CHOICE membership

Insolvencies, Administration, and the Fallout

It is not uncommon for senior management of troubled companies to keep financial problems close to their vests in the hope that they can trade through and out of their problems so long as they are solvent. Sometimes they have what they hope are just temporary cash flow problems and a good customer base, and other times their sole goal is to take care of themselves before the administrators are called in.

A strength and weakness in Australian law is that solvency is a binary switch. A company is trading or it is insolvent, there is no middle ground that it can be saved under court supervision although some administrators might have a look-see, but they are paid as administrators not company saviours.

Compare our laws re administration to the US Chapters 7 and 11 bankruptcy for example. Chapter 11 leaves the investors (shareholders) to usually be wiped out and suppliers get burnt for cents on the dollar so sometimes also wiped out, but the employees and company often survive, although sometimes Chapter 11 is used for suspect purposes.

AFAIK the biggest Chapter 11 was General Motors. In cases Chapter 11 has also been used for union busting and shedding pension obligations as well as forcing a restructure of debt.

4 Likes

If nobody was charged over this then our corporate laws and their enforcement really need some work! Yes, they need a lot of work regardless, but this - and the case of Bissett changing its charging process - seem unconscionable! A case of taking customers for a ride when you already know you’re sinking.

That’s true, and in 90%+ of cases they are wrong. I would suggest that those executives of companies who decide to change their charging practices in such a manner and then go into administration should be held liable personally and severally to the affected customers.

I agree, and this does make for some large problems to become mammoth problems when that switch is used. The US offers one alternative, that is worth considering. As you pointed out, that path can be and has been misused, so while our current laws are not perfect we would need to examine alternatives very closely before adapting their positive elements to Australia’s needs.

5 Likes

The pain of insolvencies has long been distributed unequally. Share holders, owners and senior managers have no legal excuse for not knowing the risks or true financial prospects/status of an enterprise. The customers and employees have little prospect of knowing the relevant facts until it’s too late.

Suppliers who are also at risk have some knowledge, if only through not being paid on time. They are usually the first to act if the enterprise has not done so.

Agree it is wise to consider very carefully any change before it is enacted. It is curious that the customers who are in the greatest position of ignorance are also in the least position of entitlement.

Although the customer can choose to not make payment until the goods are on the counter or able to be in their possession, we continually accept terms that require payment in advance.

Is what needs to be changed in law, ahead of all else in the order of precedence of liquidation, customers who have paid in advance are entitled to either the goods and services promised, or compensation from the liquidation ahead of all else?

After all the entitlement of a company or entity to exist and operate is ultimately subject to the will of the voters as exercised through the parliament. So should the voters not come first?

One simple change that could make all others more prudent. Too many small businesses and enough larger ones fail. What cost to the economy of these failures compared to the benefits of the few that succeed? It would be of value to know the annual comaparison.

While a business can claim losses arising the average consumer gets no such benefit for the loss which is treated no different to a theft. Perhaps also customers should be entitled to claim from the ATO a reduction in pre tax income for any such loss?

1 Like

I suspect you are not a direct shareholder although indirectly own shares through your super fund. Shareholders are on the sidelines excepting when their votes are required for electing board members, approving appointment of auditors, casting their opinions on executive pay, and so on.

Individuals as well as super funds have some culpability by often mindlessly electing and re-electing board members that are often no more than old boys clubs taking care of themselves, but.

Investors (shareholders) should have done some diligence prior to ‘investing’ and understand overall risks for a business, but there is only so much that can be learnt of what goes on in the board room and executive floor. Have a look at amaysim’s share price as an example. The analysts loved them and touted them, and then the price collapsed when reality hit and the rose glasses came off.

I disagree with your lumping those who are looking from the outside with the owners/managers who are insiders, re ‘legal excuses’.

When have we voters ever come ahead of business, our esteemed pollies, and their all-important political donors? We get lip service and outright bribes (that are not technically bribes) ramping up before elections but how often has the outcome been ‘better governance’?

I am with you that unfulfilled customer orders should be at the head of the queue, then the employee’s outstanding super, wages, and entitlements paid out, and only then distributions made to the secured and unsecured creditors. I’ll not hold my breath because government would claim anything that would reduce ‘security’ to lend to business would impact the all important economy, and thus business and the all-important donors, and thus the pollies.

