Lessons in liquidations.

Whilst we live in times where a win at all costs approach is becoming more redundant, even frowned upon, there are still pockets that need some work and voluntary administration is one such arena.

It’s critical for fairness that registered administrators, essentially court appointed representatives, remain neutral and objective in their roles. 

With the system under pressure like never before due to COVID closures, in June 2021 the Australian Securities and Investment Commission (ASIC) suggested there may not be enough liquidators to deal with the COVID fallout, the last thing small businesses owners need, is prejudicial biases from court appointed representatives.

Administrators are an essential component of the system, there to maintain fiscal responsibility and keep processes fair. 

If we are to go through a period where their skills are in greater demand than ever before, then the last thing we need is shortcutting or unethical manipulation.

Unfortunately, there are directors who care little about fiduciary duties: only self-interest, willing to find loopholes and gamify a system, caring little who gets burned in the process. 

Currently the system in Australia allows dishonest directors a number of strikes before being barred from similar future positions of power.

This leaves open the door for bad actors, with the help of ‘friendly’ Administrators, to leave creditors and employers out on a limb.

Positions of power have to be held to a higher standard

When you hear the term ‘friendly administrator’ we need to think of the carnage of being on the wrong side of ‘friendly fire’ in a war with the process of administration open to ‘bad actors’ to manipulate such things as:

• Exiting directors, allowed to offer false guarantees to some creditors for priority payment of their debts in exchange for proxies.
• Proxy counts and state of debts to be shared with interested buying parties, which then allows them to buy preferential debts off the books to procure required proxies.
• Unsecured creditor debts may be bought off the books: firstly, to gain voting proxies: secondly, as a favour to wipe sizeable bad debts clean for exiting directors. (As shareholders, they’d be last to be paid, any dividend payout would mean still having lingering legacy legal obligations to deal with)
• Any preferential debts bought off book can be claimed by the buying company as a new ‘creditor’: given the debt itself still theoretically exists on the company books. Opens the opportunity for a sweetening side deal to return a chunk of change being awarded back to them.
• Employees may be summarily terminated, bullied or given little to no due diligence of process in regard to redundancies or rights – all with zero accountability as the moment the business is officially placed in liquidation the Fair work commissions become disempowered.
• Creditor’s debts can be adjudicated in any way liquidators see fit. This includes declaring that some debts (despite contracts or undeniable evidence of works completed) don’t exist or significantly downgrading employee benefits or creditors debts without any reason or explanation.
• Meanwhile, administrators, especially with ‘friendly votes’ pay themselves, well, pretty much whatever they like.

In addition, an administrator, who sees this as just another gig, may use stress inducing tactics or strategies of non-responsiveness and poor communication with impunity. 

The term ‘Committee of Inspection’ is misleading. Given a lack of transparency or stonewalling it may be treated as little more than a box tick part of the process: committee of non-inspection may be a more accurate description.

For creditors and employees caught in the cross fire of a liquidation, the drain and energy of resources is so disheartening that it’s hardly surprising many switch off or tune out – leaving the rort to pay out without further question.

Lessons from a liquidation

From first hand experience (as both creditor and member of committee of inspection) it’s all ‘DIRRI this’, ‘Corporations Act 2001 that’, right up until the committee of inspection persevere in asking direct questions multiple times that demand transparent answers. 

At which point the administrator becomes crickets to the parties they serve and are in part accountable: silence, ghosting, no response

If it becomes clear early on (which it surely will if you’re caught in a not so friendly administrative process) there’s no point trying to change a rigged game. 

The resources required (energy, effort, time, money) simply aren’t worth it and the vultures and wolves know it. 

Any real justice or fairness will only come one of two ways. 

1. Through further out of pocket expense in the courts
2. The industry member bodies and watchdogs that are overseers: ASIC amongst them

Unless there are substantial sums involved, the cost and time rules out the court process.

If you elect to head down the ‘watchdog’ road, then keep emotion out, stick to core evidence based breaches or demonstrable, questionable ethics. Outline the facts and story succinctly.

There’s no point complaining about a broken process if you won’t play a part towards its improvement. The more parties that speak out, the more likely ‘bad actors’ are to be caught or perhaps a serious overhaul of an important fiscal arena may be overhauled and updated. 

I’ve learned these past few months to take my hat off to ASIC: likely resource poor, stretched amidst a wave of high demand. In this instance they did turn up as observers.

The best lessons learned around liquidation are the preventative ones and for business owners:

• Make sure to choose business partners wisely
• Double down on watertight shareholder agreements to minimise the risk of disputes turns into a scorched earth, burn all creditors, wipe all debts clean at any cost path.

For service providers:

• Make sure you document everything
• Make sure contracts and terms are watertight 
• Procure payments for service as you go 

If you do find yourself caught as a creditor in a liquidation weigh up your debts versus time required: decide how much energy you’re willing to give. 

Choosing to do nothing leaves unethical practitioners to hide in plain sight as the make of like bandits, so if caught in this situation, I encourage you to form your own posse with other creditors, as everyone investing a little energy, based on fact, may help with not only ensuring you get what you are owed – but also holding those that should be to account.

Written by Mark Carter.
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