A “War zone”?

Rather than continue the committee’s earlier scrutiny of the role of “non-mainstream advisers,” the final hearing of the Senate Select Committee Inquiry into Lending to Primary Production Customers returned to an examination of the work of receivers (transcript here).

A focus on one case in particular highlighted the most difficult and challenging aspects of a receiver’s work, and provided outsiders with a clear understanding as to why the Court officials responsible for taking possession of properties will sometimes involve the local police.

One receiver gave evidence about ‘personal threats’ made to ‘numerous parties’ – including a contract truck driver who had his arm broken.  When asked why the farm in question had been left idle for four years the receiver explained that although he had found tenants to farm the property, they withdrew because they believed that they would not enjoy quiet occupation of the property.  He likened the situation to ‘trying to plant wheat in the middle of a Balkan war.’

His partner addressed some of the broader issues raised in earlier hearings, pointing out that:

  • Although in theory the costs of a receivership were charged to the borrower ‘in the majority of cases, where there’s a shortfall, the cost is paid by the bank and borne wholly by the bank’ – who scrutinised those costs very carefully.
  • Comparing a sale price to a valuation was problematic. Not only because valuation can move – with examples of ’40 per cent in a year for grazing properties’ – but the reality was that receivers ‘can’t force people to pay more’ than they think a property is worth.
  • There was an ‘expectation gap’ between the value of a property bought ‘when it was going well,’ and sold when it was not.

One committee member raised the idea of a prohibition on the appointment of receivers to ‘family farms’ – an idea which is discussed in more detail in End of the line?…..should we ban receiverships? – but which is problematic for at least two reasons.

The first is that the core problem is severe financial stress.  Preventing a lender from appointing a receiver may only mean that the enterprise will trade a little longer until it is wound up by another creditor – quite possibly the ATO.  The failure of the business will not be any more pleasant for the proprietors simply because it is a liquidator rather than a receiver who sells the farm, and in many cases, other creditors will be in a worse position because ongoing trading has increased the amount they are owed.

The second issue is that – as one of the witnesses explained – if lenders are unable to take the steps to recover debts due it seems likely that it will impact their lending decisions.  Higher risk operators may find themselves paying a higher rate, or unable to borrow as much as they wish.

The final report is due on 29 November 2017.

Update: The report is now due on 6 December.

Other posts about the hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers:

“Non-mainstream advisers”

The Senate Select Committee Inquiry into Lending to Primary Production Customers began with an obvious focus on lenders.

However, as the hearings proceeded, that focus seemed to shift.  One member’s view was that ‘when you look at what’s come before this committee, the big banks have come out pretty well.’  By contrast, as the chair noted, ‘the number one area…standing out for complaints is the receivers’ (more background here).

To those following the hearings it was therefore no surprise that the 20 October hearing was dedicated to evidence from restructuring and turnaround professionals and their professional association, ARITA.

Those giving evidence (listed below) did a tremendous job in explaining the extensive regulation to which they are subject, the duties and reporting obligations imposed by the Corporations Act, and the challenges of dealing with farmers and small business operators in moments of greatest stress and difficulty.

Through the course of evidence on 20 October, the beginnings of a new line of inquiry appeared: those described by one witness as ‘non-mainstream advisers,’ often without appropriate qualifications, whose involvement was a ‘consistent element of matters which become protracted and difficult to resolve.’

The witness referred to the use of ‘arguments, which have no legal substance,’ as well a routine by which a ‘promissory note’ is tendered purportedly in satisfaction of the debt. Other devices (albeit not the subject of evidence) include the promise of offshore refinance or funding, and of evidence purporting to show that a loan has been ‘securitised’ (which is somehow said to invalidate the loan), both of which seem to require a significant and non-refundable up-front fee.

As another witness explained, those purported ‘strategies’ provide borrowers with false hope, when more realistic advice would lead them to negotiate with creditors.

One of the committee members noted his personal experience with non-mainstream advisers, one ‘pretty good’ – but others ‘not so good,’ and raised the question of whether they should be regulated.  The committee chair also raised concerns: ‘we can see the damage of non main-stream advisers.’

Another hearing has been scheduled for 17 November.  It will be interesting to see whether there is further exploration of the problems caused by non-mainstream advisers, and what can be done to mitigate the damage caused by the worst of them.

Update: Some of the relevant footage of the committee proceedings have been made available via youtube.

