20 September 2021

Director
Consumer Policy and Currency Unit
Market Conduct Division
Treasury
Langton Cres
Parkes ACT 2600

By email: UCTprotections@treasury.gov.au

Strengthening protections against unfair contract terms

The Australian Institute of Credit Management (AICM) welcomes the opportunity to contribute to the consultation on draft legislation to reform unfair contract terms.

AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through:

• mitigating risk;

• maximising growth; and

• applying sound credit principles and practices.

Without our members, businesses are exposed to reputational damage, poor cash flow management and inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM members support reform that enables all businesses to engage in fair and efficient contractual arrangements including ensuring small businesses are not at a disadvantage as a supplier or customer in credit arrangements.

The principles that underpin an unfair contract term are supported by members and provide clear guidance on how to balance interests of the credit provider, namely a clause is an unfair term where it:

• causes a significant imbalance in the parties' rights and obligations;

• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such terms, and

• would cause detriment (financial or otherwise) to a party if the term were to be applied or relied on.

These principles are used by AICM members to draft contract terms and guide actions where a dispute requires enforcement of rights under a contract.

AICM members are concerned that the draft legislation does not balance the impacts on the majority of credit providers who are applying the principles against the need to penalise the minority who are abusing their superior bargaining position resulting in unreasonable detriment. We expand on these concerns below.

Pecuniary penalty's

While not opposed to penalties where unfair terms cause unreasonable detriment when a party enforces an unfair term or there is evidence of clear intentions to rely on an unfair contract term, AICM members are concerned that potential penalties for mere existence of an unfair term could impact the efficiency of contractual arrangements. Specifically, where:

• It is not reasonably efficient for a supplier to have custom contracts or multiple versions of contracts to meet varying needs of their customer base, especially high-volume low value businesses.

• A term is not required for initial supplies to a customer but may be required for future supplies with that customer.

In these scenarios suppliers achieve efficiencies by including terms that may not be needed in all arrangements but are required in a relevant section of their customer base or supplies. These efficiencies ensure customers can access the supplies on favourable credit terms. Specifically, for small businesses it ensures they can access the supplies on credit terms without delay and expense associated with contract negotiations or paying before delivery.

Additionally, customers actively seeking to avoid their obligations are likely to use potential penalties to obtain an advantage despite the term not being relied on.

The consequences of not addressing the above could include some credit providers choosing not to extend credit terms to certain customers. For small business, this has the potential to offset the intention of the reform by increasing the disadvantages of small business compared to large businesses where favourable credit terms will be available.

Small business contract if one party employs fewer than 100 employees or turnover of less than $10,000,000

AICM members note that monitoring of thresholds for small business is significantly complex and frustrating due to the lack of publicly available information to verify company size.

The lack of financial information creates barriers and efficiencies for small business access to credit.

The AICM provided extensive background to these issues in a submission to the 2018 changes to reporting thresholds (1) in conjunction with the Australian Finance Industry Association (AFIA) and the Australian Restructuring Insolvency and Turnaround Association (ARITA).

AICM members recommend considering a change to the threshold following a review of any reforms to ensure the appropriate balance has been achieved.  This will ensure any unintended consequences, such as reduction in credit terms offered to small businesses, are minimised.

Extending penalties and remedies to other suppliers and contracts

AICM members are concerned that contract terms may be deemed unfair where they are the same or substantially the same as another term without reference to the specific situation or if the term was relied upon.

While a positive outcome of this reform is encouraging removal of unfair terms from contracts where they aren’t reasonably necessary, AICM notes that most members organisations have updated standard form contracts and this extension is likely to result in:

Customers challenging a term that is reasonably necessary due to the specific nature of the relationship which creates inefficiencies and costs for the supplier to address.

  • Customers challenging a term included to cover potential future supplies, but the supplier has not relied on the term or caused detriment.

AICM members expect this to frustrate collection of valid supplies where the principles of unfair contracts have not been breached purely due to a customer actively seeking to avoid their payment obligations.

Costs being incurred to defend the use of the term in court by demonstrating the different circumstances that apply and the reasonableness of the term.

 In summary, AICM members support the intent of the reforms but strongly recommend the reform limit application of penalties to circumstances where the principles of the unfair contract terms regime are breached, and the term has been relied on or there is clear intention to rely on the term.

 Additionally, the actual circumstances of each occasion where a term is used is considered before penalties apply or a term is deemed void.

Finally, the AICM has been working in consultation with the Australian Credit Forum (ACF) on its submission and intends to provide further comment after consultation with ACF members on Tuesday 21 September 2021 which will provide further insight to the impacts of the concerns noted in this submission.

We welcome the opportunity to further contribute to the discussion of the reforms.

Yours sincerely

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
02 8317 5085 nick@aicm.com.au

[1] https://treasury.gov.au/sites/default/files/2019-04/c2019-t342318-afia_aicm_arita.pdf

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10 September 2021

Manager
Market Conduct Division
The Treasury
Langton Crescent
Parkes ACT 2600

By email: MCDInsolvency@Treasury.gov.au

Helping companies restructure by improving schemes of arrangement

The Australian Institute of Credit Management (AICM) welcomes the opportunity to discuss potential reform of schemes of arrangement.

AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through
• mitigating risk;
• maximising growth; and
• applying sound credit principles and practices.

Without our members, businesses are exposed to reputational damage, poor cash flow management and inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM members support reform of legislation that enables viable businesses to restructure, simplifies the insolvency regime and balances interests of all stakeholders.

A significant concern of AICM members with the proposed increased use of schemes of arrangements is the additional layer of complexity it will add to an already extremely cumbersome insolvency landscape.

The addition of the Small Business Restructuring Process (SBRP) to the Australian Insolvency regime has further increased complexity in the system impacting AICM members by:

- Making it harder to understand creditors rights during insolvency appointments.

- Adding to the cost of providing credit.

- Creating greater inefficiencies when managing customers at risk or in an insolvency process.

It is clear from consultation with AICM members, legal professionals, insolvency professionals and Australian Restructuring Insolvency and Turnaround Association (ARITA) that the limited benefits that could be achieved by reform of schemes of arrangement don't outweigh the impact on credit providers and all stakeholders by adding a further layer of complication to the insolvency landscape.

AICM members are of the clear view that a fully overhauled insolvency regime would provide benefits that greatly outweigh the inputs of government and all stakeholders to achieve.

Whilst AICM members don't support reform of schemes of arrangement in the short term, the below responses are provided with the intention that this discussion is considered in reform of the entire insolvency framework.

Question 1: Should an automatic moratorium apply from the time that a Company proposes a scheme of arrangement? Should the automatic moratorium apply to debt incurred by the Company in the automatic moratorium period?

AICM members believe that directors should be sufficiently informed about the viability of the company to substantiate the ability to restructure without the need of a moratorium on enforcement of debts. The safe harbour mechanisms and the fact that most creditors will not initiate legal proceedings where a viable company is genuinely engaging with them further supports this view.

Therefore, AICM members do not support an automatic moratorium from the time a company proposes a scheme of arrangement without a court process or appropriately qualified insolvency professional (i.e. a registered liquidator) substantiating key eligibility factors such as:

- The likelihood of a scheme of arrangement will provide a better outcome to creditors than alternatives including other insolvency processes.

- The company is genuinely in distress.

- There are reasonable grounds to expect that a solvent entity will result from the restructuring.

The requirement to assess eligibility ensures the significant impacts of a moratorium on credit providers are justified and avoid abuse of the process.

AICM members believe there should be no moratorium for debts incurred during an automatic moratorium period.

Furthermore, it is the AICM's view that a sign that a business is viable is the ability to service debt incurred in the ordinary course of business. Therefore, a company unable to meet their obligations during a moratorium period is unlikely to result in a viable business emerging from a scheme of arrangement.

Providing certainty that payment will be made on debts incurred during a moratorium is important to ensure the business is viable and creditors have confidence to provide the support needed to continue operations and maintain value in the businesses.

Question 2: Would the moratorium applied during voluntary administration be a suitable model on which to base an automatic moratorium applied during a scheme of arrangement? Are any adjustments to this regime required to account for the scheme context? Should the Court be granted the power to modify or vary the automatic stay?

Basing the moratorium on voluntary administration is a suitable model to build on. As noted in response to Question 1, access to the moratorium should be subject to eligibility requirements. Additionally, aligning the process to voluntary administration will minimise the impacts of another insolvency process for credit professionals to interpret.

The liability of the administrator to debts incurred during a voluntary administration provides an effective method for ensuring the moratorium is not used to actively avoid creditors and assurance that the debt incurred during the period is paid.

AICM members support the ability of creditors to apply to the court to vary the stay but does not support the ability of the stay to be extended, as the costs of opposing a court action are prohibitive for many credit providers.

Question 3: When should the automatic moratorium commence and terminate? Are complementary measures (for example, further requirements to notify creditors) necessary to support its commencement?

The moratorium should not commence until verification has been conducted to ensure the company is eligible to access the moratorium.

AICM members recommend this verification is conducted under a court process or at a minimum by a registered liquidator.

Notification to creditors is essential to allow them to actively manage their exposures, the moratorium should not commence until it is reasonable to expect that all creditors have been notified.

Question 4: How long should the automatic moratorium last? Should its continued application be reviewed by the Court at each hearing?

A moratorium should last no longer than 30 days. Moratoriums significantly impact credit providers and therefore should be kept to the minimum viable period.

While AICM members generally oppose extensions, there are likely to be circumstances where an extension maybe in the creditor's best interests.

AICM members recommend that an extension should require approval by the majority of unrelated creditors (by dollar and number) before an application is made to the court. This process could be conducted efficiently using technology and provides efficiencies to the court reviewing the application and minimises costs for creditors wishing to object to the extension.

Question 5: Are additional protections against liability for insolvent trading required to support any automatic moratorium?

