avert the worst of it</a>
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<p>There is no point keeping “zombie” businesses alive, nor in dissuading heavily indebted individuals from taking action under insolvency arrangements that can give them a fresh start. </p>
<p>But finding the right balance of continuing support for recoverable cases while terminating it for others (and limiting the hardship caused by failure) is a difficult and challenging task for our economic masters.</p><img src="https://counter.theconversation.com/content/155744/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>From some statistics 2020 looks like economic good times. Have relief measures averted economic pain or simply deferred it?Kevin Davis, Emeritus Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1505462020-11-24T03:44:38Z2020-11-24T03:44:38ZNews of the collapse of the Grocon empire is greatly exaggerated<p>Grocon, the Australian construction empire that grew from the family concreting business started by Luigi Grollo in Melbourne in 1948, is on its last legs.</p>
<p>But Grocon, the privately held property development empire headed by Luigi’s grandson Daniel Grollo, will continue to operate.</p>
<p>Media outlets have breathlessly reported Grollo’s announcement that Grocon’s construction business is insolvent, meaning it is no longer able to pay its debts, and that external administrators have been called in (as the law requires) to sort out if the business can be sold or its assets liquidated to pay off at least some of what is owed. </p>
<p>The Grocon group, though, is more than a construction business, having found better money-making opportunites in property development and being a landlord. It is a web of many legal entities and holding companies.</p>
<p>Exactly how much of the web is being put into administration is not yet clear – as a private company, disclosure requirements are fewer than those for public companies (listed on a stock exchange). </p>
<p>But based on Grocon’s track record – and common practice in the Australian building industry – the most likely upshot is that Grocon will cut its losses on ailing entities without affecting the profitable parts of the greater empire. </p>
<p>One thing seems sure, though. Daniel Grollo and other executives will not be at risk of losing their homes and livelihoods. The real losses will be felt by others. </p>
<h2>Development beats construction</h2>
<p>Luigi Grollo’s construction business began with pouring concrete on small projects. As time went by its projects got bigger. In the 1970s it moved beyond building for other entities into property development on its own account – acquiring land, gaining development approval, building and then selling or leasing the finished product. </p>
<p>Development, which requires a certain amount of vision, access to capital and solid political connections, is the route to making serious money. </p>
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Read more:
<a href="https://theconversation.com/federal-parliament-just-weakened-political-donations-laws-while-you-werent-watching-149171">Federal parliament just weakened political donations laws while you weren't watching</a>
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<p>Construction, by comparison, provides limited opportunities for a big payday and plenty of opportunities to make a hash of it. </p>
<p>The landscape for Australia’s “Tier 1” builders – the contractors able to take on the largest projects – has been poor for several years. </p>
<p>Lendlease, for example, announced <a href="https://www.smh.com.au/business/companies/lendlease-sells-troubled-engineering-business-to-spain-s-acciona-20191219-p53ln6.html">in December 2019</a> it was selling its engineering construction business to Spanish infrastructure conglomerate Acciona. The sale followed huge losses on projects such as the Melbourne Metro underground rail project and Sydney’s NorthConnex motorway tunnel project. </p>
<p>John Holland, the builder of Melbourne’s West Gate Tunnel and the Sydney Metro light-rail project, lost <a href="https://www.afr.com/companies/infrastructure/john-holland-slashes-jobs-in-restructure-20200612-p551w6">A$60 million in 2019</a>. CIMIC Group (previously known as Leighton) made a net loss <a href="https://www.afr.com/companies/infrastructure/cimic-loses-1b-dispute-with-chevron-20201020-p566pz">of A$1 billion</a>.</p>
<h2>Grocon’s Barangaroo stoush</h2>
<p>The stated catalyst for Grocon’s announcement about its construction business is a legal dispute with <a href="https://www.infrastructure.nsw.gov.au/">Infrastructure New South Wales</a>, the state authority overseeing the development of Sydney’s Barangaroo precinct. Different companies are developing and building different parts of the project. </p>
<p>In 2018 Crown Resorts and developer Lendlease fought and <a href="https://www.smh.com.au/national/nsw/james-packer-s-crown-resorts-has-win-in-court-fight-over-barangaroo-views-20181213-p50lzb.html">won a legal case</a> against Infrastructure NSW over fears buildings being built by a Grocon-led consortium as part of the “Central Barangaroo” precinct would block harbour views from Crown’s casino hotel and Lendlease’s high-rise apartments in the “Barangaroo South” precinct. </p>
<p>Grocon subsequently <a href="https://www.barangaroo.com/the-project/news/statement-on-central-barangaroo-development-rights/">pulled out</a> (selling its interests to Chinese partner Aqualand). It is suing Infrastruture NSW for <a href="https://www.abc.net.au/news/2020-11-20/grocon-boss-grollo-says-nsw-govt-to-blame-for-insolvency/12903958">A$270 million in compensation</a> for not informing Grocon it needed to factor in sight lines from the Crown Resorts and Lendlease buildings.</p>
<p>Grollo <a href="https://www.theaustralian.com.au/business/property/grocon-collapses-into-administration-blames-barangaroo/news-story/64f83b096a5605090237f48684eab659">blamed Infrastructure NSW</a> for “forcing our hand to place the construction business into administration”:</p>
<blockquote>
<p>While I have spoken before about moving Grocon away from the construction business model to new initiatives such as build to rent, I did not want to call in administrators.</p>
</blockquote>
<p>But Grollo has said such things before. </p>
<p>In October last year Grocon put <a href="https://www.commercialrealestate.com.au/news/grocon-puts-subsidiaries-into-administration-over-28m-spat-898494/">two subsidiaries into insolvency</a> over a dispute with commercial landlord Dexus involving A$28 million in unpaid rent for space leased in Brisbane’s 480 Queen Street building.</p>
<p>Grollo also declared he was doing this reluctantly <a href="https://www.theaustralian.com.au/business/property/grocon-pulls-the-pin-over-legal-stoush-with-dexus/news-story/ce14eb96a6a409a33003b745172454ac">but had been forced into it</a>.</p>
<p>Australian Securities and Investments Commission records indicate 27 Grocon entities have been deregistered or cancelled since about 2006. That leaves, by my count, 31 registered companies. How many of these will now be placed in administration is unclear. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/these-private-companies-pay-less-tax-than-we-do-but-reasons-remain-unclear-56680">These private companies pay less tax than we do – but reasons remain unclear</a>
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<h2>A notorious industry practice</h2>
<p>The construction industry is notorious for the use of insolvency and administration mechanisms, <a href="https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/insolvency-statistics-series-1a-companies-entering-external-administration-by-industry/">dominating the statistics</a> out of all proportion to its share of the economy.</p>
<p>Many in the industry see it as a normal business practice. </p>
<p>It’s a cost-effective solution, but it leaves subcontractors and other suppliers owed money in the lurch. It creates waves of bankruptcies among smaller businesses – electricians, plumbers, plasterers and so on – who have often secured business loans with their homes. Many are left destitute. It helps explain the industry’s <a href="https://www.theguardian.com/society/2019/aug/13/why-do-so-many-construction-workers-kill-themselves">high suicide rate</a>. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/is-illegal-phoenix-activity-rife-among-construction-companies-43111">Is illegal phoenix activity rife among construction companies?</a>
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<h2>Privatising profits, socialising losses</h2>
<p>Is it right for a big operator with substantial resources to slice and dice its operating companies to ensure it continues to prosper while its subcontractor and consultant creditors are ruined?</p>
<p>The construction union – with which Grocon has long battled – has called <a href="https://cg.cfmeu.org/news/grocon-collapse-should-spur-national-security-payment-laws">for a national scheme</a> to compensate subcontractors when a head contractor goes bust. </p>
<p>But this is an invitation to continue to privatise profits and socialise losses. </p>
<p>The first step governments could take is to adopt procurement policies using value-based assessments rather than just choosing tenders based substantially on price.</p>
<p>They should also not try to transfer unmanageable risks to constructors and consultants, including setting unachievable budgets and programs.</p>
<p>This would encourage contractors to submit honest tenders and deliver quality projects without exploiting the smaller players they rely on. </p>
<p>Effective monitoring of downstream activities, including payments to subcontractors, is also vital. </p>
<p>If we are going to have a construction industry that does not rely on the public purse to pick up the pieces, we don’t need another inquiry or royal commission. We do need a co-ordinated effort to fix the obvious problems, including effective laws to stop insolvency and administration being standard business practice. </p>
<p>Administrators and liquidators should have readier access to the assets of other companies in a group and also the assets of directors.</p><img src="https://counter.theconversation.com/content/150546/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoff Hanmer has received funding from the Office of the Building Commissioner, NSW. He is a member of the AIA and the ACA. </span></em></p>Grocon as a construction business might be on its last legs, but Grocon as a property development and landlord business should be fine.Geoff Hanmer, Adjunct Professor of Architecture, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1468332020-09-28T00:48:58Z2020-09-28T00:48:58ZWe’re facing an insolvency tsunami. With luck, these changes will avert the worst of it<figure><img src="https://images.theconversation.com/files/360151/original/file-20200927-24-bx6l1q.jpg?ixlib=rb-1.1.0&rect=554%2C198%2C2600%2C1379&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Supamotion/Shutterstock</span></span></figcaption></figure><p>Ahead of the budget, the government has announced new rules that will allow small businesses at risk of collapse to continue to work out their problems instead of appointing an administrator.</p>
<p>They are needed because of an avalanche of insolvencies awaiting the end of an effective moratorium on bankruptcies (a so-called “regulatory shield”) that expires at the <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/extension-temporary-relief-financially-distressed">end of December</a>.</p>
<p>Since it was introduced in March the number of companies entering external administration has been unusually low compared to earlier years (at a time of unusually bad conditions) suggesting a buildup of zombie companies waiting to die.</p>
<hr>
<p><strong>Number of companies entering external administration</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Twelve months to each week (red) versus previous twelve months.</span>
<span class="attribution"><a class="source" href="https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/insolvency-statistics-series-1b-notification-of-companies-entering-external-administration-weekly-update/">ASIC</a></span>
</figcaption>
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<p>The new rules will allow insolvent small businesses with liabilities of less than A$1 million to keep trading under the eye of a <a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Insolvency-Reforms-fact-sheet.pdf">small business restructuring practitioner</a> for 20 days while they develop a restructuring plan to put to creditors rather than surrender control to an external administrator.</p>
<p>If half the creditors by value endorse the plan it will be approved and the business can continue under its present ownership with assistance from the restructuring practitioner. If not, it can be put out of its life quickly under a proposed simplified liquidation process.</p>
<h2>Existing laws give directors little leeway</h2>
<p>Under the current insolvent trading law, directors are expected to immediately stop the trading when they know or have reasonable grounds to suspect the company is insolvent. Directors who “give it a go” and try to trade their way out of financial difficulty face severe legal consequences: personal liability, a fine of up to <a href="https://www.asic.gov.au/about-asic/asic-investigations-and-enforcement/fines-and-penalties/">$1.11 million per offence</a> or a prison sentence of up to 15 years in extreme cases.</p>
<p>The only way to avoid these penalties is to quickly place the company in the hands of the administrator who temporarily manages the business until the company’s creditors make a decision on the company’s fate.</p>
<p>Its a regime not particularly suited to small businesses. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-needs-new-insolvency-laws-to-encourage-small-businesses-84776">Australia needs new insolvency laws to encourage small businesses</a>
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<p>The proposed new rules can be seen as a tacit admission of the failure to the “<a href="https://www.bdo.com.au/en-au/accounting-news/accounting-news-may-2018/safe-harbour-insolvency-reforms">safe harbour</a>” law reform of 2017. Applicable to all companies irrespective of size, it protects directors from personal liability for debts incurred by an insolvent company if they took a course of action “reasonably likely to lead to a better outcome” for the company and its creditors than administration or liquidation.</p>
<p>Anecdotal evidence suggests it is largely shunned by small businesses in part because of its uncapped cost. The fees of small business restructuring practitioners will be capped.</p>
<h2>The new laws will create breathing space</h2>
