Commentary following issued in April 2020 is reissued in September 2020 in light of the reports that a significant proportion – close to 55%* – of the insolvency industry is on government assistance. While the collapse in the numbers of insolvencies is a reason, Macquarie Bank’s Report on the health of the insolvency practitioner industry reveals a pre-existing low adoption of technology and of innovation and entrepreneurialism – qualities which are now needed and which are driving the growth of other sectors despite the COVID-19 downturn, or because of it. The Macquarie Report refers to a conservative industry, hesitant to change, with limited scope to generate new work or new approaches to its work. New entrants to the sector may be bringing the necessary changes. 23 September 2020
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22 April 2020: With Australia’s insolvency practitioners gearing up for what may be a large increase in personal and corporate insolvencies, a ‘pulse check’ has just been released by Macquarie Bank on the health of the industry in 2019 that will allow an assessment of how prepared it is now to deal with a very different 2020: see Positioning your firm for future growth 2020 Macquarie Insolvency industry pulse check.[1]
This Report adds to other recently published surveys of insolvency practitioners that reveal some common, and negative findings, and to some other outcomes in insolvency that are of interest.
The Macquarie Report is based upon surveys of practitioners conducted in late 2019; hence before our present crisis. It covers a range of issues including industry and business conditions, revenue levels, staffing, and technology.
Technology
The Report could not have predicted our present increased need for reliance on technology but in the insolvency sector, its impact has been around for a long time. Despite this, and the report’s endorsement of technology as an ‘enabler of future growth’ in insolvency, the Report says that
‘technology adoption across the industry has so far been relatively limited, driven by industry conservatism, hesitation to change, lower recent historical revenues, and no evidence of industry peers leading the way’.
The Report goes on to say that firms
‘tend to rate innovation and entrepreneurialism as relatively unimportant – reflecting a highly regulated industry with limited scope to generate new work or approaches to doing work’.
That does not engender confidence in the industry’s present need to adapt to technology and to embrace innovation in our post-virus world.
The Report suggests that firms should look beyond insolvency to other professional services sectors which have integrated data analytics and predictive systems into their day-to-day processes and that insolvency ‘firms could become more active in embracing change’.
Financials
But the Report then says that ‘an overwhelming majority’ expect what were then (late 2019) ‘improved conditions’ to continue into 2020, these responses being
‘the most optimistic of any of the professions surveyed’.
Liquidations were the single largest source of revenue, accounting for 40% of all firm income, although this was expected to become less important with business advisory work increasing in importance.
As the Macquarie Report concludes, firms that place a
‘premium on people … in conjunction with adopting and embedding technology early and successfully, will prosper’.
Personal insolvency
The Report only covers corporate insolvency, and its findings may have been different, and better, had it looked at bankruptcy trustees, with their more significant and increasing access to on-line processes through AFSA.
A study[2] by Dr Jenny Dickfos into the adoption of artificial intelligence and technology by the insolvency industry had already confirmed the Macquarie Report’s assessment of corporate insolvency. But practitioners in this study
‘strongly supported AFSA’s online delivery of personal insolvency services as instrumental in decreasing compliance times and administration costs over the last 10 years. However there was not the same level of support for ASIC’s online delivery of corporate insolvency services, which may reflect the smaller range of online services provided by ASIC to IPs’.
Professional identity
Then we have a rigorous academic study of Dr Beth Streten, published in November 2019,[3] which also anticipated some of the findings of the Macquarie Report. Its detailed analysis based on surveys found that
‘practitioners were struggling to adjust to changing technology, changing societal attitudes, legislative reforms and the expectations and demands of their diverse stakeholders and regulators’ and that they ‘suffered from weak professional identity’: see my Selfies of Australian insolvency practitioners – not looking good …?
Financials?
While the Macquarie Report refers to growth rates and revenue, it does not address what the industry achieves by way of financial outcomes for creditors, or generally. A recent report[4] by Professor Jason Harris reveals that in 2016-17, 92% of liquidations estimated a 0% return to unsecured creditors, and that almost 40% of liquidations had no assets whatsoever, such that, apart from the ‘mega insolvencies and restructurings’ such as Arrium and one might now add, Virgin,
‘Australia has a system that is barely supported by the assets of companies that enter external administration, and certainly is not designed to produce meaningful recoveries for unsecured creditors’.
Then there is the 2013 report of $47m of unfunded work in liquidations,[5] and the high proportion of bankrupt estates in 2020 that pay trustees no remuneration.[6]
Macquarie’s pulse check
Macquarie’s pulse check will no doubt add to our knowledge of the health of the Australian insolvency sector in the lead up to its response to the social and economic impact of COVID-19.
* An impending flood of formal insolvencies or a continued decline? Clayton Utz, 24 September 2020
[1] The report claims to be ‘the first study of its kind into the insolvency industry’.
[2] AI and the Insolvency Profession: The State of Play (2018) 26 Insolv LJ 172.
[3] QUT PhD thesis
[4] Corporate insolvency by the numbers, 27 February 2018, Australian Insolvency Law.
[5] Phillips, A, An analysis of official liquidations in Australia, February 2013
[6] Remuneration in the personal insolvency system, AFSA, 4 March 2020.