Witnesses who represented the turnaround and restructuring profession, in my view with great distinction, at the 20 October 2016 hearing:

  • Justin Walsh of Ernst & Young
  • Stephen Longley and David Leigh of PPB Advisory
  • Ross McClymont, Narelle Ferrier, and John Winter of ARITA
  • Jamie Harris, Rob Kirman, Matthew Caddy, and Anthony Connelly of McGrathNicol
  • Will Colwell, Stewart McCallum, Tim Michael and Mark Perkins of Ferrier Hodgson

For comment on some other problematic advisers: Wanted: Regulation of pre-insolvency advisers

Taxi! A cab-rank system for insolvency appointments?

Treasury yesterday released a consultation paper (available here) to provide further detail, and seek input, on the anti-phoenix measures announced on 12 September, and discussed here.

One of the most noteworthy proposals is option 9 – appointing liquidators on a ‘cab rank basis.’  This proposal is intended to address concerns that phoenix promoters will hand-pick a registered liquidator to ‘facilitate their client’s interests to the detriment of creditors.’  (Before moving on it is worth highlighting that a liquidator who did act to the detriment of creditors in that way would be in breach of their duties both under the Corporations Act and the ARITA Code of Professional Practice, and should be subject to prosecution by ASIC and disciplinary action by ARITA, if a member).

The proposal is to introduce a cab-rank for companies associated with a person designated as a “High Risk Phoenix Operator” by the Commissioner of Taxation (under the criteria and process outlined in the proposals paper).  Rather than select a liquidator of their choice such companies would be allocated a registered liquidator from a regionally based panel. That liquidator would effectively be guaranteed a  minimum level of public funding to ensure that matters were investigated and properly reported to both the creditors and to ASIC.

The paper notes that it is intended that the cab rank mechanism be restricted to circumstances where an HRPO is involved, but seeks feedback as to whether the cab rank should apply to all appointments.  It appears that the cab-rank mechanism is intended to apply only to liquidation appointments – HRPO-associated directors could appoint the voluntary administrator of their choice, but if the company passes into liquidation then that person will be automatically displaced.

There is no discussion of any restriction on the ability of HRPO-associated entities to arrange the replacement of the cab-rank liquidator.  Without such anti-abuse measures it would seem to be open to phoenix promoters use the simplified replacement regime to bring in a hand-picked appointee shortly after the initial appointment.

The paper also seeks feedback as to who should administer the cab rank.  There is a further question, albeit not asked here: what is the panel criteria?  ASIC already administers a stringent registration process (and an exclusion process where necessary), so presumably there will be no plans for another organisation, or another part of ASIC, to second guess that work.

Feedback is due by 27 October 2017.  It can be provided direct, and ARITA is also seeking member feedback.

Queensland is pursuing other measures to address phoenixing, discussed here.

“Fixing” Section 420A

Earlier posts (Receivers: are “crooks”?  and Receivers: are “inhuman”?)  have noted that receivers have been the subject of strident criticism in many of the nine public hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers.

One of the areas of specific and regular complaint has been the sale of assets at – it is claimed – a significant discount to their reported value.

However, none of the valuations referenced in the evidence appear to have been tabled, and so it is difficult for outsiders to understand whether the reference is to sworn valuations conducted by independent valuers, or whether the reference is to something less structured and formal.  Likewise it is also unclear to outsiders whether those reported valuations reflect the seasonal and market conditions at the time of the sale, or whether they are framed against different conditions present at an earlier time.

Nonetheless it seems that at least one of the committee members is concerned about the effectiveness of section 420A – which imposes an obligation upon receivers to:

“take all reasonable care to sell [mortgaged] property for:

(a)  if, when it is sold, it has a market value–not less than that market value; or

(b)  otherwise–the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.”

At the 18 September hearing (transcript available here) a bank was asked to comment on a proposal that would require receivers to take a fresh valuation on appointment, and prevent them from selling ‘for less than 80 per cent of that current valuation.’

It was not clear whether the hypothetical requirement would apply only where the sale was other than by public auction, or whether it would apply to all sales.

Regardless, the response (admittedly, off the cuff) did not raise concerns about the proposal – which suggests a greater degree of confidence in the sales programs conducted by receivers, and the outcomes they deliver, than some of the borrowers who gave evidence may have expected.

Receivers: are “inhuman”?

In Receivers: are “crooks”? I commented on some of the most quotable evidence given to the first two hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers.

The transcripts from hearings three and four are also now available here.

