Will the current extreme crisis we confront finally stir insolvency creditor activism, but in the wrong way? or further dampen it?
Just as the drum continued to be beaten on the problem of creditor disengagement in insolvencies and an article appears offering glimmers of creditor activism arising, the government has responded to the extreme economic and social crisis we now face by imposing restrictions on the rights of those creditors.
These measures include imposing monetary and time restrictions on creditors bringing threshold insolvency action and limitations on holding directors to account for insolvent trading.
The role of creditors
The fact of unpaid and unpayable creditors is a raison d’être for insolvency and the role of creditors in an insolvency has always been seen as central, given their obvious interest in the outcome. One of the biggest insolvency debates in 19th century England was over who should control or run the insolvency process, creditors or the state. The state won out, for the obvious reason that insolvency is a collective process and creditors can’t help but act in their own self-interest. Their brief period of control at that time has been described as chaotic.
Nevertheless their input and involvement was acknowledged and bankruptcy law from an early date gave creditors the right to demand information and even to remove the trustee. Corporate insolvency law followed suit, about 100 years later, in Australia at least: see Creditor activism, the ILRA & unintended consequences.[1]
‘Creditor disengagement’
This is a common term, worryingly stated as if ‘something must be done’ about it. As I have written, maybe not as a typical creditor, I would not get out of bed for 1c in the dollar, which is a generous dividend return in some cases, even 5: What’s bankruptcy all about, Alfie? The costs of administering an insolvency are usually too high, they take too long, and the remaining assets are too low, for any other outcome. There are reasons for these features, and reasons for reform.
One minor example is that the minimum dividend liquidators and trustees must pay to a creditor is $25, even if several years later. We can’t deny that creditor its due entitlement, whatever the cost.
Well before the present crisis, financier creditors were being seen in a more objective light than before, given that, as a World Bank Report explains, the insolvency regime should be viewed as representing ‘a sort of trade-off for deregulation of consumer lending … with the “premiums” financed through small and appropriately distributed increases in the costs of credit.’
In other words, we all pay through higher credit charges.
Trade and ordinary creditors have less options that way, but they do have more on-line access and other means to assess with whom they might deal, and they have access to PPS security as it may be needed.
But then, harsh as it may seem, if the debtor’s insolvency eventuates, the statistics show that a brick wall come up against any creditor getting any reasonable proportion of its money back, unless it has taken precautions before, and even then ….
Hence, the non-attendance of creditors at meetings, their claimed discard of information and reports provided to them, and more, is all quite explicable. Their better option is prevention, and if a debt is unpaid, to use the precursors to a formal insolvency – a bankruptcy notice or winding up demand – or other debt recovery mechanisms, and if successful, to hope that no claim for what may turn out be a preferential payment is made.
That insolvency option is now effectively denied a creditor through the 6 month period of compliance for debtors being enacted.
Hence, caveat creditor.
Government creditors
But all creditors aren’t equal. Government creditors can do well, or at least better. It seems some in particular are the new activists. Anecdotally, this may be reshaping and sharpening their insolvency behaviour,[2] which is thankfully regulated by their governing laws and laws of administrative review.
A government role?
That has prompted a question, that if government creditors are the main beneficiaries of insolvencies, why doesn’t the government pursue that healthy activism in monetary terms, by funding the system? … instead of, for example, having trustees in bankruptcy do so.
As AFSA has recently disclosed, trustees in 63% of their bankrupt estates do work properly the preserve of the Official Trustee, for free: although they must of course still strictly claim their remuneration for the 37% funded matters properly: see the latest AFSA Update.[3]
The present extreme crisis may change everything, with creditor activism finally emerging, but in a possibly undesirable way, each creditor trying to survive, along with its debtors.
That creditor activism may be one over which any remaining insolvency practitioners who are still working, for free, may be unable to redress. In order to maintain the integrity of the insolvency system, or prevent its decline, some government activism may be needed.
[1] (2020) 32(1) ARITA J 4, C Cuninghame.
[2] A pending article.
[3] (2020) 32(1) ARITA J 40, H McCormick.