<p>The new rules are based on <a href="https://www.investopedia.com/terms/c/chapter11.asp">Chapter 11</a> of the United States Bankruptcy Code, with important differences.</p>
<p>The US law applies to all Companies, not just to those with debts of less than $1 million. And it gives the court an oversight role.</p>
<p>The absence of judicial supervision in what’s proposed for Australia is a double-edged sword. Court involvement generally means delays and high costs.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/government-will-reform-insolvency-system-to-improve-distressed-small-businesses-survival-chances-146774">Government will reform insolvency system to improve distressed small businesses' survival chances</a>
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<p>On the other hand, it provides a valuable check against abuses – such as the deliberate liquidation and rebirth of “<a href="https://www.dissolve.com.au/information-centre/what-is-a-phoenix-company/">phoenix companies</a>” in order to avoid paying debts.</p>
<p>In Australia, that’ll be the role of the small business restructuring practitioner.</p>
<h2>It’s not yet clear how they’ll work</h2>
<p>It won’t be a panacea for small businesses. They will be required to lodge any outstanding tax returns and pay any employee entitlements before a plan can be put to creditors.</p>
<p>In the current circumstances many small businsses will not be able to comply.</p>
<p>There’s much we don’t yet know about what’s proposed. The government’s briefing says time and cost savings will be achieved through “<a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Insolvency-Reforms-fact-sheet.pdf">reduced investigative requirements</a>”. It is unclear to what the extent the liquidator’s wide investigative powers into reasons for business failures will be curtailed. </p>
<p>The changes are likely to have profound implications for many stakeholders, including creditors, employees and the general community. </p>
<p>It is important that the government consults properly before the new rules are put to parliament in time for their introduction on January 1.</p><img src="https://counter.theconversation.com/content/146833/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anil Hargovan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new rules will allow insolvent small businesses to keep trading rather than go straight into administration.Anil Hargovan, Associate Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1467742020-09-23T12:31:15Z2020-09-23T12:31:15ZGovernment will reform insolvency system to improve distressed small businesses’ survival chances<p>The Morrison government will make sweeping changes to the insolvency system to improve the chances of saving small businesses hit by the pandemic.</p>
<p>The reforms – which are described as the most significant for three decades – will cover three quarters of businesses currently subject to insolvency, almost all of which have less than 20 employees.</p>
<p>The measures include:</p>
<ul>
<li><p>a new process for restructuring debt for incorporated businesses with liabilities under $1 million</p></li>
<li><p>moving from a one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model – allowing eligible small businesses to restructure debts while remaining in control of their enterprise</p></li>
<li><p>a rapid 20-business day period for the development of a restructuring plan by a small business restructuring practitioner (SBRP), followed by 15 business days for creditors to vote on the plan</p></li>
<li><p>a simplified liquidation process for small businesses which will be quicker and cheaper</p></li>
<li><p>measures to ensure the insolvency sector can respond effectively to increased demand.</p></li>
</ul>
<p>The COVID crisis has put new pressures on the insolvency system, and highlighted problems that were there already.</p>
<p>More businesses are in financial distress, and the one-size-fits-all arrangement doesn’t take account of the varying complexities of businesses. The current high costs and lengthy procedures can stop distressed small businesses engaging early when their chances of survival are better.</p>
<p>The government says the present requirements around voluntary administration are more suited to large, complex company insolvencies than to small businesses.</p>
<p>The new process would streamline the role for, and powers of, the small business restructuring practitioner compared with the role played by an administrator in a voluntary administration.</p>
<p>The government earlier provided some relief to help shield financially distressed businesses – and the numbers of companies going into external administration have been running at lower rates than last year. But the assistance expires at the end of December.</p>
<p>Reserve Bank Governor Philip Lowe recently warned of a wave of business failures, saying: “There will be insolvencies. There will be bankruptcies. There will be some businesses that will not recover. That’s the harsh reality of an economic downturn that’s the worst in 100 years.” </p>
<p>The government has looked to overseas practice, notably reforms in the United States, as well as recommendations from the Productivity Commission in framing its changes.</p>
<p>There will be safeguards to prevent misconduct, and protections for creditors’ interests.</p>
<p>The new system requires legislation. It is due to start January 1.</p>
<p>Treasurer Josh Frydenberg said the reforms “are a critical part of our economic recovery plan and will help to boost business confidence and dynamism across the economy by allowing viable businesses to survive as our economy rebuilds. </p>
<p>"The government’s new reforms draw on key features of the <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">US Chapter 11 bankruptcy process</a> allowing small businesses to restructure their debts while remaining in control of their businesses,” he said.</p><img src="https://counter.theconversation.com/content/146774/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Morrison government will make sweeping changes to the insolvency system to improve the chances of saving small businesses hit by the pandemic.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1442892020-08-13T20:10:31Z2020-08-13T20:10:31ZFor some companies, JobKeeper has become DividendKeeper. They are paying out, even though the future looks awful<figure><img src="https://images.theconversation.com/files/352642/original/file-20200813-22-lrfvhs.jpg?ixlib=rb-1.1.0&rect=157%2C151%2C2791%2C1461&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">RomanR/Shutterstock</span></span></figcaption></figure><p>In this recession, unlike in previous ones, governments have chosen to help pay salaries to keep workers in work rather than pay unemployment benefits when they laid off.</p>
<p>It means that the July unemployment rate revealed on Thursday was <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">7.5%</a> instead of the <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6202.0Main%20Features10Jul%202020">8.3%</a> it would have been had those working zero hours but being paid by JobKeeper been counted as out of work.</p>
<p>This approach has kept employees and firms ready for work at a time when it is far from clear when things will improve.</p>
<p>Implicit in the deal was that firms in need of JobKeeper would behave as if they were in times of immense uncertainty and not pay big dividends to shareholders on the assumption that things were rosy.</p>
<p>It is early in the company reporting season but already <a href="https://www.theguardian.com/australia-news/2020/aug/12/the-dividendkeeper-shuffle-how-jobkeeper-payments-are-flowing-to-shareholders">there are signs</a> that millions of dollars in increased dividends are being paid out by companies that received <a href="https://www.afr.com/politics/federal/jobkeeper-becomes-dividendkeeper-20200810-p55kc0">millions of dollars of JobKeeper</a>.</p>
<p>As The Guardian’s Ben Butler puts it</p>
<blockquote>
<p>what we are seeing is a transfer of millions of dollars from taxpayers – the community at large – to shareholders, some of whom are already quite rich</p>
</blockquote>
<p>By supporting the wages of employees in companies at risk, the government freed up money the companies could use to pay shareholders increased dividends rather than fortify themselves against that risk.</p>
<p>It enabled them to shovel out of the door the money the government was shovelling in, leaving themselves no better prepared than before.</p>
<p>And they need to be prepared.</p>
<h2>The last thing we need is big dividends</h2>
<p>In April the <a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">Australian Prudential Regulation Authority</a> wrote to banks and insurers asking them to “seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”. </p>
<p>Even where they were confident they had the resources they needed, their dividends should be at a “materially reduced level”.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352654/original/file-20200813-20-eqtc60.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Commonwealth Bank Chief Matt Comyn. Maximum dividend, but outlook highly uncertain.</span>
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</figure>
<p>Perhaps precipitously, it relaxed the guidance on <a href="https://www.apra.gov.au/news-and-publications/apra-updates-guidance-on-capital-management-for-banks-and-insurers">July 29</a>, noting that uncertainty had “reduced somewhat”. A few days later Melbourne went into Stage 4 lockdown.</p>
<p>Its new guideline was for banks to retain at least half of their earnings when making decisions on dividends, an instruction the Commonwealth Bank followed to the letter on Wednesday paying out <a href="https://www.afr.com/chanticleer/cbas-dividend-shows-its-strength-and-power-20200812-p55kwp">49.95%</a> of its earnings as dividends.</p>
<p>That night on ABC’s The Business the bank’s chief executive Matt Comyn conceded the outlook was “<a href="https://www.abc.net.au/news/programs/the-business/">highly uncertain</a>”.</p>
<p>Earlier that day we learnt that the private sector wage index had stopped for the first time in its 27 year history.</p>
<p>A graph presented to Commonwealth Bank shareholders on Wednesday shows that almost all of the increase in deposits in its accounts comes from government benefits rather than wages and salaries.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=293&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=293&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=293&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=368&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=368&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352666/original/file-20200813-24-hllli0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=368&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.asx.com.au/asxpdf/20200812/pdf/44ldwmfm9dfd04.pdf">Commonwealth Bank results presentation</a></span>
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<p><a href="https://www.apra.gov.au/temporary-loan-repayment-deferrals-due-to-covid-19-june-2020">Some 10%</a> of all bank loan books are now made up of loans on which borrowers have been granted deferred payments. </p>
<p>Among small businesses, 17% of repayments have been deferred, a proportion set to climb from September as Job keeper subsidies are <a href="https://theconversation.com/bowing-out-gracefully-how-theyll-wind-down-and-better-target-jobkeeper-143011">reduced and withdrawn</a>.</p>
<p>In March the government gave companies temporary relief from rules that prevent them from <a href="https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Providing_temporary_relief_for_financially_distressed_businesses.pdf">trading while insolvent</a>. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">The last thing companies should be doing right now is paying dividends</a>
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<p>For the moment the change has pushed insolvencies down to an <a href="https://www.theaustralian.com.au/business/leadership/calls-for-urgent-reform-of-insolvency-process/news-story/395f98059ac3cf1ee1acf113990bc3d5">all time low</a>, creating an unknown amount of zombie companies not fully alive but <a href="https://www.afr.com/policy/economy/creditors-in-danger-of-repayment-demands-from-rash-of-insolvencies-20200728-p55g48">not yet dead</a>.</p>
<p>When the temporary relief expires (September, unless it is extended) there’s talk of an <a href="https://www.theaustralian.com.au/business/financial-services/plans-needed-to-avert-insolvency-tidal-wave/news-story/a10c5058d51441bb5aed7bcf8c2c8fd7">tidal wave</a> of insolvencies.</p>
<p>It raises concerns that for now many companies are announcing dividends that shouldn’t and ordinarily wouldn’t be paid. </p>
<p>Some (not the Commonwealth Bank) are using JobKeeper to pay them.</p>
<h2>Why dividends, now of all times?</h2>
<p>There is a relationship between dividends, share prices and executive pay. Australian companies that pay out big dividends keep their share prices high. </p>
<p>Many Australians receiving <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">dividend imputation</a> cheques, including many retirees, hold shares because of them.</p>
<p>Without them, share prices would fall and executives would be denied their bonuses.</p>
<p>One way to ensure that there is money available for dividends is to rule out new investments that can’t achieve a high rate of return, meaning money can be paid out to shareholders instead.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/high-hurdle-rates-are-holding-back-businesses-but-perhaps-they-should-be-129435">High hurdle rates are holding back businesses, but perhaps they should be</a>
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<p>Reserve Bank Governor <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-10-29.html">Philip Lowe</a> has complained that hurdle rates of 13% to 14% seem to be “hard-wired into the corporate culture in some companies” notwithstanding the record low rates at which they can obtain funds.</p>
<p>In January the head of the Australian Competition and Consumer Commission <a href="https://www.afr.com/policy/economy/business-slams-accc-over-calls-to-lower-hurdle-rates-20200103-p53oj0">Rod Sims</a> warned that unless companies lowered their hurdle rates they would “risk missing investment opportunities to foreign raiders”.</p>
