Turning ideas of insolvency around
It’s time people understood the value insolvency professionals add to the economy, say industry representatives.
“You weren’t allowed to be bankrupt or insane.”
That’s how Brendon Gibson FCA describes a proposed register of New Zealand insolvency practitioners. A partner at KordaMentha since 2003, with insolvency experienced gained over two decades, Gibson is clear that this was not an appropriate way to regulate an increasingly important sector of the professional economy.
Gibson is the chair of the Restructuring Insolvency and Turnaround Association of New Zealand (RITANZ), which represents around 400 practitioners. The group last year reached agreement with Chartered Accountants ANZ to jointly accredit insolvency professionals and require them to meet training and oversight standards expected from members of a professional body (around 80% of those working in the insolvency space are chartered accountants, Gibson notes).
Since launch last year, 90 Kiwi insolvency practitioners have received accreditation.
“We are very pleased with that.”
But the industry remains largely unregulated in New Zealand.
“Anyone can be a liquidator, they don’t need qualifications, nobody vets them. Since the GFC we have had auditor regulation and increased director regulation, trustees, financial advisers… but the insolvency practitioner has none at all. And they are the ones who control the money, at the end of the day.”
RITANZ hopes to promote an insolvency regime that gives confidence to the investment and lending communities that, if things go wrong, there are experts following well-understood procedures. Nothing is without risk, he says, but New Zealand needs a “stable system, a credible system”.
“We see one of the key parts of a credible system being people involved in the profession who have experience and who understand and operate in an appropriate manner.”
Regulation not a cure-all
In Australia, the profession is regulated but that has encouraged the rise of the “pre-insolvency adviser”, who often is not, says John Winter, chief executive of the Australian Restructuring Insolvency and Turnaround Association (ARITA).
“They say ‘destroy all your books and records and take all the money away from your insolvent enterprise and you won’t be pursued’,” Winter says. “That message has resonated all too strongly in the market.”
“What we advocate is that much greater focus should be placed on that type of behaviour and the directors who are choosing to follow that advice.”
ARITA members sometimes find dodgy dealings as they unravel the financial affairs of collapsed companies, he says.
“One of our great concerns is that despite our members recommending action against over 10,000 [directors] per year very little of that translates as action against directors through the regulator.
“Over recent years, ASIC [the Australian Securities and Investments Commission] has focused on insolvency practitioners more than directors.”
New paths
What Gibson’s and Winter’s organisations share is a desire to educate the business community about the role insolvency practitioners play in promoting healthy businesses – either through restructuring them into profitable entities or recycling the capital captured in them when they can’t return to profitability.
The key word is there in the names – T is for turnaround. RITANZ and ARITA have a strong motivation to see businesses recover from financial difficulty.
“It’s not all about closing businesses down,” Gibson says.
“It is about maintaining businesses and turning them around from a difficult situation. It is about working with businesses to the extent you can to solve their problems – or having some form of insolvency process to ensure optimal value for the creditors and therefore as a going concern, if possible. Is it a receivership and a sales process or can you avoid that sales process? It is about solving problems.”
Winter agrees, adding that in order to turn a struggling business around, insolvency professionals need to be brought in early. Organisations should get advice when they start to find themselves under strain, he says.
“If you can’t pay your bills – as and when they fall due – there is little left to salvage. If , however, you can see bumps on the horizon and you engage professional advice earlier you are more likely to see a turnaround or a restructuring of your organisation that will ensure you return to profitability – if not maintain profitability all the way through.
“Unfortunately people tend to wait until far too late and formal insolvency mechanisms become the only way out. If you are simply hoping that your business is going to turn around it is unlikely to. Relying on luck, as a business strategy, is doomed to fail.”
Gibson acknowledges that no one likes someone else coming into their business and saying “it’s not working well, you need to change”.
“Technological change, market change, the dollar can go against them – all of those sort of things can lead to a business having financial difficulty,” Gibson says.
