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Toxic Insolvency Culture Must End

 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.