Thousands of insolvent businesses could be saved with new safe harbour laws, says liquidator

Around one-third of businesses liquidated could be saved and billions of dollars recovered for the Australian economy if the government adopts draft safe harbour recommendations from the Productivity Commission, according to registered liquidator Sean Wengel.

Wengel, an insolvency principal at financial advisory firm William Buck, this morning told SmartCompany the safe harbour provisions recommended in the Productivity Commission’s draft report on the barriers of setting up and closing a business have the potential to save up to 3000 insolvent business from being liquidated.

The recommendations would see a provision for a ‘safe harbour’ to allow company directors to explore restructuring options without personal liability for insolvent trading, which is currently a significant disincentive for directors.

“The current insolvency trading laws essentially incentivise terminating a struggling business rather than encouraging its resurrection,” Wengel says.

Wengel says when a company director realises a company is trading as insolvent they have two options—appointing external administrators or shutting down.

But he says an external administration rarely helps turnaround an insolvent business and typically triggers defaults on contracts and creates a stigma for the business and its directors.

“Lots of the company’s value is lost when it enters external administration,” says Wengel.

“It’s fair to say a large majority would prefer to save their business.”

As a registered liquidator, Wengel says directors usually look for restructuring help “when it’s all too late” because of fear of personal liability.

“They’ve pushed it on for too long and they have no choice but to appoint me as liquidator. But if they’d come in 12 months prior to work on a solution to save the business, a lot would be much happier with the outcome,” he says.

The new provisions are slated to provide directors with a limited period of time to seek restructuring advice to find a workable solution for a business and avoid any personal liability in doing so.

They include four parameters that must be met by directors:

1. Directors must maintain accurate financial accounts;
2. Directors must seek quality advice from qualified restructuring advisors;
3. Directors must come to an outcome that “best serves” creditors and company members; and
4. Directors must ensure they diligently pursue the restructuring effort.

Wengel say the recommendations have been considered for a number years, but he feels introduction of safe harbour provisions has gained more momentum with the release of the Productivity Commission’s draft report.

“These laws are likely to be introduced and should be introduced in the near future,” says Wengel.

“In terms of dollar value to economy, there’s potentially billions of dollars of deficiencies realised when companies enter external administration,” he says, referring to Australian Securities and Investments Commission figures that show deficiencies (liabilities exceeding assets) totalled around $11.5 billion from insolvent companies last financial year.

“What would otherwise have been called ‘dead money’ could have been turned around by businesses staying alive … This could have a major impact on future budgets,” he adds.

The government is calling for submissions relating to the draft report’s findings.