State Of Play 1st Oct 2020 – The New Insolvency Process

Dominique Grubisa
Dominique Grubisa

Published 7:41 am 29 Jan 2021

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Dominique Grubi…: Hi there, and welcome to our State of Play. There was a bit of interesting news late last week, and they always say in the media that when the government releases news that may not be too popular, they’ll do it later on in the week leading into the weekend. So Josh Frydenberg made two announcements late last week overnight, and the first one was new insolvency laws, and the second one was a change to responsible lending practices. So none of it is law yet, but they’re mooting it, it’s on the cards, it’s got to be passed as law, chances are that it will be. So the first is that the government wants people to borrow more money. They want the banks to lend. So we had a whole couple of years of a royal commission, the banks got slammed, their share prices dropped. And now, not even a year after the fact, they’ve come back and said, okay, only joking, banks are not held to account anymore and we want to introduce lending standards where the responsibility is on the borrower and not the lender.

So we’re not this nanny state anymore where banks have to be compliant. They have to check out and scrutinize borrowers, and they can basically lend any way they want because the government wants them to lend. If people can borrow, the philosophy is then they’ll go out and spend and it will help the economy. So the complete back-flip from the royal commission where banks were under the microscope and they had to be responsible corporate citizens and ensure that they were lending money to people who could afford the repayments. Now what they’re saying is it doesn’t matter, the bank can look at prospect, but it’s up to the borrower, the responsibility is on them to make sure they can afford the loan.

I don’t think… I think it’s a bit of a storm in this take-up. At the end of the day, banks will lend to people who can afford it, otherwise it’s at their risk. So good borrowers who can afford loans are still able to borrow and always have been. And even as the royal commission [inaudible] outcome was commissioner Hayne gave his recommendations. He actually said the laws don’t have to be changed at all. And there was a case that hadn’t come through the courts yet where ACIC had prosecuted Westpac and said, Oh, they lent to someone just because they had a pulse and they should have done more due diligence and the person couldn’t afford it and they didn’t have responsible household expenditure measure. So they didn’t scrutinize enough how people were going to afford the loans. And ultimately the case went on appeal and the court said, you know what? It doesn’t matter. It’s not really on Westpac and their scrutiny won’t change anything. So it changed the law anyway, and the law currently reflects that it’s really an onus on the borrower.

At the end of the day, lending will still be harder, people won’t be able to borrow if they can’t afford it. Because banks are worried about this tidal wave of delinquent or impaired debt, bad debt, basically. Because a lot of people have lost their jobs, we’re in a recession, the economy is struggling, so banks aren’t throwing money around anyway. And the fact that the government is proposing to change the laws to encourage banks to lend, I still think banks probably won’t lend. People who can afford it will still be able to borrow, people who can’t afford it won’t be able to borrow, and that’s the bottom line of it. So nothing really to see there.

The other bit of law that they’re proposing though, is significant and massive. It changes to our insolvency regime. So at the moment the government have said our insolvency laws, that’s companies being wound up and people going bankrupt, they’re very, very complex, especially for small businesses. So the government are proposing changes to our law to help small businesses tread water and navigate through the stormy economic times ahead. So they’ve brought in and what they’re proposing is similar to Chapter 11 Bankruptcy in America. So it’s massive in Australia. We haven’t had a reform like this, like in the last several decades.

So what they’re proposing is that if a small business is in trouble, a debtor in possession model, they call it. So debtor in possession means the person in debt in the business stays running the business. So we have an administration model where an administrator comes in currently and will take over the affairs of the business and try and restructure it and save it. But when they looked at the records and the productivity commission studied this, it’s quite a complex law. And it’s great when you’ve got big billion dollar companies like Virgin going into administration, but when you’re talking the local fish and chips shop, they can’t afford to access first of all, the experts, the system is really, really complex, and that level of complexity is warranted for administrations like Virgin, but not for small businesses.

So many of the administrations that happened, what was happening at the end of the day was that they were for under a million dollars in debt, and that the business had… And this is 90, over 90% of them had under 20 employees, so quite simple small businesses. And that once they went into administration, the majority of them didn’t come out the other end. They went from administration to liquidation and there was nothing left for the creditors, the people who were owed money. So it was a lose-lose proposition and a very complex clunky system that meant that anyone on a slippery slope or a tipping point or struggling in business was just going out backwards.

