“Don’t touch these people”: Beware pre-insolvency advisors as industry faces review

‘Beware the pre-insolvency advisor bearing promises of financial salvation’ is the message from small business ombudsman Kate Carnell as her office prepares to undertake an inquiry into insolvency practices and small business.

Yesterday the Australian Securities and Investments Commission (ASIC) published details of an ongoing court case involving two businessmen pleading guilty to money laundering charges over their role in a pre-insolvency advisory scheme.

The case, which runs back to 2014 and was detailed in an ABC investigation examining how dodgy pre-insolvency practices are enabling illegal phoenixing activity, saw a company director caught up in the alleged illegal removal of company assets as a financial protection strategy.

There’s concern the use of pre-insolvency advisors has increased in recent years, particularly in high-risk industries for phoenixing activity such as construction and building.

The timing is apt as the broader insolvency industry faces the prospect of two separate reviews that will examine its operation, though these probes are not the first time the industry has been the target of scrutiny. 

On Thursday, Carnell announced her office would look into the behaviour of insolvency practitioners, noting the proportion of external administration cases that lead to a business being restructured was “very low” and perverse incentives may be leading practitioners to be over-eager with liquidation.

ASIC data shows liquidations were the outcome of 78% of business insolvencies in the December quarter last year.

The inquiry will run until February next year, but within an hour of Carnell unveiling the probe, the insolvency industry had already baulked at the idea of an SME-focused review.

The Australian Restructuring Insolvency and Turnaround Association (ARITA) has said it’s ‘extremely disappointed’ the ombudsman is undertaking the inquiry, which among other things, will investigate whether the regulation of insolvency practitioners is fit for purpose.

ARITA chief executive John Winter claimed the ombudsman’s pretext was “naive”, outlining his preference that the industry tends its own fence with a “root and branch review” announced several months ago.

“By the time the vast majority of small business [sic] reach a decision to appoint an insolvency practitioner, they are generally well beyond saving,” Winter claimed.

“That situation has been made worse by financial counsellors telling those in distress to stay away from registered liquidators and trustees and the growth of dodgy pre-insolvency advisors.”

ARITA released a whitepaper in August recommending policymakers streamline the regulation of the industry and exempt its members from ASIC’s industry funding model, which pays for the regulator’s activities. 

Carnell, whose office consulted ASIC on its terms of reference, says her office is happy to work with ARITA on identifying ways the insolvency industry can generate better outcomes for small businesses, practitioners and creditors.

“ARITA has already indicated on the public record that the system needs major reform. We agree with them,” Carnell tells SmartCompany.

“What we’re trying to do is focus on the needs of small-to-medium businesses and family businesses — not just the practitioner.”

The insolvency association has also come out swinging against so-called pre-insolvency advisors, which approach distressed companies with sales pitches about refinancing their companies or protecting assets. 

Figures published by ARITA in 2015 found 78% of liquidators surveyed had encountered cases where a company had seen what it called a “dodgy pre-insolvency advisor”.

Pre-insolvency services aren’t regulated in the same way accredited liquidators are, which means they fall outside the purview of protections created to protect businesses and other stakeholders.

Illegal phoenix activity has previously been estimated as a $3 billion problem in Australia, and while the government, regulators such as ASIC and the tax office are spending millions cracking down on the issue, there is concern pre-insolvency advisors are enabling the behaviour.

Carnell says pre-insolvency advisors will be examined as part of her review, advising business owners to stick clear of the services.

“Don’t touch these people,” Carnell says.

“They might come to you with great ideas about how you can manage through insolvency but the ASIC case shows that you’ll end up on the wrong side of the law.”

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