A US-centric stat is that only 30% of new businesses fail in their first year but only 25% make it 15 years. Your question can only be answered by taking the aggregated loses of all of the failures from mum and pop shops to companies like HIH or Enron to see if costs of failure exceeded the profit of successes. If they did one would need to question the global economic system as well as wondering why it survives. I’ll not go there as it is over my grade no matter how tantalising a topic, other than to suggest accounting for the failure rate is built into the system as the cost of money (eg interest rates and ability to attract capital).

That would seem obvious if not just reasonable to anyone but a pollie who will have the view that government should not be protecting us from business failures as it is a free market system, government guarantees of bank deposits notwithstanding.

2 Likes

The challenge with insolvencies, is a company can operate with a loss (which may companies do from time to time) as they can rely on bank overdrafts, loans or revenue raising to cover these losses. These forms or revenue cover can ensure the long term survival of a company/business and ride it through tough times (say one reporting period where a loss has been reported.

Take Qantas for example, it has reported losses for many years up until recently and was able to fund its ongoing operations through other revenue streams. If Qantas was unable to do this, it could have suffered the same fate as Ansett.

When a company can’t meet its financial obligations and avenues to fund losses has dried up, then it become insolvent. Most businesses also assume that credit won’t dry up and will continue as business as usual until it finds out the pot has run dry. When the pot does run dry, it has an obligation to then report and take the necessary steps into insolvency.

This can also happen to a fashion in Australia. The first function of the administrators is to determine through restructure, cost cutting etc if the business can survive. They also try and find buyers for the ongoing business. Finding a new owner is difficult as it could also be an albatross around the new owners neck. Often only profitable parts of a business are cherry picked by buyers and become continued operations.

If this is not possible, then the next steps occur when the company ceases trading and is liquidated.

ASIC has information about business insolvency requirements and processes in Australia.

My understanding is the US system provides protections to those who take time to restructure or other, to try and make the business profitable again or to allow ongoing operations with debt management processes in place. Such protections don’t exist in Australia.

2 Likes

And so be it. It’s what happens next that matters.

Just because ASIC has requirements it oversees does not make this right or suggest history has delivered anything fair or reasonable to the customer.

Personal experience in a past life demonstrated this. If you are a big corporate buying from another there are mechanisms that you can use to protect you against risks of suppliers suddenly going under. Bank guarantees, security of title provisions, taking over of incomplete works and negotiating with the receivers are all options. For the little customer as are most consumers there are no such mechanisms and no way to access them in a reasonable way.

It would seem reasonable for the rest of us to have something better than what is now the circumstance. Perhaps it is to by consumer legislation ban payment in advance for purchases? Perhaps it is to put a trustee between the supplier and customer so the funds do not pass until the goods are received? Or as my previous suggestion put the customer as the first to be settled, in full if possible?

It would seem it is in insolvency as it is for other consumer concerns. In the need to reduce carbon footprint, the average consumer is wearing the risk and costs, while the other sectors in business, transport and agriculture skip away with no targets.

p.s. While I have some super, making a loss or gain to my benefit at the risk and loss to others because one of the investments fails may not excuse poor management nor excuse morally the debts owed to the failed enterprises employees and customers.

Some thoughts…

While these seem good solutuons, they would be impracticable and would stifle the economy.

There are many industries that rely on advance payment for purchases. Take the home building industry for example. A builder needs to ensure that the client has sufficient funds to ensure that building work can continue. If the builder held all the credit, the costs of building would increase substantially as the builder/builder’s insurance would factor the risks of non-payment for work in the cost of building. Many builders would fold as they wouldn’t be able to obtain enough credit to dover all extenses until the tranche of work has been completed and then funds released to pay.

Say for example that a small business requires 1000 of a particular item specifically manufactured. Should a larger company take credit from the small busines and hope that the small business at the end if the day pays for the goods after they are manufactured? If they do, then the credit costs will be passed onto the small business and then to all of us, the end consumers.

Trusts are already used by the legal profession when settling home purshases/conveyancing and parts of the travel industry. Rolling this across the economy would be a huge burden and would increase transaction costs as it requires management and regulation. There have also been issues with trusts in the past as well and they are not fail safe.