Insolvent trading is a significant cost to credit providers and occurs in most insolvencies. Therefore directors should only be provided protection from insolvent trading if they have acted in a timely manner and once creditors are on notice.

Question 6: What, if any, additional safeguards should be introduced to protect creditors who extend credit to the Company during the automatic moratorium period?

If a moratorium is provided without full disclosure, impacts on credit providers will include:

- Being unwittingly exposed to significant risks.

- Unable to make informed decisions.

- Inefficiencies such as undertaking recovery action when a moratorium is in place.

Creditors and other stakeholders should be informed of the moratorium by requiring disclosures as soon as it commences, in the same way as in Voluntary Administration and other processes.

ASIC company searches should reflect the moratorium in a similar way that Voluntary Administrations and other processes are reflected. This ensures creditors are able to search the register and the information flows through the relevant credit bureaus that provide alerts and monitoring services (used daily by credit professionals). This is the most efficient way to ensure credit providers are on notice and can make fully informed decisions.

Question 7: Should the insolvency practitioners assisting the Company with the scheme of arrangement be permitted to act as the Voluntary Administrators of the Company on scheme failure?

AICM members favour the administrator and/or liquidator being independent of the insolvency professional assisting a company with the scheme of arrangement to ensure there is review of the advice and conduct during this period.

This would provide greater creditor confidence that the schemes are only used by a genuinely distressed company and not used to defeat unrelated creditors.

Question 8: Is the current threshold for creditor approval of a scheme appropriate? If not, what would be an appropriate threshold?

AICM members support the threshold of 75% of creditors by number and value. Lower thresholds are likely to be detrimental to genuine creditors and enable manipulation by a minority.

AICM members don't support cross-class cram down generally but acknowledge it may be beneficial to creditors in select circumstances. If cross-class cram downs are to apply, it should only be possible with court approval and with adequate opportunity for creditors to oppose.

Question 9: Should rescue, or 'debtor-in-possession', finance be considered in the Australian creditors' scheme context?

AICM members do not support rescue financing without strong controls to minimise the impact on ordinary creditors returns in a subsequent liquidation.

Such controls could include rescue financiers only obtaining a return if it can be substantiated that the financing resulted in a better outcome for other creditors, or it would have if not for an unforeseeable factor.

Without controls on rescue financing, creditors could face further eroded returns from insolvency, further disincentivising support of businesses displaying signs of insolvency.

Question 10: What other issues should be considered to improve creditors' schemes?

Due to the very limited use of schemes of arrangements, AICM members do not have specific issues to be addressed.

Question 11: Are there any other potential impacts that should be considered, for example on particular parties or programs? If so, are additional safeguards required in response to those impacts?

Whilst ARITA represent insolvency professionals, the proposed structure included in their submission again shows their recommendations on insolvency reform balance and the interests of all stakeholders including credit providers.

The ARITIA proposal has received a limited review by AICM members and is broadly supported for further consideration. The key features of this proposal ensures a viable business to restructure effectively whilst balancing interests of creditors, other stakeholders (including government) and includes controls to prevent abuse.

AICM members feedback has shown that the following elements are key to enabling financially distressed business to restructure and a viable entity to emerge:

- Risk of payments being deemed voidable preferential payments

Treatment of payments made to creditors immediately prior and/or during a scheme of arrangement is critical to ensure credit providers continue to support businesses displaying signs of insolvency.

AICM members professional obligation to mitigate risk of preference payments is a key factor limiting their ability to provide continued credit and payment arrangements to businesses displaying signs of insolvency. By removing this risk more businesses will be provided the space to restructure without the need for a formal process.

The current preference claim regime is a disincentive for creditors to support viable business displaying signs of insolvency. It imposes losses, costs and inefficiencies on creditors who provide support in addition to the loss exposure at the point an insolvency process commences.

The evidence for the benefits of limiting the recovery of preference claims is seen through the implementation of limitations in the new simplified liquidations process. AICM members have reported these limitations are a significant step forward that should be built on to cover all insolvencies.

In addition to calling for general reform of preference claims, AICM members recommend the reform of scheme of arrangements ensure payments received before and during a moratorium are protected from preference payment claims in a subsequent liquidation.

- Clarity on fundamentals for creditors

Creditor support for restructuring and long-term prosperity of a company will be best achieved when there is clarity as to:

- When/if creditors get paid for pre-moratorium debt and moratorium debt?

- Who is liable for these debts?

- Priorities for payment.

- Security over assets such as supplies of stock secured by PPSR registration.

Uncertainty or eroding the creditors position on these elements will result in credit providers focusing on recovery of their debt and stock rather than supporting the restructure.

- Role of the insolvency professional

AICM members are generally sceptical of debtor-in-possession models due to the inherent risks of trading with insolvent entities and the absence of independent assessments and controls.

Creditor-in-possession models provide confidence to credit providers that their interests will be a priority and any misuse or debtor related causes of the solvency are identified and mitigated by an independent insolvency professional who is appropriately skilled and qualified.

The SBRP experience has shown that creditor confidence in the process is critical to success. Where the Restructuring Practitioner is anything less than an unrestricted registered liquidator, AICM members would immediately be hesitant to support a restructuring plan.

Balancing debtor-in-possession models with requirements that address creditors concerns will provide better outcomes for all stakeholders and maximise the value in the restructured entity.

We welcome the opportunity to further contribute to the discussion of reform of schemes of arrangement.

Yours sincerely

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
02 8317 5085 nick@aicm.com.au

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5 March 2021 

Manager, Market Conduct Division
The Treasury
Langton Crescent
PARKES ACT 2600

Email: MCDInsolvency@Treasury.gov.au   

Increasing the statutory demand threshold

The Australian Institute of Credit Management (AICM) appreciates the opportunity to participate in this consultation.

The AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through.

  • mitigating risk;
  • maximising growth; and
  • applying sound credit principles and practices.

 

Without our members, businesses are exposed to reputational damage, poor cash flow management and inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM members do not support an increase to the statutory demand threshold, with the key factors for this position being:

Members are not aware of any research or data supporting claims that the current threshold is being systematically abused. Further, the cost or benefits of increasing the threshold have not been assessed.

Members are concerned that an increased threshold will increase the cost of providing credit as a result of an increase in the intentional avoidance of debts and a reduction in debtor creditor engagement.

Will reduce creditors ability to identify and mitigate high risk exposures.

It may increase barriers to accessing to credit, reduce competitiveness and increase risks for small businesses.

We expand on these points in response to the questions in the discussion paper.

Question 1: Should the threshold at which a statutory demand can be issued on a company be increased?

AICM members do not support an increase to the threshold for the following reasons:

  • There is no evidence that change is needed.

While members initially felt $2,000 is a relatively low threshold, they do not support an increase as there are clear and significant known negative consequences (detailed throughout this submission) that will result from an increase.

Members strongly recommend that research is conducted to understand the range of amounts statutory demands are currently issued for and what benefits would be achieved by increasing the threshold weighted against the negative consequences highlighted in this consultation.

The threshold will increase active avoidance of obligations.

A survey of AICM members in August 2020[1] following 3 months of the temporary increase to $20,000 and announcement of the extension until 31 December 2020 provided a clear indication that an increased threshold leads to an increase intentional avoidance of debts.

The responses to our survey clearly showed:

Overwhelming opposition to the increased threshold and time frames.

The increases created significant negative consequences impacting creditors ability to:

engage with customers that are solvent,

support customers that are impacted but viable, and

identify those that are insolvent and not viable.

Debtors not impacted by COVID-19 used these extensions to actively avoid meeting their obligations. 

This survey shows that an increase in threshold will be used by a significant number of entities that actively seek to avoid their obligations.

Additionally, at the current threshold of $2,000 members routinely experience customers with capacity to pay sighting the threshold as the only reason for not meeting their obligations to creditors. An increase in the threshold will increase this behaviour and increase the costs worn by credit providers.

The threshold can reduce the ripple effects of insolvent trading and minimise unfair advantages obtained by business that avoid their obligations.

The nature of the statutory demand process is that a solvent and viable business should be able to satisfy a demand.  It follows that businesses unable to satisfy demands issued at or near the $2,000 threshold are not viable.

A negative consequence of an increased threshold is that unviable businesses continue to trade and accumulate debt.  This increases the ripple effects of insolvencies and is manipulated by businesses seeking to obtain an unfair advantage over businesses that do meet their obligations under this threshold.

AICM members are reporting several incidences of businesses that were moving to insolvency in March 2020 that are only now close to or actually entering insolvency processes that have debt levels 10 times higher due to the temporary moratoriums.

Issuance of statutory demands has a high correlation with future default.

Credit providers rely on past performance to identify future credit behaviours of customers and manage risk exposures.  Without efficient access to information that strongly correlates to future default risk, credit providers are unknowingly exposed to risk which they aren’t able to mitigate.

It is important to emphasise that credit providers take all information into account, both positive and negative, when making credit decisions. When presented with materially adverse information credit professionals will engage with customers to understand the viability of the business and mitigate risks in order to provide credit.  Our members role is to make fully informed credit decisions to enable sales and credit that is mutually beneficial to customer and creditor.

Discussion with Equifax has revealed that while issuance of statutory demands is not incorporated in credit reporting the resulting absence of court writs and court judgements of an increase in the threshold to $10,000 will result in impairment of the ability of credit providers to identify future: 

defaults by anywhere up to 36% (court writs) and 52% (court judgements) respectively.

insolvency by up to 28% (court writs) and 43% (court judgements) respectively.

Further, Equifax analysis has shown currently any business having creditor demands, court judgements and/or writs between $2k to $5k is assessed as being approximately 10 times riskier than the population average.

Existing measures protect viable businesses with temporary solvency issues.

