There seem to be some rather unhappy insolvency practitioners at the moment bemoaning the low levels of insolvencies – yes, unhappy because more businesses and individuals are, apparently, remaining financially stable – with the prospect of an ‘insolvency tsunami’ having passed, and speculating when an ‘uptick’ (and other such positive terms) in the ‘insolvency market’ will arrive through the ATO pursuing its debt and creating more ‘insolvency appointments’.
That is an odd message.
Do we hear dentists bemoan the introduction of fluoride and the fewer teeth to fix, or doctors the better attention to road safety so there is less injury work for them, or lawyers the greater efficiencies in land transactions and technology? Do doctors talk of a bad back market?
The message?
Insolvency is a difficult profession to sell, with its perhaps dysfunctional mix of being there to help but also to sanction, working both for private creditor interests and also public government interests.
But there can be a message that insolvencies are a proper outcome in a competitive market economy and that the decline may suggest a lack of entrepreneurial risk as being an essential feature of business activity. ‘Risk can only be eliminated by not doing business at all’. To that extent it is a default process that is called upon as and when risk materialises, and surgery or rehabilitation or support is needed.
Human and business health
There are in fact a few parallels between business and human health – the need for prevention, a ‘healthy’ lifestyle, and on-going health checks and assessment of risks. These are valid positive messages and a sign of the relevant professions adjusting.
Just as there has been a better focus on human lifestyle and health over the last decades, it had seemed that a refocus of the insolvency profession was occurring in recent times, with an emphasis on restructuring and turnaround, and less so on formal insolvency. Ideally, the former would forestall the latter but there is no good data to rely upon. Whether safe harbour and other such advice has assisted we don’t yet know, a 2019 review rather lazily not done.
A 2021 refocus
It may be that 2020 has prompted a stakeholder review anyway resulting in a refocus in 2021 on stakeholders’ need for resort to the insolvency system. This may be a positive sign of a long-term trend with business finally accepting the advice – constantly given – to act early when financial stress appears, supported by more strategic action from creditors holding back from their previous automatic response of ‘debt owing therefore liquidate’. Their alternative and more strategic responses were found to be effective, and these have remained and may continue.
In the perspective of history
How insolvency responds to these economic and social changes in 2021 is assisted by some knowledge of its history.[1]
The accounting profession arose out of the creation of companies in the 19th century when those with knowledge of accounts were called upon to deal with railway company failures and other collapses, and major frauds.
As it has been said,
“the accounting profession was born through bankruptcies, fed on failures and frauds, grew on liquidations and graduated through audits.”[2]
In 1870, one large accounting firm is recorded as drawing over 90% of its income from insolvency work.[3]
Concerns started to be raised about the quality of some of these ‘accountants’ leading to today’s professional accounting bodies being established, as “an attempt to control the insolvency practitioners of the 19th century.” It was said that
“if an accountant were required, he would be found at the bar of the nearest tavern to the Bankruptcy Court”
and merely being seen in public with an accountant could be considered “an omen of disaster”.
Lawyers shunned insolvency work on reputational bases.[4]
For most of the second half of the 19th century, many firms gained the vast majority of their fees from insolvency work, compared with audit. The law drove much of the change. The UK 1862 Companies Act has been called the ‘accountant’s friend’ because it required the presence of accountants at every phase of a company’s life, from its formation through its working life to its liquidation.[5] This Act is the model for the first companies acts in Australia. But with the UK Companies Act 1900 mandating compulsory and uniform annual audits, auditing “quickly overtook bankruptcy and liquidation work as the main occupation of accountants in public practice.”[6]
Nevertheless, the practice of insolvency continued profitably.
In 1993, the first edition of Keay’s Insolvency said that “the law of insolvency has been relegated to the background by both the accounting and legal professions for many years”. Since then, and voluntary administration and other changes, insolvency has remained a significant component of accounting practice, and of the law, and remains so.
2021
What is a significant trough in 2021 may be evidence of the ebbing and flowing since the 19th century but it may also prompt a focus on what some have always said is the part-time nature of insolvency work, being called for when times are tough but with its personnel having skills applied elsewhere in the meantime.[7]
Those skills should be extensive, although their connection with accounting may be lessening – the role of an insolvency practitioner has been said to be “only indirectly linked to the accountancy profession” [8] – but applicable elsewhere, with some readjustment in approach.
So, it may well be that 2020 has allowed those using the system to do a stocktake and realise that their usual responses of notices and demands and insolvency appointments produced little by way of outcomes. Other professions have adjusted over time. It is quite certain that the core work and principles of insolvency will continue, although greater business transparency, artificial intelligence and IT generally will change things, for one thing replacing much of the hack work, and refocusing attention away from unproductive tasks.
It is too early to tell what is happening right now, and internationally, but we may be in some tectonic shift in thinking, as we have seen in approaches to human health. Better data allows more strategic approaches.
Meanwhile, those in the profession should remain flexible and constructive and forward thinking, and perhaps get some professional advice on how to re-present their skills in 2021.
Any reasonable offer accepted …
[1] See generally Australian corporate insolvency and its practitioners: the past, present and the future, Symes and Murray, yet to be published paper, 2019.
[2] H W Robinson, A History of Accountants in Ireland (Dublin, 1964) 30.
[3] R McQueen, A Social History of Company Law, Great Britain and the Australian Colonies 1854-1920, (Ashgate, 2009) p 219.
[4] Insolvency Practitioners and Big Corporate Insolvencies, Flood & Skordaki, Research Report 43, ACCA, 1995.
[5] R Brown, A History of Accounting and Accountants (Jack, Edinburgh, 1905) 234.
[6] R H Parker, “British Men of Account” reproduced in Parker, Papers on Accounting History at 109.
[7] Corporate Insolvency Law, Perspectives and Principles, Finch & Milman, 3rd ed, p 220
[8] Trade Practices Commission, Study of the Professions, Final Report – July 1992, Accountancy at p 72.
2 Responses
This is a very interesting post!Thanks!
Thanks Preeti. Much of my thinking goes back to some work Chris Symes and I did on the history and sociology of the professions, but for my part, going beyond my formal learning in law.