Insolvency Disrupted

Where is it all heading?

In July 2020, the Insolvency Inquiry Report (‘IIR’) set out how small businesses were treated during the insolvency process – before and after entering a formal external administration.  On the back of the IIR, Parliament made amendments to the Corporations Act in 2021, including introducing a new category of liquidation referred to as a simplified liquidation.

The IIR was critical of the insolvency process, noting that where

‘…businesses do need to be wound up, there is a concern that the cost of the process far outweighs any benefit to creditors, even where liabilities are small, and a business structure is simple’. 

see Insolvency Report

A majority of small businesses (63%) which had been through an external administration process considered that, once a registered liquidator was appointed, the focus of the liquidator and the creditors was on winding the business up, rather than considering a restructure.  There was confusion amongst those surveyed as to what they expected and what occurred once a registered liquidator was appointed.  Many did not realise that once a liquidator was appointed, they took full control of the business and made all business decisions: ‘That’s why we appointed them to help restructure. They promised (to help) but sold everything.’

What does experience tell us?

Over 50% of small business owners felt ‘locked out’ of their business from the start, with no involvement in the process whatsoever.

‘Once our accountant highlighted the potential issue and we consulted a lawyer, it all happened pretty quickly afterward… effectively we were sidelined quickly.’ ‘(We were) not allowed any involvement in the insolvency process. We were prevented from entering all properties by security guards, including being locked out of our house.’

The report also highlights concerns that the chosen registered liquidator held no understanding of their industry.

‘The receivers appointed by the bank had absolutely no experience with agriculture. We frequently had phone calls from the receiver asking ..

where would I sell the wheat? What does the boom spray look like, again?

They re-negotiated longstanding contracts to purchase the grain and hay harvested that were paying market price, to contracts that would pay approximately half the market value but pay within three days not the industry standard of 30 days. We had our machinery listed with specialist dealers, located in the area, yet the receiver withdrew the machines from sale and placed them in an auction in an area where there was no broadside cropping.

No machine realised more than 50% of its value. To view our operation, the receiver drove the 400km to meet with us on the farm bringing along three other people. The receiver charged us travel costs at $200/hr for the junior accountant.

The investigations and the fees

In response to allegations of high fees (where many surveyed found the actual cost and the time taken significantly exceeded initial estimates), liquidators submitted that their statutory obligations to investigate the company’s affairs was primarily to blame. 

Liquidators did not want to see a compromise of the thoroughness of this investigative process despite there being a commonly held perception that liquidators extend an external administration process as long as there are assets that can be realised to reimburse their fees.

GM Advisory Comments

Most observations from the report were only perceptions. However, it is clear and certainly not uncommon that there are issues with the insolvency process. There are many reasons for this including a lack of transparency and poor communication (quick guide to restructuring terms).

GM Advisory will work with directors to ensure they understand the process and the possible outcomes. Keeping directors informed and safe at all times.