License article

'Corporate undertaker': the new hip career?

It used to be investment banking which enticed the brightest and most ambitious recruits from the universities. Before that, it was the audit firms and management consultants who held sway. Private equity was fleetingly in vogue, until the financial crisis.

And now Australia has a problem. Unless something is done to reform and regulate the insolvency business, the "best and the brightest" may soon be corporate undertakers.

You don't hear “Daddy, I want to be a liquidator when I grow up” too often. But that may well change. The rate of growth in insolvency firms, both by personnel and by fees, has been stunning in recent years, even as other more productive industries have foundered.

And it is easier to construct a social and economic defence for the investment banker or private equity vulture than for the liquidator, at least the way the industry is run now. Blatant cases of liquidators and lawyers stretching out legal disputes, exhausting the estate before creditors can get to it.

A handful of big banks and their law firms are calling the shots. The courts are clogged with frivolous, time-wasting actions at onerous cost to the public, smaller creditors are starved of returns.


Then there are the constant relief orders granted to liquidators by the regulator exempting them from publishing financial statements. So creditors don't know what is going on.

These relief orders amount to convenient, government-sanctioned blackouts where creditors are kept in the dark while the pros get to carve up a company carcass between them.

And so a malaise has come about; a “regulatory capture” arising from neglect and government apathy.

There was a Senate inquiry into insolvency two years ago chaired by Nationals Senator John Williams. His findings were damning. They found the Australian Securities & Investments Commission should be stripped of its role as regulator.

But nothing of substance came of it. The government sat on its hands.

In a twist of irony, the chairman of ASIC at that time, Tony D'Aloisio, has now turned up as a director at PPB, the rising star in the world of insolvency.

The rot had set in before D'Aloisio got there and there's no doubt he has always played a straight bat
but it's not a good look to the chairman of the regulator suddenly materialise at a fast-growth liquidator after a Senate rebuke of ASIC's stewardship of the insolvency sector.

More so as the industry watchdog recently interceded to help PPB as a "Friend of the Court", making submissions on the liquidator's behalf amid criticism of its appointment as receiver to Provident Capital.

Meanwhile, the Institute of Chartered Accountants also admits to some sort of regulatory role in the industry but has done nothing to arrest its slide into zombie-heaven – notwithstanding tenuous claims of “unwavering dedication to act in the public interest”.

In the liquidation of Lehman Australia, PPB has racked up $55 million in costs so far of which $28 million in legal fees was forked out battling the bona fide claims of smaller council and charity creditors, the real victims of Lehman's financial products, while championing the cause of the parent bank all the way to the High Court.

What can be done to mend a broken system? Liquidators on the bank panels are not even investigating, let alone pursuing, claims against the banks.

When administrators, liquidators and receivers are appointed, they are required to sign a DIRRI (Declaration of Independence, Relevant Relationships and Indemnities). The DIRRI is designed to ensure independence, to ensure that the wind-up is conducted in the interests of all creditors, not just the most powerful.

John Sheahan, the principal of Sheahan Lock, has been a critic of the conflicts in the system. He says the DIRRI regime should be toughened up for starters. Not only contractual obligations of insolvency practices – where there is a panel – but also practical commercial conflicts, such as getting a lot of bank work, should be declared.

Further, he believes that ASIC should appoint an independent review panel, or practitioner, to look at particular administrations. In this, the way would be clear for legitimate claims to be pursued and frivolous claims over assets struck out.

Perhaps, says Sheahan, a liquidator or administrator could report to ASIC any overt or implied threats brought against them by another party. 

There is a serious question as to why banks and secured creditors are so determined to remove independent administrators (independent from them that is) from office even though they have control over all assets via fixed and floating charges.

Too often the banks are keen to avoid an independent examination of their pre-appointment conduct, say, where they are accused of acting in a shadow-director capacity, deciding who could be a director, when and to whom the business would be sold, demanding a power of attorney be granted over all share capital in interim period, creating "designed-to-fail financial covenants" which would allow banks to act on a breach, taking additional third-party collateral and cross-guarantees and generally aiding and abetting directors in breaching their fiduciary duties in preferring the interests of the bank over others.

Banks are particularly prone to exert undue pressure at refinancing time. Then there are the excessive steps taken in trying to ensure that their officers are not subjected to S596 examinations by liquidators to prevent the truth being revealed in court.