So they introduced, or they’re proposing to introduce these new laws to prop up and save a lot of struggling businesses. So how it’s going to work, what they’re saying here is that they extended our insolvency laws from what was like a 21 day period to issue a statutory demand or a bankruptcy notice to send someone under, to six months. So there was a six months block or period where creditors, people who were owed money, couldn’t wind up a company or a business. And that ran out about now. And then I said, okay, it can’t run out in September, we’re not ready for it, so we’ll extend it another three months. So businesses are safe now until the 31st of December. But then I said, what’s going to happen after the 31st of December, like 1st of January? This tidal wave, this avalanche of businesses are just going to go belly up.

We don’t have the number of liquidators and specialists in Australia to deal with that, and it’s not going to help anyone. So it’s part of a JobMaker package where they’re trying to keep businesses trading through the difficult times, and they’re doing that by proposed tweaks to the law. So they want to make the system simple and streamlined and encourage creditors, people who are owed money, to work with the business, to trade through it. So they’re calling it restructuring, basically renegotiation of debts to save the business for the greater good of everyone. So how it’s going to work is they’re proposing instead of liquidators and administrators who are really qualified and expensive in the top accounting firms, they’re introducing a new role which is a small business restructuring practitioner. So that’s someone who can come in and work with the business. They haven’t announced what it will be or what the qualifications are, probably some sort of an accountant who can work on a plan with the business.

And then there’s 20 business days where they’ll work out a plan, work out the debt, see if it can be saved or not. And then that expert will take that plan to the creditors, and the creditors, the people who are owed money, then have 15 days to vote on it. So to look at the plan to decide, yes, we are going to work with that and we’ll agree to it. Now if 50% of them in terms of dollar value of the debt, so if 50% or more agree to the plan, then the others are bound and the restructuring expert then stays on and administers that plan.

In effect though, what it means, that doesn’t start until the 1st of January. And then the government have said, well, how can people… We haven’t written the law yet. How do we get these experts up and running? Get them qualified and licensed to go out there and do this and to understand laws that don’t even exist yet? So what in effect they have done is they’ve said, okay, all a business has to do is when the end of the year comes and they want to restructure and take advantage of these new laws, they can just file with assets and intention of the fact that they intend to restructure. And that gives them another three months, so till the end of March, where no one can wind them up or take them under.

So they’re kicking the can down the road a bit by trying to get our house in order so that businesses can be saved and people aren’t going to be made insolvent on mass. So what it means, and what we’ve seen at DG Institute is that creditors, people who are owed money are becoming really negotiable now because what they’re seeing is, okay, banks aren’t lending anymore, there’s really no more money. The credit tap has been turned off well and truly, and the debt to I feel like basically people who are owed money from people in debt being given a lifeline.

So creditors, people who are owed money are saying, gosh, we better sort this out ourselves because the government are just extending and extending. And at the end of the day we’ve waited now… When we look at when it started in March till the 31st of December, we’ve waited nine months and businesses have been protected, they’re calling them zombie businesses, have been protected. And now they’re saying another three months, but even at the end of three months, so end of March next year, there’s going to be new laws that will compel us to work with businesses and people in debt. Hey, let’s just do it anyway. So we’ve had, and you would’ve remembered our last State of Play, I talked about the World of Debt, it’s massive at the moment and there’re deals to be done.

I’ve been saying for a while, everybody is negotiable. So now is your time to streamline with the new laws and the change of the government rhetoric and talk track. There’s so much opportunity and you need to ride a wave and restructure yourself, share the debt, streamline, and lay a platform for growth. Because there’s going to be a lot of opportunity next year, but you need to really shed a lot of debt and get yourself match fit. So if you’re in business it means talking to your landlord, renegotiating your lease, there’re deals to be done all around. Everybody is coming to the negotiation table, and that means you can shed a lot of excess baggage and weight in the debt world and streamline yourself.