Notably, in the fourth hearing one senator asked whether “receivers have professional standards bodies?”  Neither the bank to whom the question was directed, nor the other members of the committee, were able to identify ARITA’s role or the fact that ARITA had already lodged a submission to the inquiry.

Towards the end of the hearing the Chair referred to having seen conduct by receivers that ranged from “fraudulent—through to things that we could possibly describe as inhuman.”

If the committee does continue to pursue its present line of investigation it would not be a surprise to see a further Senate Inquiry into the conduct and regulation of receivers.

Receivers: are “crooks”?

The registered liquidators I speak to have a real sense of being under close and careful scrutiny.  ASIC is an increasingly active regulator – as evidenced in the most recent enforcement report (available here).  The roughly 85% of registered liquidators who are ARITA members must also comply with its comprehensive Code of Professional Practice (available here), or risk facing its Professional Conduct Committee.  And many would say that FEG – an active and well-resourced priority creditor – provides additional scrutiny to receiverships where employee priorities are involved.

It is clear from the evidence provided to the Senate Select Committee on Lending to Primary Production Customers (available here) however, that some of the borrowers subject to receivership do not see – or do not appreciate – the level of scrutiny and supervision.

One borrower claimed that asset sale proceeds “finish up in the receiver-manager’s accounts” and do not reduce the farmer’s debt – a “systemic misappropriation of those funds” by the “most corrupt, the most unscrupulous, the most unethical industry in Australia.”

Another debtor said that receivers “are crooks down and out,” and a former rural agent described the insolvency profession as “the greatest bunch of virtually bloody criminals and they get away with it.”

Insolvency practitioners may argue that those giving evidence are the most vocal of an unrepresentative minority, but it seems that their evidence may be having an impact.  The committee chair closed the Perth hearing with a reminder that the inquiry was “not only into lending practices, including default, but also into other service providers associated with this sector, including receivers, brokers and agents.”

The reputation of the insolvency profession remains an ongoing issue, and we should not take outsiders’ understanding – of a technically complex function – for granted.

Postscript: Some comment on the later deliberations of the Inquiry is here: Receivers are ‘inhuman’?

Consultation: Reforms to address corporate misuse of the FEG scheme

On 2 May the Senate Inquiry into Superannuation Guarantee Non-Payment released its final report (available here), discussed here.

For restructuring and turnaround practitioners one of the noteworthy recommendations was that:

the government consider amending the Corporations Act to ensure that the priorities in section 556 apply during all liquidations, regardless of whether the business being liquidated was operated through a trust structure.’

Only a fortnight later, the government has released a Consultation Paper: Reforms to address corporate misuse of the FEG scheme.  Pleasingly, one of the issues raised is whether that Inquiry recommendation should be implemented, and so there is the possibility that the law will be amended a great deal more quickly than anyone expected.

Other significant areas of potential reform include:

  • Possible amendments to the Corporations Act so that receivers and liquidators may not deduct any part of their general costs from the proceeds from of realisations of circulating assets – unless employee entitlements have been paid in full.
  • Changes to reinvigorate section 596AB, which has not been used in litigation since its introduction in 2000. Section 596AB provides for criminal prosecution and civil recovery against someone who enters into a transaction with the intention of avoiding the payment of employee entitlement liabilities.  Options here include:
    • Changing the ‘fault element’ from ‘intention’ to ‘recklessness.’
    • Increase the maximum penalty for criminal convictions.
    • Sidestepping the difficulties with proving intent by adding a civil penalty provision based on an objective test.
  • Allowing parties other than a liquidator to initiate recovery action: including FEG, and in some specific circumstances, the Fair Work Ombudsman or the ATO.
  • Preventing abuse of corporate group structures, possibly by implementing a contribution regime similar to that in New Zealand – where parties may apply to Court for a ‘contribution order’ against solvent group members, where it is just and equitable to do so.
  • Modifying the existing director disqualification provisions to target behaviour which impacts FEG – for example reliance on the FEG scheme to pay redundant workers their outstanding employee entitlements where there is minimal or no return of the FEG advances on two more occasions.

However, there are other issues which could helpfully be addressed:

  • The ‘traditional’ view was that a liquidator’s job was to convert all assets into cash, and then allocate that fund in accordance with the priorities in section 556.  A more recent alternative suggests that the section 556 priorities be applied in real time.  That theory arguably results in the difficult proposition that a liquidator should close a business down rather than risk employee entitlements in trading a business on – even to achieve a sale which might avoid the need to pay entitlements at all!
  • Another problematic area is the question as to whether trading losses should be allocated against the circulating or non-circulating asset pools.  Sometimes businesses are knowingly traded at a loss, to improve circulating asset recovery such as the conversion of WIP, or collection of debtors – however there seems to be a view more recently expressed that trading losses should not be allocated against circulating assets.

