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March 25, 2015

Insolvency: it’s like a death in the family

Our feelings about corporate collapse are a little akin to a death in the family in that we only reluctantly acknowledge that it could happen to us. Likewise, our attitudes towards those professionals who deal with the aftermath of corporate collapses – insolvency practitioners – could be likened to undertakers where their work tends to be viewed as unseemly in the wider context of wealth creation by businesses.

Governments and regulators in a number of major economies including the UK, Singapore, the USA, and here in Australia, have either completed or are currently undertaking ‘root-and-branch’ reviews of their corporate insolvency laws. It is my firm belief that accountants outside of the immediate confines of the practice of corporate insolvency need to be fully aware and more actively engaged in these reforms. In short, our feelings and attitudes towards what insolvency practice is all about requires a refreshed engagement especially if we are to fulfil our roles within businesses and meet our responsibilities towards the economy and wider society.

Critical to our understanding is an appreciation of balancing competing demands and interests which the effective treatment of corporate collapse invariably involves. The dual objectives of corporate insolvency law is to restore a debtor company to profitable trading where this is practicable and to maximize the return to creditors where the company cannot be salvaged. Unless the balance between these objectives is properly struck, we potentially encourage risk aversion and stifle commercial innovation with consequent sub-optimal economic outcomes.

Prolong or over-estimating the chances of recovery undermines economic efficiency by stranding both assets and capabilities which might otherwise be gainfully deployed. Moreover we risk encouraging errant and reckless behaviour on the part of those who run companies. Accountants need to be able to navigate through these complexities and provide appropriate advice and wise counsel while at the same time understanding where and when skilled specialists and the various legal mechanisms applied to handle a corporate collapses need to be called into action.

Against the backdrop of these policy considerations, the practicalities of the insolvency system requires the collectivised treatment of private law claims which now compete as there is no longer enough to go-around. The presence of competing claims brings with it hard choices to which insolvency law seeks to strike a balance, these include:

  • Individual creditor interest versus collective creditor interests.
  • Collective creditor interests versus fair protection of those running financially stressed companies with the best endeavours of recovery.
  • The advantage which some creditors can gain through taking security versus the lesser capacity amongst other creditors to self-protect against risk of debtor insolvency.
  • The treatment of trade and similar creditors who are ‘volunteers’ to a relationship with the insolvent debtor versus non-consensual creditors, for example, those with negligence-based claims.

The rules that determine these matters must be strong enough to coerce behaviour where necessary and be sufficiently rational and fair to achieve wide community acceptance given the hard choices that the insolvency system must contend with. Nevertheless, exact precision in these rules should not be expected as they necessarily need to be applicable in a range of events and circumstances arising in the conduct of commerce and trade.

Here again, I am in no way advocating that accountants within businesses, and those who advise business, should aspire to a higher order of technical expertise in what is a highly specific and relatively narrow area of practice.

What I am urging though is advancing our critical professional judgment with an appreciation of the balances which insolvency law seeks to strike. This is especially important given there are a range of trade-offs which have wider implications beyond the immediacy of the individual corporate failure. Bringing to these decisions our existing notions of impartiality and the pursuit of the public interest are vital elements in achieving timely and just outcomes within the constraints of corporate failure.

Only then might accountants, along with the broader business community and society itself, more confidently confront the inevitable issue of corporate collapse and no longer see it as a catastrophe but as the opportunity for renewal and economic transformation. If we achieve this we will be able to better appreciate the opportunities for collaboration with insolvency practitioners rather than approaching what they do as the disquieting necessity of corporate dismemberment, burial and the distribution of the remains.

Alex Malley’s previous articleCulture and simplicity key for audit committees

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