Colleagues - The Official SV Partners Newsletter - Issue 39 March 2023

WILL AI REPLACE INSOLVENCY PROFESSIONALS?

The concept of artificial intelligence (AI) has been around for decades and has been visualised in movies ever since - think the Tin Man from Wizard of Oz or probably most notably, the Terminator movies. For some, AI is considered a threat to humans whilst to others, AI may be seen to eventually replace humans within many industries that exist today.

One of the AI systems that has been developed, which has been garnering plenty of attention of late, is ChatGPT developed by OpenAI. For those unfamiliar with ChatGPT, it is an AI language model and is able to answer questions on a wide range of topics.

The basis of this article was to test whether ChatGPT was able to advise a client on Australia’s insolvency laws and whether it could develop a proposal to put to creditors in a Voluntary Administration.

Questions

To test the ability of ChatGPT, I asked the following standalone questions:

1. What to do when I can’t pay my debts?

2. My assets are $100,000 and my liabilities are $200,000, am I insolvent?

3. My company is insolvent, what are my options?

4. I have assets of cash at bank of $5,000, debtors of $20,000 and related party loan account of $100,000. I have liabilities of trade creditors of $500,000 and related party loan account of $1,000,000. How do I propose a Deed of Company Arrangement?

5. The same facts as question 4 but whether ChatGPT could design a proposal to be submitted to creditors as part of the Voluntary Administration process.

Responses

As a general observation and having never used ChatGPT prior to writing this article, I was impressed with the amount of information quickly provided and the way in which it was written.

What I found when asking these questions was that whilst the information provided was somewhat informative, it was of a basic level and did not always provide specific solutions that may exist for a particular situation.

For example, in response to question 3, the Small Business Restructuring option was not listed as an option to the company. I also noted that differing answers could be produced depending on whether a question was a standalone question or a follow-on question from an answer.

In relation to the specific scenario set out in question 5, ChatGPT advised that it was not authorised to provide financial or legal advice and was unable to generate a specific Deed of Company Arrangement (DoCA) proposal for the specific situation set out in the question. Whilst a specific response was not provided, ChatGPT helpfully provided basic information about what the purpose of a DoCA was including:

“Overall, the goal of a DoCA proposal is to create a sustainable plan for the company to repay its debts while continuing to operate and generate revenue. By working with creditors to develop a mutually beneficial plan, a company may be able to avoid liquidation and continue operating into the future.”

Travis Olsen - Director | Adelaide

ChatGPT was also very careful to ensure that in all its responses, it identified that professional advice, be that either financial counsellor, lawyer, accountant or insolvency practitioner, was required to be sought. This is well demonstrated by the following paragraph in response to question 3:

“It’s important to note that each option has its own advantages and disadvantages, and it’s essential to seek professional advice from a qualified insolvency practitioner to determine the best course of action for your specific situation.”

Ultimately, whilst ChatGPT at the time of writing this article, was able to provide basic but useful information into the Australian insolvency laws, it was unable to provide detailed advice that may help guide a client experiencing financial difficulty.

Future of AI in Insolvency

Given the speed at which technology is evolving, no one can say for certain how AI will affect the professional services industry, including the insolvency/restructuring. As I see it, other than any technological impediments that are well beyond my knowledge, an important hurdle for such AI systems appears to be whether they will be authorised to

TRUST ACCOUNT ROLLOUT

Matthew Hudson - Associate Director | Brisbane

provide financial and/or legal advice and importantly are insured for that advice.

Conclusion

For a client, whilst ChatGPT can be rather useful for the purposes of gathering basic information, I would always recommend that the client meets with an appropriate professional to discuss any financial difficulty they are facing. At SV Partners, we offer a confidential, free, no-obligation first meeting to discuss the client’s financial difficulty and provide options that are designed to address that financial difficulty.

Finally, in my opinion, the best piece of advice obtained from the answers to my questions from ChatGPT was:

“Remember, the most important thing is to take action as soon as possible. Ignoring your debts will only make the situation worse, so be proactive and seek help if you need it.”

Wise words from ChatGPT and I doubt there would be an insolvency practitioner who would disagree with this statement.