So I’ve invited Alicia Houston back on, head of DGI Debt Management, because she was such a roaring success last time and she’s even been getting rid of debt in the last two weeks from people who only just had the light go on in their head two weeks ago on our State of Play. So I’ve invited her back due to popular demand. Welcome Alicia.

Alicia Houston: An into, thank you.

Dominique Grubi…: So Alicia, for those of you who didn’t catch her last time, she’s come from the dark side. So she was big in debt collection with one of the big debt collection companies, and we had hunted her here to bring all that skillset and that insider knowledge of what the debt collectors look for and how far they’ll go so that we can negotiate. And they’ll go a long way in this market, Alicia.

Alicia Houston: Absolutely. That’s what we’re finding at the moment for sure.

Dominique Grubi…: Yeah. So high level, I’ve talked about the laws and I’ve given a background and an overview that creditors are really, really negotiable right now, but it will mean more to you when we talk through some situations because people seem to resonate with that. So I’ve asked Alicia to cherry-pick some more case studies, we covered a few last time, and I wanted a broad-brush approach. So some personal loans, some credit cards, some mortgage debt, some business debt, and the sort of things that creditors are negotiating right now. So we’ll start with business debt because you’ve found that in terms of business debt, knowing that the new laws are in the pipeline, creditors are becoming more negotiable.

Alicia Houston: Yeah, that’s right. And I think that in the past, sort of pre-COVID and pre all of these new laws coming out, the creditor was the one in… They had the ball in their court for sure. They don’t fall under the same guidelines that consumer credit does, they obviously are able to serve their statutory demands and have that wound up pretty quickly-

Dominique Grubi…: Because the law was basically, look, you’re sophisticated, you’re in business, we don’t need to protect you. You signed a contract, you owe the money, the law’s not going to come to you. Yeah.

Alicia Houston: Yeah, absolutely. So we’ve found recently that that’s obviously changing and we’re kind of pulling a little bit of pressure back in our favor and being able to use that for our favor. So this particular small business based in Queensland, they came to us after COVID had hit and obviously affected their business and they had about 14 creditors ranging from $80,000 owing to some to only just $1,500 to a couple of others. So we’re in the midst of that, we’ve been able to resolve half of those already. So $90,000 across seven debts that we have settled for, so that we’re saving… Oh, sorry, $90,000 worth of debts. We’ve saved them for 48%, so they’ve settled those for 52%.

We had one particular creditor though, who is just refusing and just last week served a statutory demand the day before this new law came out. We already knew that we had an extended period of time until the end of December, but we did not know that the business restructuring was going to come around again. So we believe, I mean, this particular creditor is owed quite a significant amount of money, however with the remaining seven debts, they’re not more than 50%. So yeah, definitely it’s all working in our favor at the moment and I believe that when we go back to their lawyers with our next proposal, I really feel confident that we’ve got the upper hand with this one.

Dominique Grubi…: Yeah. Because the law has kind of met us halfway now, because even if these people stand their ground, their statutory demand is going to fail, and all this business has to do is restructure under the new laws. This creditor is less than 50% of their debt and all the other creditors are ultimately likely to go along with it because nobody gets anything from a winding up. So this was them being probably bitter, perhaps it became personal, and just uncommercial. So it forces, the new law you can say in a case study like this, forces the business to be commercial and keep all its employees in jobs. And the creditors, like the one bitter creditor would mean that everyone else misses out, no one gets paid and the insolvency expert, like the liquidator takes everything.

Alicia Houston: Yeah, that’s right. And I mean, you can see, like I said, we’ve had 50% of the debts that they came to us with a couple of months ago already settled for 50% of what they were owed. So this one in particular definitely took it a little bit personally, the story has it that unfortunately the company had a contractor overseas, they were unable to travel due to COVID and things have fallen apart. And if they don’t settle, if they don’t take this and the business does go under and into liquidation, then they won’t come out of it any better off anyway.

