It’s time to update the insolvency regime
It’s served the nation well, but Macks Advisory believes it’s time for Australia’s insolvency system to be updated. It’s been virtually unchanged since the introduction of voluntary administration in 1993.
We believe the regime needs reform to accommodate problems arising from the increasing number of cross-border transactions and insolvencies.
There are also International considerations. Global reconstruction of companies proceeds apace. It’s highly desirable therefore that Australia has an insolvency system that’s relative to what’s happening worldwide.
The Murray Inquiry into Australia’s financial system could hardly have been expected to look at the theory of everything. While it recommended far-reaching reforms in the banking and superannuation sectors, no specific recommendations were forthcoming for the insolvency regime.
Not that this is necessarily a bad thing. Indeed, Macks Advisory believes the regime would best be served by an independent expert’s review of any suggested reforms.
Some suggestions
For example, should the system include ways to encourage directors of businesses in financial difficulty to safely seek advice and implement restructuring at the earliest opportunity?
Could reforms be introduced allowing such businesses to reverse illfortune so as to maximise possibilities of better outcomes for stakeholders?
Should provision therefore be made for an independent expert to represent all stakeholders’ interests in a corporation nearing collapse or facing urgent need of structural turnaround?
Some insolvency practitioners favour an Alternative Dispute Resolution Process to expeditiously deal with complaints and bankruptcy procedures that involve them and their lawyers.
It’s argued a resolution process of this kind would actively promote improvement of insolvency administration referred to by the Murray Financial System Inquiry (MFSI).
Investor considerations
It’s interesting to note that the MFSI report was published about the same time as the US released a report on its Bankruptcy Code after a three-year review.
Herein lies yet another reason for Australia, particularly as far as potential international investors are concerned, to ensure confidence in our insolvency system is maintained. For example, the system clarifies how liquidation might best be avoided without taking anything away from the need to keep directors honest.
The MFSI seems to favour better protection for executives of financially stressed companies. Perhaps this could be provided if directors were given temporary relief under insolvency trading law that would allow them to get expert advice about their company’s financial situation, without exposure to personal liability.
To prevent abuse of such a provision, it would however need to be an independent, accredited advisor working to a strict timetable, or an undertaking sanctioned by a Court.
Of course this would not be a one-size-fits-all solution but we’d be surprised if other insolvency firms wouldn’t agree it’s an option that provides administrative flexibility and possibly the best chance of maximising returns to stakeholders.
A case in point was the restructuring of Channel 9, where stakeholders agreed to keep the company operating without exposing directors to liability.
Avoiding court battles
Increasing numbers of insolvency practitioners would like to see abolition of ipso facto clauses – where one party can terminate a contract when the other party becomes insolvent. It’s felt all stakeholders’ interests would be better served if such clauses were suspended during a restructuring process.
Macks Advisory’s view is that the sooner an alternative dispute resolution process is incorporated into Australia’s insolvency regime, the better.
Lacking recourse to any such provision our firm – and undoubtedly similar firms – have had from time to time no satisfactory alternative during company administrations and bankruptcy procedures, other than to become involved in costly, destructive court battles.
Of course people can, and do, make legitimate claims during administrations, but others will make patently illegal claims that unless challenged in court and actually ruled to be illegal, allow those claimants to get away with making a mockery of the law to the disadvantage of other stakeholders.
Finally as we see it, reforms to the regime need to ensure that, because the consequences will be so adverse, people are constrained from seeking prematurely to push a company into liquidation.
Generally stakeholders’ best interests are met where a business in financial difficulty can be reconstructed to continue viably, while at the same time also appreciating that in a free market no service is done to the economy in propping up a business that’s fundamentally unsound.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office at Level 11, 99 Gawler Place, Adelaide SA 5000.
