I am a professional business consultant with over 40 years of experience helping businesses across most sectors to manage the complexities of bankruptcy and insolvency when there are no alternative options. I am more than a little disgruntled that the bill to reduce the bankruptcy exclusion period from three (3) years down to one (1) year has been conspicuously ignored since 2016.
Of course, one of the key questions around this entire bill proposal is: Will this really reduce economic barriers and improve economic growth? In my opinion, it will! Of course, my opinion is open to conjecture. Will reducing the period to one year suit everyone’s situation? Most likely, not! Of course, we need to address how this reduction would potentially affect the permanent records of bankruptcy in the National Personal Insolvency Index, employment, travel, et al.! Nor is it responsible to ignore the complexities within the legislation. I have no doubt that as you are reading this, you will be thinking of various other key points for and against the proposed change. However, taking all aspects of the debate into account, we as a nation need to reassess the ‘one-size-fits-all’ three-year exclusion period, and in particular, evaluate how this then impacts employment, innovation, entrepreneurship, et al.
I am sure most of us can recall that in April 2016, the Australian Federal Government announced three major insolvency law reform proposals in its Improving Bankruptcy and Insolvency Laws Proposal Paper (‘The Proposal Paper’). On October 19, 2017, the Bankruptcy Amendment Enterprise Incentives Bill, 2017 (‘The Bill’) was introduced in the Senate. The Bill was for the Bankruptcy Amendment (‘Enterprise Incentives Act, 2017’), which means if the Bill were enacted, it would result in the amendment of the Bankruptcy Act, 1966.
Among the proposed changes in the Proposal Paper was the reduction of the default bankruptcy period from three (3) years down to one (1) year in the event that ‘no offence has been committed’. In the event that bankruptcy is reduced to one year, it is proposed that this action will:
- Retain the bankruptcy trustee’s ability to object to discharge, and instead, to extend the bankruptcy period to eight (8) years.
- Retain the permanent record of bankruptcy in the National Personal Insolvency Index.
- In consultation with relevant industry and licensing associations, align licensing and industry restrictions with the reduced one-year default bankruptcy period.
- Reduce the current restrictions on a bankruptee’s ability to obtain credit or undertake overseas travel to one year, subject to any extension due to misconduct.
- Impose a continuing obligation on the bankruptee to assist in the proper administration of their bankruptcy, even after discharge.
- Retain the bankruptee’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 (5) or eight (8) years.
Not only would this legislation be massively beneficial in assisting new businesses to drive innovation and entrepreneurship, it would ease the strain on trustees and the AFSA, because it is predicted that there will be a surge in insolvencies due to the economic impacts of COVID-19.
As a fellow Australian and businessperson, please take just 30 seconds of your time to sign the petition (via clicking the link below) to urge the Federal Government to urgently prioritise the proposed Bill. At the very least, there needs to be an imminent amendment to the legislation, with a clause that states that each case will be assessed based on its individual circumstances. Once an application has been assessed, it will be categorised as either a one (1) or three (3)-year exclusion period, with individually evaluated restrictions.
It is our belief that this is an extremely important priority given our current business environment, which independent Australian economists have predicted will be a protracted and severe recession due to COVID-19. It goes without saying that if there is a massive spike in bankruptcies and insolvencies, this will (without question!) have an enormous negative impact across the country, with dire enduring impacts on both individual Australians and the Australian economy at large. There are a colossal number of businesses across all sectors within Australia who are already remarkably close to the wire. So, the time to act is NOW! The legislated change needs to be urgently prioritised for the sake of countless Australians who’re doing it very tough!
Albert Einstein once suggested, ‘We cannot solve our problems with the same thinking we used when we created them’. Yet, this is exactly what we see from some clients during a financial crisis. They share their stories and wait for our advice. Often, instead of following the advice, they repeat the same mistakes.
Ignoring the root of a problem is a recipe for disaster. When clients choose to go about their day-to-day lives without addressing the origin of the problem, they create a vicious cycle that they are doomed to repeat. It may take weeks or months, but rest assured, without learning from past mistakes and taking corrective actions, the result will be the same. We will be sitting across from them in our office again, hearing their latest story of financial struggle. Many times they have been drip-feeding creditors. In reality, they are sending good money after bad. They are just delaying the inevitable.
It does not have to be this way. The cost of waiting until you are actively fighting a financial fire is high. Preparing for and preventing damage to your financial affairs is a better alternative to engaging in damage control. Moving to a ‘Plan B’ scenario has been almost always less effective and more expensive.