Dominique Grubi…: Absolutely. So yeah, we were kind of already doing this, these informal debt arrangements where creditors were negotiable. It’s just that the law now has got behind that and said, well, all you need is 50% of them to agree, and then the others are forced to agree. So there’s no other real plan B for creditors. So it gives you in a debt situation a lot more power. And that’s important in small business, not just because of the business debt, which is one thing and saving jobs, but also with small business loans and debts. Often the directors are personally liable, so they’ve given personal guarantees and that means that you can lose your house and all sorts of other things. So if you’re a business owner and you’ve got business debt, huge opportunity now, and imminently doable to settle for cents on the dollar and shed a whole lot of debt. What about though, when we talk about unsecured loans, Alicia, so we’re talking credit cards, personal loans, lines of credit, overdrafts, that sort of thing.

Alicia Houston: Yeah. That kind of thing. I mean, obviously always has been negotiable, at the moment we’re finding that banks are struggling, the royal commission obviously had a big impact on a few banks in particular Westpac being one of them. And so whilst the potential scrapping of the responsible lending is there, they still have the fear of a debt going bad and they will still need to, I guess, account for that.

Dominique Grubi…: Yeah. There’s a lot of impaired loans and they’ve actually put a lot of money in reserve to cover that debt. So the banks, many of them didn’t pay dividends at all this year because they said this is tough time and we’ve just got to be ready. So they’ve got a bit of a war chest to cover bad debt and they’re taking losses just to get cash in because they know there’s worse yet to come. So quite negotiable, many of the lenders right now. So talk us through this one.

Alicia Houston: Yeah. So David and his wife from South Australia, they had just over $104,000 in unsecured debts, including personal loans, there was an overdraft in this one as well, and a few credit cards. David was made redundant from his job and obviously their family took a little bit of a hit. They were struggling to make ends meet through that.

Dominique Grubi…: And it’s a lot of debt to be in, $104,000, and if it’s unsecured interest rates are a lot higher. We’re not talking 2%, 3%, we’re talking double digit interest rates on unsecured debt.

Alicia Houston: Yeah, exactly. I mean, you kind of get into this situation thinking, well, I’ll get this credit card to help pay off that one and [crosstalk] do some balancing, yeah. When you think about $104,000 in unsecured debt it’s not uncommon at all. It might sound scary and it is scary when you’re in that position.

Dominique Grubi…: A lot of people just in a hole, but keep digging and…

Alicia Houston: Keep digging until they can’t anymore and then think, what do I do now? What am I going to do?

Dominique Grubi…: But the great news is, and what they don’t know is that you don’t have to borrow from Peter to pay Paul and keep just circulating debt. Debt can be negotiated away, which is what you’ve done here.

Alicia Houston: Yeah. So for this one, we do these all of the time, unsecured debts is pretty common, but this one was a pretty good saving. It was almost 90% we saved from the $104,000.

Dominique Grubi…: So they owed $104,000 across all those debts and you paid it off at $93,000.

Alicia Houston: $93,000 was saved. Yeah. What’s that? My math isn’t too good. $11,000?

Dominique Grubi…: Yeah.

Alicia Houston: $11,000 they paid to settle.

Dominique Grubi…: So $11,000 to get rid of a $104,000. That’s amazing.

Alicia Houston: Yeah. So really a happy couple obviously there, now planning to… They’d said that their life had changed in the last six months. They’re planning on building their family home and moving on with their life.

Dominique Grubi…: Yeah. So yeah, if you’ve got like a debt uncle, people with debt just holding them back, it can be gone like within a few months. And instead of worrying about juggling and how you’re going to make repayments and interest on that debt, just get rid of it, now’s the time, and put all your attentions into building.

Alicia Houston: Yeah, that’s right.

Dominique Grubi…: And the other thing that I asked Alicia to cover was a mortgage situation. So we have many clients with underwater properties, tends to be that they overpaid in the boom, or mining town properties that have just gone down in value and people kind of think, Oh, wow, I owe more, the mortgage is more than the value of the property. So I’ll just have to keep paying and wait for the market to come good because I can’t sell it, I can’t pay off the loan, so they’re just struggling. And they’ve been doing so for many years and it’s just throwing good money after bad because those markets aren’t going to come back anytime soon, at least.

Alicia Houston: Yeah. That’s right. So this one we just got settled this week, so very recent. The particular client is from New South Wales, they had a property in Queensland, he had invested a fair bit into a few properties during 2010 to 2014. And yeah, unfortunately the market just did a complete 180 heading in the wrong direction. So we spent a long time trying to sell the properties actually, which everyone else in the same towns were doing at the time, trying to sell their properties [crosstalk 00:28:31].