External administrators or controllers (like Liquidators, Receivers, Administrators, etc) and arguably Restructuring Practitioners (in relevant circumstances), in Queensland are soon to be prevented from recouping their remuneration or expenses from trade debtors or retentions where they are appointed to head contractors or (potentially) subcontractors with sub-subcontractors.

This is due to the project trust accounts that are set to become mandatory from 1 October 2025, under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (“BIFSPA”). This date represents the deadline of project trust accounts that will need to be setup by. A small number are currently already in play.

The practical effect of BIFSPA is that external administrators are barred from receiving their fees or costs in administering these project trust accounts.

The offending provisions in BIFSPA are (amongst others):

a) ss 51C and 51E of BIFSPA, which limit the trustee or its agent from recouping fees/costs;

b) s 58A which creates an executive liability provision for any trustee/agent that breaches these provisions (ie potentially includes liquidators*); and

c) an external administrator’s normal right to apply for orders from the Court to rectify this issue is limited by ss 56B and 51G. Many abandoned/disclaimed project trust accounts will otherwise be left for the QBCC to deal with. Given the complex priority systems under Australian insolvency law and the resources required to address these issues, the task may well be overwhelmingly burdensome for the regulator.

BANKRUPTCY - COMPOSITION FOR ANNULMENT - THE THIN EDGE OF THE WEDGE

Field - Director | Perth

Over the Christmas - New Year period, my office has seen a number of bankrupts seeking to have their bankruptcies annulled pursuant to section 73/74 of the Bankruptcy Act through composition proposals paying very low returns. By that I mean below 5 cents in the dollar. These proposals have not gone unnoticed by Bankruptcy Regulation at AFSA. To be clear, we encourage parties to make the best/highest offer possible to maximise their prospects of success.

When it comes to Deed of Company Arrangements (DoCAs) and Personal Insolvency Agreements (PIAs), the threshold for practitioner recommendation/support of proposals is normally the comparison against an estimated liquidation or bankruptcy return to creditors. Courts are generally also unlikely to overturn such arrangements provided that threshold test is met. That is, unless related parties have carried the vote then other considerations start to weigh in.

Miserly is a term some judges use with respect to these proposals and Bankruptcy Regulation referred us to the 2016 case of Bendigo Adelaide Bank Limited v Clout which dealt with a proposal from Mr and Mrs Mouglalis. As the middle column of the table below indicates, the return to creditors in that case pursuant to the proposal was going to be one tenth of one cent in the dollar. Clout as Trustee had recommended against the proposal because there were outstanding areas for investigation which may have generated a better return for creditors, but creditors had approved it nonethe-less. The bank appealed to the court seeking to have the composition set aside on the basis (amongst other things) that it would not benefit creditors generally. The judge agreed.

The same words “benefit creditors generally” is the test set out in IPR-175(2D) (a) for Trustees to report upon to creditors, with the answer being either yes or no.

Accordingly, AFSA considers this case should be considered and applied by Trustees when preparing that report to creditors which reports upon whether a proposal will benefit creditors.

It seems to me, this is something of a grey area. Where is the line between being so miserly that a Trustee is obliged to report that the proposal is not of benefit to creditors generally. Is it 1 cent, 2 cents, 5 cents in the dollar? The judges have not quantified it to date, so the duty remains with the Trustee to discharge and provide some support for his/ her recommendation.

The safe play in the meantime for Bankruptcy Trustees appears to be to reference the case authority and provide some analysis/ commentary as to how the proposal benefits creditors generally i.e. subject to the circumstances of the case and the following table is one of the tools I have adopted to convey that analysis.

Other typical benefits of these proposals include:

i) timely and certain return to creditors in circumstances where, alternatively, a return from the continuation of the bankruptcy may be unlikely to occur; and

ii) lower costs of administration, which consequently provides a higher return to creditors.

Are these proposals being accepted by creditors? We have seen good support from suppliers, debt owners/managers and even the banks. The ATO appears to be more supportive in relation to low

debt levels (say below $100k) but setting unattainable benchmarks (50c/$) on larger debt, potentially a reflection of its compliance history focus over commercial considerations.

