The predicted high number of business-related bankruptcies caused by COVID-19 in the next six to 12 months may motivate the government to consider reforming corporate and personal insolvency laws.
This is the view of leading insolvency lawyer, writer and commentator Michael Murray, who shared his insights as guest speaker on Jirsch Sutherland’s recent Dispelling Bankruptcy Myths webinar.
Murray also believes the coming ‘insolvency tsunami’ will help change the negative stigmas associated with bankruptcy, particularly that bankrupts deserve to be punished – a mindset that started in Roman times and has persisted into the 21st century.
“Bankruptcy still has that tone of commercial immorality and wrongfulness, if not quite criminality, but it’s all your fault if you went bankrupt and you should serve your term,” explains Murray.
Since bankruptcy was first created in Roman times to control fights about unpaid bills, bankrupts have faced harsh and lengthy punishments such as being sent to a debtor’s prison and enslavement to the creditor. “Bankruptcy was considered criminal behaviour,” says Murray.
Bankrupts have also suffered from numerous stigmas including the perception they are negligent, incompetent or wilfully used bankruptcy to escape repayments to fund a life of luxury. Murray cites Alan Bond and Christopher Skase as continuing this stigma, escaping creditors and continuing to enjoy high-end lifestyles. [Bond was sentenced to seven years in prison for his role in siphoning $1.2 billion from Bell Resources to Bond Corp but only served four years.]
According to Murray, it’s these stigmas and the long-held bankruptcy belief of ‘do the crime do the time’ that are hampering changes to today’s bankruptcy laws.
Murray has long championed bankruptcy reform in Australia; he played a key role in shaping the Insolvency Law Reform Act 2016 and regularly advises on law reform and policy.
The current period between bankruptcy and discharge of three years and one day will seem severe for people who went bankrupt as a result of the crisis, adds Murray. “A couple of years ago the government tried to reduce the period of bankruptcy from three years to one and there was a lot of opposition to that.”
In its current state, Murray supports bankruptcy as a viable option, enabling people to “wipe the slate clean and get on with their lives”.
Reasons for bankruptcy
Murray says most bankruptcies arise from overuse of credit, bad luck or poor health and are handled by an official trustee. “The majority of bankruptcies are consumer related, with business-related bankruptcies making up about 25 per cent. Registered trustees take the more difficult ones, about 20 per cent.”
Today’s bankruptcies are more complex and complicated, Murray adds, with assets, trusts and family law claims with litigation often required – which call for a registered bankruptcy trustee to run the process effectively.
However, with the significantly higher number of people predicted to go into bankruptcy when the government relief measures end, a trustee may be difficult to secure. “There are only 198 registered bankruptcy trustees in Australia,” says Murray.
Like all of Jirsch Sutherland’s bankruptcy trustees, Partner Chris Baskerville supports a reduction in the period of bankruptcy and an easing of penalties in cases of “no-fault” bankruptcy.
“Without the ability to release someone from their debts, there would be little incentive for entrepreneurial activity, the cornerstone of most democratic societies that drives economic development,” says Baskerville.
“We’re hoping that the many no-fault bankruptcies caused by COVID-19 will help remove the stigmas associated with this process of closing a business.”
The importance of seeking advice early cannot be stressed enough, Murray says. “We don’t want to see good people miss the opportunity to restructure their affairs. Call at the first sign of distress. You have more options and have better results.”
Common bankruptcy questions:
What are my options for avoiding bankruptcy?
A Personal Insolvency Agreement, also called a Part X Agreement, can help you avoid bankruptcy.
An appointed Controlling Trustee can secure a PIA by negotiating with your creditors to secure a binding formal agreement for debt repayment that suits your financial situation. To repay creditors, the trustee can decide whether to dispose or liquidate some or all of your assets.
Creditors are often accepting of the agreement as they realise they may recoup more than if you become bankrupt. With a PIA secured, creditors can’t force you into bankruptcy and the stress associated with them pursuing payments is eased.
I’m not yet insolvent so can a restructure help me avoid a PIA or bankruptcy?
A qualified insolvency practitioner can advise on whether a restructure of your business could improve your financial situation. A restructure involves reducing debt, often by recapitalisation, cost cutting, and selling assets, and negotiating a feasible payment plan with creditors.
An insolvency practitioner also creates a restructuring plan to prevent job losses, contract terminations, destruction of goodwill and asset diminution, and ensures you stay compliant.
Should I borrow to pay creditors?
When you borrow to pay creditors, you still have a debt to repay, with interest, to your new creditor – a bank or a non-bank lender – which usually charge high interest rates.
Unfortunately, many borrow on another card to fund repayments and find themselves in an inescapable merry-go-round of credit card debt. It isn’t surprising that 50 per cent of bankruptcies are caused by credit-card debt.
It’s largely for this reason that we usually advise against paying debts with credit cards and recommend other options that don’t build on your existing debt and secure feasible payment plans with creditors.
What happens if a PIA isn’t secured?
If you’re unable to secure a PIA, your only option is bankruptcy, which releases you from almost all of your debts and allows you to make a fresh start.
If the stigma of bankruptcy is delaying your decision to start the process, keep in mind that it is a legal, orderly way to achieve a best outcome for insolvent partners and sole traders. Also, with an appointed bankruptcy trustee in charge, liaising with your creditors and putting a stop to their repayment demands, many experience relief from the associated stress and pressure.
Your bankruptcy trustee will sell your assets to repay your creditors, and if your income exceeds a set amount, you may be required to make payments.
When is the right time to call an insolvency practitioner?
Sooner rather than later.
Ideally, the best outcomes are achieved when you contact us at the first sign of financial distress, largely because you have more options at this point.
“Becoming bankrupt is not a sign that you’ve failed or thrown in the towel – it’s a legal, viable option for providing the best outcome for your creditors and yourself. We’ve found it’s usually the more experienced business owners who turn to us for advice at the first sign of trouble to explore their options,” says Baskerville.
For any questions about personal insolvency go to our website or contact us on 1300 547 724.