<p>It’s something akin to an undeclared investment strike by corporate Australia, something akin to “heads, shareholders win; tails, employee, creditors and the rest of us lose”.</p><img src="https://counter.theconversation.com/content/144289/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Linden received funding from RMITs EU Centre to conduct his doctoral research. The Centre is funded by the European Union</span></em></p><p class="fine-print"><em><span>Warren Staples has received funding from Australia China Council, Department of Foreign Affairs and Trade (DFAT), and the Victorian Managed Insurance Authority (VMIA). Warren is currently a member of the Institute of Public Administration Australia (IPAA) Victoria’s Sustainability Community of Practice (CoP) Advisory Committee.</span></em></p>Wages are going backwards, loans are in arrears, companies are being kept alive by government support and an exemption from insolvency rules, yet still they are paying out dividends.Andrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT UniversityWarren Staples, Senior Lecturer in Management, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1384652020-08-12T14:10:55Z2020-08-12T14:10:55ZUK’s new insolvency process should worry company creditors around the world<p>Virgin Atlantic’s rescue deal is something of a watershed in how companies can escape insolvency. The deal, which will involve Richard Branson and US hedge fund Davidson Kempner Capital Management injecting US$1.6 billion (£1.2 billion) into the airline, uses the new restructuring plans made possible by the UK <a href="https://www.legislation.gov.uk/ukpga/2020/12/contents/enacted">Corporate Insolvency and Governance Act 2020</a>. </p>
<p>While most creditors have accepted the rescue deal, the approved restructuring plan will also bind those who are against it. The UK procedure has also been <a href="https://www.stattimes.com/news/virgin-atlantic-wins-us-protection-on-restructuring-plan-aviation/">recognised by</a> a court in New York so it protects Virgin’s American assets as well as its British ones. </p>
<p>The <a href="https://essexlawresearch.blog/2020/07/01/the-new-corporate-insolvency-and-governance-act-2020-an-extraordinary-act-for-extraordinary-times-a-quick-look-at-the-acts-long-term-statutory-reforms/">new Act</a> is quite a shift from the old UK insolvency rules. There’s always the need to find a trade-off between protecting creditors and enabling business rescues, but the new rules mainly promote rescues, and there is little additional protection for disgruntled creditors. With the fallout from COVID-19 likely to lead to many more collapses, the implications are considerable. And, just like in the Virgin case, this looks set to affect creditors’ rights around the world. </p>
<h2>Controversial insolvencies</h2>
<p>In the UK, there have been significant controversies concerning the use of pre-packaged administrations (also known as pre-packs). Particularly popular in the early 2000s, pre-packs allow failed businesses to be sold to the best bidder using a pre-negotiated (“pre-packaged”) agreement between the debtor and the buyer. </p>
<p>Though pre-packs minimise costs, delays and negative publicity, they quickly became a way for distressed businesses to be sold for a pittance to a buyer connected to the debtor. The debtor’s shareholders retained control and the creditors (and taxpayers) received little or nothing. </p>
<p>The government <a href="https://www.companydebt.com/news/rescue-news/government-announces-the-final-stage-of-its-pre-pack-reforms/">tightened up</a> the rules in 2015, requiring that businesses be properly marketed and introducing a <a href="https://essexlawresearch.blog/2020/07/07/pre-pack-pool-quo-vadis/">pool of independent experts</a> to guide creditors over whether a proposed sale was reasonable.</p>
<p>These changes largely worked, and pre-packs continue – such as the <a href="https://www.accountancydaily.co/pwc-organises-pre-pack-deal-travelex">recent rescue</a> of forex services group Travelex. But they don’t work where groups of creditors obstruct them, and practitioners have long lobbied for more instruments to rescue distressed businesses. </p>
<p>The traditional rescue route for companies is to enter administration <a href="https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide---an-overview-of-company-voluntary-arrangements/#:%7E:text=Unlike%20a%20scheme%20of%20arrangement,unsecured%20part%20of%20its%20claim.">and either do</a> a deal with creditors known as a company voluntary arrangement (CVA), or get a court order known as a scheme of arrangement to impose the deal on any creditors unwilling to accept it. Both use lots of time and money, and come with strict rules.</p>
<p>The government had <a href="https://www.gov.uk/government/consultations/insolvency-and-corporate-governance">long promised</a> reform, but the COVID-19 pandemic meant this could no longer be delayed. Among the new rules designed to facilitate rescue is the new restructuring plan procedure. Much to the approval of the industry, a rescue can now be imposed on dissenting creditors with a court order (known as a “cross-class cram-down”), provided that some conditions are met. Additionally, the rules around the level of creditor approval required for these plans to be permitted are more relaxed than for CVAs and schemes of arrangement. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Man with nothing in his trouser pocket" src="https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352542/original/file-20200812-18-ixa44p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">No money, no probem.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/broke-businessman-showing-his-empty-pocket-250467778">Nito</a></span>
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<p>The order of priority that applies in liquidation cases is not strictly binding in restructuring plans either. Normally creditors must be paid in ranking order – so that, for instance, mortgage holders are paid before trade creditors. Usually this means that lower-ranking creditors receive nothing, and that a higher-ranking class can block a debt repayment plan. Now it is easier to sidestep them. </p>
<p>Admittedly, courts must first be satisfied that dissenting creditors will be no worse off than with any alternative plan (normally a pre-pack). Yet UK courts have proved reluctant to question the judgement of those running the company, thus further limiting the creditors’ protection. </p>
<p>Restructuring plans can also be carried out by companies with the most tenuous connection with the UK (unlike CVAs, which require companies to be mainly focused on the UK or either registered here or in the European Economic Area). For the court to find a “sufficient connection” with the UK, it may even suffice that restructuring negotiations were carried out there. </p>
<p>Since Virgin Atlantic is a UK company, there is no such problem here, but recall that that deal has <a href="https://www.bloomberg.com/news/articles/2020-08-04/airline-virgin-atlantic-files-for-chapter-15-bankruptcy-in-u-s">been recognised</a> by a New York court. This is because both the US and UK have adopted the UNCITRAL Model Law on cross-border <a href="https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency">insolvency</a>, which means they recognise insolvency procedures initiated in one another’s countries. Many other countries are also parties to this framework, so companies with little connection to the UK will probably be able to use the rules to protect themselves from creditors worldwide. </p>
<h2>The problem with rescues</h2>
<p>Giving companies more protection from creditors is not necessarily a bad thing, of course. If you rescue a company, you save jobs. But not always. A “rescued” company whose business is fundamentally broken is a “zombie” company, a sort of parasite in our economy. It may crowd out viable businesses, or push unpaid creditors over the edge. Also, the money lost by the government in failed rescues could be spent more usefully. </p>
<p>Take Debenhams’ <a href="https://www.ft.com/content/56767546-677f-45e1-a85f-011da4fe10ee">restructuring saga</a>. Debenhams was rescued in April, after sales plummeted under lockdown. The process is <a href="https://www.ft.com/content/c5ff00a6-78e1-4b0a-8ab5-ba36cd5add7a">likely to result</a> in a sale of its remaining profitable assets by the end of September. </p>
<p>But this is the third time in less than a year that Debenhams has gone through an insolvency procedure. <a href="https://www.ft.com/content/2e66a618-cd85-11e9-b018-ca4456540ea6">During</a> both <a href="https://www.ft.com/content/c12d39fc-67f6-11e9-9adc-98bf1d35a056">previous</a> attempts, suppliers and creditors went totally or partially unpaid. Debenhams also received state COVID support, for instance through the <a href="https://www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme">job retention scheme</a> and the <a href="https://www.shearman.com/perspectives/2020/03/uk-government-includes-tax-deferral-in-covid-19-business-support-package">postponement of</a> taxes that were due. </p>
<p>The retailer now continues as a going concern without fully paying landlords and suppliers – except essential ones – due to being in administration. And it is quite likely that more creditors will end up unpaid as a result of the latest rescue. </p>
<p>Should we turn the clock back to the good old days in which companies were liquidated and businessmen sent to prison for failing to pay their suppliers? Far from it. But the risks associated with restructuring plans seriously need to be discussed. </p>
<p>The government should introduce more stringent eligibility and approval criteria to ensure that only viable businesses are rescued. For example, restructuring plans could be made available only to companies heavily involved with the UK, and the additional voting requirements applicable to CVAs and schemes should be extended to the new restructuring plans. Unless we move quickly, we can expect a lot more zombie companies and distraught creditors in the months ahead.</p><img src="https://counter.theconversation.com/content/138465/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eugenio Vaccari does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Pre-packs used to be the UK’s most controversial way for companies to thwart creditors. No longer.Eugenio Vaccari, Lecturer, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/840722017-10-19T19:03:44Z2017-10-19T19:03:44ZDebt agreements and how to avoid unnecessary debt traps<figure><img src="https://images.theconversation.com/files/190948/original/file-20171019-32370-1qsjiru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In many cases there are better ways than debt agreements to wipe out your debt</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/59937401@N07/7214450550/in/photolist-bZvWNs-HhhcFy-9Eh9R1-n2sg6-pY6H6n-Hhhd8W-8aAXZ4-2xNWp-7fNUg1-aUDBTz-8aAMNR-dSzPuE-8aAzvn-8aAzvp-8aAXZ8-8azQTR-8aAMNn-8aDKd9-MJNssa-J4wvHq-5S2X3-3irZjD-8aAMNx-8aAzv8-8aE913-8bafKW-oAoyZr-opupcx-9xpJs4-PzvT84-7TLhDQ-ao2C3j-9Ktb6e-bwiejC-aA4Zuo-6gcAAw-6g8qJM-N4Guan-8aAMNT-8aXxcE-8aXxcQ-5sA6WD-8aE8ZQ-8aAMNz-4NKZnb-8rZbx8-77EHym-bxdRLx-aaYL9V-6gcADm">Flickr (creative commons) </a></span></figcaption></figure><p>Debt agreements are the fastest growing form of personal insolvency in Australia. They were designed to offer debtors a low-cost way to make arrangements with their creditors, while avoiding bankruptcy and some of its more serious consequences. </p>
<p>When introduced, law reformers intended that debt agreements should be administered by volunteers rather than by commercial administrators who charge fees. However, in practice, debtors often pay substantial fees to debt agreement administrators. </p>
<p>In fact, many debtors pay more than 100% of their original debt, because of the high cost of administration fees. But there are cheaper options available for managing debt. </p>
<h2>Debt agreements</h2>
<p>Debt agreements are binding contracts made between debtors and their creditors in accordance with personal insolvency law. They are aimed at providing debtors in financial stress with the option of compromising with creditors. Not all debtors can enter into a debt agreement - there are income and debt limits.</p>
<p>In many cases, debtors pay their creditors an agreed reduced amount by instalments over a period of time. A debt agreement administrator assists in the negotiation process and distributes the payments to creditors. </p>
<p>Debt agreements have fewer adverse consequences than bankruptcy. One key advantage is that debtors may be allowed to keep their home. </p>
<p>Nonetheless, the adverse consequences of debt agreements include having a record on the <a href="https://www.afsa.gov.au/online-services/bankruptcy-register-search/what-npii">National Personal Insolvency Index</a>, and difficulties obtaining credit. Debtors’ ability to maintain a licence in various professions may be affected and the debt agreement must be disclosed in certain situations.</p>
<h2>A growing problem in Australia</h2>
<p>In 2016 there were 12,150 new debt agreements, comprising 41.5% of all personal insolvencies in Australia. While the number of debt agreements has increased steadily each year, bankruptcies have decreased since 2010.</p>
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<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3036315">Our research</a> examines three sources of data to gauge the impact of debt agreements. These sources include statistics from the Australian Financial Security Authority (AFSA), an online survey of 400 debtors, and interviews with industry stakeholders. </p>
<p>Most debtors pay more under debt agreements than the amount they originally owed. This is due to the fees charged by AFSA and, in particular, for-profit debt agreement administrators. </p>
<p>In 2016, close to <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3036315">23% of debtors’ payments</a> went towards debt agreement administrators’ fees. The total amount of fees paid by debtors is higher when <a href="https://www.afsa.gov.au">Australian Financial Security Agency</a> fees and set-up fees paid to debt agreement administrators are included.</p>
<h2>Many debt agreements are unsuitable</h2>
<p>Debt agreements are useful for some people, such as those who have a home to protect from seizure in bankruptcy. However, consumer advocates find many instances of debt agreements unsuited to the needs of debtors. High administration fees are detrimental particularly for low income debtors. </p>
<p>Some debtors enter into debt agreements which they clearly cannot afford, aggravating their financial stress. If they are unable to make the payments required under a debt agreement and it is terminated, the fees cannot be recovered but the debts to creditors remain, leaving debtors in a worse position. </p>
<p>Debtors who rely primarily on Centrelink benefits are among the clearest examples of people unsuited to debt agreements. Centrelink benefits are meant to provide a basic standard of living, and diverting a portion of income towards debt agreements is likely to cause significant hardship. </p>
