Increased insolvencies call for greater collaboration

Recent data from the Australian Securities and Investments Commission (ASIC) has proved what many of us suspected – that insolvencies are on the rise – in some industries almost threefold.

With most Covid-related business subsidies and protections a thing of the past (at time of writing), it is now clear that insolvencies are on the rise. According to ASIC, 305 NSW companies entered external administration or had a controller appointed in September 2022. This figure back in September 2021 (the height of a Sydney pandemic lockdown) was 109.

Reasons for the increase in insolvencies include:

• the Australian Taxation Office resuming enforcement of federal taxation debts

• government Covid stimulus and protection measures (such as the 6-month period for compliance with a statutory demand) having ended

• increased costs, supply chain issues and labour shortages in the construction sector.

Implications for government agencies

Increased insolvencies create more pressure on government departments, given the extra workload this creates.

Often agencies and insolvency practitioners feel that they have competing interests, however to ensure best possible outcomes are achieved, there are some ways to change this.

1. Consider funding insolvency professionals for private enquiries and litigation. Administrators and liquidators often work unfunded which means they have limited ability to engage lawyers or incur disbursements in pursuit of claims which might ultimately result in a dividend to creditors. A director is more likely to return funds or property to an entity that has litigation funding or where a creditor is working with the insolvency practitioner to pursue the debt.

2. Be active at creditor meetings. Ask questions, query what investigations have occurred to date and what avenues of recovery a liquidator/ administrator is willing to explore.

3. Where possible, provide information to the insolvency practitioner about the known affairs of the company. Often when administrators/liquidators are appointed they are expected to identify potential claims the company might have on limited information and in circumstances where the company’s books and records are incomplete or nonexistent.

4. Have discussions with other creditors. Where creditors group together so much more can be achieved. Creditors can vote together, pressure for investigations/claims to be pursued or even form a committee of inspection.

5. Authorise key people to consistently deal with insolvency practitioners, consider creditor proposals and vote at creditor meetings. This will allow government departments to streamline the way insolvencies are dealt with, adapt quickly to evolving situations and develop depth in their capability across this space amongst their teams.

Liquidators and administrators have an obligation to act in the best interests of creditors. Key people within government departments can ask questions of appointed liquidators and/or administrators (together with lawyers appointed by the department) to help them make informed decisions. However, be sure to read the creditors’ reports, question the insolvency practitioner’s course of action and question their remuneration if it appears excessive.

Other considerations

When faced with a debtor who enters administration, liquidation or is facing payment or cash flow difficulties, the following can also be considered:

• whether the debt will be treated as a secured debt (such as a mortgage, caveat or PPSR registration), in which case enforcing that security is the best way to recover without concerns of any clawback

• whether a personal guarantee can be relied on to pursue recovery separate to any claim that can be made on an insolvent corporate entity

• whether another party against whom action can be taken is jointly liable for the debt without the need to rely solely on any liquidation dividend or payment from a voluntary administration

• where a department believes a debtor may be insolvent, two key considerations arise:

  • firstly, any payment from the debtor to the department up to six months before the liquidation might be a preference payment and may be required to be repaid to the liquidator on demand. Defences against this include subjective knowledge of indicators of insolvency and whether a reasonable person in the department ought to have thought the debtor was insolvent at the time of payment

  • secondly, where the department believes a debtor may be facing cash flow difficulties, extending further credit may be unwise. Alternative terms such as cash on delivery, additional security or a personal guarantee can be put in place. This will provide an alternative means of recovery and also some protection where funds received are deemed a preference payment.

• if the department is concerned about payment, it should ensure any contract with the debtor is strictly complied with. Contracts often contain a provision which allows one party to terminate the contract where an “insolvency event” has been committed by the other. Any wrongful termination or failure to honour the terms of the contract could give rise to a claim for damages against the department. Advice on these provisions can be sought before taking action

• if a department wishes to continue supply arrangements with a company that is in liquidation or administration, a new agreement with the administrator or liquidator will usually be needed. Typically, the liquidator or administrator becomes the contracting counterparty, which gives rise to a number of considerations on which advice can be sought

• parties likely to default on their payment obligations may try to create a dispute or allege breaches of agreements to counter their obligations. Remember that although the department has obligations as a model litigant, non-government entities are not subject to the same standards

• while rental protections for commercial tenants under the Retail and Other Commercial Leases (COVID-19) Regulation 2022 ended on 30 June 2022, some protections still apply to eligible tenants for breaches between 13 July 2021 and 30 June 2022. This will also affect a landlord’s right to recover under any guarantee.

In general terms, moving quickly and decisively is the best way to recover in all debt recovery activities.

Authors: Gavin Stuart and Gilbert Olzomer