Australia: A cynical liquidator comments on recent insolvency law reform

A missed opportunity for some real reform.

Today, the full raft of provisions in the Insolvency Law Reform Act 2016 (ILRA) became effective. The changes mark the biggest wholesale changes to the insolvency laws in the last 20 years. The law reform was also a decade in the making with several changes stemming from recommendations made in a Senate report into the insolvency industry from 2010.

With 10 years of planning and the ILRA's final version being a voluminous 395-pages you would have been excused for thinking creditors and practitioners were about to enter a Utopian era ... A place where unnecessary red-tape is non-existent, where phoenix activity and abuse of process by directors and their advisors is eliminated, and where insolvency practitioners have necessary protections to vigorously pursue and investigate actions.

Sadly, it is not to be.

More than anything, the ILRA gives additional powers to the regulators and the courts to enforce practitioner compliance. The cynic in me suggests the result will mean more red-tape, more compliance costs and undoubtedly therefore, a lower return to creditors.

Undoubtedly, these reforms are largely aimed at addressing rogue action that historically plagued the insolvency industry. A prime example being the former liquidator, Stuart Ariff, who pled guilty to misappropriating millions from the liquidations he administered. In the pre-2009 period, Ariff also flaunted remuneration approval provisions, charged excessive amounts, refused to resign as administrator, and failed to keep creditors adequately informed.

Many ILRA provisions now arm creditors with weapons aimed at addressing these 'problems of yesterday', including:

  • Powers to demand information and reports from a practitioner.
  • Powers to remove an incumbent practitioner by resolution.
  • Powers to appoint a "reviewing liquidator" who can review an incumbent appointee's fees and disbursements.
  • Powers to direct practitioners to do certain things (directions that must be considered, but not necessarily acted upon).

These concepts are great—well, at least in theory. In reality, my years of experience suggest that in the SME space, the powers (when used) will frequently be used for the wrong reasons. For example, a creditor can strong-arm practitioners into acting in their interest rather than all stakeholders' best interests. After all, most recovery actions identified in an insolvent entity happen to be against major creditors who now wield more power than ever before.

It is important to remember that dozens of liquidators have been banned or reprimanded since the Stuart Ariff days. ASIC has rightfully stepped up its regulator role over the last decade. And if for a moment we assume that the "Wild West" era of insolvency has in fact now passed (a view that I share)—then I question what exists in these new ILRA laws to address the today's problems?

The current and quite real challenge for the industry is the 'unregulated pre-insolvency advisory industry' that target vulnerable directors by promoting phoenix activity and other questionable conduct that clearly breaches directors' duties. Some of those 'advisors' are taking substantial assets that belong rightfully to creditors, or advising directors to take them, much like how Ariff did. Ironically, a few recently banned liquidators have now dusted themselves off and found a new home in the murky world of pre-insolvency advice.

Here are some real-life examples of today's insolvency issues:

  • I recently interviewed a director of a building company. We were appointed by the court, with the ATO being the petitioning creditor. The director told me that once the court application was filed—and the company's financial issues became public knowledge—he received at least a dozen unsolicited phone calls from pre-insolvency advisors (anecdotally) looking to "help him" redirect company assets to a safer home ... one that they portrayed as being far away from the nasty creditors' reach, who he failed to pay. Some of these nice callers purported to only charge a small percentage of the creditors' value—the director could go without paying, while indicating that he could keep all the assets.

No regulation prohibits soliciting vulnerable and sometimes desperate directors; and the pre-insolvency advisory industry is unregulated.

  • We are currently managing a liquidation where the director had engaged the services of a pre-insolvency advisor. The director (admittedly: allegedly and without a paper trail) was encouraged to transfer all company assets offshore, to apply for questionable tax refunds (including a material R&D grant) and finally—strip the company of its assets before placing it into liquidation. The assets have moved through such a matrix of individuals, companies and trusts that investigating the matter would need substantial funds. Unsurprisingly, the liquidation has no assets and therefore we have no 'fighting' fund.

This means our hands are tied and must resort to pleading with ASIC and creditors for funds to investigate and pursue asset recovery. In this case, most likely the director's and advisor's actions will go unchecked.

  • In another liquidation, a pre-insolvency advisor had (again, allegedly) encouraged a director to withdraw $80,000 literally two days before liquidation to partly satisfy a debt owed to the director. That cash at bank was the company's only asset. The advice was that the director would be 'in the driver's seat' and if the liquidator 'kicked up a fuss' the director could ultimately negotiate to repay a lesser sum back to the company—it was touted as a "win win" for the director.

And what were our options, as liquidators, in yet another unfunded liquidation? Is it in creditors' best interest that we spend thousands in our fees and legal fees to prove a point—or do we just negotiate with the director to settle for a lesser sum?

The files mentioned above are by no means unique, they are in fact far more common than most think.

It is fair to say that most of the commentary around pre-insolvency advisors is focused on their involvement around illegal phoenix activity. While figures in a Fair Work Australia report put the cost of illegal phoenix activity to the Australian economy at over $3 billion annually, there is no estimate of how much is attributed to advice given by pre-insolvency advisors.

However, our experience sees most pre-insolvency advisor activity centered around director misconduct such as the examples highlighted above, not illegal phoenix activity. And the cost to the Australian economy—we say if allowed to go on unchecked—it will make the cost of illegal phoenix activity a blip on the radar.

Pre-insolvency advice is a growing industry, and with no real regulation or barriers to entry; those in the know are saying "why not give it a go". The ILRA does not address these problems and it is a shame and a real missed opportunity for positive and meaningful reform.

Let's hope we won't have to wait until 2027 before today's problems are finally remedied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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