<p>People whose incomes comprise a disability or aged pension may in many cases be better off declaring bankruptcy, or seeking other forms of debt relief. </p>
<h2>Better options available</h2>
<p>There are several fee-free options for managing debt which do not involve the adverse consequences of debt agreements. </p>
<p><a href="http://www.moneyhelp.org.au/your-debt-options/hardship-programs/">Financial hardship</a> schemes commonly allow payment by instalments, or short term extensions of time, for debts owed to utilities or credit providers. Free independent dispute resolution offered by the <a href="https://www.fos.org.au/">Financial Ombudsman Service</a> and the <a href="https://www.cio.org.au/">Credit and Investments Ombudsman</a> is available to people who have disputes with financial service providers. </p>
<p>People often enter into debt agreements without seeking independent advice or accessing other options for managing debt. In 2016, 92% of debt agreement debtors relied on debt administrators as their primary source of information. <a href="http://consumeraction.org.au/wp-content/uploads/2013/05/Fresh-start-or-false-hope-April-2013.pdf">Marketing</a> often emphasises the advantages of debt agreements over bankruptcy. </p>
<p>Debtors often lack adequate knowledge of cheaper, better options for managing debt and of the adverse consequences of debt agreements. When the debt agreement system was established, it was not expected that private, profit-making debt administrators would assume a prominent role. </p>
<p>Law reformers noted in the 1996 Bankruptcy Legislation Amendment Bill that ‘if fees were charged, debt agreements would in many cases not be viable either for the debtor, or for his or her creditors’. They further noted that this would defeat the purpose for which debt agreements were introduced. </p>
<h2>Recommendations</h2>
<p>Reforms to the debt agreement system are currently being considered, but in order to be effective, these reforms should provide better safeguards for debtors. These should include stricter eligibility requirements for debtors entering into debt agreements such as a minimum income or ownership of assets which are protected from seizure in bankruptcy. </p>
<p>We need a more rigorous, legally binding assessment of debtors’ suitability on the part of debt agreement administrators; the provision of clearer information to debtors; and limits on administrators’ fees. Debtors should have access to free dispute resolution services when problems with debt agreement administrators arise.</p>
<p>Such reforms would reduce the risk of debtors being left worse off, financially, as a result of debt agreements that are unsuited to their circumstances.</p><img src="https://counter.theconversation.com/content/84072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Ramsay receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Lucinda O'Brien and Vivien Chen do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Debt agreements have become the fastest form of personal insolvency in Australia. But in many cases, there are better options available to manage debt.Vivien Chen, Lecturer, Monash Business School, Monash UniversityIan Ramsay, Professor, Melbourne Law School, The University of MelbourneLucinda O'Brien, Research Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/847762017-09-28T19:06:09Z2017-09-28T19:06:09ZAustralia needs new insolvency laws to encourage small businesses<figure><img src="https://images.theconversation.com/files/187952/original/file-20170928-1460-1hv2krt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Banks aren't sure they will recover their money if SMEs fail.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Ten Network’s recent experience of <a href="https://theconversation.com/ten-networks-problems-are-history-repeating-79420">voluntary administration</a> and subsequent <a href="https://theconversation.com/the-impact-of-cbss-takeover-of-ten-is-much-larger-than-just-one-network-83095">rescue by CBS</a> demonstrates how insolvency law works for large Australian companies. But <a href="http://www.abs.gov.au/ausstats/abs@.nsf/0/C575766838376FA0CA2573E1000E3F2F?Opendocument">97% of Australian businesses</a> are small or medium size enterprises (SMEs), and they face a system that isn’t designed for them.</p>
<p><a href="http://www.huffingtonpost.com.au/2015/09/28/small-business-failure_n_8187166.html">60% of small businesses</a> cease trading within the first three years of operating. While not all close due to business failure, those that do tend to face an awkward insolvency regime that fails to meet their needs in the same way it does Network Ten.</p>
<p>The lack of an adequate insolvency regime for SMEs inhibits innovation and growth within our economy. It adds yet more complexity to the already difficult process of structuring a small business. Further, it <a href="https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Tackling-Small-and-Medium-Enterprise-Problem-Loans-in-Europe-42614">inceases the cost of funding</a>. Lenders know that recovering their money can be onerous if not impossible, so they impose higher costs of borrowing. </p>
<h2>Australia’s insolvency regime</h2>
<p>Australian insolvency law is divided into two streams, each governed by a separate piece of legislation. </p>
<p>The <a href="https://www.legislation.gov.au/Details/C2017C00312">Corporations Act</a> deals with the insolvency of incorporated organisations, and the <a href="https://www.legislation.gov.au/Series/C1966A00033">Bankruptcy Act</a> addresses the insolvency of people and unincorporated bodies (such as sole traders and partnerships). </p>
<p>Both schemes are aimed at providing an equal, fair and orderly process for the resolution of financial affairs. But a large part of the Corporations Act procedure has been developed with the complexity of a large corporation in mind. For example, there are <a href="https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Tackling-Small-and-Medium-Enterprise-Problem-Loans-in-Europe-42614">extensive provisions</a> that allow the resolution of disputes between creditors that are only likely to arise in well-resourced commercial entities. </p>
<p>The Bankruptcy Act, by contrast, takes account of the social and community dimensions of personal bankruptcy. This legislation seeks to <a href="https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/what-are-consequences-bankruptcy">supervise the activities of the bankrupted person</a> for an extended period of time to encourage their rehabilitation.</p>
<p>SME’s awkwardly straddle the gap between these parallel pieces of legislation. Some SMEs are incorporated, and so fall under the Corporations Act. SMEs that are not incorporated are treated under the Bankruptcy Act as one aspect of the personal bankruptcy of the business owner. But of course, SMEs are neither people nor large corporations. </p>
<h2>How insolvency works</h2>
<p>Legislation governing corporate insolvency is founded on the assumption that there will be significant assets to be divided among many creditors. Broadly speaking, creditors are ranked and there are sophisticated and detailed provisions for their treatment. If Ten would have proceeded to liquidation, creditors would have been <a href="http://www.abc.net.au/news/2017-06-26/channel-ten-may-yet-be-saved-from-receivership/8653522">broadly grouped into three tiers</a> and paid amounts well into the tens of millions.</p>
<p>One type of creditor is a “<a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ppsa2009356/s12.html">secured creditor</a>”. Banks, for example, will often require that <a href="http://www.smh.com.au/business/cbd/costs-keep-adding-up-for-bruce-gordon-and-lachlan-murdochs-ten-bid-20170917-gyj7ka.html">loans for the purchase of business equipment</a> are secured against that equipment. In the event of default, the bank takes ownership of the equipment in place of the debt, if they can’t be paid out. </p>
<p>Unsecured creditors, on the other hand, do not have an “interest” over anything. If a company goes into liquidation, an unsecured creditor will only be paid if there are sufficient funds left after the secured creditors have been paid, and the cost of the process has been covered. There is no guarantee that unsecured creditors will be paid. Most often, they are only paid a portion of what they are owed.</p>
<h2>The unique challenges of SME insolvency</h2>
<p>When it comes to SMEs, there is little or no value available to lower-ranking, unsecured creditors in an SME insolvency estate. At the same time, higher-ranking, secured creditors tend to have effective methods of enforcing their interest outside the insolvency process. For instance they could individually sue the debtor to recover money owed. As a consequence, creditors are rarely interested in overseeing or pursing an SME insolvency process. This means the system is not often used and creditors with smaller claims go unpaid.</p>
<p>Even if creditors do want to use the insolvency process, it is likely the SME’s assets are insufficient to cover the cost of employing an insolvency practitioner and the required judicial oversight. </p>
<p>This problem is made worse because SMEs <a href="http://idealog.co.nz/venture/2016/08/failed-not-finished-dealing-social-stogma-entreprenuerial-failure">often wait too long</a> to file for insolvency, owing to their lack of commercial experience or the social stigma of a failing business. Instead, debts continue to grow well beyond the point of insolvency, and responsibility falls on creditors to deal with the issue. </p>
<p>There are further difficulties depending on whether the SME is incorporated. Incorporated SMEs are frequently financed by a combination of corporate debt, taken on by the SME, and the personal debt of the business owner. This may result in complex and tedious dual insolvency proceedings: one for the bankruptcy of the owner and the other for the business. </p>
<p>Unincorporated SMEs, in turn, suffer from two stumbling blocks. First, the personal bankruptcy scheme has not been created to preserve the SME or encourage its turnaround. Second, personal bankruptcy proceedings require specific evidence that the person has committed an “<a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ba1966142/s40.html">act of bankruptcy</a>”, such as not complying with the terms of a bankruptcy notice in the previous six months.</p>
<p>This hurdle makes the process far more time-consuming than the corporate scheme. It is also more difficult for creditors to succeed in recovering their investment and, by extension, prevents them from efficiently reallocating it. There is a real danger that this will deter creditors and <a href="http://documents.worldbank.org/curated/en/973331494264489956/Report-on-the-treatment-of-MSME-insolvency">raise the cost of capital at first instance</a>.</p>
<h2>What can we do about it?</h2>
<p>The best way to meet the needs of SMEs would be to create a tailored scheme that sits between the corporate and personal regimes, as has been done in <a href="http://www.uncitral.org/uncitral/en/data/whats_new/2017_05_presentations.html">Japan and Korea</a>. These regimes focus on speeding up the proceedings, moving the process out of court where possible and reducing the costs involved. </p>
<p>However, as the legislation in these two countries notes, there can be marked differences between small and medium-sized businesses that all fall under the SME banner. Therefore, what is needed is a flexible system made up of a core process, together with a large array of additional tools that may be invoked.</p>
<p>Designing such a scheme remains no easy feat. However, at its core, such a scheme would ideally allow business owners to commence the insolvency process and remain in control throughout. The process would sift through businesses to identify those that remain viable, and produce cost-effective means for their preservation.</p>
<p>Non-viable businesses would be swiftly disposed of, using pre-designed liquidation plans where possible and relying on court processes and professionals only where absolutely necessary. Creditors would therefore receive the highest return possible, and importantly, honest and cooperative business owners would be quickly freed from their failed business and able to return to economic life.</p><img src="https://counter.theconversation.com/content/84776/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s insolvency laws inhibit growth and innovation. They weren’t designed for small business, which make up 97% of all businesses.Kevin B Sobel-Read, Lecturer in Law and Anthropologist, University of NewcastleMadeleine MacKenzie, Research assistant, Newcastle Law School, University of NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/653372016-09-14T05:41:41Z2016-09-14T05:41:41ZExplainer: why Hanjin’s ships are stranded around the globe<p>The collapse of South Korean company Hanjin Shipping has left ships, cargo and crews stranded around the globe. It highlights the complex consequences of a shipping company going bankrupt, with Hanjin’s creditors and customers waiting to see whether the business can be saved.</p>
<p><a href="http://www.hanjin.com/hanjin/CUP_HOM_1700.do?sessLocale=en">Hanjin Shipping Co</a> is one of the world’s top ten container carriers, operating some 70 liner and tramper services, transporting more than 100 million tons of cargo annually. Its fleet consists of some 150 container ships and bulk carriers.</p>
<p>Increased competition and Hanjin’s own high debt levels have led to its demise, as it struggled to adapt to changes in the market. Demand for shipping has fallen since the global financial crisis, at the same time as technology has started to produce larger mega-ships. Over capacity is one major problem. </p>
<p>Container operators are also increasingly constrained by competition laws in the US, the EU, Japan and more recently, China. It is a scenario playing out among other shipping companies in what appears to be a major readjustment of the size and operations of the world’s shipping fleet. </p>
<p>The company’s financial woes have caused it to seek protection from its creditors through Korea’s corporate “rehabilitation” laws. This is similar to Chapter 11 bankruptcy in the United States. This is where the insolvent debtor restructures the debts it owes to creditors, according to a rehabilitation plan, while the company continues its operations.</p>
<p>Under South Korean law, the plan must be approved by the creditors and the court and it is then implemented by a nominated receiver. The receiver is now in charge of Hanjin’s operations, and its ships, worldwide. </p>