The insolvent trading safe harbour is a well-established process that enables businesses of all sizes to orderly restructure their business and address solvency concerns.

Additionally, the commencement of the Small Business Restructuring Process on 1 January 2021 provides an additional avenue for businesses with temporary solvency concerns and unable to satisfy statutory demands to restructure and ensure viable businesses are able to continue. 

The existing threshold is on par with other jurisdictions.

We note the research of Australian Restructuring Insolvency and Turnaround Association (ARITA) that the existing minimum debt threshold in Australia of $2,000 is of a similar quantum to that which applies in the United Kingdom (£750) and New Zealand (NZD $1,000).

The current process provides protection from abuse.

AICM members strongly oppose abuse of statutory demands and note that best practice credit professionals will undertake all reasonable steps to encourage engagement before issuing statutory demands, noting that the costs of issuing demands creates commercial motivation.

Further the current process contains measures to validate, oppose or respond to the statutory demand. A debtor can have a statutory demands set aside due to existence of a dispute, set-off or if the debt is compounded.

Question 2: If the threshold is increased, to what amount should it be increased and why?

AICM members do not support an increase in the threshold.

If an increase to the threshold is to be considered further the AICM welcomes the opportunity to assist government research through its relationships with the major credit reporting bodies, credit providers, debt recovery firms and legal entities to quantify the impacts.

We are confident that research could quantify the impacts of multiple threshold levels to determine a threshold that maximises benefits and minimises negative consequences.

Question 3: If the threshold is increased, when should this change come into effect?

Noting the likely significant consequences, a minimum of 12 months should be provided from passing of legislation to enable industry to adapt.

Question 4: What will be the impacts of increasing the threshold?

Noting the earlier negative consequences of an increased threshold AICM members expect impacts to include:

Lessen creditors appetite to provide credit terms for supplies under the threshold.

To negate the negative consequences of providing credit supplies below the threshold credit providers may impose greater requirements on these amounts or require payment before supply.

This would result in a situation where larger purchasers are afforded greater advantages and able to exert more market power over their competitors.

Reduce motivation for debtors to engage with creditors.

When reflecting on the impacts of the COVID-19 pandemic a positive outcome reported by AICM members is customers in financial distress have increasingly engaged in open discussions when experiencing financial pressures.  

AICM members advise that the temporary restrictions on issuing statutory demands was a small factor creating this change but sight commercial benefits as the key drivers including:

  • Providing the support creates stronger customer relationships.
  • A better return is achieved by providing viable businesses more time to pay as opposed to enforcement actions.
  • Legal enforcement is costly and time consuming.
  • Insolvency of the business is unlikely to provide any return to creditors.


An impact of increasing the threshold will be reversing this positive trend due to a reduced incentive for debtors to engage with creditors as they rely on the increased threshold and don’t engage to resolve their financial hardship.

In addition to increasing costs and inefficiencies for credit providers, small business owners will face greater impacts on their ability to resolve their financial position and restart due to increased debt and lack of engagement.  By engaging early credit providers are more likely to be able to assist viable businesses with debt forgiveness, payment deferrals and/or repayment arrangements maximising the outcomes for both parties.

Impacts on small businesses.

While not experts on small business members were drawn to comment on potential impacts. 

Small business credit as providers may be more financially impacted by an increased threshold as reduced avenues to enforce payment of debts and identify high risk customers may have more significant impacts on their solvency and personal finances.

As customers, small businesses may be less able to obtain credit terms for supplies below the threshold if credit providers appetite to provide credit changes as a result of an increased threshold. Specifically the AICM notes AFSA statistics showing trade credit represents a similar proportion of the credit provided to individuals in business, with 32% of bankrupts’ debt being owed to trade creditors and 35% to banks[2].  A restriction in access to this trade credit for small businesses may further tilt the tables in favour of larger businesses.

We welcome the opportunity to discuss our submission further.

Yours Sincerely

 

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
02 8317 5085
nick@aicm.com.au

 [1] https://aicm.com.au/news-resources/articles-news/aicm-covid-19-survey-results-august-2020/

12 February 2021

Treasury
Langton Crescent
Parkes ACT 2600
By email: CreditReforms@TREASURY.GOV.AU

National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021

The Australian Institute of Credit Management (AICM) appreciates the opportunity to participate in this consultation.

The AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through

• mitigating risk;
• maximising growth; and
• applying sound credit principles and practices.

Without our members, businesses are exposed to reputational damage, poor cash flow management and inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM members support the licencing requirements to encourage the standard of practice to be improved and therefore providing protections to consumers.

Below are recommendations to further strengthen the regime and ensure it meets the stated objectives.

1. Capture services provided to individuals in all credit relationships.

AICM members noted that credit repair activities expand beyond those provided to individuals in their capacity of debtor to consumer credit arrangements and includes:

- As guarantor under consumer credit contracts,

- As guarantor under commercial credit arrangements e.g. as a director of a corporate entity, and

- As a sole trader under commercial credit arrangements.

AICM recommends expansion of the definition to providing credit reporting assistance to an individual in all credit or debt related matters not just as a consumer credit contracts.
If all forms of credit activity are not encompassed the poor practices and predatory behaviour could be allowed to continue in this space.

2. Capture all forms of credit activity.

AICM member noted that credit repair activity is not only in relation to payment defaults or payment information. Members also see activity in relation to credit enquiries recorded when credit applications are received but a contract not entered.

AICM members recommend ensuring that all forms of credit repair activity is captured not just when a credit contract has been entered to ensure loop holes do not exist for predatory behaviours to continue.

3. Further obligations on the licence holder

AICM members called for specific obligations to prevent activity such upfront fees, non-transparent fee structures and high pressure sales tactics.

Specifically preventing these detrimental activities and others identified by the Australian Securities and Investments Commission (ASIC) Report 465 which presented findings of its research into debt management firms will provide clear mechanisms to enforce.

4. Ensuring commercial credit providers can lodge complaints with AFCA.

AICM's trade credit members regularly report concerns about the activities of credit repair and debt management firms that are belligerent and a result of services sold to individual that are not in their best interest. Currently there isn't a clear avenue for them to report this activity and support the individual to achieve a better outcome.

It would be beneficial for commercial trade creditors who are not members of AFCA to be able to lodge complaints in relation to firms that breach their responsibilities and obligations. This would ensure AFCA is able to receive all complaints and allow better identification of systemic issues and deterrence of poor behaviour.

We welcome the opportunity to discuss our submission further.

Yours sincerely

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
02 8317 5085 nick@aicm.com.au

 DOWNLOAD SUBMISSION

11 February 2021

By email: Bankruptcy@ag.gov.au

The bankruptcy system and the impacts of coronavirus - discussion paper

The Australian Institute of Credit Management (AICM) appreciates the opportunity to respond to this discussion paper.

 The AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through

  • mitigating risk;
  • maximising growth; and
  • applying sound credit principles and practices.


Without our members, businesses are exposed to reputational damage, poor cash flow management and inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

A focus of our consultations with members included credit professionals in providing the trade credit sector.  Trade credit is increasingly important to the success of sole traders and small business.  AFSA recently published statistics showing trade credit represents a similar proportion of the credit provided to individuals in business, with 32% of bankrupts’ debt being owed to trade creditors and 35% to banks[1]

AICM members recall the financial costs imposed on their organisations when incorrect settings in bankruptcy led to mise use of the bankruptcy process, specifically the 6 month early discharge provisions that were abolished by the Bankruptcy Legislation Amendment Act 2002.

AICM members opposed the 1 year default period proposed by the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 due to the negative consequences that would flow for debtors and creditors and remain opposed to a permanent reduction in the default period. 

While members acknowledge significant adverse consequences of COVID-19 in some sectors, generally the quality of their debtor’s ledgers are a clear sign that economic impacts do not justify a change to the bankruptcy process and show a clear reduction in the pressures that drive bankruptcy levels compared to prior to the pandemic.

AICM members expect levels of corporate and personal insolvency to increase from their current artificially low levels returning to the levels experienced to before the pandemic, however they do not anticipate a tsunami of insolvencies.  This is based on the following:

Significantly increased engagement between debtors and creditors. 

AICM members have reported customers in financial distress have increasingly engaged in open discussions when experiencing financial pressures.  While the volumes of debtor contact at the onset of the pandemic posed significant pressures on their operations, AICM members have strived to meet this with increased support for customers including repayment arrangements, debt deferrals and forgiveness.

AICM members advise that the temporary restrictions on issuing statutory demands was a small factor creating this change but sight commercial benefits as the key drivers including:

-        Providing the support creates stronger customer relationships.

-        A better return is achieved by providing viable businesses more time to pay as opposed to enforcement actions.

-        Legal enforcement is costly and time consuming.

-        Insolvency of the business is unlikely to provide any return to creditors

AICM members have reported the number of delinquent customers has reduced significantly in the last 12months.

The majority of members debtors ledgers are in better condition than prior to the pandemic with significant reductions in delinquent debt.

However within these general improvements many have several debtors who are not engaging to resolve debts as the business has ceased trading or the individuals are actively avoiding their obligations.  It is from these debtors they expect insolvencies to occur in coming months, allowing the human and financial capital tied up in these entities to be recycled into productive use.

Due to the above AICM members continue to oppose a reduction in the default period of bankruptcy and expect a 1 year default period to undermine the increase in debtor and creditor engagement. 

If the default period is reduced to 1 year for all bankruptcy’s there will be reduced incentives to engage with creditors as debtors view bankruptcy as an easy (however un-necessary) solution to financial distress.

Maximising mechanisms to encourage debtor obligations to be resolved without the use of insolvency processes is the best way to avoid negative consequences of bankruptcy. 

A repeated message received from members during consultation on personal and corporate insolvency matters is that:

 -        The current regime is too complicated even for experienced credit professionals to navigate efficiently.