An individual customer liability is usually low compared to other creditors. One has to remember that companies are also people and when a cojpany is not paid, it can affect a significant number of people, including their employment security. I expect that the impact on the economy from a number of individual customer losing a small amount od money compared to a business losing the same combined amount would be less. There is also potential of a chain reaction that the company holding credit collapses exposes even more companies to credit default and financial pressure.

One can minimise risks when purchasing items to try and pay cash on delivery rather than cash on order. I anticipate that a lot of business won’t accept COD as they possibly have been burnt in the past by customers that change their mind or don’t pay.

It is also easier to chase bigger credit amounts than smaller individual amounts…because the cost of chasing the owed monies may he more than the debt being recovered.

It appears ‘the feds’ are a sleepy sort and trading after liquidation (or whatever) could be happening. At the end of the day the customers are out of pocket and even if the owners are prosecuted it is unlikely the victims will be anything but victims of the business as well as of the legal system.

1 Like

I still have an unused Ansett ticket somewhere - Adelaide to Melbourne Return. I saw it some time back and reminisced slightly over the days of carbon paper, real printers with hammers, and other things that are now extinct, like corporate pride and customer service …

Of all the sad stories in business Dick Smith is the one that really hit home to me. From many years as a true electronics hobbyist store where you could buy discrete components to build circuits, to kits, and in most stores wind the knob on a Yaesu or the like (I think that was the brand they favoured? it didn’t matter - real radios and staff who knew how to call CQ ! :wink: ) slowly but surely over the years (post Dick’s leadership) descending into being a purveyor of cheap consumer crap from China and scarcely a 555 timer in sight …

Some people enjoy surfing the waves, some enjoy the swim, but one thing seems for certain - we’re all headed for the S-bend …

3 Likes

Sorry for not sharing your admiration, but Dick Smith was essentially a rip off (if not an honest licensee) that was Tandy’s Radio Shack Australia. For a time thre was even a Tandy Australia. To make it more confusing Tandy’s original business was leather working for hobbyists if I remember correctly. As with Hungry Jack and Burger King over the years there could reasonably be confusion over the brands and companies. No more and no less, and emulated their fall as well as their rise following their business plans.

Dick Smiths products were the (Tandy) Radio Shack Optimus house brands and his System 80 was the Radio Shack TRS-80, affectionately known in the US as the Trash-80.

In the US Radio Shack already headed south by the late 1970’s and the hobbyists shops were the vestiges of Lafayette Radio that stayed true (somewhat like our Jaycars).

A businessman for sure. A trail blazer? I think not. In the end he took the money and ran like most others.

4 Likes

Dick Smith (the person) exited the stores in early 1980s.

Unfortunately many of the social media crowd think he was responsible for the more recent shift into appliances/electronics, which he wasn’t.

2 Likes

I loved the shops, not so much the man himself, and while I know he was first and foremost a businessman, on a scale of “Saint to Gerry Harvey” he’s probably the median-ish value :slight_smile: In the sense that he copied the US formulae it’s a bit sad, but people in this country have done that for a long time and continue to (it was known as the trash-80 here too - was more of an S-100 person myself …).

I remember going to one of the original Burger King outlets at Darlington SA as a young child - a fast food establishment unrelated to the US chain (other than it was started by an American who I’m sure never heard of nor ripped off the name !! :wink: ) and the reason they launched the franchise in Australia as Hungry Jacks. Sadly, years later, a Hungry Jacks arrived at the same location. Never could stomach their ‘food’ …

3 Likes

Perhaps he took the money, and moved on to other things? That’s business and good for your sanity.

As per @phb DS left a vibrant successful business. Unfortunately to an owner with little nouce in the niche market.

Dick was first to Brisbane in the early 1970’s. Jaycar was no where to be seen believing the world ended at Spencer Street Station. Nothing against the Jaycar of today.

What follows is down to the new ownership under Woolies, and their later discard.