<p>In the meantime <a href="http://www.cnbc.com/2016/09/12/cargo-from-hanjin-ship-taken-out-of-long-beach-port-amid-pledge-of-new-rescue-funds.html">the chairman of Hanjin Group has transferred 40 billion South Korean won</a> to the company to help unload cargo stranded on the its vessels, but regulators have warned securing further funds could take “considerable time.”</p>
<p>Ideally, the plan will give Hanjin sufficient breathing space while the receiver restructures its business into perhaps a leaner operation, or one in which others, including creditors, may take a financial interest. </p>
<p>Ships are unusual assets for a receiver or liquidator to deal with. A shipping enterprise can be extensive geographically – with ships at all points of the world, and difficult logistically – with those ships at various stages of cargo handling. A range of other players - the owners of vessels chartered to Hanjin, and bunker (fuel) suppliers and port agents in many different countries - all add to the complexity. </p>
<p>Typically, a liquidator takes possession of the fixed assets of a failed business – land, plant and machinery – assets that stay put and can be located and secured. While some of those assets may be overseas, shipping collapses invariably involve the application of cross-border insolvency laws. </p>
<p>Ships travel from place to place and can be hard to find and secure. Maritime law is unique for that reason; for example, the ship’s crew have a direct claim on the ship itself for their unpaid wages – <a href="http://www.investopedia.com/terms/l/lien.asp">a maritime “lien”</a>. They can have a court marshal board the ship, to arrest and secure it under a court order. </p>
<p>Arrest involves the marshal attaching an arrest warrant to the ship’s cabin or mast, and taking steps to prevent the ship leaving its mooring. This right of a crew dates back to the days when unwanted and unpaid sailors might find that while on shore leave at a distant port, their employer, the ship owner, sails off. </p>
<p>Others also have rights to arrest a ship at various ports around the world, this is happening right now with Hanjin. The South Korean receiver will be resisting these arrests of Hanjin’s ships. </p>
<p>However one of the fundamentals of bankruptcy is that ordinary unsecured creditors owed money have to wait in line for the receiver to decide how best to deal with the insolvent business. This includes realising assets to pay and what can be paid in way of dividends to those creditors – in many cases only 10 cents in the dollar, if they are lucky. Some maritime liens and other claims give the relevant creditor a “secured” claim, one that is paid out first before the ordinary creditors. </p>
<p>It appears that the South Korean receiver Mr Tae-Su Seok is applying to various courts around the world for orders to challenge what may be secured claims. Well developed international cross-border insolvency laws will help him access to foreign courts to obtain orders protecting the ships in that jurisdiction. At the same time, he will be looking for funds to try to keep any profitable parts of the business going. </p>
<p>The shipping world is waiting to see how and whether the Hanjin rehabilitation succeeds. Other major collapses, for example in Korea with Pan Ocean and Korea Line Corporation, have resulted in creditors’ claims being considerably compromised. In these cases only a certain percentage of debts were repaid and over a period of time, or creditors took equity in the shipping company. </p>
<p>Given the state of world shipping, that outcome may occur here. The shipping industry suffers from an inherent inflexibility in responding to changing economic conditions. There may be a decline in demand for certain goods, leading to a drop in shipping rates.</p>
<p>A shipper taking delivery of a new vessel some long time after it was first commissioned may be left high and dry in finding that there is a much reduced demand for its services. On the other hand, a shipping company’s leaner world fleet may find that it does not have sufficient capacity when trade conditions quickly change.</p>
<p>While ships will always be needed, shipping is finding increased competition from air freight services, transporting many goods – food for one, and technology consumables – unsuitable for longer shipping delivery times. Demand for the latest iPhone 7s, or fresh fruit, would call for overnight air freight, rather than weeks. Pirate incursions are another current risk.</p>
<p>Still, the huge capacity of ships will never be offered by flight and this remains a major advantage. Ship design and technology is also improving - computer guided “crewless” ships are on the horizon. But shipping remains a business subject to the vagaries of international trade and economic conditions. </p>
<hr>
<p><em>Mr Ryan Eagle, Partner, Ferrier Hodgson, Sydney, provided assistance in writing this article.</em></p><img src="https://counter.theconversation.com/content/65337/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Murray does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Korean Hanjin Shipping has ships and crews stranded in ports around the world as creditors and customers wait to see if the company can be saved.Michael Murray, Fellow, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/619122016-07-26T01:18:57Z2016-07-26T01:18:57ZSave or salvage: the real role administrators play in troubled businesses<figure><img src="https://images.theconversation.com/files/131881/original/image-20160726-31178-1w16clk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Successful rescue of a company is the ideal rather than the reality.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>News that Australia’s third-largest pizza chain Eagle Boys <a href="http://www.svpartners.com.au/eagle-boys-voluntary-administration">has been placed in administration</a> suggests a bleak future may lie ahead for the company. </p>
<p>Administrators have indicated they “are in the process of identifying restructuring measures”. But <a href="http://www.arita.com.au/docs/default-source/tts/tts-2013-wellard-final-report-for-arita-website.pdf?sfvrsn=0">research</a> by ARITA’s Mark Wellard (formerly from QUT) on the effectiveness of voluntary administration indicates that a sustainable rescue is generally achievable in only a minority of cases. </p>
<p>Indeed ASIC has <a href="http://www.pc.gov.au/inquiries/completed/business/report">reported</a> that failure rates of companies entering into voluntary administration are high, with 78% of companies being de-registered within five years.</p>
<p>The <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s435a.html">Corporations Act 2001 (Cth)</a> makes it clear that the main objective of voluntary administration is to rescue an insolvent company, or as much of its business as possible. </p>
<p>Successful rescue of the company or its business is in the interests of a wide range of stakeholders, including the company’s employees, creditors, shareholders as well as the community in general.</p>
<p>If a company or its business cannot be rescued, then the voluntary administration regime is designed to achieve better outcomes for the company’s stakeholders than would otherwise be achieved if the company was immediately wound up.</p>
<p>The notion of rescue is commendable. But the second objective of voluntary administration of salvaging better outcomes for all stakeholders is more achievable. </p>
<p>Wellard suggests that the weighted average dividend paid to unsecured creditors is generally much higher than would otherwise have been achieved if the company was wound up. </p>
<p>When tested on a sample of <a href="http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/creditors-deed-of-company-arrangement/">Deed of Company Arrangements</a> (DOCAs), the average dollar median dividend return was 5.4 cents in the dollar, compared to an expected dividend of zero had the companies surveyed been wound up. It is not surprising, therefore, that most voluntary administrations appear to be of a <a href="http://www.arita.com.au/docs/default-source/tts/mark-wellard-aij-doca-review.pdf?sfvrsn=0">“quasi-liquidation”</a> nature.</p>
<p>Within the insolvency profession there is a <a href="http://www.pc.gov.au/inquiries/completed/business/report">view</a> that Australia’s insolvency regime tends to punish and stigmatise corporate failure, resulting in a lack of restructuring culture in Australia. This is exacerbated by companies waiting too long before entering into voluntary administration, meaning there is little remaining of a company’s trading or income-producing business to rescue.</p>
<p><a href="http://www.pc.gov.au/inquiries/completed/business/report">Additional factors </a> that also put at risk the successful rescue of a company or its business include the actions of receivers in enforcing priority debt claims by selling key company assets, the company’s inability to access financial support to trade out of corporate insolvency, and the risk of personal financial liability in attempting corporate or business rescue.</p>
<p>The fate of two recent high profile voluntary administrations give us some insight into how these factors interrelate.</p>
<h2>Dick Smith Holdings Ltd</h2>
<p>Dick Smith was <a href="http://www.mcgrathnicol.com/app/uploads/Media-Release-5-January-2016.pdf">placed into voluntary administration</a> on 4 January 2016. Shortly after this, Ferrier Hodgson was appointed as <a href="http://www.ferrierhodgson.com/au/creditors/dick-smith-holdings-limited-and-associated-entities">receiver and manager</a> by the company’s secured creditors with the aim of selling the business as a going concern.</p>
<p>By 25 February 2016, Ferrier Hodgson <a href="http://www.asx.com.au/asxpdf/20160225/pdf/435c73y138nrst.pdf">announced</a> the closure of all remaining Dick Smith stores in Australia and New Zealand as the business sale process had resulted in no acceptable offers. The closure of Dick Smith stores meant job losses for 3,300 employees and effectively ended any opportunity for the voluntary administration to achieve any corporate rescue objectives.</p>
<p>Arguably the most <a href="http://www.abc.net.au/news/2016-01-06/dick-smith-workers-deserve-answers-nick-xenophon/7071740">controversial aspect </a> of the Dick Smith saga was the post-Christmas <a href="http://www.ferrierhodgson.com/au/-/media/ferrier/files/documents/corp-recovery-matters/dick-smith-holdings-limited-and-associated-entities/press-release--ferrier-hodgson--dick-smith-holdings-january-2016.pdf">announcement</a> that pre-purchased gift cards could not be honoured by the Dick Smith stores. Unfortunately, the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Dick_Smith">Senate inquiry</a> established to examine the issue lapsed due the federal election’s double dissolution. However, as the Turnaround Management Association Australia Ltd noted in its <a href="https://www.turnaround.org.au/documents/Sub4_Turnaround_Management_Association_18.03.16_2.pdf">submission</a> to that inquiry, the most effective way of protecting the holders of gift cards, and indeed all stakeholders of distressed companies, is to maximise the possibility of business rescue.</p>
<h2>Queensland Nickel</h2>
<p>Queensland Nickel was placed into voluntary administration on 18 January 2016. At that time QN was insolvent and its administrators determined the company had been so since at least 27 November 2015. This was the date that QN’s key logistics supplier withdrew from debt negotiation arrangements and issued a demand for payment of its total debt of $11.9 million.</p>
<p>Delay in entering voluntary administration impacted QN’s ability to access financial support. This led to QN’s administrators recommending that it was in the interests of creditors for QN to be liquidated.</p>
<p>Placing QN into liquidation ensured that a number of questionable transactions made by QN with related parties could be investigated. It also meant that <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588h.html">insolvent trading provisions</a> could be pursued against the company’s directors (which include former politician Clive Palmer). With the benefit of hindsight, liquidation was the more efficient outcome for QN creditors than voluntary administration.</p>
<p>The <a href="http://www.pc.gov.au/inquiries/completed/business/report">Productivity Commission</a> recently recommended that Administrators <em>must</em> convert a voluntary administration to a liquidation if, within a month of their appointment, the Administrators do not reasonably believe that the company or a significant part of its business is viable. </p>
<p>This recommendation is meant to encourage directors to enter into voluntary administration sooner when corporate rescue is more achievable. In the interests of achieving sustainable company or business rescue early adoption of this recommendation should be considered.</p>
<p>As for Eagle Boys, the <a href="https://insolvencynotices.asic.gov.au/browsesearch-notices/notice-details/Eagle-Boys-Dial-A-Pizza-Australia-Pty-Limited-003169391/e1fb0bd0-456b-4572-b60e-dc50c777bcb4">first creditors meeting</a> will be held later this week. Until then, it is far too early to predict with any certainty as to whether voluntary administration will result in a successful business restructure.</p><img src="https://counter.theconversation.com/content/61912/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The appointment of administrators too often leads to the demise of a company anyway. Salvaging rather than saving might be best.Jennifer Dickfos, Lecturer in Business Law and Corporations Law, Griffith UniversityCatherine Brown, Lecturer, Business Law, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/603822016-06-15T02:50:05Z2016-06-15T02:50:05ZReducing bankruptcy to 12 months ignores realities of insolvency<figure><img src="https://images.theconversation.com/files/126641/original/image-20160615-22380-p2vfki.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Reform to Australia's bankruptcy period seeks to wipe its stigma. </span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The proposed federal government changes to insolvency that reduce the bankruptcy period from three years to 12 months need to be questioned. </p>
<p>It has <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/Improving-bankruptcy-and-insolvency-laws">been argued</a> the shortened default period will have the desired impact on encouraging entrepreneurial activity and reducing the associated stigma of being a bankrupt.</p>
<p>While this may indeed allow a bankrupt a “fresh start”, it ignores the reality of what typically causes personal insolvency in Australia. Research indicates alternative reform measures are more effective tools in reducing the stigma of bankruptcy.</p>