 -        Creditors bear the burden of insolent trading, abuse of the system and unfair consequences such as under the preference claims regime.

 -        The complexities and inefficiencies create creditor disengagement with the process.

AICM members strongly support the calls of ARTIA and others for a holistic review of the corporate and personal insolvency regime in Australia rather than piecemeal reforms. The ultimate goal of this review should be a single insolvency regime that is:

 -        Clear for all stakeholders to understand and engage with.

-        Efficient and with the right settings to foster efficient recycling of distressed assets and viable businesses.

 -        Rewards good business practices and early engagement.

 -        Discourages abuse of the system and ability to defeat creditors.

 -        Maintains a focus for encouraging creditor engagement pre-insolvency.

We welcome the opportunity to discuss our submission further.

Yours sincerely

  

Nick Pilavidis

Chief Executive Officer

Australian Institute of Credit Management

02 8317 5085 nick@aicm.com.au

 

Annexure 

Below are expanded comments in relation to questions in the discussion paper with relevance to AICM members.

 

1.     Bankruptcy

 How do current economic circumstances impact the policy setting for a default period of one-year bankruptcy?

&

Have stakeholder views about the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 changed due to the impacts of the Coronavirus?

AICM members believe the economic circumstances and consequences of the Coronavirus pandemic do not justify changes to the insolvency system.  Further, they do not expect an increase in the level of bankruptcy’s beyond that experienced prior to the pandemic.

Noting the escalated uncertainty of future economic conditions, AICM Members noted that if conditions do deteriorate significantly they will continue to have a vested economic and reputational interest in supporting viable businesses and individuals.

Rather than experiencing negative impacts, AICM Members believe the current economic conditions since the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was debated have significantly reduced the pressures driving bankruptcies.  They sight general improvement in the level of delinquencies and credit providers increased willingness to support customers who engage with them.

 While members acknowledge there are circumstances where a reduction in the default period or earlier discharge may be appropriate, they strongly attest this will not be best achieved through a reduction in the default period to 1 year.

 A reduction in the default period will have significant negative consequences, will not result in increased entrepreneurial activity and will reduce debtor and creditor engagement pre-insolvency.

 Negative consequences of a reduced default period include:

 Debtors viewing bankruptcy as an easier solution to engaging directly with creditors.

 Increased manipulation e.g. debtors incurring debts with intention of declaring bankruptcy to avoid repayment.

 Members note that actual and perceived debtor abuse can lead to barriers and increased costs of credit as they seek to avoid and minimise their exposures and risk.

 Reduced ability for trustees to adequately detect and avoid abuse of the reduced period with related consequences including:

    • Reduced return to creditors.
    • Increased abuse of the system.
    • Creditors lack of confidence in the process.
    • Adverse impacts on creditors risk appetite.

The time frame is too short to allow the trustee to substantiate reasonable grounds to deny discharge at 1 year.

 Individuals are not incentivised to do more than the bare minimum to assist the trustee.

 Reduction of access to credit for new small business ventures.

 Members state that temporary and piecemeal changes to the insolvency system has created increased complexity and uncertainty and a key driver of creditor disengagement with the insolvency processes.  It is important to note that these impacts may be more acutely felt by small businesses who don’t have the benefit of the employing experienced credit professionals.

 For efficient deployment of economic resources, protect jobs and foster small business growth an efficient system is required.  While it has repeatedly been acknowledged that the Australian economy will significantly benefit from a holistic review of the insolvency system (such as the productivity commissions business set up, transfer and closure report in 2015[2]), there is yet to be meaningful action to achieve this.

 The AICM strongly recommends that a change to the default period is considered on its own merit and no changes to the insolvency regime are implemented until a, long overdue, thorough comprehensive review of the corporate and personal regimes is undertaken.

 How might a default period of one year benefit debtors with business related debts such as sole traders?

 Our members view the benefits for sole traders through the lens of the effect on their policies for providing support and extending credit.

 With this in mind members believe the default period of one year will have no benefits to sole traders.

 The negative impacts as summarised earlier are likely to result in tighter more restrictive policies that increase the barriers to the credit needed to fuel the growth and establishment of small businesses.

 A change in credit policy foreshadowed by members is a requirement for greater security when extending credit to sole traders.  Noting that sole traders are personally liable for credit incurred, the increased security may need to be obtained by charges over family homes or other personal assets which all stakeholders seek to avoid. 

 Do stakeholders have views on how the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 could be amended to respond to concerns about the one-year default period being made available to bankrupts for whom such a concession is not a desirable or justifiable outcome?      

A fundamental aspect of members objection to reduction in the default period is that under the current regime they regularly experience bankruptcies where the individual’s actions are a significant contributor to the bankruptcy. 

These actions include poor borrowing or business decisions through to irresponsible behaviour and actively seeking to defeat creditors.

Additionally, a one year default period may be seen as an easy short term solution to individuals that would otherwise be able to resolve their situation with creditors directly or via debt agreements and personal insolvency arrangements.

While opposed to the reduction members would support consideration of a mechanism allowing individuals to access a streamlined process or discharge after a minimum of 12 months.  This mechanism would include a requirement for the individual to satisfy a number of stringent criteria intended to:

  • Prevent access to individuals intending to misuse the bankruptcy process or have not taken reasonable steps to avoid bankruptcy.

Encourage debtors to maximise opportunities to address their obligations directly with creditors before proceeding with bankruptcy.

Members have raised the following aspects that should be assessed before an individual can move through the bankruptcy process in less than 3 years including:

  • Not a prior bankrupt.

Actions of the bankrupt have not significantly contributed to the bankruptcy.  Actions to consider would include:

    • Increasing their indebtedness when there was reasonable expectation, they were aware they are already over committed or in financial distress.
    • Has the bankrupt attempted to resolve debts with creditors?
    • Any indication the bankrupt is pursing bankruptcy with an intention to defeat creditors, i.e. discharge not possible until any indicators have been adequately investigated.


A personal insolvency agreement or debt agreement is not a viable option.

The bankrupt has fully complied and assisted the trustee.

Creditors provided a period to object to the discharge on the grounds that bankrupts actions have contributed to the bankruptcy with trustees required to investigate any objections.

By establishing an evaluation criterion the process would be able to ensure:

Individuals with a genuine need and non-complex situations will have a reduced period of bankruptcy enabling them to move forward.

Bankruptcy is not seen as an easy solution for those otherwise able to resolve their obligations.

Minimal abuse of the process.

 Current protections are not diminished.

 Trustee required to consider reasonableness.

 Additionally AICM members strongly attest that the level of current level of creditor defeating insolvency actions in business related bankruptcies warrants these assessments before early discharge is permitted. 

 If changes are implemented AICM members strongly call for a review to be undertaken within 24 months and the changes to lapse if this review is not undertaken.  The intention of this recommendation is to ensure the reduction is reversed unless a review establishes the stated objectives have been achieved.

 This position is supported by statistics published by ASIC for corporate insolvencies showing insolvent trading is identified in 71% of reports by administrators in July 2018 to June 2019 identified a misconduct of insolvent trading, this has increased from 69% in July 2017 to June 2018 and 63% in July 2017 to June 2018. These figures are relevant to business related bankruptcies as the majority of corporate insolvencies relate to small businesses and indicate the significant costs incurred by creditors as a result of the actions of business owners.

 Additional comments on bankruptcy

AICM members strongly oppose amendments to reduce the time bankruptcy can be reflected in credit reports. Equifax analysis shows that prior bankrupts are twice as likely to exhibit poor risk behaviours such as defaults, missed repayments or frequent applications for additional credit and this risk continues for 5 years after bankruptcy.

The record of prior bankruptcies is therefore necessary for fully informed credit decisions as credit providers are exposed to a higher level of risk when providing credit to prior bankrupts. To not allow credit providers access to this information for a minimum of 5 years will expose them to unnecessary risk and have flow on consequences.

 AICM members are business enablers, they look for reasons to provide credit as this is in the commercial interests of their business.  When discharged bankrupt applies for credit this fact is weighted considering the time since bankruptcy and other positive indicators such as capacity to pay and repayment history. 

2.     Debt agreements

What reforms, if any,  either  temporarily or more permanently, should be made to the debt agreement system to respond to the Coronavirus?

As stated earlier members do not support or see a need for changes as a result of the economic conditions.  This is supported by the extremely low use of the small business insolvency reforms since commencement on 1 January.

 Are there changes that could be made to the debt agreement system to make it more useable for those with business-related debts such as sole traders?

 AICM members welcome changes that reduce the use of bankruptcy and encourage use of debt agreements and personal insolvency agreements as these processes are significantly more beneficial to creditors and debtors. Credit assessments of debtors that have been through one of these arrangements are generally more favourable thank bankruptcy.

 While debt agreements are more favourable than bankruptcy, AICM members are cautious to support changes to debt agreements as these changes need to be thoroughly considered to ensure they don’t reduce the incentive to engage directly with creditors.  It would be detrimental for creditor and debtor for agreements to be pursued before exhausting pre-insolvency avenues.

 AICM members believe any changes would be best considered in a full review of the insolvency system.          

3.     Personal insolvency agreements

Could personal insolvency agreements play a greater role – either temporarily or more permanently in settling debts for individuals, including those who have business-related debt (e.g. sole traders), who are in financial distress due to the impacts of the Coronavirus?

&        

Are there barriers to the uptake of personal insolvency agreements?

AICM members noted that the personal insolvency agreements play an important role in resolving financial distress, including for business related insolvency’s however the complexity and cost of the process along with general complexity of the insolvency regimes are limit their effectiveness.

Could the processes for establishing personal insolvency agreements be streamlined to make them more attractive or more accessible, particularly for individuals with business-related debt?

AICM members support review of this process only as part of a whole of insolvency system review. 

4.      Offence Provisions

What new or expanded offence provisions could respond to concerns about the abuse of a one year default period of bankruptcy?

