Here we go again!

I note with interest in the press recently that, with the new Prime Minister putting an open mind to matters pressing at the Australian economy, the insolvency world is to once again confront and consider the possibility of an American styled Chapter 11 process for the potential resolution of business insolvencies. What is more is that it is one of the legal arms of one of the Big 4 ‘accounting’ Firms that will seek to see its fullest consideration.

For those of us around in 1993 when the “Harmer” changes were brought in resulting in the creation of the Voluntary Administration regime, they will remember that the Harmer Report considered long and hard the Chapter 11 option and provided a sound basis for its avoidance.

Some quick background on the Chapter process put simply. Under Chapter 11 a company appoints solicitors who make an application to the Court on its behalf to have the company placed under the protection of Chapter 11. Under this process, the directors essentially become trustees of the assets for the purposes of the Court action and the process and the business continue side by side. Each class of creditor then forms and appoints solicitors to represent either themselves or the class as a whole and the process is negotiated through the Court system. Once an arrangement is finalised, that arrangement is sanctioned by the Court and then put in place, and the company is released from its protection. The options are very wide and it is the Court that seeks to maintain a sense of decorum. Interestingly the process has been used to alienate certain classes specifically, not uncommonly unions, and the time and actions spent in preparing for the application can involve practices that may be considered criminal under Australian legislation!

It is as noted in the Harmer Report that Chapter 11 was a very expensive process. In fact if I recollect correctly it is one that was referred to as “being too costly for the majority of Australian companies, all but the largest of our listed companies.” (If you mean the top 55 percent, then that’s 4 banks and 2 miners.)

I am all for a review but seriously what is required is changes to legislation that protect the operational status of the business, preserve value and minimise costs and time. From where I sit these cannot be achieved if the process is driven by a Court. The time taken at present to get matters through the Court system is such that what should (commercially) be negotiated and resolved in days can take months or even years!

I cringe every time I see value in a business destroyed by our process, so seriously I say bring on change, but let’s make it change for the right reasons not simply to create costs and complexity unnecessarily.