Our regulators have also advised that they would prefer not to see proposals go with the initial/statutory report to creditors. This is likely on the basis that further investigations could be undertaken by a Trustee if the proposal is put later in the bankruptcy. In some cases, no doubt this is a very solid point, however the legislation obliges the Trustee to deal with the proposal (when received) so ultimately a question for creditors to determine on a case by case basis. I encourage proposals as

early as possible to minimise costs in report writing (and reading for creditors) and that in many cases the work performed will be of the same standard and in similar timeline to that of a controlling Trustee dealing with a PIA proposal.

If you see a proposal that you think does not pass the “sniff test”, we encourage you to talk with the Trustee about the surrounding circumstances, give us a call or confer with Bankruptcy Regulation.

As mentioned, creditors determine the outcome through their vote and there are checks and balances available as a court override.

Malcolm

RESTRUCTURING ANYONE? MY COMPANY OWES MONEY... WHAT ARE MY OPTIONS?

Jason Cronan - Director | Sunshine Coast

This is often the first question we are asked when we are introduced to a director of a company that is faced with debt difficulties.

The answer is relatively straight forward; it is the devil in the detail and impact on the relevant stakeholders (the company, director, shareholders, creditors, employees, family members, etc) that requires some expert assistance and advice, as each situation has different issues.

The options available to a company (and its officers) when faced with debt are:

1. Pay all of the debts owed in full

This could be facilitated by:

• A lump sum payment (borrow money, from company assets, sale of a business)

• Payments over time

2. Compromise / settle the debts with creditors

• A private settlement negotiated with creditors directly

• A formal arrangement pursuant to the Corporations Act. This can be achieved via a:

► Small Business Restructure (this option has certain restrictions)

► A Voluntary Administration, proposing a Deed of Company Arrangement

3. Do nothing or don’t resolve the debts owed

If the debts are not settled or paid, this may lead to:

• Creditors taking action to garnishee income or assets

• Secured creditors taking steps to recover and sell secured assets (e.g. banks, private secured lenders, motor vehicle financiers, debt financiers, trade creditors)

• Secured creditors appointing a receiver over the company

• Suppliers recovering goods (retention of title / security claims)

• Landlords evicting tenants

• A creditor liquidating the company through the Courts

• ASIC deregistering the company

4. Voluntarily liquidate the company

This can be done for companies that are solvent (that can pay the debts owed) or insolvent (that can’t repay the debts owed).

Liquidation is the process to bring the affairs of the company to finality and involves recovering and selling the company’s assets, investigating its financial affairs and, if sufficient funds are recovered, paying funds back to creditors (and possibly shareholders).

With more volatile economic conditions ahead, and the ATO likely to become more aggressive to collect outstanding debt, it is important that you and your clients obtain expert advice, to assist in understanding the options available and the relevant implications.

If you have a client facing debt difficulties, please contact your local SV Partners’ expert for assistance.

Call us today on 1800 246 801 or submit an enquiry to contact@svp.com.au

INTERNATIONAL WOMEN'S DAY 2023

In celebration of International Women's Day 2023, female leaders from SV Partners were featured across our social channels as they shared their thoughts on embracing equity. IWD's theme of 'Embrace Equity' aims to get the world talking about why equal opportunities aren't enough. People start from different places, so true inclusion and belonging require equitable action.

Michael McDonnell Results Legal Principal

Dean

Managing Partner

On International Women’s Day each year I reflect on the progress we have made but also acknowledge that there is more work to do. I recognise the amazing achievements of many who continue to lead and inspire and commit to using my voice to do the same.

Anne Meagher - Director

We hold the torch as strong role models for women of the future, and we can show them that our gender is no impediment to our achievements, as we are limited only by our own ambition and desires.

Jessica Widjaja - Supervisor

I believe equity is about embracing diversity as an asset and giving everyone what they need to be successful. Understanding that each person has their own unique insight and a valuable skillset will foster better collaboration and lead to even greater success for organisations.

Brooke Darlington - Senior Manager

Alexander NicholasBlack