Preferences next as Govt mulls more COVID moves

AICM CEO Nick Pilavidis.

Sources close to Government deliberations around how to cope with the tsunami of insolvencies anticipated once fiscal support ends have told iNO measures to restrain liquidators from pursuing preferences are under active consideration.

“A lot of stakeholders are seeking to have unfair preferences suspended, the AICM for example,” a source said in response to iNO’s enquiries about options the government could implement after it begins to wind back fiscal support to businesses from September.

“The ATO is extremely concerned about what preference payments could do to its cash flows,” the source said.

Given liquidators pursuing preferences is often viewed as controversial (by those who got 100 cents in the dollar and then had to return it) it may be politically palatable for the government to impose some restraint on their pursuit.

“It’s going to be complicated and time consuming and if preferences are taken out it’s one less concern.” AICM CEO Nick Pilavidis.

But as with the current moratorium on insolvent trading, suspending a measure to prevent a crisis in the near term creates a greater risk in the future.

The source said Treasurer Josh Frydenberg and Assistant Treasurer Michael Sukkar are being lobbied by a host of groups including the Australian Taxation Office (ATO) and the Australian Institute of Credit Management (AICM) seeking the curbs, which if imposed would benefit viable and non-viable businesses alike whilst dealing another blow to registered liquidators already bearing the burden plummeting appointment rates created by the Government’s six-month moratorium on insolvent trading.

AICM chief executive Nick Pilavidis said the potential for preference pursuits to decimate businesses that have been maintained through the COVID-19 lockdown period by loan deferrals and similar arrangements was the primary concern for his members.

“Whenever the support turns off our members need to start negotiating with customers who have received deferrals to try to work with their customers to get payments flowing,” he said.

“It’s going to be complicated and time consuming and if preferences are taken out it’s one less concern,” Pilavidis said.

The AICM chief also confirmed that reforming the laws around preference payments was one of his organisation’s long term goals.

“What we’re really calling for is a temporary exemption at this stage relating to payments made during COVID which will help to flatten the insolvency curve,” he said.

John Winter, chief executive officer of the Australian Restructuring and Insolvency Association (ARITA) had a very different perspective.

“If you take unfair preferences away it will defund the profession when it is struggling for work because of the insolvent trading moratorium,” he said.

Winter said that if liquidators were going to be restrained from pursuing preferences then the Assetless Administration Fund (AAF) should be substantially expanded and the process by which ASIC approves AAF funding streamlined.

He also said any exemption applied to unfair preference payments would itself have to be restrained to ensure related parties such as directors, officers, staff and significant shareholders were ineligible, otherwise there was the risk of a frenzy of phoenixing.

“When they drop the insolvent trading moratorium the presumption of insolvency will be pretty much automatic,” he said.

“How do you have a reasonable presumption that your counter party isn’t insolvent?”

Stephen Hathway, president of the Association of Independent Insolvency Practitioners (AIIP) also identified dangers inherent in a softening of the laws around preferences.

“Don’t forget what the principles of preference payments clearly protect against. Creditors with big sticks extracting their money before the rest,” he said.

“If you don’t have that law you get the larger creditors using their influence to the expense of the minions.

“And one of the other forms of preference is getting security over assets.

“Debtors can be forced through intimidation into handing a preference through a mortgage or similar instrument to those prepared to bully and intimidate their way to the front of the queue.”

Clearly the politicans have a greatmany competing demands to juggle and will likelyleavesuch decision making as late as possible.

While support like Jobkeeper is still scheduled to end in September, the insolvent trading moratorium is in place till October, assuming of course that the government doesn’t decide that a tsunami of insolvencies and consumer bankruptcies aren’t a good look a few months out from Christmas.

Emails and calls to the office of assistant treasurer Michael Sukkar were not responded to before iNO’s deadline our deadline. Support INO’s continued chronicling of the insolvency sector.

13 Comments on "Preferences next as Govt mulls more COVID moves"

  1. Terry Smith | 10 July 2020 at 1:56 pm | Reply

    The only thing more socially acceptable than making fun of fat people is kicking liquidators.

