Insolvency

“INSOLVENCY is not a dirty word” – Let’s change the insolvency conversation

By Andrew Spring MICM*

Similar to that classic Skyhooks anthem, Ego is not a dirty word, it is time to challenge the way that we think about insolvency and our interactions with those involved or associated with it.

Our world has changed so much this year, more akin to playschools Upsy Down Town, than to what we had been accustomed. And with many of us braving the likes of working from home or video conferencing for the first time, why not use this upheaval as a way to tackle some of the other result limiting stigma’s that exist –starting with insolvency. Certainly, the Government would have us believe that entering into an insolvency process is welcoming the apocalypse, but to follow that analogy, then perhaps we should consider the prophesying of R.E.M who claimed It’s The End Of The World As We Know It (And I feel fine). In reality, even the powers that be understand that an effective use of the insolvency regime is necessary in a vibrant and self-sustaining economy, evidence by the, as yet unlegislated, Insolvency Reform proposals. It is also important to remember that behind every insolvency appointment at the core of each stakeholder is people. In a very trying time, loading inappropriate community stigma’s onto the stresses already faced by many of us is damaging and dangerous.

So why the musical theme? Because music is universal. It does not judge you and it does not discriminate. Whether you like it or hate it, it does not mind. It is just there for you. Unfortunately, most things in life are not as pure, particularly in business and certainly in Insolvency. But in the spirit of opening our minds to the possibilities of changing our perspective on Insolvency, let’s strip back our insolvency process to its core. What is the insolvency process designed to achieve? Defaulting trade relationships have occurred since the beginning of trade itself. The consequence being largely determined by the community’s moral guidance – early insolvency law. For example, the Ancient Greeks, would force debt slavery on the delinquent debtor and his family until the debt was repaid by physical labour. In our own history, we utilised debtor prison as an encouragement for the defaulting party to pay what was owed. Certainly, times have changed as the morality of our community has determined that the imprisonment of debtors is no longer acceptable, nor perhaps, particularly effective ➤

as a means of collection. Today, there is more emphasis placed on the circumstances surrounding the default, noting that like Shakespeare’s Antonio, who was to lose a pound of flesh to Shylock when inclement weather delayed his merchant ships, sometimes the events that caused the default are beyond a person’s control – so the method to deal with the default should be proportionate. So why is this important when considering changing the insolvency concersation? Well, our laws have changed, but have our perspectives of those individuals that find themselves in financial distress also changed?

COVID has wreaked havoc on many Australian businesses, and the stigma associated with insolvency, particularly around fear and shame, could also play a destructive role in the coming months.

The stigma comes from the widely held belief that insolvency is for incompetent or crooked business owners, directors and individuals: it’s a sign you have failed and that your reputation will be forever tarnished. As a creditor, there is no doubt that

“COVID has wreaked havoc on many Australian businesses, and the stigma associated with insolvency, particularly around fear and shame, could also play a destructive role in the coming months.”

you have had these thoughts many times before. And like a broken watch, that is right twice a day, sometimes those opinions are vindicated. But how many opportunities for better outcomes are being missed because good people, through fear of the “label”, are delaying making the right decision to seek help.

This labelling overshadows the fact that insolvency is a legal and orderly way to save or wind up a business, or free an individual from debts. The fear and shame associated with insolvency often: l deters people from talking about their situation l stops them from gathering the appropriate information to make informed decisions l delays them from both exploring and actioning an early intervention procedure that can save their business or an insolvency procedure to wind it up with minimal losses.

Like all stigmas, the insolvency one thrives on lack of information and misinformation. So let’s review some basic facts to try and break through some of the barriers to talking about financial distress and insolvency within our community: 1. Many businesses go into liquidation and people become bankrupt due to no fault of their own, often as a result of circumstances out of their control, and not because they are incompetent or crooks.

Customer default, supply chain failures, regulatory reforms,

technological advancements and changing consumer behaviours are all difficult to predict and can derail a business. This year and, unfortunately, into 2021,

COVID-19 will force countless business owners and individuals into liquidation or bankruptcy due to no fault of their own; they are victims of a pandemic with no rule book and no end date in sight. 2. Entering into an insolvency process doesn’t necessarily mean it’s ‘the death’ of the business.

Insolvency isn’t just the process of liquidation and bankruptcy. It also includes legal and effective early intervention procedures that can save or turn a company around. This includes personal insolvency agreements, safe harbour, voluntary administration and the governments new small business restructuring process (to be legislated) which, appropriately utilised, can provide individuals and viable businesses that have had some “bad luck” with a second chance. 3. Australia’s insolvency procedures are legal processes designed to support an efficiently functioning economy, by reviving businesses that are viable and recycling the resources of those that are not. Used appropriately, the process minimizes economic loss in our society, and provides an opportunity for resources, human and tangible and intangible assets to be put to profitable use. 4. Talking to an insolvency practitioner does not make you insolvent, just like talking to your doctor does not make you sick. Insolvency practitioners are registered gatekeepers; their role is to provide transparency and business support mechanisms designed to protect the people involved in the business –owners, employees, customers and “Entering into an insolvency process doesn’t necessarily mean it’s ‘the death’ of the business. Insolvency isn’t just the process of liquidation and bankruptcy. It also includes legal and effective early intervention procedures that can save or turn a company around.”

creditors - even if that results in the closure of the business and recycling of its resources. 5. Understanding insolvency is good business practice and, as a company owner or director, it is their responsibility to act when their business is in financial distress. Refusing to consider or explore insolvency options is not a personal choice, regardless of whether it is driven by fear or shame - it’s bad business practice which only leads to further losses and personal asset exposure. As credit professionals, encouraging that conversation is also good business practice. 6. Delaying taking action on an insolvency solution affects many people: owners/directors are exposed to increased mental stress due to a feeling that they are letting everyone down, employees don’t know if they’ll be paid and whether they can support themselves and their families, creditors worry about the impact on their business’s financial position, customers are unable to meet their own obligations, and the families of all involved can be affected financially and emotionally.

As a credit professional, the fast paced nature of the world you now live in which includes, e-commerce, sms reminders and direct debits mean that the personal relationship between credit professional and debtor can be lost. Perhaps though, there is an obligation to find a way to interact and more importantly to learn the trends of each customer. Personal relationships will give you the power to identify exceptions and the platform to intervene.

When a debtor begins to deviate from the normal – asking “how their business is going?” is a gentle way to say you are noticing. And if they are unable to correct the deviation, then suggesting speaking to an external adviser may be enough for that person to raise their concerns to their own management. Any agitation may topple the first “domino” towards an action point that may get you paid, save a customer or at worst minismise any loss. It also sends the message that you are not scared of corrective action, even if that means a formal restructure, which chips away at the barrier to the debtor considering their options and engaging with a plan earlier rather than later. Remembering that while you don’t want an insolvency appointment to occur, you shouldn’t be scared if it does happen for the right reasons at the right time.

So in the immortal words of Van Morrison, Talk is Cheap, let’s begin the conversation and begin to unshackle our community when it comes to dealing with financial distress. Knowing that the key to better outcomes for everyone, is acknowledging and engaging with the Insolvency process early.

*Andrew Spring MICM Partner Insolvency Intel – powered by Jirsch Sutherland