A report from insolvency firm Restructuring Works has revealed why directors of struggling companies are so hesitant to put their companies into administration – just 6.4% of companies that entered administration in the year to February 2009 were successfully restructured.
Restructuring Works director Cliff Sanderson says the statistic (which measures the number of deeds of company arrangement deals with creditors against the number of total administrations) is a signal that Australia’s restructuring laws are not working.
He is calling for a full review of restructuring laws and suggests Australia should consider moving towards the British model under which banks are unable to appoint receivers to a company.
Sanderson argues that bank-appointed receivers look after their client first and other creditors second, and make it extremely difficult for a director to get a restructuring through.
“I think it’s essential that we move towards that UK model,” he says.
The company’s “Business Stress” report also noted a big jump in the value of bad debts within Australian banks, which soared from $4.4 billion in calendar 2007 to $20.7 billion in 2008.
Sanderson says while banks are still in a strong position with bad debts at that level, it does provide a forward indicator of future insolvency action.
“It’s a big thumping number in terms of the value of insolvencies, and an indicator of the level of businesses struggling in Australia, and struggling badly.”
Sanderson says he is finding his “pipeline is full – as in there is lots of potential work – but people are not frantic” at present. “But in our view, it’s a matter of time.”
He points out that in the last big recession, the first big collapses did not occur until 1989, a full two years after the sharemarket crash of 1987. “And bad debts didn’t actually peak for two to four years after that,” he says.
“Directors will hang on as long as they possible can, because they know that administration means the end of your company.”
Related stories:
•· How to survive insolvency – and prosper
•· How do I know if my business has real cashflow problems?
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