A perfect example of the cost of switching to a Plan B is bankruptcy. Entering bankruptcy before creditors place defaults against you is advisable. Down the track, you can make an offer to your creditors. If they accept, your bankruptcy is annulled. Your bankruptcy status is removed, and all debts are considered settled. This preserves a clean credit file and all the advantages that come with it when borrowing in the future.
Conversely, if you wait until creditors place defaults against you, the option of annulling your bankruptcy is still there, but all defaults remain on your file even after debts are settled. It will damage your ability to qualify for credit.
With company insolvency, the consequences are dire. Not only can waiting create a bad credit rating, but it also ensures more damage is done to your professional and commercial relationships. You run the risk of creditors reporting your company for insolvent trading if you delay settling your debts. Creditors are more likely to be understanding if you are upfront about financial difficulties and work toward settling them quickly.
If you think your financial circumstances are spiralling out of control, call us sooner rather than later to arrange an informal chat. With 32 years of experience, we can help work through the issue and get those financial fires out for good. It could be one of the most cost-effective things you do.
IT’S TIME WE SHIFTED OUR THINKING ABOUT BANKRUPTCY
The Coronavirus pandemic has left the global economy teetering. Despite the efforts of governments to provide income support, such as JobKeeper payments, large-scale layoffs are likely. Shifts in consumer behaviour, driven by necessity towards online shopping platforms, are forecasted to crystalise and become the new normal. This heralds doom for many bricks-and-mortar businesses without the capital to inject into digitisation or drop-shipping distribution models. As recurring shockwaves start to ripple throughout each industry, the personal impacts of the global downturn will start to surface.
Recent changes benefit many, but not all
On 25th March this year, the Federal Government instituted changes to bankruptcy laws offering temporary relief and protection to people in financial difficulty. Clearly, the government foresees a wave of debt problems coming and seeks to minimise the damage. Yet despite the increase threshold for bankruptcy notices from $5,000 to $20,000, one only need cite Australia’s status as the holder of the world’s second-largest household debts to know many will benefit little from this change.
The personal toll of economic downturn
In a recent publication citing the mental health ramifications of COVID-19, The Black Dog Institute cited the unemployed and casualised workforce as being particularly vulnerable to depression and anxiety. It seems only logical to place small business owners in this group as well. Collectively, the enhanced financial insecurity caused by economy-wide stoppages in commercial activity, places them at a much higher risk of experiencing unbearable financial stress, resulting in mental illness.
Dealing with wrong thinking
Much like mental illness, bankruptcy carries a stigma that often prevents people seeking help. Mounting fears, shame, withdrawal and avoidance – all ordinary symptoms of depression and anxiety – become the daily mental diet of a person struggling under severe financial pressures. And since our culture, rightly or wrongly, assumes that an individual’s financial situation is entirely the product of their own behaviour, those suffering financial stress are more likely to turn to toxic forms of mental positivity rather than pursue available avenues which can restore their financial stability and mental health
Going Bankrupt or in Liquidation: Tips for Choosing the Right Advisor
Going from bedrock to bankrupt can be a scary experience.
When asking creditors for more time to pay, negotiating flexible payment arrangements, or offering smaller payments to settle the debt do not work, bankruptcy is the final solution. Generally, it is advisable for individuals and businesses to voluntarily file for bankruptcy or liquidation instead of waiting for creditors to seek permission from the courts to order you bankrupt.
Having the right advisor to help you navigate through bankruptcy or liquidation is an important step in the process. Here are four options debtors can choose from.
1. Financial counsellors
Financial counsellors are recommended by the Australian Financial Security Authority (AFSA) as a resource for dealing with unmanageable debt. They offer confidential and free advice about options for sorting through mounting debt. Best of all, they are independent and will work toward achieving your best interests, not that of creditors. However, very few will actually walk you through to the whole process of Bankruptcy.
Solicitors are great with legal matters but may not be familiar with accounting and insolvency and helping with the ongoing information that may be required. Debtors who choose this option should locate a solicitor who specialises in bankruptcy and liquidation the difficulty being they also work for trustees and liquidators who provide the majority of their work. Also, they tend to refer you to the Trustees that they get work from, not necessarily the one that will do the best job for you.
Accountants can help determine if there are other financial options before claiming bankruptcy. Some accountants focus on liquidation and bankruptcy can lead you through the process if you decide to proceed. Many will further refer clients to a registered trustee that is in their discussion group. In Australia the average accountant has 3 clients per year facing insolvency normally they don’t have a lot of experience in dealing with the complexities of Insolvency.
