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The government has been warned that simply adopting US-style bankruptcy measures could result in propping up businesses that should be wound up and short-changing creditors.
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US-style debtor-led bankruptcy arrangement risky, government warned
25 August 2020
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11 minute read
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As temporary insolvency relief measures come to an end on 24 September, the government is weighing up options to cushion the impact of a wave of businesses failures, including adopting parts of chapter 11 of the US Bankruptcy Code.
Chapter 11 allows debtors to continue controlling its business operations as a debtor in possession — a recommendation that had been recently put forward by the Australian Small Business and Family Enterprise Ombudsman.
However, CPA Australia business and investment policy manager Gavan Ord believes undertaking such major reform without appropriate consultation could lead to a number of adverse outcomes for businesses and creditors.
“The consequences of such changes would need to be carefully considered, and would see it potentially undermining the reasonable expectations of unsecured creditors that their interest and contractual entitlements be given paramountcy in circumstances of corporate distress and failure,” Mr Ord said.
“It risks sustaining essentially moribund businesses, which in an economic rational sense should be wound up, and what assets there are, redeployed for better purposes.
“It risks those individuals who commit wrongdoing, or at a minimum are incompetent, not being brought to account.”
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Likewise, Australian Restructuring Insolvency & Turnaround Association chief executive John Winter believes that while the government is hoping to manage a large number of businesses going under at the same time — as forewarned by RBA governor Philip Lowe — it would be unwise to rush towards a chapter 11 approach.
“More than anything, Australian culture doesn’t suit a chapter 11-style approach. As a society, we simply don’t believe in leaving the people in charge of a business that they led into financial distress,” Mr Winter said.
“We are more concerned to hold them to account for their failings that have left creditors — who are often SMEs, tradies, mums and dads — out of pocket.
“Chapter 11 is a quantum more expensive than our system. And it’s completely unfriendly to creditors. If creditors think they get short-changed now, a chapter 11-style system is going to leave them even further out of the money.”
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