Interested parties are invited to make a submission by Friday, 16 June 2017.


Poles & Underground

One of the issues raised in the Carnell Report – or more correctly, the ASBFEO Small Business Loans Inquiry Report – was a concern about a perceived conflict of interest arising from investigating accountants being subsequently appointed as receivers.

The report noted that “Some, who submitted to the Inquiry, are concerned about the investigating accountant’s ability to recommend a course of action, such as a receivership, and then being appointed by a creditor to that role.”

To address the concern the report recommended:

(R10) “Banks must implement procedures to reduce the perceived conflict of interest of investigating accountants subsequently appointed as receivers. This can be achieved through a competitive process to source potential receivers and by instigating a policy of not appointing a receiver who has been the investigating accountant to the business.”

Those whose responses to R10 argued against the mandatory appointment of a ‘stranger’ because of the additional costs and disruption to the management of the business will be interested in a recent decision of the Federal Court: Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed).

It appears (it is not completely clear from the judgement) that it was the directors of a company who appointed as administrators two restructuring & turnaround practitioners that had previously conducted an independent business review for the company’s bank.

Prompted by a question at a creditors meeting the administrators (by then the liquidators) had recognised a potential conflict of interest, and quite properly applied to Court for directions, at their expense.

Noting that the liquidators had already repaid their fees for the IBR engagement, and that no creditor had raised any objection, the Court allowed the liquidators to continue in that role because the liquidators’ ‘substantial knowledge’ of the affairs of the company was ‘likely to assist in the efficient conduct of the liquidation’ and would be a benefit to creditors as a whole.

Wanted: Regulation of pre-insolvency advisers

ASIC appears to have been quite active over the last few months.  Sydney Insolvency News reports the three year suspension of one liquidator’s registration by CALDB, an application for orders prohibiting two others from practising, and voluntary undertakings from another two practitioners.

The circumstances that the CALDB reasons (available here) describe are disappointing, but they do not make very interesting reading in their own right.  There was no controversy because everything was agreed: the issues, the facts, and the penalty.

What has more significance is the reason why there was so much agreement.  Much of a liquidator’s duties are set out in the Corporations Act: requirements to make public disclosure, maintain bank accounts, arrange for remuneration approval, and so on.  Those statutory requirements are supplemented by an ARITA Code of Professional Practice which sets standards not just for the work to be done, but critically, the documentation of that work.

For most of the issues dealt with in the CALDB decision it was pretty clear not just what should have been done, but whether the liquidator could show that it had been done.

Those standards are supported by a broader framework which includes:

  • ASIC powers to seek an audit of a liquidator’s accounts
  • Court power to undertake an inquiry into a liquidator’s conduct
  • New rules in the ILRA which will allow for the appointment of a ‘reviewing liquidator’ by ASIC or the Court. (Creditors may similarly appoint a reviewing liquidator by resolution, but only in relation to matters of remuneration and costs).
  • A statutory registration regime which assures the skills, experience, and professional indemnity insurance of those seeking entry into the profession
  • Processes by which registration can be suspended, or even revoked – forcing an exit from the industry if appropriate.

Altogether, it is quite clear that that there is now quite a comprehensive regime supporting the regulation of insolvency practitioners.

There is a clear contrast between the regime supporting the CALDB decision, and the complete absence of any regulatory framework governing the pre-insolvency adviser in the Asden Developments case,  whose client ended up a bankrupt after following his advice.  In Asden there was no investigation by a regulator, and therefore no consequences for the pre-insolvency adviser.  The adviser is now a bankrupt, but only because he was unable to pay back the large fee that was paid to him.  There is no restriction on his re-entry to the provision of pre-insolvency advice – even whilst he is a bankrupt.

None of this can be a criticism of ASIC.  ASIC is not the regulator of pre-insolvency advisers, because there no regulation of pre-insolvency advisers.

The potential customers of pre-insolvency advisers are those by definition seeking assistance at an extremely stressful and challenging time.  It must be extremely difficult for them to make an assessment of the quality (or even legality) of the advice that they have been given, by a self-proclaimed expert – but there should be no need.

