In July this year I wrote an article on SME Insolvency Reform that has been printed in the September 2020 ARITA Journal. The crux of my article was about the possibility of the Federal Government making bad laws if they ignored the subject matter experts. My fear in July was that the Federal Government was going to try to implement a quick fix to small business insolvency where no quick fix was possible.
Today’s announcement by the Morrison Government could not be a more blinding example of what happens when governments don’t listen, or in this case, don’t ask people that actually might know about the subject matter being legislated on.
Sadly, in many respects the insolvency profession has failed to sell the value that it provides to our economy. That failure when coupled with an inept, opaque and incompetent legislative process sees our Federal Treasurer selling magic beans and snake oil to a country desperately in need of well thought out and practical solutions.
There is no doubt that the Treasurer thought that this was a good idea. As my dad used say though, “you know what thought thought? He thought he looked good on a horse so he got down to have a look!”
He are some of the blindingly obvious problems with Josh’s Magic Beans.
- Small and Micro Businesses (SMB) don’t put off getting restructuring advice because of price. They put it off because it allows them to live in denial. Denial that their pride and joy has failed despite sinking every ounce of their soul into the venture. Admitting that despite your very best effort, you just couldn’t make it work is incredibly difficult;
- SMBs don’t cease to trade, out of fear of insolvent trading. They are already ‘all in’ and have nothing to lose. The fear of insolvent trading stops listed company directors with no skin in the game. SMB directors have nothing left because every scrap of skin is already in the game. They stop trading because they run out of money;
- SMBs that are now insolvent, are not going to suddenly become viable because of a 20 business day period in which to formulate a plan. They are unviable because of deep rooted problems with their businesses and for many, have had years to formulate a plan;
- Banks are not going to sit back and wait for Josh’s Magic Beans to fix an unfixable problem. Every SMB that is in trouble has assets subject to security, usually all of them plus the owners. Unless Josh can magically make banks agree to huge debt reductions, SMBs are cooked. All Josh’s Magic Beans has done, is give banks a trigger to appoint a receiver and take it out of the hands of the owner. The cynics out there might ask Josh who sold him the magic beans in the first place? Was it a Banking Lawyer, an insolvency practitioner specializing in receiverships or one of their advisors? Lets hope Josh is smarter than to fall for that;
- Whilst we talk about banks, how will banks react to this new world order? Getting a loan as an SMB is currently harder than Chinese maths. The government is now imposing a new regime for dealing with SMB debt that will be controlled by the people that ran up the debt. If SMBs thought banks were tough before this, strap in;
- Before creditors get the benefit of Josh’s Magic Beans, the SMB must pay out all employee entitlements. If they could afford that, invariably they could afford to pay their creditors. So, no magic beans for creditors in most scenarios;
- The disturbing rationale for this whole misadventure is in black and white in the fact sheets to Josh’s Magic Beans. In the case study on Terry’s Swim Centre, it states “Although creditors receive a reduced payment versus the amount they were initially owed, they receive more than if Terry were to put his business into liquidation.” Rather than sell the swim school to an operator that might make money, creditors get to fund Terry’s lesson in economics. They leave the swim school in the hands of Terry and get to wait for him to drown again (pun intended). We really are, all in this together! If socialism had an insolvency policy this would be it.
- The role of the Small Business Restructuring Practitioner is going to be vital. Believe it or not liquidators are highly trained professionals that have licenses governed by very strict legal and ethical obligations. The ‘turnaround’ space has been plagued for years by unregulated advisors that owe no duty to anyone other than themselves. Opening this space up to them is dangerous and will be rife for abuse. It’s as dumb as giving untrained security guards the responsibility for the quarantine of highly contagious people. Who would do that?
I am sure that the next 97 days will be an interesting time as the Government puts the lipstick on this pig they have trotted out. As it stands now, the only way that Josh’s Magic Beans will sprout once planted in the barren soil of denial, is with the moisture provided by the tears of all the creditors that won’t get paid.