While increased provisions would be essential to attempt to deter the abuse of a one year default period it is unlikely any offences will successfully deter misuse.

Preventing misuse by limiting access to a bankruptcy period of less than 3 years will be exponentially more effective than offence provisions and ensure those that have acted reasonably are not unduly prevented from moving forward.

Should one year default period be implemented AICM members expect significant increase in activity of untrustworthy advisors and therefore strongly support the introduction of offence provisions that target the provision of untrustworthy advice.

 When seeking feedback on offences AICM members quickly move to call for proactive measures that educate individuals (especially those engaged in business) and encourage best practices such as engaging with appropriately qualified insolvency experts at an early stage.  As continued uncertain economic conditions are expected for several years AICM members urge urgent action such as voucher systems to encourage access to advise early.

Additionally, AICM members believe that appropriately qualified professionals are essential to an efficient insolvency system and provide confidence to creditors.  There should not be lowering of the bar that has been seen with restructuring professionals.  Maintaining high levels of educational and qualification requirements of professionals licenced to operate in the insolvency system at the levels required of liquidators and registered trustees is essential to creditors confidence in the system.

 

12 February 2021

Treasury
Langton Crescent
Parkes ACT 2600
By email: CreditReforms@TREASURY.GOV.AU

National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021

The Australian Institute of Credit Management (AICM) appreciates the opportunity to participate in this consultation.

The AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through
• mitigating risk;
• maximising growth; and
• applying sound credit principles and practices.

Without our members, businesses are exposed to reputational damage, poor cash flow management and inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM members support the licencing requirements to encourage the standard of practice to be improved and therefore providing protections to consumers.

Below are recommendations to further strengthen the regime and ensure it meets the stated objectives.

1. Capture services provided to individuals in all credit relationships.

AICM members noted that credit repair activities expand beyond those provided to individuals in their capacity of debtor to consumer credit arrangements and includes:

- As guarantor under consumer credit contracts,

- As guarantor under commercial credit arrangements e.g. as a director of a corporate entity, and

- As a sole trader under commercial credit arrangements.

AICM recommends expansion of the definition to providing credit reporting assistance to an individual in all credit or debt related matters not just as a consumer credit contracts.

If all forms of credit activity are not encompassed the poor practices and predatory behaviour could be allowed to continue in this space.

2. Capture all forms of credit activity.

AICM member noted that credit repair activity is not only in relation to payment defaults or payment information. Members also see activity in relation to credit enquiries recorded when credit applications are received but a contract not entered.

AICM members recommend ensuring that all forms of credit repair activity is captured not just when a credit contract has been entered to ensure loop holes do not exist for predatory behaviours to continue.

3. Further obligations on the licence holder

AICM members called for specific obligations to prevent activity such upfront fees, non-transparent fee structures and high pressure sales tactics.

Specifically preventing these detrimental activities and others identified by the Australian Securities and Investments Commission (ASIC) Report 465 which presented findings of its research into debt management firms will provide clear mechanisms to enforce.

4. Ensuring commercial credit providers can lodge complaints with AFCA.

AICM's trade credit members regularly report concerns about the activities of credit repair and debt management firms that are belligerent and a result of services sold to individual that are not in their best interest. Currently there isn't a clear avenue for them to report this activity and support the individual to achieve a better outcome.

It would be beneficial for commercial trade creditors who are not members of AFCA to be able to lodge complaints in relation to firms that breach their responsibilities and obligations. This would ensure AFCA is able to receive all complaints and allow better identification of systemic issues and deterrence of poor behaviour.

We welcome the opportunity to discuss our submission further.

Yours sincerely

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
02 8317 5085 nick@aicm.com.au

dOWNLOAD SUBMISSION 

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24 November 2020

Manager
Market Conduct Division
Treasury
Langton Crescent
Parkes ACT 2600

By email: MCDInsolvency@Treasury.gov.au

Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 – Draft Regulations

The Australian Institute of Credit Management (AICM) supports the intended outcomes of the Insolvency Reforms to Support Small Business however, based on the current drafting of the bill and regulations we believe these will not achieved.

Key themes of review include:
- Operation of the Restructuring is inefficient.
- Risks to creditors will increase.
- Drafting of the Bill, Regulations and Explanatory Memoranda lack clarity.
- Lack of clarity, certainty and confidence for creditors in the process.
- Opportunity for manipulation to defeat creditors and facilitate illegal phoenix activity.

Due to these concerns it is our member's position that it is likely the reforms will result in creditors mitigating risk by reducing credit terms offered when businesses are displaying signs of insolvency and being unwilling to support restructuring proposals. These concerns would result in more businesses entering creditor in possession insolvency processes and reduce the availability of credit to support viable businesses that could otherwise restructure.

Additionally, the absence of a requirement for creditors to vote on a next step when a plan or proposal fails is likely to result in zombie companies and/or greater preference for creditors to obtain and pursue personal guarantees in order to mitigate risks when extending trade credit.

In addition to our recommendations (and those of ARITA and AFIA) we recommend that the Restructuring and Simplified Liquidation process have a sunset clause of 2 years unless a full review is conducted and recommendations implemented.

A thorough and immediate review of the whole insolvency regime is fundamental to ensuring best outcomes. Industry generally agrees that the current regimes need thorough review and improvement, should these reforms be implemented with flaws already evident the trust and integrity of Australia's business environment will be significantly eroded.

We detail our concerns and expand further in Attachment A along with our submission on the exposure draft bill.

We welcome the opportunity to discuss our submission further.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
T: 61 2 8317 5085
E: nick@aicm.com.au

 

Attachment A
1 - New Debt Restructuring process

Eligibility for the debt restructuring process

AICM members are not confident the eligibility criteria are appropriately set to ensure the intended companies will be able to access the process and concerned they do not support efficient operation of the process.

$1 million liability threshold

As stated in our prior submission the $1 million liability threshold is too high and other measures would be better suited. It is AICM's view that several small businesses may be ineligible due to the high credit requirements and cost of inputs while larger businesses with low credit requirements may gain access.

Books and records

AICM recommends inclusion of a requirement to have good books and records as a criteria for eligibility.

As the records of the company will determine the efficiency of the company to prepare a plan and the SBRP to assist and certify the plan good books and records are essential to the success of this process. We also note that the requirement should be balanced such that businesses that have made a reasonable attempt to maintain good books and records would be eligible.

The requirement to have reliable and accurate books and records will:
- Ensure the efficiency of the process.
- Allow the SBRP accurately assess the viability of the business whilst minimising costs.
- Aid the SBRP ability to certify that the company is able to meet its obligations under the plan will be costly if records aren't available.
- Ensure businesses accessing the process have the fundamentals in place to assist their long term viability and ability to honour a successful proposal.
- Give creditors greater confidence in the plan and prospects of meeting the plan.

Contingent liabilities

AICM recommends – detailed clarification of the term 'contingent liabilities' is required to provide clarity between the accounting and legal concepts.

Further, it is unclear who will be responsible for calculating contingent liabilities, the creditor, company or SBRP.

The exclusion of contingent liabilities further jeopardises the likelihood the plan will be accepted or be capable of completion. To expand:
- The restructuring process and/or plan will be derailed if contingent liabilities become due.
- Without clarity of these potential liabilities creditors aren't able to have certainty or confidence the process will be beneficial or assess the risks associated with the plan.
- By including information of contingent liabilities creditors can be fully informed when the process commences and/or when assessing a proposal.

Debt restructuring period

No Disclosure the value of creditors debt values or claims

As an accurate value of debts is not established until the plan has been formulated and presented to creditors, AICM member experience with companies entering insolvency processes indicate the majority of proposals will be based on debt values that are significantly understated.

AICM strongly recommends - the process is revised to ensure debt values are verified as early as possible by:
- Providing a schedule of debts with the directors' declaration and this included with the SBRP's notice to ASIC and Creditors; and/or
- Requesting creditors submit a proof of debt in the notice to creditors.

This recommendation will:
- improve the quality of the proposed plan,
- make the process much more efficient, and
- give creditors more confidence in the process.

Declaration of employee entitlements and tax lodgements

It is important for details of these liabilities and obligations to be established before preparation of a plan and to assess the likelihood of a successful plan being established.

The absence of a requirement to declare employee entitlements and tax lodgements are up to date (or can be brought up to date) before a plan is entered leaves opportunity for manipulation including obtaining a statutory protection to conduct transactions that defeat creditors.

AICM recommends - a requirement to declare employee entitlements and status of tax lodgements is made at the commencement of a restructuring plan.

Directors declaration

Currently the declaration specifically permits the directors to omit preference payments to related parties from this declaration. This is a significant omission which will be manipulated.

AICM Recommends – the declaration also consider related party preference payments.

Additionally, Creditors will not have confidence that the declaration is accurate and reliable if the SBRP is not experienced with insolvency and the operation of legislation related to voidable transactions. Further, a lack of experience with insolvency will increase the time and cost of the SBRP assisting with this declaration.

Ordinary course of business

While the ability of businesses to continue to trade is supported AICM members are concerned the subjective nature of this term may be manipulated by those seeking to defeat creditors. Further, the subjective nature of this test, low value of transactions and cost of enforcement it is unlikely manipulation can be successfully deterred or prosecuted.

This is a significant concern that could erode creditor confidence in this process and reduce willingness to support proposals.

This concern supports the need for the SBRP to be at same standing as liquidators to ensure they are able to efficiently identify transaction not in creditors interest and detect attempts to defeat creditors.

It was also noted that there is no restriction to transactions not in ordinary course of business once a plan is made. This may allow the company to enter transactions related to assets not bound by the plan but critical to the business jeopardising the plan.

The AICM Recommends – standard terms include restrictions to transactions that are reasonably likely to affect the performance of obligations under the plan.