<p>The proposal to shorten the bankruptcy period are amid a suite of <a href="http://www.innovation.gov.au/page/agenda">insolvency law reforms</a> proposed by the <a href="http://www.pc.gov.au/inquiries/completed/business#report">Productivity Commission</a>, that were released in April at the same time as the government’s National Innovation and Science Agenda. </p>
<p>These included: </p>
<ul>
<li><p>Retaining the bankruptcy trustee’s ability to object to discharge and to extend the bankruptcy period to eight years</p></li>
<li><p>Retaining the permanent record of bankruptcy in the National Personal Insolvency Index</p></li>
<li><p>Consultation with relevant industry and licensing associations, to align licencing and industry restrictions with the reduced one year default bankruptcy period</p></li>
<li><p>Reducing current restrictions on a bankrupt obtaining credit or undertaking overseas travel to one year, subject to any extension for misconduct</p></li>
<li><p>Imposing a continuing obligation on the bankrupt to assist in the proper administration of their bankruptcy, even after discharge</p></li>
<li><p>Retaining the bankrupt’s obligation to pay income contributions for three years, regardless of the one year discharge, with the possibility of income contributions to be extended to five or eight years.</p></li>
</ul>
<p>There are a number of compelling arguments against the proposal.</p>
<p>First, shortening the discharge period will have no effect on the numerous restrictions which currently exist under Australian Law and professional association rules. These restrictions add to the stigma of bankruptcy in employment and business. </p>
<p>Researchers <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/journals/UNSWLawJl/2015/58.html?stem=0&synonyms=0&query=title(Howell%20and%20Mason%20and%20University%20of%20New%20South%20Wales%20Law%20Journal%20">Nicola Howell and Rosalind Mason</a> suggest alternative reform measures are more effective tools in reducing the stigma of bankruptcy. </p>
<p>These measures include a review of the continuing need for entry barriers to occupations or professions based on bankruptcy; or changes to the accessibility or public record permanency of the National Personal Insolvency Index (NPII). </p>
<p>For example, a registered chartered accountant loses their registration on becoming bankrupt based on the premise that the restriction is imposed to protect consumers from those involved in the mismanagement of business. However, registration is lost, regardless of whether their bankruptcy arose as a result of consumer debts as opposed to business debts. </p>
<p>Suggested changes to the NPII include the NPII no longer providing a permanent public record of a person’s bankruptcy, or alternatively, imposing restrictions on those who can access the NPII. </p>
<p>Second, a shorter discharge period to improve entrepreneurial activity ignores the reality of what typically causes personal insolvency in Australia. </p>
<p>Statistics consistently show that the majority of bankruptcy cases are caused by factors such as unemployment and excessive use of credit, rather than carrying on a business. </p>
<p>Figures from the <a href="https://www.afsa.gov.au/resources/statistics/provisional-business-and-non-business-personal-insolvency-statistics">Australian Financial Security Authority</a> show that since 2007-2008, consumer debt has accounted for 75% (lowest: 2012-13) to 85% (highest: 2008-09) of debtors entering bankruptcy. The latest available figures in 2014-15 was 78%.</p>
<p>Third, justifying a reduced default bankruptcy period by comparing it to countries such as United Kingdom, New Zealand and Ireland, is flawed. For instance, when the United Kingdom made a decision to reduce its discharge period to a similar period in 1998-99, its level of consumer-related debt was 35%. Australia experiences a much higher percentage of this type of bankruptcy, so a comparison in terms of entrepreneurial activity may have little relevance. </p>
<p>The Federal Government’s <a href="http://www.innovation.gov.au/page/insolvency-laws-reform">insolvency law reforms</a> are aimed at “striking a better balance between encouraging entrepreneurship and protecting creditors”. A better way to achieve this balance is to categorise bankrupts according to their level of indebtedness to income, ownership of property and number of bankruptcies. </p>
<p>Using these thresholds as a means of determining their level of culpability means that bankrupts could be classified as “reckless”, “unfortunate” and “able”. </p>
<p>Relying on the repealed s149T Bankruptcy Act 1966 (Cth), (which previously provided for a shortened bankruptcy discharge period from 1992-2003) eligibility of a 12 month default bankruptcy period would then be restricted to “<a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/journals/MelbULawRw/2004/22.html?stem=0&synonyms=0&query=title(Melbourne%20University%20Law%20Review%20">unfortunate bankrupts</a>”. Unfortunate bankrupts being those bankrupts who are unable to pay their creditors at all, or who are unable to pay the trustee’s remuneration and expenses in full.</p>
<p>Reckless bankrupts are those whose bankruptcy arises from their own disregard or carelessness in accumulating debt, without the ability to repay that debt. Previously, a bankrupt was ineligible to apply for early discharge if he or she satisfied the criteria in s149Y Bankruptcy Act 1966 (Cth), such as their debts exceeded 150% of his or her income. </p>
<p>Able bankrupts are those bankrupts who neither fall into the “reckless” or “unfortunate” categories and thus have some measure of ability to repay their debts. </p>
<p>Specific education measures, such as mandatory financial literacy education, may also be more productive in reducing the incidence of bankruptcy long term. In a <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2660712">recent study</a> by Melbourne Law School, several participants of an online survey specifically attributed their clients’ ongoing financial problems to a lack of financial literacy. One advocate reported that “some clients view bankruptcy as a way of financial management to be considered more than once”. </p>
<p>The advantage of imposing financial education on undischarged bankrupts is that it reduces the possible risk of repeat bankruptcies that might result if the default bankruptcy period is reduced.</p>
<p>Insolvency laws invariably must balance the competing interests of creditors, debtors and the general community. Australia’s present laws regarding bankruptcy discharge periods and associated restrictions on debtors during those periods reflects the current balance, which may be considered “creditor protective”. </p>
<p>Reducing the bankruptcy discharge period and its associated restrictions to one year will re-balance these interests in favour of the debtor. However, such changes will not achieve the Federal Government’s stated purpose as outlined in the Innovation Statement.</p><img src="https://counter.theconversation.com/content/60382/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The majority of bankruptcies occur due to unemployment and excessive credit, rather than business failure.Jennifer Dickfos, Lecturer in Business Law and Corporations Law, Griffith UniversityCatherine Brown, Lecturer, Business Law, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/576422016-04-12T20:11:54Z2016-04-12T20:11:54ZWas Clive Palmer a ‘shadow’ director of Queensland Nickel?<p>As Clive Palmer disputes his involvement in recent money-making decisions of Queensland Nickel, the administrators of the business <a href="http://www.abc.net.au/news/2016-04-12/clive-palmer-queensland-nickel-liquidation-administrators-credit/7318586">have released a report</a> which implicates Palmer as a “shadow” director. </p>
<p>The report, which recommends the business be placed in liquidation, asserts that directors in the company may have contravened sections of the Corporations Act and the report has been referred to the Australian Securities and Investment Commission (ASIC), with the possibility Palmer may have committed criminal offences.</p>
<p>The issue of whether Palmer can be defined as a “shadow” director in Queensland Nickel is important as it goes to his personal liability for the debts arising from trading while insolvent. Administrators state in the report Queensland Nickel became insolvent on November 29 and remained that way until their appointment in January this year. Sacked staff are owed A$73.9 million while unsecured creditors are owed A$151.2 million and party related creditors A$546 million.</p>
<p>Palmer has strenuously denied he was a director in the company, although he has admitted to being part of a committee that approved expenditures. He has also admitted to the use of email alias when communicating with the company, but denied it was used to disguise his involvement with Queensland Nickel.</p>
<p><a href="http://www.austlii.edu.au/au/cases/cth/FCAFC/2012/6.html">In the eyes of the law</a>, there is no difference between a director formally appointed, shadow director and a de facto director. A company director, whether formally appointed or not, has the duty to act in good faith; in the best interests of the company; to exercise care and diligence; and to avoid all conflicts of interests. </p>
<p>Australia’s insolvent trading laws, applicable to directors (including de facto or shadow directors), are widely regarded as one of <a href="http://www.supremecourt.wa.gov.au/_files/Insolvency_Practitioners_Assoc_National_Conference_28May09.pdf">the most stringent in the world</a>. As part of the deterrence regime, directors may incur civil or criminal liability. </p>
<p>Directors are potentially liable to a fine, a disqualification order leading to being banned from management and compensation orders for corporate loss. Criminal proceedings are reserved for offences linked to fraud and dishonesty and may lead to prison terms for up to five years. </p>
<p>So the stakes are high and it hinges upon the basic, but fundamental question – who is a company director?</p>
<p>The term “director” is defined under section 9 of <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html">the Corporations Act</a> which defines a director as a person who:</p>
<blockquote>
<p>“is appointed to the position of a director; or unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director (de facto director); or
(ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes (shadow director)”</p>
</blockquote>
<p>Thus, a person may be a director even without any appointment to that position. The reason for such an expansive definition was given in the case of <a href="http://www.austlii.edu.au/au/cases/cth/FCAFC/2012/6.html">Grimaldi v Chameleon Mining NL</a>:</p>
<blockquote>
<p>“…contrived so as to enlarge the classes of persons concerned in the management and affairs of a company, upon whom legislative standards and liabilities ought to be imposed.”</p>
</blockquote>
<p>So the net for potential liability as a director is deliberately cast very wide.</p>
<p>In unlocking the definition of director, the Court in the Grimaldi case held that the definition applies as much to a person who is a true usurper of the functions of a director in a company. </p>
<p>By law, when considering whether someone is a director, the court considers whether the person has been acting in a role (or roles) within the company and performing functions that would usually be performed by a director of that company given its circumstances. It takes into account that the roles and functions performed will vary with the commercial context, operations and governance structure of the company. </p>
<p>This means the way in which Palmer ran his operations at Queensland Nickel may determine whether or not he is defined as a shadow director. The law shows that the critical focus in the case of Clive Palmer and Queensland Nickel is likely to be on his conduct in the company, not his title.</p>
<p>For a court to conclude that Clive Palmer’s involvement in Queensland Nickel falls within the following description of shadow director, <a href="http://swarb.co.uk/in-re-hydrodam-corby-limited-chd-1994/">it will have to show that:</a></p>
<blockquote>
<p>“He [or she] lurks in the shadows, sheltering behind others who, he [or she] claims, are the only directors of the company to the exclusion of himself [or herself].”</p>
</blockquote>
<p>If the evidence shows that an outside person, such as Clive Palmer, called the shots at Queensland Nickel and that management was accustomed to acting to his instructions and will, the court is more likely to decide he was a shadow director. Judicial precedent shows that there must be a causal connection between the instructions or the wish of the shadow director and others acting on it.</p><img src="https://counter.theconversation.com/content/57642/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anil Hargovan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Clive Palmer denies being a shadow director of Queensland Nickel, but in eyes of the law, it will be his involvement in business decisions that matters.Anil Hargovan, Associate Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/530452016-01-12T04:39:45Z2016-01-12T04:39:45ZXenophon is right to call for law reform on gift cards<p>The corporate collapse of Dick Smith has many people, including cross-bench <a href="http://www.nickxenophon.com.au/media/releases/show/legislative-move-to-save-dick-smith-gift-card-holders/">Senator Nick Xenophon</a>, angered at the treatment of gift card holders as unsecured creditors.</p>
<p>The concept leading to this situation is more than 100 years old and was borrowed from the laws of bankruptcy before corporations existed. Companies that are in financial trouble have a variety of methods to help them systematically either trade out of trouble or methodically be wound up as an entity. Legally, these processes are known as external administration and involve receivership, voluntary administrators and liquidators, depending on which route is taken by the various groups of creditors.</p>
<p>The classic case that established the principle of a corporation being a separate legal entity from its shareholders, is Salomon v Salomon & Co Ltd in 1897 House of Lords (UK). The case was between two creditors. The first was an unsecured creditor that had lent Salomon Ltd money and Mr Aaron Salomon himself who had lent his company money as a secured loan. The end result was that Mr Salomon as a secured creditor would rank in priority ahead of the unsecured other creditor.</p>
