How does the Asian economic boom affect Australian insolvencies?

There is no doubt that the global economy is going through enormous structural change as the weight of global economic activity increasingly shifts towards Asia. The above diagram demonstrates that in 2012 the Asia-Pacific region together with the Indian subcontinent accounts for in excess of 36% of world GDP. Australia has benefited greatly from this structural change. Three quarters of Australia’s exports are to Asia. We have a similar dependence on Asia with respect to tourism and immigration.

Australia has just emerged from the largest resources boom in its history and this is largely as a result of the economic development of mainland China. Moreover the structural change seems to be permanent which means that Australia is in an excellent position for the foreseeable future.

In June 2013, Jones Partners commenced a major research project into the state of the Australian economy, businesses at risk and insolvencies. At a function announcing the launch of this project, Mr Phil Ruthven, Chairman of Ibis World spoke in glowing terms about the opportunities afforded to Australia by the Asian economic boom. See the video excerpt taken from the presentation to see what Phil had to say on the subject.

However there are risks that cannot be ignored. There is currently a rebalancing taking place as the mining investment phase draws to an end and it is unclear as to whether the domestic economy will pick up quickly enough to counter this investment turn down. The Jones Partners research project has culminated in a report entitled “Collapse Restructure and Renewal-The State of the Australian Insolvency Market” which will be released at a function to be held at The Institute of Chartered Accountants on 29 July 2014. The author of the report, economist Mr Chris Nadarajah will join an eminent panel including Ibis World this chairman Mr Phil Ruthven and the Commonwealth bank’s chief economist Mr Craig James to discuss the report.

It is also important to note that this economic boom does not make Australian businesses immune from failure. The increased pace of the Australian economy as a result of this boom clearly leads to many more opportunities and perhaps greater entrepreneurship (which means risk-taking) and on its own this could increase rather than decrease the number of insolvencies. This is because it has been clearly demonstrated that insolvencies are more dependent on the quality of management than the state of the economy. Of course this does not mean that the state of the economy is not a major contributor to insolvency levels. Our research shows that the level of economic activity has a close correlation with the numbers of insolvencies.

The major macroeconomic contributor to insolvency levels is economic structural change which is clearly what is happening in the Australian economy as a result of the boom in Asia. We have already seen most of Australia’s manufacturing go offshore and we are now seeing external pressures on many other industries that would otherwise seem to be immune. Accountancy services for example are now being increasingly outsourced to places like India.

Overall Australia will clearly reap immense benefits from the growth in Asia however there are both downside an upside risks. The changes taking place in the Australian economy will clearly have an adverse effect on some industries and this will have a consequential increase in the number of insolvencies in those areas.

Other related articles:

Rates of Currency Exchange – Impact on Australian Businesses

Is Management the key driver of business success or failure?

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Void Transaction Recoveries in Bankruptcy

Bankruptcy Trustees have a wide range of powers to recover property for the benefit of creditors. This power is not just limited to realising divisible property that was owned by the individual at the commencement of the Bankruptcy or which is acquired during Bankruptcy and prior to discharge. The provisions in Division 3 of the Bankruptcy Act 1966 (“the Act”) allows a Trustee to effectively ‘clawback’ transactions which resulted in the disposal of the individual’s property taking place prior to the commencement of Bankruptcy.
If certain criteria which respect to the transactions are met, the transaction may be void against the Bankruptcy Trustee and they may seek to recover the dissipated property for the benefit of creditors. There are three (3) categories under which transactions may be clawed back by the Trustee:

1. Undervalued transactions (Section 120 of the Act)

An undervalued transaction is a transfer of property (which includes a payment of money or transfer of ownership) which is below market value. Bankruptcy Trustees may attack such transactions as being void if they occurred within five (5) years of the commencement of Bankruptcy. The effect of this provision is to make the transaction invalid and allow the recovery of transferred property for the Trustee to realise its true market value. In this regard, the Trustee would need to repay any consideration given by the transferee for the transfer.

Certain transactions are excluded from the avoidance provisions and recipients may also be protected if they acquired the property in good faith and provided market value for the transfer.

The most common transaction as Bankruptcy Trustees we see generally occurs in this category where the individual may seek to transfer his or her interest in real estate to the spouse or other family member for nil consideration. Alternatively, another scenario which frequently occurs is when the family home that is jointly owned is sold and the net equity is subsequently used to buy a property solely in the non-bankrupt’s name. Regrettably both types of strategies within the timeframe will most likely fail and it can then cause further stress for the individual and family members.

2. Transfers made to defeat creditors (Section 121 of the Act)

Where it is shown that the individual transferred property prior to Bankruptcy and the primary reason for the transfer is to prevent such property from being available to his or her creditors, the transaction may be void. To prove this intent, the Bankruptcy Trustee merely needs to prove that at the time of the transfer, the individual was, or was about to become, insolvent. It is important to note that a Trustee may seek to recover property transferred under this section occurring at any time prior to Bankruptcy.

One important note here is that the inability of the individual to produce records to demonstrate that they were infact solvent at the time of the transaction is usually the aspect where most individuals fail to meet the test. In such circumstances this will strengthen the ability of the Bankruptcy Trustee to make a recovery in relation to such transaction.

3. Preference payments (Section 122 of the Act)

These are transfers or payments made, during the six (6) month period leading up to the commencement of the individual’s Bankruptcy, to an unsecured creditor which results in them receiving a preference, priority or advantage over other creditors.

Creditors who act in good faith in accepting payments are protected under these provisions unless they knew or had reason to suspect the individualwas insolvent. Therefore genuine attempts made to recover monies in the ordinary course and without knowledge of the individual’s financial position will generally be a satisfactory defence. Obviously when payment or instalment plans are entered into as part of the recovery efforts this can strengthen the possibility of recovery by a Bankruptcy Trustee under this section, particularly in circumstances where there is communication between the parties pertaining to the financial position of the individual which we find is routinely required as part of considering a payment plan.

In short, these recoveries demonstrate a few key points:

  1. Asset protection generally will be ineffective when the individual is already on the financial slippery slope and by endeavouring to re-position assets the individual and transferees are quite often worse off because of the additional financial and emotional costs that are then required to deal with in defending a Bankruptcy Trustee’s claim;
  2. Creditors acting outside of the ordinary course of collecting monies due to them need to be mindful of the possibility for clawback if an individual is subsequently declared bankrupt; and
  3. Above all, it is important that competent professional advice be sought by individuals in particular when attempting to deal with divisible assets when they are in financial difficulty.