PPSA Securities

While the ability of businesses to continue to trade is supported, operation of the regulations will erode creditors rights which could lead to credit being withdrawn from companies displaying signs of insolvency due to:

- Un-perfected Security interests vesting in the company.

While the vesting aligns with other insolvency processes, it would be unjust for the company to benefit from these assets where restructuring ends, the plan is rejected, or the plan fails.

- Unclear if creditor rights to proceeds of goods sold during ordinary course of business and subject to PPSA registrations.

AICM recommends – redrafting of these sections to allow creditors to maintain their security interests

Liability for trade during restructuring period

Greater clarity as to who bears the liability to debts incurred during the restructuring period is sought by AICM members.

While it is understood the company will be liable, clearer detail in the explanatory memorandum is sought on whether or not these amounts will be captured by the plan.

Timing of notice being provided to creditors

The Restructuring Processes commences when directors appoint an SBRP but creditors may not be notified until 5 days later. This creates a 5 day period where creditors rights are affected but they are not informed.

As debts during a restructuring period are at extreme risk of not being paid in full (plus there is uncertainty if these debts are payable by the company or captured by the plan) it is unreasonable to blindly expose creditors to this risk.

AICM recommends - commencing the process once the notice is published with ASIC and provided to creditors.

The consequence of not addressing this may be to increase creditors hesitation to extend credit to companies displaying signs of insolvency in order to mitigate risk.

Remove the term "arrangements"

The use of "arrangements" when describing transactions prior to restructuring maybe too broad as it captures:
- Credit agreements for supply on order, further limiting creditors ability/willingness to supply on credit terms during the restructuring.
- Pricing agreements for supply on order, resulting in suppliers to revert to full retail pricing during restructuring.
o If creditors lose rights to proceeds of goods subject to PPSR registration this significantly increases their risk and mitigation is to reduce sale of goods on credit to businesses displaying signs of insolvency.

AICM recommends removal of the term arrangements.

The Small Business Restructuring Professional

As noted throughout our submission the creditors willingness to engage in the restructuring process and support proposals will hinge on their ability to be confident their interests are protected and being overseen by the SBRP.

While we support the intent to minimise the cost of the process, we recommend that this is best achieved by ensuring the SBRP is appropriately qualified, educated and experienced to conduct insolvency appointments.

To achieve the best outcomes for all stakeholders the SBRP needs to assist the directors with minimal disruption to the operation of the business, assess their plans, consider a diverse range of creditors, navigate complex legislative requirements and have a working knowledge of other insolvency processes. Further, the nature of this legislation indicates much of the operation of the process and decisions will only be clear after repeated use and/or establishment of case law.

Therefore, AICM recommends that SBRP's are only fully registered liquidators for a minimum of 12 months when registration requirements could be reviewed.

Alternatively, if the SBRP is capable of holding a restricted registration the AICM recommends this is disclosed on all communications and they are not entitled to hold themselves out as a 'liquidator'. This will ensure creditors are able to fully understand the capacity in which they act.

Fixed price remuneration

AICM members are concerned that due to the uncertainty of the work that will be required by an SBRP fixed price remuneration may lead to:
- Over quoting of the fee to cater for uncertainty.
- Short cutting work creditors would rely on to be confident their interests are protected.

Debt restructuring plan

Minimum detail provided with plan

Creditors ability to approve the plan will require them to be provided with sufficient information to assess the business case for incurring a bad debt. As structured the proposal is not required to contain information that will enable creditors to efficiently assess the proposal.

Without inclusion of a minimum level of information:
- Creditors may not engage with the process
- Creditors are likely to seek details from the SBRP which will increase costs and impact the efficiency of the process.
- Companies seeking to defeat creditors may manipulate this to obtain further time.

AICM recommends – Proposals include at a minimum:
- The reason restructuring is needed,
- Details of the company's assets,
- How restructuring will enable the business to continue trading, and
- What factors will support the company meeting obligations under the plan.

5 year period

Business conditions are likely to be tough for many years to come and the business environment is increasingly volatile and dynamic, therefore the longer the term of a plan the greater risk of failure making the potential returns to creditors less certain.

It can also be assumed that a standard maximum term of 5 years is likely to result in most plans being made for this term.

AICM recommends – 2 year standard maximum term, with the ability of the SBRP to approve up to 3 years where it can be shown this is in creditor's interest.

Value of secured debts

The value of secured debts is likely to be contentious as while the regulations state secured debts are valued to the extent the debt exceeds the security there is uncertainty as to:
- Who values security? Debtor, creditor or company
- What valuation method is used? Forced sale, Market value, retail value or wholesale value.
- The dispute resolution process on the value of security

Treatment of payments made under a plan that terminates

The regulations do not state if payments received under a plan would be voidable as an unfair preference payment if the company subsequently enters a liquidation process.

Should these payments be subject to preference claims creditors willingness to support restructuring would be further eroded.

AICM recommends the regulations specifically exempt payments made to unrelated creditors from voidable preference claims.

SBRP certification of the plan

To emphasise our earlier recommendation, we note the certification of the plan will only provide confidence to creditors if they are able to rely on the SBRP's knowledge, qualifications and experience.

Disclosure of debts

Currently a disclosure of debts included in the formulation of the plan is only made when the plan is provided to creditors.

As noted earlier, the ability for plans to be formulated and accepted efficiently requires the value of debts being verified as early as possible.

The regulations permit an SBRP to cancel a company's proposal to make a restructuring plan if one or more affected creditors were not disclosed in the proposed restructuring plan. It is highly likely this will happen in the majority of plans hence our earlier strong recommendation that the process is amended to efficiently establish the value of debts long before a proposal is put to creditors.

Accepting a proposal for a restructuring plan

Disclosure of proposed plan

Ensuring creditors receive the plan as quickly as possible to ensure efficient operation of the process. AICM members are concerned that the plan will be sent using records of the small business that may be incorrect. This is a significant issue for businesses (including SME creditors) that are don't monitor ASIC notices and where the company's primary contact point is a generic address such as remittances@creditor.com as these addresses are often monitored by technology unable to identify urgent items such as these plans.

AICM recommends the SBRP is required to:
- Make reasonable efforts to validate contact details for creditors. Such as comparing company records to PPSR records, ASIC records and invoices received by the company.
- Lodge the plan with ASIC, this will ensure that any creditors omitted from the plan and not notified by the SBRP will be able to access details of the plan and SBRP efficiently and provide details of the debt most efficiently.

Period to respond

Under the proposed structure creditors expect the voting on proposals to be highly ineffective and prone to failure considering:
- The first plan is highly likely to change when accurate debt values are agreed, and omitted creditors included.
- The process to assess the value of debts and amend the proposal could be repeated numerous times.
- Changed proposals could be misinterpreted from a duplication of a prior proposal.
- Failure to amend a vote following a change could result in an unsatisfactory proposal being accepted or vice versa.
- Costs to the SBRP will increase due to the repeated assessments and changes to the plan.

AICM Member experience strongly indicates the above will be highly likely in the majority of restructuring processes and is a key factor that will erode the ability of the debt restructuring processes success.

Acceptance by the majority in value

The acceptance by majority in value will create an imbalance of power toward creditors with large debt values.

AICM recommends – Voting aligned with the current voluntary administration process which will ensure lessor valued creditors do not lose power and maximise uniformity between processes.

Acceptance by the majority in value

The acceptance by majority in value will create an imbalance of power toward creditors with large debt values.

AICM recommends – Voting aligned with the current voluntary administration process which will ensure lessor valued creditors do not lose power and maximise uniformity between processes.

Purchased debts valued at amount paid

The AICM supports this measure to ensure related parties and others with vested interests are unable to manipulate the process.

Termination of the Process

As detailed in our prior submission AICM strongly recommend that a creditor vote is taken to decide the next step when a proposal is not accepted or the process otherwise cancelled.

This is especially relevant where a proposal has been made and the business deemed insolvent.

To further support the recommendation AICM members have noted that likely reactions to a terminated plan would be:
- To deem the company insolvent and not trade with the entity.
- As no plan could be formulated wind-up proceedings are unlikely to provide a commercial return so unlikely to be initiated, potentially resulting in zombie companies.

An orderly decision on the next step should include options to return to directors, liquidation or voluntary administration. This would ensure that all viable options to maximise outcomes for all stakeholders are available and explored.

The effect of making a restructuring plan

Creditors debts not included in the plan can be admitted by SBRP after plan made

While initially supportive of this inclusion members noted that their concern that they are not afforded an opportunity to accept or reject the revised/reduced return that would result.

This is a significant concern as it undermines the certainty of the initial plan and the clarity of the process.

AICM recommends – creditors are afforded another 5 day period to accept or reject the revised plan

Terminating a plan

AICM members support the termination of a plan if the company/directors provided misleading information, however it is unclear if the creditors debts remain compromised.

AICM recommends – that when a plan is terminated, especially due to misleading information, the full value of the debt admitted, less any payments, is due and payable on the day the plan is terminated.

General Comments

Exemptions and disputes to be dealt with by application to courts

Due to time and cost, the use of courts to deal with disputes does not provide creditors confidence in the process and further the supports the need for the SRBP to be a full liquidator.

SBRP to declare referral fees paid

AICM members strongly object to the inclusion of this regulation which legitimises the use of referral arrangements and erodes the independence of the SBRP and confidence in the process.

Meetings of creditors

AICM recommends - meetings of creditors are able to be held if the practitioner deems it would provide efficiencies, the circumstances warrant their use or the meeting would benefit creditors.

2 – Simplified Liquidation

Voidable transactions

AICM members welcome the amendments to circumstances that preference claims can be pursued however repeat our previous recommendation that preference claims to un-related creditors in the ordinary course of business are exempt to minimise the ripple effects of insolvencies.