<p>Today’s <a href="https://www.comlaw.gov.au/Details/C2014C00273">legislation</a> also provides for certain creditors to be given priority such as employees and government creditors collecting tax (state and federal). The liquidators or receivers or administrators all have legal responsibilities to realise the company assets and pay the creditors. If the company is insolvent, it simply means the assets are less than the debts and some creditors will only receive a few cents per dollar of debt.</p>
<p>There has been appropriate outrage over the fact that Dick Smith, and through its agents of Coles Supermarkets and Woolworths, gift cards were sold for cash and now the administrator of the Dick Smith company will not honour those sales. There have been some <a href="http://www.dailymail.co.uk/news/article-3386425/Furious-Dick-Smith-customers-vent-anger-useless-gift-cards.html">specific examples</a> of hardship for sums in excess of A$1,000, although in reality there will be many A$50 and A$100 gift cards left over from Christmas presents sitting in people’s desks. </p>
<p>Not honouring the cards is a simple application of the <a href="https://www.accc.gov.au/consumers/consumer-protection/when-a-business-goes-bust">priority rules</a> as set out in current law. But as Senator Xenophon has publicly stated, this is inequitable and unreasonable, and there should be law reform. The Senator has also called for a Senate Inquiry into the collapse of Dick Smith, but similar lessons were already learned from the <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22library%2Fprspub%2FXZ896%22">HIH Insurance Royal Commission</a> in 2001.</p>
<p>Senator Xenophon also wants corporations law to be amended to make directors of companies that collapse personally liable for the value of gift cards purchased or deposits paid for goods.</p>
<p>He makes a very valid point in stating that the receivers, Ferrier Hodgson should consider honouring the gift cards while the shop is still trading and that the goods are for sale. In many cases, the consumers that hold the gift cards may wish to spend more money to buy specific good above the value of the gift card, which would help with stock reduction and cash flow. </p>
<p>If Dick Smith is not able to be restructured (what is known as a scheme of arrangement) and continues as a going concern, the specific rules of liquidation are then applied. At that point in time, it would be more reasonable for all creditors, including the gift card holders, to be treated in the same way.</p>
<p>It is not good to make changes to laws on the basis of neither anecdotal changes or “knee-jerk reactions,” but there are sufficient examples of retailers that sell such gift cards and become insolvent to warrant corporate law reform. The technology for the gift card sales to be held on escrow (effectively like a trust account until the money is applied to the relevant goods or services supplied) could be easily created without heavy compliance costs for the company.</p>
<p>One of the additional complexities with this area of consumer law is that the purchaser of the gift cards (the person actually contracting with Dick Smith or the agent like Coles or Woolworths) is not the actual consumer (the gift card is often a gift provided to a third party for no contractual consideration – payment). This concept of escrow or trust would enable the gift card holder to get their money back as cash in a situation such as voluntary administration or receivership.</p>
<p>A review of this area of law is needed for the benefit of Australian consumers.</p><img src="https://counter.theconversation.com/content/53045/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Adams receives funding from the ARC but not in respect of this article. </span></em></p>It’s not good to make law changes as a knee-jerk reaction, but in the case of insolvency and gift cards, it’s time.Michael Adams, Dean, School of Law, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/519952015-12-08T07:19:25Z2015-12-08T07:19:25ZSome risks in Turnbull’s benign view of business failure<p>Malcolm Turnbull spruiks his lines like one of those optimistic entrepreneurs that he urges Australians to become. The positive tone of the message is the first step to eliciting a favourable response for the content.</p>
<p>Thus it was with Monday’s innovation statement and Turnbull’s news conference launching it.</p>
<p>Turnbull’s exhortation – that Australians should be more willing to take business risks and less fearful of failure – is an attempt to promote a major cultural change in the community. This drive to transform thinking is arguably of greater significance than the particular measures that were announced.</p>
<p>But the often-compelling nature of Turnbull’s presentation can discourage forensic examination of what he’s actually saying, and its implications.</p>
<p>He is a man who doesn’t blush at his own hyperbole – as in this Monday observation:</p>
<blockquote>
<p>If you start a new venture, a new business and it goes well for a while and then, for whatever reason, it doesn’t succeed, you may have lost some money, your investors may have lost some money, but the overall economy massively benefits because you are wiser, your employees are wiser, your investors are wiser, everyone’s learnt something and the ecosystem benefits. That’s why cultural change is so important. </p>
</blockquote>
<p>This cheery view of the benign nature of failure surely represents a very specific perspective.</p>
<p>It’s one appropriate to the deft person who can muster the resources and has the skills to bounce back – and good on those people. We do need more of them.</p>
<p>But to claim that a business failure is just a glitch replete with upsides and never mind the downsides ignores a whole lot of things.</p>
<p>While the “ecosystem” might be benefiting, the family who mortgaged the house to launch a business that has now gone kaput could be devastated. Some investors who put money into a start-up that could not live up to its big idea may have lost part of their retirement nest egg. The now “wiser” employees may be having trouble getting other jobs.</p>
<p>None of this is to deny that it’s vital for Australia to become more innovative, or that start-ups deserve fostering. Rather, it is to argue that the statement in the innovation policy that “we need to leave behind the fear of failure” overhypes and oversimplifies something that requires a more sophisticated approach.</p>
<p>The old adage “nothing ventured, nothing gained” is all about the need to take risks. But in start-ups and the like, it is also a matter of the nature and degree of risk, who is taking them, and what the consequences of failure will be. If the risk-taker is going to be financially or personally destroyed by a venture going wrong, it’s a risk better avoided. Only some will be able to endure the several failures now being extolled as a reasonable pathway to success.</p>
<p>A balanced view is required, but Turnbull’s rhetoric often has a balance bypass.</p>
<p>In his quest against the fear of failure, he has been influenced not just by his own experience of the business world, but apparently by talks he had recently with Israel’s chief scientist. The refrain is also a mantra of Bill Ferris, who will head the new Innovation and Science Australia that is replacing Innovation Australia.</p>
<p>The innovation statement has specific measures, involving reform of the insolvency laws, that are designed, if you like, to somewhat reduce for entrepreneurs the risk of taking risks.</p>
<p>The default bankruptcy period will be shortened from three years to one. A “safe harbour” will be brought in to protect directors from personal liability for insolvency trading, if they appoint a professional restructuring adviser to develop a plan to rescue a company in trouble. And, if a company is restructuring, there will be a ban on “ipso facto” contractual clauses that allow an agreement to be ended solely due to an insolvency event.</p>
<p>These changes might bring their own risks in a laxer attitude by directors, but Turnbull stresses that other obligations on directors would remain so protections would continue to be there.</p>
<p>Helped by the sheer force of his personality and messaging, Turnbull has pulled off his innovation policy, leaving Labor lamely pointing to the fact that it had plans out first in some of these areas.</p>
<p>It’s not just a matter of the government stealing ideas worth having. What else would an agile and innovative administration do? And it’s only partly that most attention inevitably focuses on what a government does, especially one with a new leader, rather than what an opposition says.</p>
<p>The real lesson is that Turnbull can bring together a policy and enthuse it with a special life that makes it attractive (even when it raises questions) while Shorten’s announcements are piecemeal, often sludgy and lack a narrative or a spruiker who can radiate confidence.</p>
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Malcolm Turnbull spruiks his lines like one of those optimistic entrepreneurs that he urges Australians to become.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/519082015-12-08T04:37:09Z2015-12-08T04:37:09ZInnovation statement’s significant insolvency changes are well overdue<p>Those looking for the detail on insolvency changes announced in the Federal Government’s long awaited innovation statement won’t find it on the government website. </p>
<p>But the Productivity Commission’s report, <a href="http://www.pc.gov.au/inquiries/completed/business#report">Business set-up, Transfer and Closure</a>, also released yesterday, acts as a companion piece to explain the Federal Government’s intention to introduce significant changes to Australia’s insolvency and restructuring laws.</p>
<p>The reports released today recognise that our restructuring laws have fallen behind world best practice. We need to ensure that our laws provide appropriately flexible mechanisms to achieve good commercial outcomes from restructuring efforts. </p>
<h2>Current laws</h2>
<p>Australia’s laws provide both formal insolvency processes (such as company liquidation and personal bankruptcy) as well as regimes to help individuals and businesses avoid insolvency and restructure their affairs. Individuals have the option of Debt Agreements and Personal Insolvency Agreements, while companies have voluntary administration and schemes of arrangement.</p>
<p>Restructuring laws help individuals and businesses to maximise their asset values and thereby increase returns to creditors, minimise job losses of employees and downstream effects on suppliers, customers and other creditors. </p>
<p>Australia’s corporate restructuring laws have been in place since the early 1990s (based on a report by the Australian Law Reform Commission in 1988). Since that time many other countries, including England, Hong Kong, Singapore and the United States have undertaken major reform projects to improve restructuring laws.
Recent official inquiries, including by the Senate and the Financial System Inquiry have recommended further reviews to encourage flexibility and efficiency in restructuring. </p>
<h2>Proposed changes</h2>
<p>The Productivity Commission’s report provides 15 recommendations for reform of insolvency law, although the Innovation Statement only mentions three of these. </p>
<p><em>Reducing personal bankruptcy to one year</em></p>
<p>Personal bankruptcy currently lasts for a minimum of three years. Both reports note that this may be a disincentive for entrepreneurs whose businesses fail. The clear theme is that if Australia is to encourage a vibrant start-up economy we need to refrain from blaming entrepreneurs as failures and punishing them through lengthy and rigid insolvency regimes. </p>
<p>This reform will help to reduce the stigma attached to personal bankruptcy and assist with facilitating a “can do” ethos for business entrepreneurs.</p>
<p>For too long insolvency laws have treated business failure as a personal failing of the businessperson. Certainly there is sometimes fraud and misconduct in business failure, just as there is in many sectors of the community, but insolvency law should facilitate rescue and rehabilitation to help businesspeople to start again.</p>
<p>The reforms proposed are a move in the right direction and they provide a process for longer periods of bankruptcy where fraud or misconduct is involved. </p>
<p><em>Introducing a safe harbor for directors during restructuring</em></p>
<p>There has been a lot of discussion about reducing liability risks for company directors with the AICD proposing a broad-based defence for director across a range corporate law rules. </p>
<p>Both reports recommend a defence for directors who seek to restructure their business. At present directors of companies in distress who seek to restructure in the hope of a turnaround run the risk that they will be sued for insolvent trading, which could involve personal liability for all of the companies unsecured debts. This may cause them to shut down the business rather than take the risk, or to resign from the business. </p>
<p>The proposed defence would protect directors from insolvent trading liability, but would require them to engage a suitably qualified restructuring advisor who (following the Productivity Commission’s report) would need to be registered by the Australian Securities and Investment Commission (ASIC). The directors would need to act according to the advice of the restructuring professional and the safe harbour would only continue for so long as there were reasonable prospects of saving the business. </p>
<p>This proposal should also address some of the concerns that have been expressed about “pre-insolvency advisors” who are currently unregistered and largely unregulated. But the proposal could have gone even further and required the advisers to be a member of a professional body with a code of professional ethics and a disciplinary regime. </p>
<p><em>Nullifying ipso facto contract clauses</em></p>
<p>Finally, the federal government will remove the ability of contractual parties to cancel or modify their contracts purely on the basis that voluntary administration or a scheme of arrangement (that is, a formal restructuring process) has been entered into. </p>
<p>This was recommended in the 1988 Law Reform Commission report into insolvency and has existed in personal bankruptcy law since the 1960s, but has not yet been incorporated into corporate insolvency laws. This move will bring our law closer to the US Chapter 11 bankruptcy procedure which prohibits such clauses.</p>
<p>This is a welcome move that will help companies trying to restructure keep their business going rather than having key contracts terminated at a time when they need them the most.</p><img src="https://counter.theconversation.com/content/51908/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Murray works for ARITA, Ferrier Hodgson, and QUT.
