Where does all the money go?

When news that former corporate high-flyer Rodney Price had gone bankrupt broke last week, the same question was asked in offices around Australia: Where did all the money go?

In his heyday, Price was one of Australia’s most aggressive corporate raiders, teaming up with Sir Ron Brierley to launch a string of takeovers in the 1980s. He was chairman of John Fairfax Holdings in 1997 and 1998 and later became chairman of fledgling pay television company Australis Media.

Price gave the impression of being very, very wealthy. His family’s agribusiness company Four Arrows owned a portfolio of properties worth around $150 million. Price flitted between Australia and London and points in between. In December last year, he shot to prominence after agreeing to buy a ritzy Sydney penthouse for more than $20 million.

No wonder Price’s bankruptcy was a shock to so many. His debts, many of which are owed to lenders in Britain, total more than $35 million. His assets include $1,000 in a National Australia Bank account and $2,000 with the Commonwealth Bank, and a few sporting club memberships. How could such as seemingly wealthy man lose so much, so quickly?

The collapse of Gold Coast entrepreneur Matthew Perrin into bankruptcy earlier this year was similarly mystifying. In September last year, Perrin and his wife Nicole were valued at around $150 million. Late last year, he was reported to have pocketed around $50 million from the sale of his stake in software company RuleBurst, which was sold last year to IT giant Oracle for $150 million.

Yet by early March, Perrin’s empire was down to $30,000 in cash, a $200 watch, $3,000 worth of clothes and $16,000 in super. His debts, which were around $28 million in total, included $1.62 million of gambling debts.

So how do some entrepreneurs crash so hard and fast? To find out, I asked two bankruptcy trustees, Jim Downey of Melbourne accounting firm Downey & Co. and Alan Scott of insolvency firm BRI Ferrier in Adelaide.

Scott is Rod Price’s bankruptcy trustee and while he wouldn’t comment directly on that matter, he was prepared to shed some light on the key factors that cause bankrupts to lose it all.

Denying denial

Both men agreed there is one essential ingredient in most bankruptcy: denial.

Most entrepreneurs have a big appetite for risk (Perrin, a big punter, certainly is proof of this) and so are used to living through moments where their career and at least a good part of their fortune is on the line.

But where most troubled business people will take steps to get themselves out of trouble – perhaps selling an asset, or shutting a business, or making a lifestyle change – the bankrupt is prepared to keep going.

Downey says many bankrupts will not even tell their spouse about their money problems until it’s too late. The reticence of people to confront their issues is best highlighted by his story about a promotion a group of insolvency professionals ran 25 years ago, in a previous downturn. The group spent a few weeks promoting in the media a special two hour session were 20 insolvency professionals would sit in a call centre and talk to people about their money problems. “The phone rang twice, and one call was a wrong number,” Downey says.

“It’s incredible how many people will just put their head in the sand and they just won’t face the problem,” Downey says. “They do keep rolling the dice and battling on because they can’t face the prospect it’s all crumbling down.”

Price certainly seems to fit this description. He appears to have become involved in a series of high-risk property plays, including one project to build a master plan community in the Afghan capital of Kabul. When the credit crisis hit, Price was way over his head. But it still appears to have taken the best part of a year for him to admit that the game was up.

Scott says timing is another issue that causes bankruptcies, particularly in the current environment and particularly for those in the property sector.

“A number of property projects just don’t stack up anymore. The banks have significantly changed the rules,” he says. “When the economy changes as dramatically as it did, it makes it very hard to change what you have been doing quickly enough and have a fallback position.”

Smoke and mirrors

Another big problem for the once-wealthy bankrupt is the form of wealth their empire is based on. Before his collapse, Matthew Perrin had invested heavily in a supermarket venture in China. While his investments and assets were clearly valuable, they were not exactly liquid.

It’s a common problem. When the demands from creditors, landlords and lenders started to build, and the entrepreneur needs cash, the actual amount of cash the business person can release from the empire may actually be quite small.

“Often there’s an appearance of wealth that is a bit of fiction,” Downey says. “Often an entrepreneur has a good part of his wealth hocked against his business. It’s amazing how the assets on the bankrupt’s balance sheet have a habit of halving and the liabilities have a habit of doubling.”

Of course, in some cases the image a wealthy entrepreneur is just that – an image. Price’s apparent wealth was clearly an illusion – there have been reports Price was living on an allowance from the family company after being cut out of its operations last year.

The toll which allows many creditors to force an entrepreneur into bankruptcy is a personal guarantee. These days, most banks, finance companies and landlords want a personal guarantee before they will give you any money. But some entrepreneurs – including Matthew Perrin – also used personal guarantees in their dealings with business partners, fellow investors and other backers.

These guarantees can open (or at least hold open) many doors – after all, who wouldn’t think that a Rich List member didn’t have the cash to back their guarantee. But when things turn sour, the guarantees mean there is almost no protection for an entrepreneur’s personal asset.

Both Downey and Scott are quick to point out that outside of a few high profile examples, the number of personal bankruptcies in Australia has been relatively small during this downturn. Indeed, figures from the Insolvency and Trustee Service Australia show 9,437 personal insolvency actions in the three months to June 30, just 2.67% higher than the previous corresponding period.

But both men are bracing for a crunch, particularly given the willingness of Australians to borrow heavily for almost everything.

“Interest rates are so low that you only need a slight increase in interest rates and people are going to really hurt. You raise the mortgage rate to 8-9% and you see what happens,” Scott says.

We might be asking the “where did all the money go” question a lot more in the next few years.