Further the reduced circumstance don't reduce the time frame required for a claim to be brought by the liquidator, currently 3 years.

AICM strongly recommends – the time frame for a preference claim to an unrelated creditor be reduced from 3 years to 12 months

To support this recommendation we note that the AICM has been discussing this criteria with insolvency practitioners, legal professionals and other industry and business groups for several years (including in a panel discussion during the ARITA online conference this month with 300+ insolvency professionals attending). Despite this extensive consultation the AICM is yet to receive an objection to the 3 years being reduced to 12 months.

Meetings of creditors
As previously stated, meetings of creditors can provide efficiencies to all stakeholders and should not be prohibited from taking place. The AICM also notes comments of ARITA that the restriction of meetings may diminish the liquidators ability to achieve outcomes beneficial to creditors such as to collect payment of an outstanding claim of the insolvent entity by reaching a reduced settlement rather than no payment or incurring legal fees.

AICM recommends - meetings of creditors are able to be held if the practitioner deems it would provide efficiencies, the circumstances warrant their use or the meeting would benefit creditors.

 

download submission


24 November 2020

Ms Amy Auster
Chief Adviser Markets
Financial System Division
Treasury
1 Langton Crescent
CANBERRA ACT 2600
By email: amy.auster@treasury.gov.au

Dear Amy

National Consumer Credit Protection Amendment (supporting economic recovery) Bill 2020

The Australian Institute of Credit Management (AICM) appreciates the opportunity to participate in the consultation these amendments to improve the flow of credit to consumers and small businesses.

The AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes through
- mitigating risk;
- maximising growth; and
- applying sound credit principles and practices.

Without our members, businesses are exposed to reputational damage, poor cash flow management, inefficient processes. Their employers are at risk of breaching regulatory requirements and not getting paid for hard won sales and services delivered.

Our members are the custodians of cash flow. They assess credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM members support the intention of these bills, particularly to provide clarity and efficiency in the assessment and provision of credit to support economic recovery whilst maintaining necessary protections for consumers.

The AICM has reviewed the submissions of the Australian Finance Industry Association (AFIA) and Equifax. On behalf of our members we strongly endorse their submissions.

Below is detail of elements with significant relevance to AICM members raised by AFIA, Equifax and our membership:

- Ensuring consistency of implementation and oversight of legislation by ASIC, APRA and AFCA.

The benefits to consumers and the economy will only be achieved if credit providers have certainty and clarity on compliance to new requirements.

AICM supports AFIA's recommendation that AFCA's role be more clearly defined to address the current concerns members raise with the complaints process including cost, complexity and consistency.

- Strengthening principles of 'borrower responsibility' and 'a lender is able to rely on information provided by the consumer, unless there are reasonable grounds to believe it is unreliable'.

These principles represent a significant move to restore balance in the creditor/borrower relationship. Clarifying that the principles apply to the entire assessment process, as detailed by AFIA, will assist the flow of credit whilst maintaining credit professionals inquisitive and customer focused mindset to ensure assessments are based on reliable information and support the efficient and scalable processing of credit applications.

- Formally defining the term 'without substantial hardship' as recommended by AFIA, namely 'when a consumer will be unable to comply with the consumer's financial obligations under the contract if a circumstance referred to in a subsection of this section would exist if the credit contract is entered or the credit limit is increased'.

AICM members agree the recommended definition will remove ambiguity for lenders, consumers, advocates, regulators and AFCA. Further, a clear definition aids the communication of legislation and company policy through to the credit professionals tasked with implementation, administering and interacting with consumers.

- Greater protection for consumers and credit providers from vexatious credit repair firms.

AICM members strongly support the requirement for debt consolidation/repair firms to obtain Australian Credit Licences, however recommend consumer protection will only be achieved by legislating additional requirements.

For clarity AICM members acknowledge that many firms in this sector provide a genuine service to consumers, however a majority create significant detriment through significant redistribution of expensive resources in their continued escalation of requests to review already robust processes to all participants of the credit community and the Australian economy.

Specific recommendations supported by AICM members are:

o Extend licencing requirements to cover entities that represent consumers in relation to all types of credit including telecommunications, utilities, trade credit and the equipment hire sector.

If the licencing requirements don't cover all forms of credit damaging practices will continue.

o Require these firms to be subject to a 'Best Interest Duty' requirement with accompanying formal guidance as recommended by Equifax.

AICM Members support this recommendation as they routinely experience consumers being charged significant fees where outcomes promised were overrepresented or could be achieved with no cost to the consumer.

This requirement would:

? reduce the vexatious actions that frustrate AICM members and threaten the integrity of the credit reporting system in both consumer and commercial credit; and

? protect consumers from misleading and dishonest conduct.

o Include regulation of fees charged to customers for 'credit repair' activity.

As recommended by Equifax, AICM members support upfront fees being prohibited as they often see customers who have paid significant fees without any action being taken or where the credit repairers representations to the consumer were overstated and not based on any understanding of the circumstances of the consumer/credit providers relationship or contracts.

o Education requirements for staff of debt management and credit repair firms.

As these firms frequently interact with consumers in financial hardship or vulnerability, all customer facing staff should receive adequate training in financial hardship, insolvency and financial fundamentals that aligns with best practice in credit providers organisations.

This requirement will increase the integrity of the sector and likelihood of vulnerable individuals receiving the right support for their situation.

It is important to note that many of the individuals engaging these firms may not self-identify as requiring financial hardship assistance, as many believe there are others worse off, or may not be technically be eligible for hardship assistance. However, many AICM members report incidences where these firms had been engaged to achieve outcomes which could have been provided for no cost by the creditor either directly or via a financial counsellor.

o A safe harbour from the section 13 obligation to provide a consumer with a written copy of a credit assessment upon request by the consumer when requests relate to non-genuine vexatious requests especially from vexatious requests debt consolidation/repair firms.

The ability for credit providers to rely on a legislated safe harbour will enable them to disrupt the damaging behaviours of firms not acting in consumers best interests.

- Clarity on small business purpose.

To ensure greater clarity AICM supports AFIA's recommendation of a quantitative definition, such as '20% for business purpose', rather than the proposed 'not minor or incidental'.

We welcome the opportunity to discuss our submission further.

Yours sincerely

Nick Pilavidis
Chief Executive Officer
Australian Institute of Credit Management
02 8317 5085
nick@aicm.com.au

 

 

12 October 2020

Manager
Market Conduct Division
Treasury
Langton Crescent
Parkes ACT 2600

By email: MCDInsolvency@Treasury.gov.au

Corporations Amendment (Corporate Insolvency Reforms) Bill 2020

The Australian Institute of Credit Management (AICM) appreciates the opportunity to participate in the consultation process on the Insolvency Reforms to Support Small Business as detailed in the Exposure Draft Bill.

The AICM represents over 2,600 credit professionals who contribute to a resilient economy and drive successful business outcomes by mitigating risk, maximising growth and applying sound credit principles
and practices.

Without our members, businesses are exposed to reputational damage, poor cash flow management, inefficient processes, breaching regulatory requirements and risk of not getting paid for hard won sales and services delivered. Our members are the custodians of cash flow. They assess and mitigate credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

AICM has long supported calls for reform of the insolvency regime in Australia with a key concern of members being poor dividends from formal processes and delays in businesses engaging in meaningful restructure. We provide the following views of members with the objective of supporting the reform to achieve outcomes that address these issues for our members and therefore supporting economic recovery.

Whilst supportive of the intent of these measures, AICM members have raised concerns with the proposals that may lead to a reduction in trade credit provided to small business. Primarily these concerns arise from:

- Compromise of guarantees and PPSR securities.

- Apparent inconsistent treatment of PPSR securities.

- Uncertainty related to credit provided during the restructuring period.

- Delay between commencement and ability of debtors to engage a restructuring advisor.

- The qualifications of the Restructuring Practitioner.

- Potential for increased unfair preference claim risk.

Expanded further in the attachment, our members have reported that the consequences of these concerns materialising may require them to take steps to mitigate the increased credit risk. Mitigation would include reducing credit terms offered to small businesses examples include but not limited to:

- only trading on Payment before delivery terms;

- withdrawing credit terms when viable businesses need it the most; and

- being unwilling to support business as usual trade during the restructuring period.

Our submission details recommendations related to the draft legislation and formulation of the following regulations.

We welcome the opportunity to discuss our submission further.

Yours sincerely

Nick Pilavidis
Chief Executive Officer

APPENDIX

1 - New Debt Restructuring process

AICM supports the intention to create an opportunity for debtor companies to restructure with low cost and maximum flexibility. Minimising disruption to business is specifically supportive of the role of the Restructuring Advisor.

Debtor in possession concept

While AICM members support the role of the Restructuring Advisor providing consent for transactions during the restricting period that are not in the ordinary course of business to ensure creditors interests are protected, clarity is sought on who is liable for debts incurred during this period and confirmation that any payments made to creditors will not be capable of being deemed preference payments.

AICM recommends – Credit obtained during this period is prioritised or guaranteed by the restructuring advisor. While hesitant to suggest the restructuring advisor bears liability, an unintended by-product may be that without certainty of payment creditors will be exposed to a direct risk of non-payment and will be inclined to either:
- withdraw supply of credit and move to a cash with order structure; or
- only supply the goods and services necessary to continue trading as normal during this period.

Additionally, incorporating this debt as part of restructuring may complicate and frustrate the formulating of a proposal.

AICM recommends – any payments received by un-related creditors during a restructuring period are explicitly exempt from being deemed a voidable preference claim. This will provide confidence to creditors to continue to trade with the business in as close as possible normal manner.

The potential of large orders to be entered prior to the appointment of a restructuring advisor is a concern for AICM members which may be detrimental to small business as credit providers may mitigate this risk by being less willing to provide supplies on credit terms above normal levels restricting businesses ability to respond to surges and growth potential. We note that the director's responsibility to avoid these transactions is too remote to provide creditors comfort.