Twenty years ago there was no such thing as a pre-insolvency advice industry.  It is an industry that has developed and grown, at the same time as the professional associations have lifted the standards of their members, and as ASIC has raised the bar on the regulation of liquidators.  Some (but not all) of those involved are the former registered liquidators and former solicitors no longer able to practice as such.  It is clear that the regulatory framework has been left behind.

The restructuring and turnaround profession needs to work hard to explain the problems, and advocate for an appropriate licensing and regulatory regime for the pre-insolvency advisers who currently operate without being subject to any scrutiny or review.

For comment on some other problematic advisers: “Non-mainstream advisers”

Liquidators versus Zombies?

[First published on Linkedin.com on 17 October 2016]

It’s no surprise that ASIC’s move to a user-pays model will impact the restructuring and insolvency community, but the proposed model – reported by the Sydney Insolvency News blog (SIN) – is unexpected.

Most practitioners had anticipated that ASIC would follow the model used by the personal insolvency regulator, AFSA, to recover costs involved in the regulation of personal insolvency practitioners.  AFSA charges a “realisation levy” against the value of assets recovered by the trustee, calculated by practitioners and directly charged to each insolvency administration i.e. directly reducing the pool of assets available to creditors. The applicable rate has varied over time: from 8% in 1997 when it was introduced in its current legislative form, to as low as 3.5% in 2007, increasing to the current 7% as at 1 July 2015. The concept of a levy based on asset realisations is therefore well established, and well understood by all stakeholders: creditors, practitioners, and the regulator.

SIN reports that it is proposed that ASIC will charge practitioners an annual fee of $5,000 per annum, and a further $550 for each formal insolvency appointment, to recover a targeted $9m. Notably, the $550 charge cannot be directly on-charged as a cost of the administration – practitioners must absorb that cost.

What will be the consequences if the new regime is introduced as proposed?

Rationalisation of registrations

The additional cost is likely to prompt some semi-retired and part-time practitioners to hand back their registrations.

Whilst this will reduce the number of industry participants and thereby reduce competition, it may in part be a positive if it clears out practitioners who are not properly investing in their own skills, or their practice resources. However, there are clearly some practitioners who may be temporarily sub-scale, that we should not be seeking to push out:

  • Start up practitioners: new entrants who will add competition once they build up scale.
  • Practitioners that may be temporarily scaling back a practice to accommodate a work/life balance: in reality more likely to be the female practitioners that the profession needs to improve its diversity.
  • The next generation: senior employed staff undertaking a transition to partnership. Again these are more likely to include the female practitioners that the profession needs to improve its diversity.

Fees will increase

Most practitioners charge on the basis of hourly rates. At one stage there was a standard (albeit suggested rather than mandated) scale of fees, however the scale was scrapped following concerns that it might be viewed as anti-competitive, and practitioners have complete freedom to charge whatever fees they set.

Some practitioners will respond to additional charges by increasing their hourly rates so that in effect the additional cost will be passed on to creditors. However, practitioners will estimate the increases required, some will “overshoot” in the absence of the upper limit imposed by a realisations charge, whilst some will fall short – so will there will not necessarily be an equitable distribution of the increase.


Until recently there were two classes of liquidators: “Official Liquidators” and “Registered Liquidators.”   The Insolvency Law Reform Act 2016 removes the position of Official Liquidator, and with it, the previous obligation that all official liquidators had: to accept all requests to act as a liquidator absent a disqualifying conflict of interest.

If taking a liquidation is guaranteed to cost a liquidator $550 – on top of the various costs that they already incur in searches and similar, and in addition to their own time – then it seems likely that some liquidators now free to decline appointments will do so. For creditors, the end result may be that they are unable to secure a liquidator to act at all unless they are prepared to provide an indemnity to meet at least a part of the costs and/or fees that a liquidator will incur in taking on such appointments. Of course creditors will have the option of declining such requests, but if so there is the risk that some companies may never be wound up, living on as corporate zombies!

The Australian Taxation Office – which is a significant creditor of almost all companies – is the most active creditor, initiating more winding up applications than any other creditor, and therefore is potentially the most affected should registered liquidators decide to change their approach.

Where to from here?

Implementing an AFSA-style model – albeit with a realisation levy that would surely be significantly lower than 7% – allows us to side-step the risk of consequences that may impair diversity and competition, as well avoiding the risk of corporate zombies. Hopefully, at what is presumably an early stage of consultation, there is scope to bring alternate models into the discussion.