He writes for Thomson Reuters, Wolters Kluwer, LexisNexis and Edward Elgar
He is a Fellow of the Australian Academy of Law. </span></em></p><p class="fine-print"><em><span>Jason Harris does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s insolvency laws are behind world best practice and need reform.Jason Harris, Senior Lecturer in corporate, commercial and insolvency law, University of Technology SydneyMichael Murray, Visiting Fellow, QUT, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/424742015-07-01T20:12:21Z2015-07-01T20:12:21ZIs it time to reform the cornerstone of Australia’s insolvency regime?<figure><img src="https://images.theconversation.com/files/86954/original/image-20150701-25059-bv7nfa.jpg?ixlib=rb-1.1.0&rect=1227%2C933%2C6397%2C4444&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Voluntary administration has been the widely-used step in efforts to prevent a company being dissolved.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The last time Australia had a comprehensive evidence-based review into our corporate insolvency laws was in 1993, chaired by the late Ron Harmer. Among the most notable reforms of that landmark review was the ground-breaking creation of voluntary administration, which allowed companies at risk of insolvency to continue trading in the hands of appointed overseers. </p>
<p>Since then, there have been other reports covering various aspects of insolvency law, including a <a href="http://www.aph.gov.au/binaries/senate/committee/corporations_ctte/completed_inquiries/2002-04/ail/report/ail.pdf">Parliamentary Joint Committee in 2004</a>; the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed_inquiries/2008-10/liquidators_09/index">Senate Inquiry into Administrators and Liquidators</a> in 2010, and David Murray’s 2014 Financial System Inquiry.</p>
<p>Public submissions have just closed on the latest draft report by the Productivity Commission, which floats a number of suggestions that have gained currency in insolvency circles, particularly drawing on <a href="http://www.arita.com.au/in-practice/arita-submissions">submissions</a> of the Australian Restructuring Insolvency and Turnaround Association (ARITA). The theme is that the current law needs to do more to facilitate restructuring.</p>
<p>The report contains much useful data and confirms that the bulk of Australian businesses are small. Notwithstanding this, the report doesn’t examine the debate about whether one size fits all and its suggestions regarding restructuring largely focus on the “big end of town”. </p>
<h2>Reforming voluntary administration</h2>
<p>While Harmer gave us a “state of the art” rescue procedure in voluntary administration, (which was later adapted by the British) it can be argued it is too expensive and is a sledgehammer for most small companies, so a simpler breathing-space for them might be a useful addition to the menu of procedures. </p>
<p>The Report rightly rejects the need, raised by the Murray Inquiry, for importation of the expensive <a href="http://www.investopedia.com/terms/c/chapter11.asp">US Chapter 11</a> bankruptcy provisions. But it does recommend one welcome adoption from the US, the outlawing of “ipso facto” clauses, where contracts provide for automatic termination on insolvency. </p>
<p>This prevents companies from trading during insolvency, as it can affect leased goods, premises and key supplies. This impediment to rescue could easily be removed. We have long had the prohibition in our Bankruptcy Act, so why not in the Corporations Act too?</p>
<p>In the 1993 reforms, directors’ liability for insolvent trading was deliberately linked to voluntary administration, the latter designed to maximise chances of the company surviving, or if not, a better outcome than on liquidation. If directors allow the company to incur debts once they knew or should have known it was insolvent, they will be personally liable; but if they appoint an administrator, they have a partial defence. But it is said fear of liability means directors are triggering voluntary administration too early, and since it is an insolvency procedure, the attendant stigma leads to value destruction. </p>
<h2>Safe harbour for directors</h2>
<p>There has been a call for a “business judgment” defence; a “safe harbour” if directors act in good faith and call in an independent restructuring expert. The Federal government took this up following the 2008 financial crisis, but an then-incoming Minister David Bradbury dropped it on 2011, citing lack of evidence of any problem.</p>
<p>The PC has picked up the ball once again, and adds ARITA’s suggestion of “pre-positioned” sales, with safeguards if related parties are involved. However, the PC envisages the “safe harbour” as a positive duty, not a defence. </p>
<p>It does not discuss how this would interact with the other duties in the Corporations Act. Also, it is not a “business judgment”, since the directors would be relying on the adviser. Will the “independent restructuring advisers” be regulated, and need qualifications? And how would small companies afford them? </p>
<h2>Too early - or too late</h2>
<p>Lastly, the report fails to mention the more likely driver for triggering voluntary administration too early - namely the Australian Taxation Office’s Director Penalty Notice regime, which also links director liability to voluntary administration or liquidation. </p>
<p>Paradoxically, it is also said that voluntary administration is often used too late. Thus, the report recommends it should be available if the company may become insolvent in future; that may be beneficial, but then it says voluntary administration should not be available if the company is insolvent. </p>
<p>This would be a backward step, and overlooks the difficulty of deciding whether a company is technically insolvent. Further, it removes the flexibility of voluntary administration. Granted, the report cites evidence that very few voluntary administrations lead to survival - but it does not follow that we should prevent it being used to try a rescue. </p>
<h2>Bankruptcy discharges</h2>
<p>The report also touches upon schemes of arrangement, a costly court-driven rescue procedure. It proposes a “panel” could replace the court for some aspects, but generally fails to consider how schemes relate to voluntary administration and informal rescue.</p>
<p>On receivership, it recommends extending the duty of care of receivers when disposing of assets. It then makes an “information request” asking whether there is evidence of any problem! As for exit, the report takes up ARITA’s suggestion of a streamlined procedure for small liquidations. This is laudable, though the main issue will be funding it. Another welcome suggestion is that directors should all have an identification number, aimed at reducing “phoenix” activity, but with wider monitoring advantages.</p>
<p>Lastly, to encourage enterprise through “fresh start”, it suggests Australia should follow the UK and reduce the automatic bankruptcy discharge period from three years to one. This has merit, but since most bankruptcy (78%) is consumer related, it needs more thought about the impact on all stakeholders.</p>
<p>Keeping the public discussion going on these reform ideas is welcome. But the draft report lacks holistic analysis and there is a danger that piecemeal changes could have unintended consequences. It seems time we had another “Harmer”.</p><img src="https://counter.theconversation.com/content/42474/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Brown does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Voluntary administration was considered a state-of-the-art rescue procedure for struggling companies in 1993. But is is time for another wide-ranging review of our insolvency laws?David Brown, Co-Director, Bankruptcy and Insolvency Scholarship Unit, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/338882014-11-24T04:17:51Z2014-11-24T04:17:51ZChasing money: why the insolvency industry needs reform<figure><img src="https://images.theconversation.com/files/65074/original/image-20141120-28678-1gc9pht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The insolvency industry is facing criticism of over-servicing, excessive fee charging and self-interest.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p><a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2014/ILRB-2014">Proposed laws</a> to reform the insolvency industry are long overdue. Under the changes, liquidators will require a licence and creditors will be able to remove poorly performing practitioners. The reforms aim to improve consumer confidence in an area that has been <a href="http://www.afr.com/p/business/companies/keeping_the_liquidators_honest_uohZ6UPQRtS9XIQAilJzDP">plagued with controversy</a>. However, they still fail to meet the need for transparency around corporate insolvencies.</p>
<p>The industry already has a chequered history when it comes to attempted reform. Proposed changes stalled last year. Regulation of the industry has been the subject of <a href="http://www.ntu.ac.uk/nls/research/insolvency_journal/previous_editions/index.html">eight major reviews and inquiries</a> over the last 25 years.</p>
<p>In 1998 the <a href="http://www.alrc.gov.au/report-45">Harmer Report</a> outlined the shortcomings of the regulatory system governing insolvency practitioners. It cited failures within the industry to respond quickly to complaints against practitioners. Other criticisms included a lack of established professional conduct standards and ethics. </p>
<p>Practitioners’ remuneration levels were also not determined nor reviewed by an industry board. Rather the market was relied upon to set reasonable fees.</p>
<p>Although a professional code of conduct now exists 25 years later, the same criticisms can still be made today. Successive reviews have made <a href="http://www.ntu.ac.uk/nls/research/insolvency_journal/previous_editions/index.html">similar recommendations</a> to tackle these shortcomings. Most of them still have not been implemented. The result is the insolvency industry is open to criticism of over-servicing, excessive fees and self-interest. </p>
<p>The largest 13 insolvency firms <a href="http://www.bankruptcy.net.au/docs/Senate%20report%20September%202010.pdf">comprise 39% of the market</a>. They may be more deserving of, but better able to deal with, such criticisms than smaller individual practitioners, which represent 29% of the market.</p>
<h2>The industry overhaul</h2>
<p>The planned changes aim to remove unnecessary costs from the insolvency industry. This should result in around $55.4 million per year in compliance cost savings. Submissions on these changes are due in late December. </p>
<p>Under what has been dubbed as a “user pays” system, they require liquidators to be licensed and to undergo continuing education. The result is the government can reap big fees in exchange for licences. </p>
<p>Registration must be renewed every three years. For this to occur, written evidence of adequate professional indemnity insurance and compliance with continuing professional education conditions must be provided. The circumstances where registration may be cancelled or suspended have been widened. These include any offence conviction involving fraud or dishonesty. </p>
<p>There have been highly publicised accounts of poorly behaving liquidators. <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2009/829.html?stem=0&synonyms=0&query=Ariff">Stuart Ariff</a>, who is serving a six-year jail sentence, provides the most notorious example.
However, the Ariff case is considered exceptional and not reflective of the majority of insolvency practitioners. </p>
<p>A lack of licensing within the industry has not led to an increase in the number of badly performing insolvency practitioners. Rather, its absence has meant the small number of dishonest practitioners remains undetected. Licensing will increase public confidence in the industry. </p>
<p>Where creditors are unhappy with the performance of a liquidator, they will be able to remove that practitioner and appoint another. To do so, the majority of creditors in number and value must pass a resolution at a creditors’ meeting. No particular grounds for removal are required.</p>
<p>However, the former administrator may apply to the court to be re-appointed. The court may re-appoint the administrator if it is satisfied the removal was improper. </p>
<h2>Increasing consumer confidence</h2>
<p>These changes finally act on the unanswered criticisms of the Harmer Report. The regulation of personal and corporate insolvency regimes will now be consistent.</p>
<p>This will cut compliance costs across the industry. A system of licensing will maintain educational standards and experience. So does the ability to cancel or suspend licences. These measures increase consumer confidence in the professionalism and competence of the industry.</p>
<p>Yet more can be done. More public education about a liquidator’s role and the nature of the work is needed. </p>
<p>The changes also fail to address a common theme in previous reviews: there is no adequate and publicly available corporate insolvency data. This information is needed for effective policy making, public debate, regulation implementation and ongoing review. It is imperative that such data be independently collected, maintained and available to the public free of charge.</p><img src="https://counter.theconversation.com/content/33888/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jennifer Dickfos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Proposed laws to reform the insolvency industry are long overdue. Under the changes, liquidators will require a licence and creditors will be able to remove poorly performing practitioners. The reforms…Jennifer Dickfos, Lecturer in Business Law and Corporations Law, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.