Doug Constable Responds to Sarah Danckert: Sunday Morning Herald: Caution over bankruptcy and insolvency law changes

Sarah Danckert, Reporter

Sydney Morning Herald

8 December, 2015

 

Alleged union fraudsters such as Kathy Jackson and the heads of some of Australia’s largest collapsed financiers could be key beneficiaries of reforms to bankruptcy laws proposed by the Turnbull government.

#DougConstable #SarahDanckert #SundayMorningherald #bankruptcyandinsolvency

Response

  • They could be beneficiaries but really it wouldn’t make any difference because if they committed a crime with money, it’s a crime and criminal authorities will take care of it. If they haven’t committed a crime. Bankruptcy is still the only option.
  • Even if they were beneficiaries, it would make no difference. The only important point is that if a crime has been committed with money, criminal authorities will handle the situation. Otherwise if no crime has been committed, bankruptcy is the only option.

 

The  federal government on Monday launched reforms to make it easier to bounce back from a business failure, including changing the default period for personal bankruptcies from three years to one year.

Response

  • These reforms make practical sense, but one big difficulty for trustees is that they (often wrongly) think they can resolve the affairs in 12 months as a result. Bankruptcy has safeguards which state that even if the bankrupt is discharged they still have an obligation to assist their trustees, to finalise any property or any assets. Resolving it in 12 months or 3 years would make no difference.
  • In Australia, it is not a crime to not pay your debts. With this in mind, where is the advantage in the 2 years?
  • Is the 2 years a punishment? 

 

It’s unclear whether the bankruptcy reforms, which are expected to be legislated in mid-2017, will apply retrospectively to existing bankrupts as the government is working through the final details of the reforms.

Response

  • Hopefully they do apply retrospectively as bankruptcy is not a criminal offense. If so, it will tidy up things and allow entrepreneurs to go with their life again.

 

A Treasury spokesman said existing powers to extend the bankruptcy period to up to eight years would be maintained.

“The proposal recognises that not all bankruptcies occur due to misfortune or innocent mistake,” the spokesman said.

The government’s reform package also introduces a “safe harbour” provision to protect directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company.

Response

  • This is an excellent idea. In Victoria and other states of Australia, in order to be able to drive a boat you need a boat licence, obtained through taking a course. In order to be able to serve alcohol, you need to obtain a liquor licence. Why is there no similar safeguard against starting a business?
  • Anyone can open a business in Australia, by obtaining an ABN. The main issue with this is that although ambitious individuals may be inspired, they have no practical knowledge on how to run a business. In protecting a director’s penalty notice to help with the running of the business, it would promote business. It makes a lot of sense to determine how well businesses are run in comparison with a set standard. Without licensing a business, it is a great idea to have someone come in and take care of it.

 

The reforms will also make “ipso facto” clauses, which allow contracts to be terminated solely due to an insolvency event and often lead to a company’s liquidation; unenforceable if a company is undertaking a restructure.

The Australian Bankers Association chief executive Steven Munchenberg said the bank lobby supported the concept of helping entrepreneurs to learn from their mistakes but cautioned the government over its reform package.

“In putting in place policies to encourage this, however, we need to be careful that those changes do not increase the risk of lending to businesses. This would be counter-productive. We will be looking to work closely with the government to get this balance right.”

Response

  • There has already been a reform in terms of lending, to make sure people borrowing for a house can afford it. The same should apply to a business. Lending institutions are loaning on the fact that their directors have put up their own money and house.
  • The business should be able to pay a loan.

 

Ms Jackson is alleged to have defrauded the Health Services Union and filed for bankruptcy this year, while LM Investment Management founder Mr Drake entered into bankruptcy last year and is alleged to have siphoned off $21 million in personal loans. Mr Sherwin was made bankrupt in 2013 after the collapse of Sherwin Financial and Wickham Securities, and is alleged to have transferred client money into his own accounts.

Response

  • While the claims are only alleged, the same principle applies; the bankruptcy reforms will not make any difference. If a crime was committed, it is a matter for the federal police. It is not up to the trustees to investigate it.
  • If they can’t pay the money, they go bankrupt. If bankruptcy was a penalty, the judge would decide that, not a trustee.

 

Lawyers for Ms Jackson and Mr Sherwin did not return calls. Mr Drake did not respond to inquiries.

Australian Restructuring, Insolvency and Turnaround Association chief executive John Winter, who supports the reforms, told Fairfax Media the laws would benefit people who used bankruptcy laws to avoid paying off creditors.

When asked whether the reforms would make it easier for fraudsters and corporate crooks to be back in business, Mr Winter said:”Look, yes it could, but people do need to be aware of who they are dealing with.”

“There’s some famous people who have cycled in and out of bankruptcy over their lives. There’s a whole bunch of other people who are out there trying to build a business and it didn’t quite work and yet they get very heavily penalised and they can’t restart,” he said.

Response

  • A valid argument, but it should be considered that bankruptcy is a tool to be used by both creditors and debtors. Even if creditors are the only ones who turned to bankruptcy, debtors are also able to use bankruptcy to start again. Many cases exist in which people who have gone through bankruptcy once or twice have nevertheless bounced back and put good input into the economy.
  • The danger of bankruptcy is that if a trustee comes in and administers it, it is no different than putting a fox in charge of the hen house.
  • It is not an uncommon situation that a person declared bankrupt owes (for example) $65,000 and ends up paying $160,000 due to trustee fees.
  • A better solution might be to shorten the time to 12 months, so that the creditors can move on without feeding the trustee pockets.

Mr Winter said the law changes were aimed at trying to help the “good guys” in the system get back on their feet. But he conceded the reforms announced today without further legislative changes could leave the system open to rorting.

Response

  • Rorting from whom? The only rorting that takes place is by the trustees that gauge thieves. Regardless, people go bankrupt and they cannot pay their bills. If they quivel money away, the trustees and/or police have the ability to find out where it is. Whether 1, 3 or 8 years, the abilities still exist.

“Addressing people who are trying to rort the system is another set of regime change,” Mr Winter said.

He said a separate set of reforms to insolvency laws recently introduced by the government would help stop people from unfairly affecting investors.

Mr Winter said the changes would “work both ways”, with various entities with funding contracts to a collapsed company, such as Vocation Ltd, which had its state funding cut off when it went into administration last month, forced to continue funding the collapsed company if it were undertaking a restructure.

Response

  • This is a good idea. If the company was under a restructure, by these reforms they would be able to continue and the idea makes a lot of sense.
  • This could also stop large companies from dictating a blanket approach and liquidating companies just for the sake of it.
  • The Tax Office currently has a policy that if one cannot pay, they are liquidated.
  • Example: A furniture business had a 60,000 tax debt, and were fined 60,000 for not paying it. The business offered 50,000 as an immediate payment but they went through with liquidation regardless.
    • The Tax Office got nothing; the business was liquidated and nobody got any money, while the owners saved $60,000. The Tax Office was the biggest contributor; these changes stop the Tax Office from chasing business.
    • The liquidators did not receive any money.
    • The business owners saved $60,000 and restarted business.

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