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It is widely known by members of the legal profession and also by debtors and unsecured creditors, who have had the misfortune to be exposed to the machinations of the insolvency industry, that prostitutes mostly provide a more honest, ethical and socially utilitarian service than many insolvency practitioners.

It would also be true to say, at least in New South Wales, that sex workers are better regulated than insolvency practitioners. At least they are required to have routine checkups.

The whole scheme of Australian insolvency law is flawed. As the law stands, cheats, banks, insolvency accountants and the mates of some of them, are the big winners.

The big losers are the ATO, unsecured creditors who advanced money to the debtors in good faith and business proprietors and, in particular, the proprietors of small businesses, who are literally both robbed and screwed at the same time.

As our law stands, in corporate situations, a bank can put a company into receivership or liquidation, while retaining the major say on who the liquidator will be.

A bank can also appoint a receiver to a company’s assets and undertakings and, under a legal fiction, the Courts will hold that the receiver’s actions, even where damaging to the unsecured creditors and shareholders, were taken on behalf of the company, and not on behalf of the secured lender.

Insolvency practitioners, be they receivers appointed by the secured creditor or an administrator appointed by the board of an insolvent company who is subsequently converted into a liquidator, or a Court-appointed liquidator, will all too frequently, sell the company’s assets for the lowest price that they can contrive to justify, and none too rarely, company assets are divested under suspicious circumstances, where corruption cannot be ruled out. Prices paid for assets are typically low, higher offers from the debtors or their associates are frequently rejected and unseemly charges are levied against sale proceeds by the receivers, administrators or liquidators and their sub-contractors, usually without any criticism or interference from the secured creditors, who are most often, banks.

I write from the perspective of well over three (3) decades of observation and experience, expressing my reasonable suspicions tinged with strong impressions, which have given rise to firm belief.

Although the purpose of our insolvency laws is to protect the public – in particular, unsuspecting parties – from being burned by insolvent traders, the vast majority of the victims of insolvency are actually the unsecured creditors. The secured creditor has the benefit of its security interest which, so long as the secured asset retains its value and the loan was made prudently in the first place, means that the secured creditor remains protected.

Once a receiver or liquidator is appointed, the directors of the debtor company are usually too worn down, both financially and psychologically, to be able to resist their own systematic financial destruction by the insolvency industry machine.

The US system is so much better.

Under Chapter 7 of the US Bankruptcy Law, the creditors of a company which has become or is likely to become insolvent, can submit a Plan of Reorganisation to the Bankruptcy Court, which if supported by the creditors and approved by the Court, the directors must then implement themselves.

So long as it is faithfully adhered to by the board – the board have to submit monthly reports to the Court, which are subject to review by a Judge of the Bankruptcy Court – the Plan of Reorganisation will be allowed to be fully implemented and the bankruptcy then terminated; all the while, so long as the Court is satisfied that the secured creditors are properly protected under their securities, the secured creditors – most often banks – are compelled by law to sit back and watch the directors trade the company out of its financial difficulties and the unsecured creditors being repaid. A moratorium is placed on the banks taking enforcement action under their securities in the meantime.

The great virtue of the US Chapter 7 Scheme, is that it is the unsecured creditors who need protection under the bankruptcy law, not the secured creditors, such as banks and Chapter 7 gives the unsecured creditors – and the debtor company – a chance.

How often in Australia do sub-contractors on property projects lose out to developers and financial institutions when banks foreclose, leaving the “subbies” high and dry and often, financially ruined? Similarly so many creditors who have advanced money or extended credit in good faith to a corporation which becomes insolvent, are left out in the cold when a bank, using a receiver or liquidator, moves in to “kill the goose”, which would still be capable of laying the golden egg, if it were not first carved up by the insolvency practitioners doing the bank’s bidding. 

The sometimes – and not at all rarely – exorbitant or rapacious fees, charged by insolvency practitioners to the company’s estate for the privilege of being butchered, with the acquiescence of the secured creditor and which are rarely, effectively challenged – often because the debtor has already been gutted and has lost the fortitude or the resources to take  effective action and also, because there is inadequate regulatory oversight of insolvency practitioners by ASIC, which bears the statutory responsibility to regulate the insolvency profession – too often mean that the fruits of enterprise and hard work, are pulped on the rocks of our iniquitous insolvency regime.

Refractory practitioners who, investigated by ASIC, have been found to have functioned below even the relatively low industry standard, are generally subjected to an all too short period of suspension as their only punishment.

There is no established process for the taxation of fees charged by insolvency practitioners, similar to costs assessments for the bills charged by members of the legal profession. I am aware of one instance  five (5) years ago, where a liquidator in an accountancy firm charged out the firm’s tea lady at $210 per hour to help beef up what, prima facie, appeared to be an exorbitant and unsustainable bill for “services”. However the unsecured creditors did not have the financial resources or confidence in “the system”, to challenge the liquidator in a Court of law.

With few exceptions, the ATO also loses out.

Tax payers see money collected on behalf of the company for GST which should have been paid to the Tax Office, swallowed up by banks and liquidators. The Deputy Commissioner for Taxation is treated just as another unsecured creditor and as such, the ATO resignedly and cynically, frequently demonstrates a lack of interest in the entire process.

This is an aspect which goes to the heart of what the Hon Senator John Williams (MP, NSW) and I, sought to expose last year and which received wide media coverage but to little ultimate avail.

It is time that Australia adopted the US Chapter 7 approach to insolvency law and practice and recognised that the interests of the unsecured creditors should be rated ahead of the interests of the secured creditors, wherever the facts on the ground permit this to occur. Further, the directors of an insolvent company, which is capable of being rescued, should be given a reasonable Court-supervised opportunity to trade out of its financial difficulties through a feasible, well supported and properly executed Plan of Reorganisation supervised by the Court.

In Australia, the whole field of insolvency has been abused by financial institutions and by insolvency “pros” and it is high time that both our legislature and the regulator, took proper charge and ensured that the law decently protects the public.

What should be used as a pesticide to protect the harvests of commerce, must not be allowed to continue to exert a poisonous effect on small and medium size business, stifling enterprise and nourishing perfidy.

 

STEWART A. LEVITT