4. Private trustees
Private trustees are the preferred option when claiming bankruptcy. Creditors can nominate trustees, but I recommend avoiding this at all costs. When creditors appoint, the trustee is there with the creditor’s interests in mind and may not be impartial. Creditor-appointed trustees can be very aggressive and may not offer the best solutions, so it is best to avoid going this route.
5. Insolvency Advisors
Good Advisors have a team of accountants and solicitors they can refer to they will also have a panel of trustees and liquidators. They can help choose one that fits your needs. My clients are provided with three to four independent trustees and liquidators to choose from. There is an emotional component to bankruptcy, and good trustees recognise and understand that aspect of the process.
Over the years, I have dealt with a large number of trustees. Whether you go with a private or government trustee, find one that you can talk to. I have found The Government Trustee AFSA quite good to deal with. The majority of my Bankruptcy clients would go to them. With Liquidations we need to use a Registered Liquidator
Keep in mind a trustee should be there for you as well, not just the creditors. They help draw a line in the sand and set you on the right course toward financial recovery. When a letter comes out requesting more information from the trustee, answering it quickly is always the best approach. Be certain to answer the inquiry completely and satisfactorily to reduce the likelihood of complicating the process. This is where someone with experience is important to guide you through the entire process.
Yes, I am an Advisor, I work for you through the whole process, I have been through it personally, I use my 30 years’ experience to protect your interests. I have an idea of the emotions you are facing. It doesn’t need to be the end. Using the experience to build the future is the most important thing.
A business owner under external administration – already at wit’s end, buffeted by bouts of arguments with former business partners and spouses, and suffering devastating impacts to self-esteem – gets hit by a wave of intrusive phone-calls, threatening letters, and sharply worded emails.
The practices of liquidators when dealing with businesses, in particular their treatment of directors, has recently been put under the spotlight by an Ombudsman-led inquiry. What it revealed shows how commonplace industry professionals engage in toxic behaviour leading to terrible outcomes, compounding the financial damage of insolvency.
Dodgy Practices in the Cross-hairs
As the appointed agent of creditors seeking restitution for unpaid debts, liquidators and administrators owe an obligation to obtain the best possible outcome for their client. Being a ‘business’ themselves, they adopt a ‘results oriented’ approach and since they take on the liability of the insolvent company, are highly motivated to extract the maximum possible capital in the shortest possible time.
While governed by ASIC regulations and (supposedly) subjected to strict oversight, their profession has become renowned for engaging in practices that can only be labeled as ‘dodgy’. To make matters worse, there is little within current industry guidelines to prevent liquidators and administrators from continuing on their destructive path.
Copping the Mushroom Treatment
Often, a business will enter voluntary administration, either due to a lack of funds to contest a legal battle, or in an effort to collaborate with creditors to get a fair outcome. Ideally, during this stage, the relationship between the administrator and directors will be collaborative and consultative.
Unfortunately, in many cases, the opposite is true. Businesses are frequently steamrolled into liquidation with little or no consultation, and the relationship between parties rapidly deteriorates. During the process of liquidation, there is no obligation to consult or keep directors informed.
When Communication Breaks Down
When liquidators do engage with directors, communication is at times marked by insensitivity and hostility. Demands for rapid delivery of information, failure to explain complex processes, and an overall disregard marks interaction.
Since liquidators report solely to creditors, major decisions can be made and advanced without a directors’ knowledge – however their compliance and responses will be demanded. In the pursuit of executing their role as relationships become intractable, liquidators then turn to bullying tactics and borderline harassment.
Unresponsive, Reactive Oversight
ASIC is tasked with providing guidelines to liquidators and offering remedies to complainants who feel a liquidator is in breach. Given the already lax environment liquidators operate in, ASIC’s approach to their oversight is both minimal and entirely reactive.
ASIC has been criticised for its lack of responsiveness to complains about liquidators and administrators behaviour. They are generally resource-based and too slow to get on top of the problem, meaning they’re forced to pick their battles: the ones that get the biggest headlines.
What’s Really at Stake?
When faced with winding-up a business, directors confront a world defined by loss, both psychological and financial. Deepening depression, followed by suicidal thinking, so sadly becomes the daily mental diet of small business directors when a company is placed in external administration.
ASIC needs to get better at reining-in dodgy liquidators and administrators, by bolstering its oversight and responsiveness to complaints, and by reforming requirements to provide more consultation and involvement to directors.
Australia has just entered its first recession in nearly 30 years. As the COVID-19 economic downturn deepens, increasing numbers of people will find the business they’ve poured everything into can no longer survive. It’s unconscionable to think that through the actions of liquidators, their own lives should become unbearable as well.