Dominique Grubi…: So far more supply than demand.

Alicia Houston: Yeah, that’s right. And wasn’t able to sell it unfortunately, was struggling again to just try and keep up with those mortgage repayments. Yeah. Recently though, we had one of them sell, have a shortfall of just over $286,000 and we got that settled for a payment of just over $29,000. So that was 10% again, but of such a massive amount, massive weight lifted off their shoulders.

Dominique Grubi…: So that would have been $286,000, nearly $300,000 in unsecured debt. So they took the move, they sold the property, they kept the enemies close in the sense that the bank knew that they were selling the property. They knew there’d be a shortfall, and then afterwards they said, okay, well, we owe you $300,000 but we’ll give you a $29,000 full and final settlement and all the debt’s gone. And that’s how they’ve settled that. So to resolve a debt like that for 10 cents in the dollar that’s life-changing.

Alicia Houston: Absolutely.

Dominique Grubi…: Otherwise you’re just carrying that burden and it’s not a house, it’s not an asset that like a mortgage where the thing would go up in value, it’s just debt for no purpose. And they’ve got some other properties and they’ve the same strategy now applying to all of them.

Alicia Houston: Yeah. And I mean, that’s the good thing, we can use this one to assist the other creditors in kind of falling over and accepting something similar because that is what we’ve done. We’ve kind of gone out with an offer at a prorated amount so that it was fair and everyone would be offered the same. Not all of the properties have sold yet though, so we’ve still got a little bit of work to do, but a great outcome for this customer so far.

Dominique Grubi…: Yeah. So obviously it’s horses for courses and it’s a case by case basis and it’s holistically trend wise. What are lenders doing? And more niche. What is this lender doing at the moment? Is this one negotiable? Are these paying out? What are they likely to accept? What are the parameters? And we’ve got the breadth and depth of data and knowledge about the debt world and what’s happening there. So it used to be a year ago, like under the microscope of the royal commission, you could say to lenders, oh, well, you’re non-compliant, you didn’t dot your i’s and cross your t’s. Therefore, that’s real leverage and a point of negotiation. Now, that doesn’t fly, especially because the government is saying, who cares about responsible lending, we’re going to change the laws anyway. So you’ve got to stay with the time and the laws and the trends and know what’s happening.

But what is really a groundswell now is lenders and creditors falling over themselves to just get money in and that cents on the dollar. So as little [inaudible] as we see here, 10 cents on the dollar. So if you’re carrying debt, if it’s the time to just streamline, even if you can afford it, why should you? They’re doing deals, it’s not affecting credit scores, so it doesn’t change your situation. You’re still able to borrow, you still get a high credit score, it’s just that you’re getting your house in order and focusing on growth and opportunity ahead. And there will be a lot of opportunity that will come out of current change and uncertainty. And you want to be nimble and ready to move on that, not with a whole lot of history and baggage that you’re carrying from the past.

So I’ve secured with our team, our debt specialists, some times for you to take this offline because we really want to help people trade through this and come out the other end. So next step is to book an appointment with a member of our team. So it really is a case of horses for courses, it’s a case by case basis. But what I’ve asked Alicia and the debt specialist team to do is to take a razor blade into their diaries and free up some spots to take this offline. If you’re wanting to talk about your situation, there’s only a handful of spots available, so we’re going to put a link in the comment section and the description section to book an appointment. Unfortunately, once those spots are gone, they’re gone. It’s going to be first in best dressed. So go to that link now and see what’s possible for you. There really has been no better time to get your house in order and shed that debt. So thank you so much, Alicia, for sharing-

Alicia Houston: No worries, thanks for having me.

Dominique Grubi…: … and awesome job there, keep up the good work. And don’t forget to follow us on Facebook so you can get regular updates, and share this with your friends, tag them in the comments section so that we can create a ripple effect and empower more people. And if you’re watching on YouTube, don’t forget to like us, subscribe, and hit the bell so we can notify you every time we release new content. That’s it for today, stay safe, take care, and we’ll talk soon on our next State of Play.