Economic Impact Of Covid-19 & Pre-Insolvency Advisors


As the economic impact of the COVID-19 pandemic filters through our economy and the end of the Jobkeeper stimulus package in March 2021 looms, remember the adage, ‘If something seems too good to be true, it probably is.’

Earlier this month, the Australian Financial Security Authority (“AFSA”) launched a campaign to raise awareness of dodgy pre-insolvency advisors. It is feared that those experiencing financial stress as a result of the economic fallout of the COVID-19 pandemic will make for easy targets for pre-insolvency advisors.

Most pre-insolvency advisors are unqualified individuals with no affiliation with any professional body and, hence, no Professional Indemnity Insurance or Code of Conduct to adhere to. Another worrying problem is some of these so-called pre-insolvency advisors have either been through bankruptcy or liquidation and are now “experts”.

While not all pre-insolvency advice is improper, you must be careful as such advice results in company director misconduct and facilitation of illegal Phoenix activity. This is where an indebted company transfers its assets to a new company under a different name for little or no consideration. The company is usually liquidated, leaving creditors, employee entitlements tax or some or all of the above.

Pre-insolvency firms use public databases to identify struggling companies; individuals cold call them to offer “pre-insolvency” advice. The advice provided usually includes unrealistic promises that directors in financial difficulty understandably are inclined to cling to. Part of this can relate to how to “phoenix” the business, which can result in directors spending time in prison.

What should you do if your client finds themselves in this position or you hear someone offering their services to them?

Do your background checks first! Before engaging an insolvency/turnaround expert, ensure they’re a member of a recognised, reputable professional body such as the Australian Restructuring Insolvency & Turnaround Association (‘ARITA’).

It is also good to check with ASIC or AFSA to determine if the advisor is a registered liquidator for a company, a Bankruptcy Trustee, or a Debt Agreement Administrator for personal situations and his/her registration history.

Another option is to get a second opinion and stay open to the possibility of contrasting advice that your client may not want to hear. Often, the purported good news from the pre-insolvency advisors only postpones the inevitable, with more damage left behind.

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