  2. One of the most fundamental (if not THE most fundamental) principles of insolvency law is pari passu – the concept that creditors on an equal footing should be treated equally and entitled to a rateable distribution of available assets. That is the raison d’être for the preference provisions. Without them, one would have, as is often famously stated, “an unholy scramble to the courts to beat the liquidator or bankruptcy trustee”.
    The bigger and the most bullying creditors take the spoils and leave nothing for the smaller, weaker ones.

  3. Theodopoulos Waters | 10 July 2020 at 10:45 pm | Reply

    Another reason to leave Australia to live/work in the UK.

  4. Powder Puff | 11 July 2020 at 9:32 am | Reply

    Fundamental flaw with ARITA comment. The Safe Harbour safety net only protects “directors” from insolvent trading – it does not deem companies which are insolvent as being solvent. Consequently nothing has changed with respect to the recovery of preferential payments during the pandemic. That said, there are unlikely to be ATO preferences because ATO is paying out funds not receiving them. What is the takeaway: Creditors who deal with zombies do so at their own risk. Get rid of the zombies!

    • I too found John Winter’s (ARITA representative) hard to understand and reconcile to my knowledge of insolvency laws.

  5. Just a thought | 11 July 2020 at 12:12 pm | Reply

    Primary purpose of preference is to maintain pari passu treatment of creditors, not necessarily fund insolvency practitioners (although they may be a byproduct).

    The better approach would be to amend the defences available to creditors whom have been identified to receive a preference. For example this could include settlement of long running litigated dispute or extensive demands for arrears which could be done without necessarily saying they had constructive knowledge of insolvency of their client.

  6. Grant Morris | 13 July 2020 at 10:14 am | Reply

    My understanding is Preferences are stated to be where one creditor receives a preference (or advantage) over other creditors and the aim is to redistribute those funds amongst all creditors not pay the Liquidators fees.
    I don’t believe any arms length and non related payments should be regarded as Preferences however do think Preferences would be more readily accepted by creditors if the funds recovered were only paid to the body of similar class creditors and not used to pay the Liquidator and his solicitors/advisers.

  7. Time for change | 15 July 2020 at 11:33 am | Reply

    Winters comments are pretty poor and reflect badly on the “old school” thinking common place in the profession where liquidators do jobs to pay fees alone and think that is a good outcome. John it is 2020 and the profession is more than this it is about saving and rehabilitating companies not just a platform to get liquidators work. The ARITA board is out of touch and represents the old way of doing things. ARITA should really just be AIA as that is all they stand for.

  8. Allan Eskdale | 15 July 2020 at 2:46 pm | Reply

    Did not understand Powder Puff’s comments. Appears to me the ATO is by far the biggest receiver of preferential payments from businesses they know to be insolvent. Certainly a significant conflict of interest for the government.

    To put Winters’ comment in its proper context, the banks and ATO have allowed insolvent businesses to continue trading until they exhaust liquid assets; insufficient funds to pay reasonable fees, let alone investigate irregularities.

    COVID is a perfect storm allowing owners and directors to bury their failed business without question. The volume of insolvencies should be sufficient protection from detection, but significantly reducing funding available for investigations is certainly a bonus.

  9. Powder Puff | 16 July 2020 at 8:15 am | Reply

    Allan – Winters said ““When they drop the insolvent trading moratorium the presumption of insolvency will be pretty much automatic”. Why “when they drop”? Companies can be insolvent now and many are – there is no need for the end of the moratorium to establish this. All the ending of Safe Harbour protection does is allow liqudiators to once again pursue directors for insolvent trading. It does not mean that liquidators must accept all companies were solvent during the “moratorium”; there is no moratorium against pursuing creditors who trade with insolvent companies and receive a preference. As regards the ATO. My guess is that businesses on the brink of liquidation are probably receiving money from the ATO and deferring debt – so no preferences likely to have been made in the 6mth relationback period. Those paying the ATO are probably solid and unlikely to go into liquidation.

  10. Allan Eskdale | 16 July 2020 at 11:18 am | Reply

    Powder Puff, I had not thought of that relation back period, not familiar with the technicalities I suppose. So the Government puts in place a moratorium on insolvent trading for six months, ATO suspends payment plan arrangements for six months resulting in all payments received to date by the ATO falling outside the relationback period. Puts in place moratorium against future preferences. Your point taken, but still a bit of a conflict of interest.

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