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Picton finally liquidates - is it time to review insolvency law? - Andy McCourt

It was always fated to happen; substantial Perth, WA printer Picton Press is finally to be liquidated following a protracted period of administration, Deed of Company Arrangement and what other Perth printers describe as ‘unsustainable cut-throat pricing’ as an attempt to stay afloat.

It’s very sad that it came to this and I am sure all our hearts go out to the employees who have done their best and must now wait for FEGS to view their cases for reimbursement of monies owed.  They, the tax office, paper merchants, other printers and providers of trade services – all look like taking a bath in the whole sorry affair.

Picton’s is not a solitary case of course, lately we have seen the demise of Whirlwind Print in Victoria and Sydney Allen in Sydney and again, the list of those losing vast sums of money is long.  Before that there were the absolute shemozzles of Geon and Blue Star Mk1. In essence, and properly used, there is little wrong with the concept of limited liability as a protection for investors who take the risk. It’s when things go wrong that determines if insolvency law is being exploited to avoid debts, so that the business can be ‘phoenixed,’ and downsizing company collapse reduce business 512started again with a ‘clean slate.’ This was what the private equity owners of the Geon group tried to do but were thwarted when paper suppliers refused to supply paper until the prior debts were paid. In the end, the assets of the entire Geon group were liquidated, with one or two components being re-acquired by the people who originally sold them, and subsequently successfully run again. Blue Star was more complex but, in New Zealand, it was re-purchased by a company connected to its previous owner, Tom Sturgess, and has been very successfully run since then. Similarly, the IVE Group, formerly Blue Star Australia, is thriving since coming back under the Chairmanship of Geoff Selig and being listed on the ASX.

The birth of 'limited liability'

The concept of limited liability for shareholders, investors and directors of companies began around 1811 in the USA and 1855 in the UK, with the Limited Liabilities Act. Although controversial, there can be little doubt that these laws encouraged enterprise, inventiveness and measured risk.

However, the limited liability laws drew criticism from many quarters including a British politician Edmund Cox who said in Parliament: “He who acts through an agent should be responsible for his agent's acts, and that he who shares the profits of an enterprise ought also to be subject to its losses; that there is a moral obligation, which it is the duty of the laws of a civilised nation to enforce, to pay debts, perform contracts and make reparation for wrongs. Limited liability is founded on the opposite principle and permits a man to avail himself of acts if advantageous to him, and not to be responsible for them if they should be disadvantageous; to speculate for profits without being liable for losses; to make contracts, incur debts, and commit wrongs, the law depriving the creditor, the contractor, and the injured of a remedy against the property or person of the wrongdoer, beyond the limit, however small, at which it may please him to determine his own liability.”

Cox’s statement may sit well with those who have been caught with bad debts from companies who have gone broke and indeed director’s guarantees security over property are often used by banks and larger suppliers to secure loans. But, it is the unsecured creditors including staff and the ATO who suffer most in liquidations, seldom getting more than a few cents in the dollar, if anything, back for what is owed.

Phoenixing - legal and illegal

So, the insolvency system itself: administration, receivership and liquidation – is necessarily there to ‘sweep up’ or deal with failed companies but, like all systems, it is open to abuse by less scrupulous, dishonest operators. It should be remembered that there is both illegal and legal phoenix activity, ASIC defines it thus:

“The key difference between a legitimate phoenix business rescue and illegal phoenix activity is the director’s dishonest intentions. Where a director sets out to intentionally avoid paying debts and liabilities, by transferring assets to another company without paying the true market value, then the conduct is illegal.”

There are ‘grey areas’ where unsecured creditors are left mystified at the lack of recoverable assets left in a company when they attend their first creditors’ meeting following the appointment of a liquidator. Whirlwind creditors expressed dismay that most of the assets were disposed of prior to the company being officially liquidated – it was distasteful for them and for many distressing, but it was not apparently illegal. The 2016 liquidation of Sydney Allen Printing is still being fought about in Court, with the liquidator trying to claw back payments made before the collapse, claiming they were ‘preferential’ and former directors and investors being subpoenaed to the Supreme Court to give evidence under oath. The case is on-going.

Consideration should also be given to the liquidators themselves, who are the first to be paid once they are appointed to administer a failing company. Picton tried to change liquidators at the eleventh hour to no avail. While some do try to turn-around the business or find a buyer, seldom is this the case with printing businesses and the fees keep mounting up until there is very little left for any unsecured creditors. It is not unheard of for liquidators to be ordered to repay high fees – a recent case in SA ordered an insolvency firm to repay $1.9 million plus interest for example. Some liquidators have had their certification withdrawn for misappropriation of funds, charging excessive fees and one in NSW was found guilty of 83 counts of misconduct relating to the liquidation of 16 companies and ordered to repay $4.9 million in overcharged fees.

Companies will continue to get into trouble and go into admin, receivership and liquidation. Providers of unsecured credit must be ever-vigilant and recognise signs of impending trouble early, and adjust their credit practices accordingly. Moreover, despite a tightening of insolvency laws, the system is still open to abuse and perhaps ASIC and the government should look at some requirement for mandatory early notification of financial stress that is on public record for all the see and judge whether or not they will continue to provide credit. The ‘trading while insolvent’ laws are easily side-stepped under the current structure. Directors of companies, and administrators if appointed, have an obligation to act in the best interests of the company and, if things do go wonky, as they sometimes will, an obligation to creditors both secured and unsecured.

We don’t need a ‘nanny state’ environment where people are afraid to take risk in business but we do need a new look at the way the admin/liquidation system works, and the need to freeze assets early on if a business is in trouble. It’s only fair to the capable, honest traders who put value on the most important part of any business deal – trust.