3 Likes

Woolies DSE just followed the US Radio Shack model abandoning the hobbyist market and evolving to selling consumer rubbish to uninformed consumers as a bigger slice of their business every year. Dick emulated Radio Shack, and Wollies DSE emulated Radio Shack, right down to closing their doors. Why? By the 1980’s and beyond they stood for nothing you could not buy anywhere else from better informed salespeople at lower prices.

When we got off the plane in 2002 DSE was recognisable as a Radio Shack for better or worse, and it was apparent how quickly they were collapsing like the US Radio Shacks were at the time.

4 Likes

It’s always useful to have an alternative view point.

If economic theory was simple and predictable we would all be billionaires. Changing the status quo may not be impracticable, just challenging. No different to many other changes that receive similar contrary argument only to eventually succeed and deliver right or goodness.

The economy is stifled for many reasons, some arguable, but most are just economic theories. Otherwise every GFC would be evident in advance to all.

I’d argue there is still a need to address the inequity of outcomes for the very day consumer that can result from failure of any business.

Larger scale agreements including contracts with builders are regulated and there are standard forms of contract. BCIA in Qld for instance. There is no need to change this.

For an elementary store gift card of $100 the loss if you earn after tax $50,000pa, (More than many of us) is perhaps minor? 0.2% for the maths.

But on 10,000 customers it adds to $1,000,000 and is significant and deserves due acknowledgement. For a big business on a $500M project ( not small but not uncommon) it’s the same as loosing $1m on a single deal. Careers are made or lost on less and sums of this value are not on a handshake or one page order. While painful there is always a recourse.

Should consumers accept less? I’d argue not!

3 Likes

The original purpose of the ‘limited liability company’ was to allow investors to own stock in a company without risking their entire life’s savings, home etc.

Of course, for a small business-person today the banks want to make sure they have access to your entire life savings as well as those of your extended family!

On the other hand, a company’s shareholders are expected to be the first to lose in troubled times - up to the value of the shares they have purchased and no more! When executives of a company are encouraged to ‘have a stake’ by being given share options in their remuneration, this encourages them to keep trading for as long as possible and to get rid of their shares before anyone else knows that there may be trouble. Illegal, but you can pretty much count on one finger the number of executives that have gone to jail in recent years for insider trading.

We have some laws that are intended to protect consumers and the average ‘blind’ shareholder, but they are being regularly weakened - as are the regulators. I agree with other commenters that governments - by protecting large corporations at the expense of individuals - are heading us all towards trouble. Governments worldwide have in seeking power at any cost forgotten the meaning of their remit.

3 Likes

The coalition appears to be helping small business survive by a modification to administration laws. It will only affect companies < $1 million, but looks like a local version of the US Chapter 11 that usually ruins shareholders but allows a company to trade out of trouble, creditors willing.

3 Likes

To whose ultimate benefit?
This reference suggests a difficult and expensive solution when a company files for Chapter 11 protection.

The Aussie low cost minimalist solution for small companies seems very different. There is no mention of how if at all there will be any regulatory or judicial oversight.

Perhaps the Aussie Ch11 lite will be a great solution.
But if in the end even more good money is lost through poor decisions and doubtful business practice a while new world of woe for those caught out.

It will be an interesting test of political will assuming it requires the usual legislative reforms.

3 Likes

It is a call. If the creditors are willing to support the owner continuing business, why not give them a go? It is at the end of the day their skin in the game to see if they and the owner can ‘pull it off’ or lose it all.

As it is today the administrator essentially does a cold accountancy exercise and tells everyone what they get.

Who might benefit? Creditors, the owner, and everyone who keeps their job. Who loses? Ideologues who do not like the idea and who else? People are allowed to gamble. The creditors see the odds and books, and are not often naive, unlike many gamblers.

3 Likes

I think is is a reasonably good move if they get the legislation right…this intention seems like it many be:

Eligible businesses will have 20 business days to come up with a restructuring plan with a small business restructuring practitioner, and creditors will have a 15-day period to vote on it. If at least 50% of creditors by value endorse the plan, it will be approved and will bind unsecured creditors.

Just hope the business restructuring practioner is well defined and that they have good professional indemnity insurance. Maybe if the plan is voted up, the creditors take on any financial liability risks…something which could also be added. The other thing they need to consider is oversight…allowing by a creditor or creditor’s representative.

4 Likes