“From my experience, the earlier people come and say, ‘look, we have a problem’, the more options you have.
“A lot of the work that our members do is not public. A lot of work is done outside formal insolvency. But work is done inside formal insolvency and when that happens it is very public.”
Assisting business
In Australia, Prime Minister Malcolm Turnbull has championed three changes to insolvency and bankruptcy regulations aimed at stimulating more innovation in the economy (see an extended interview with Turnbull in the June issue of Acuity).
The first is a “safe harbour” provision that would protect directors from personal liability for insolvent trading if they appoint a restructuring adviser. The second is reducing the default bankruptcy period from three years to one year. The third is making ipso facto clauses, which allow contracts to be terminated solely due to insolvency, unenforceable.
Two of these are no-brainers, says Winter.
“The reforms to safe harbour and ipso facto laws are two of our [ARITA’s] key policies. Getting those policies up and running before we see another downturn in the economy is critical.”
Those changes will provide useful tools to help forestall a recession, Winter says, and help turnaround practitioners provide remedial assistance to businesses far earlier.
“There is no doubt there is a deep-seated aversion to risk taking in the Australian director landscape. A part of this culture is a tendency to push struggling businesses into a formal insolvency framework earlier than might be necessary,” Winter says.
“For us, the message around the transition to having a restructuring moratorium – because that’s what it really is – and how that is received by directors is the most important part of the law reform. If directors don’t embrace it fully, it will peter out.”
Bankruptcy reform is more contentious in Australia. Winter says there are mixed views across the profession.
“It is deeply inconsistent that we have a very laissez faire approach to business failure, particularly at the small end. You can close a business down and restart a similar business with little or no inhibitions,” Winter notes.
“Whereas if you are inadvertently caught up in a bankruptcy – your employer goes broke and you end up with debts – you can face a long time in the purgatory of bankruptcy.
“Nonetheless, a lot of our members deal with the worst [bankruptcy] cases – those who are trying to game the system or hide assets etc – so among professional insolvency practitioners there are those who say they need as many punitive measures as possible because they see such errant behaviour.”
Gibson says that safe harbour provisions for directors and a repeal of ipso facto regulations might also benefit New Zealand.
“There are questions about director liability in what’s known as the ‘twilight zone’ when a company is in financial difficulty and there are options to trade out. Directors are sitting there wondering if they are creating risk in terms of reckless trading and personal liability.
“Ipso facto clauses… Solid Energy went into voluntary administration and Genesis decided to use one of those clauses to get out of a supply contract. If we had ipso facto clauses where that can’t happen, that would have helped the voluntary administration process. Some debate needs to go on there but it is a very relevant debate.”
“But firstly, we [RITANZ] think there are fundamental issues in the way the industry works at the moment that we would like sorted through some form of regulation.”
Member perspective – Bruce Gleeson FCA
Jones Partners Insolvency and Business Recovery
Insolvency work requires adaptability and good project management skills, Gleeson says.
“Quite quickly we have to get across the specifics of an industry, or niche part of an industry, and at the same time get across regulation.”
This is challenging but also what makes the work enjoyable, he says.
There is also a sense of achievement in finding a solution for all stakeholders. He cites working with Wincrest Homes as an example of making a difference.
“The company was involved in the construction of residential homes across NSW. There was a slump in the number of building starts and the business had expanded into Victoria somewhat unsuccessfully. We were able to put into place a proposal that enabled those homes to be completed.”
It can also be rewarding to help people through personal insolvency.
“The ones that stand out are where the individual has come to us burdened with a lot of credit card debt and personal loans they have incurred, perhaps as a result of illness or some other type of breakdown.
“The bankruptcy enables them to get back on their feet. You can see a person who came to you as down and out, and couldn’t see a way through, change to somebody who gets back to a healthy state of mind and makes a useful contribution to society.
“They are the ones for me that are most pleasing.”