Additionally, consideration is needed for suppliers of non-standard items (that cannot be sold to another party) who may be currently producing or have produced items prior to the restructuring period. Providing a priority to funds generated from these items will benefit all parties as the supplier will continue production and the business will be able to achieve the intended profit from sale or utilisation.

AICM recommends – a director liability for any trade that is outside the ordinary course of business for the 3-6 months prior to a restructuring process. Further, the AICM notes that payments made to creditors for supplies, arrears and aged debt is captured by the definition of ordinary course of business as these are made to obtain supplies and trade as normal, therefore it is not appropriate for these payments to be captured by a corresponding liability akin to a voidable preference payment.

Concerns relating to Guarantees and PPSR securities not enforceable during restructuring

While the limiting directors liability encourages use of the restructuring process and may improve the potential for the plan to not be frustrated this is a significant concern with members seeking clarity on directors and relatives liability under guarantees to the shortfall of debts not paid under the by the plan.

The AICM notes that restricting enforcement of guarantees outside the restructuring period will further devalue the security represented by the guarantee and may minimise the director's motivation to formulate the best possible return for creditors. By devaluing the guarantee creditors may:

- Seek other guarantees e.g. from shareholders other than the director and other 3rd parties;

- Seek bank guarantees which will increase cost of the credit provided, delay businesses access to credit and reduce their ability to switch suppliers;

- Restrictive credit terms or require payment before delivery; and

- Be more hesitant to support businesses displaying signs of potential insolvency.

AICM recommends – clarifying that all guarantees can be pursued outside the restructuring process as directors and appropriately qualified Small Business Restructuring Professionals (SBRP)can quantify and incorporate this in their formulation of a plan producing the best outcome for all stakeholders. The alternative will limit growth, undermine viable businesses and create additional insolvencies.

The stay on PPSR securities raises the following concerns for AICM members:

- Loss of right to proceeds from stock sold during the restructuring period.

AICM recommends – clarifying that creditors right to proceeds is maintained during the restructuring period.

- The debtor company may inadvertently benefit from consignment stock located on the customers customer's premises which the supplier cannot easily restrict access to, recover or quarantine on short notice. Further the supplier may be forced into being an unwilling creditor.

It was noted by members that the ATO is not expressly prevented from issuing Director Penalty Notices should be addressed to ensure the ability to formulate a plan is not frustrated.

Inconsistent treatment of vesting of PPSR securities interests – 588FL Corporations Act ("CA") and 267 Personal Property Securities Act ("PPSA")

In the draft legislation, there is an intended amendment/extension of s.588FL CA Act such that "green" registrations are caught and vest in the Company upon the appoint of a SBRP, subject to the courts retaining their normal discretion to extend the prescribed 20 business days period.

There is no mention in the draft legislation as to any amendments to s.267 PPSA, which vests any unregistered security interests upon the appointment of a voluntary administrator or liquidator.

This creates an anomaly whereby late "green" registrations vest (but can be validated by the courts), but unregistered security interests do not vest. There appears to be no reason for this distinction, and which operates unfairly to registered (though late) PPSR security interests and properly timely registered PPSR security interests.

AICM recommends - that such anomaly be rectified such that either:

- The proposed amendments/ extension of s.588FL CA to the appointment of a SBRP be removed; or

- Suitable amendments to s.267 PPSA also be made such that unregistered security interests also vest upon the appointment of a SBRP.

Company is taken to be insolvent when it proposes a restructuring plan to its creditors

Given the point of insolvency is a major determinant in unfair preference payments AICM members seek clarity that payments received during this period will not be captured by preference claims namely payments received:

- During the restructuring period;

- After a plan is approved; or

- If restructuring ends and the company returned to directors.

Without clarity that payments will be exempt creditors will be hesitant to trade with the business and seek security and trading conditions that complicate and delay access to credit.

Absence of meetings of creditors and efficient access to timely information

Creditors play a significant role in determining the appropriate course of action and this decision making requires access to sufficient and timely information.

Members commented that achieving the formulation of a comprehensive restructuring plan in a short time frame whilst continuing to trade as normal may present time restrictions for the Restructuring Advisor and small business directors. These time restrictions could make it inefficient or difficult for creditors requests for information and questions to be responded to in a timely manner, potentially resulting in a reduction in confidence in the restructuring plan.

Additionally, meetings with creditors may enable the restructuring advisor and directors to better understand creditors positions and receive information and facts they are able to contribute.

While the current insolvency process requires creditors reasonable requests to be responded to within 20 days, insolvency professionals sight increased costs created by this process and AICM members advise that delays and resistance is still encountered obtaining responses.

Members also noted there is continuing difficulty obtaining lists of creditors from some insolvency professionals. This information is important in all processes and increasingly so during a restructuring process as it facilitates creditors interaction and achieving consensus in an efficient manner.

AICM members believe that optional virtual meetings can be cost and time efficient ways to address these concerns.

AICM recommends:

- Restructuring advisor providing the option for creditors to attend a virtual meeting held after a proposal is put to creditors and before a decision or vote is required. The purpose of the meeting is to:

o Receive a briefing from the restructuring advisor and/or Directors as to the reasons for insolvency, progress of developing a plan, factors that support the business is capable of being restructured;

o Allow creditors to ask questions relating to the briefing;

o Allow all creditors to hear concerns raised by others; and

o Allow creditors to provide their views on options for the restructuring plan and their expectations, including tabling a restructuring plan by any creditors (if they wish to).

- A Iist of creditors should be provided as soon as reasonably practical after appointment of the restructuring advisor and not more than 5 days after.

As an accurate understanding of the company's liabilities is essential for determining eligibility for the process providing this list promptly and to relevant stakeholders will improve the integrity of the process and viability of the plan.

Options on rejection of the proposal

Considering the company has been declared insolvent once a proposal is put to creditors members believe it is not viable for directors to be given the autonomy to decide on the next step.

Allowing the directors to retain in possession and control of a business that has been declared insolvent is not appropriate with the following concerns noted:

- When is the company no longer deemed insolvent?;

- Supplies will only be provided on payment before delivery terms unless significant security is provided;

- Potential employee and tax obligations will not be met;

- Potential for assets to be stripped prior to formal insolvency; and

- Potential for the business not to continue trading or being wound up i.e. creating debt laden "zombie companies".

AICM Recommends – Once a proposal is rejected creditors vote on the next stage which could include:

- Extension of time to formulate a plan;

May be appropriate if the return was too low or too ambitious or uncertain (such as relying on a sale of an asset or other outcome) allowing directors an opportunity to substantiate the plan;

- Voluntary Administration;

Appropriate if a creditors believe a better proposal could be formulated and a Deed of Company Arrangement formulated; and/or

- Simplified Liquidation or Liquidation.

Simplified liquidation may be the most likely outcome on rejection of a restructuring plan, however inclusion of other options ensures this is the avenue of last resort.

Full liquidation should be an option available to creditors to exercise when there are grounds to require full investigation.

$1 million liabilities threshold

Members felt the debt threshold was not an appropriate measure to restrict the process to small un-complicated businesses noting that in some industries medium to large businesses would be captured but in others it would more clearly only capture small businesses.

Overwhelmingly members supported the government adopting a uniform definition of a small business which would provide significant clarity and efficiency benefits.

AICM recommends – lowering the threshold to $500,000 for implementation and thorough industry consultation undertake to review or implement an appropriate alternative measure.

Qualifications of the Restructuring Advisor

AICM members expressed concern at the prospect of the restructuring advisor qualifications being reduced.

The standing of the restructuring advisor is fundamental to creditors engaging with the process and having confidence that their interests have been appropriately considered when formulating a proposal. Lack of suitable qualifications and professional standing of a SBRP could lead to otherwise viable plans being rejected due to uncertainty.

The qualifications, integrity and oversight of the restructuring advisor is vital as a safeguard to limit the potential of abuse such as illegal phoenix activity.

Timing of restructuring

AICM Members commented the 35 business days to formulate a restructuring plan is longer and therefore more burdensome on creditors than the current voluntary administration (VA) process which can deliver a decision for a DOCA in 15 to 25 business days

Review of the process

Considering the tight time frames for delivering a perfected legislation, regulations and rules we strongly recommend the amendment lapses if a comprehensive review is not implemented, responded to by government and tabled in parliament. This review should be commenced and completed 12-24 months after commencement.

Additionally, while this incremental reform is supported (subject to our concerns and recommendations) the AICM believes a thorough and complete review of the Australian corporate insolvency regime to ensure the system is fit for purpose and supports economic development and capacity to be responsive to future challenges.

2 - Temporary relief for companies seeking a restructuring practitioner

This measure seeks to extend the current temporary insolvency protections ("moratoriums") expire on 31 December 2020. In October 2020, 205 AICM members responded to a survey following the announcement of the extension, this survey revealed:

- The extension is opposed by 67% of respondents;

- Confidence to provide credit terms was reduced for 70% of respondents;

- Confidence to provide repayment arrangement or deferrals was reduced for 64% of respondents; and

- Increased risk of preference claims has negatively impacted 70% of respondent's ability to provide credit terms and payment arrangements.

Key reasons for these results are:

- Creditors are unable to distinguish viable businesses from the businesses that are insolvent and not viable but haven't entered an insolvency process due to the moratorium;

- Lack of adverse information such as other creditors including the ATO initiating enforcement action;

- They would support viable businesses without these moratoriums; and

- A significant number of customers are sighting the moratoriums as they actively avoid paying valid debts.

The Transparency of business tax debts measure passed by the government on 22 October 2019 would allow creditors to be fully informed when assessing risk and enable fully informed credit decisions when trading with businesses during this time. To clarify:

- Creditors would be able to enter discussions with business that have outstanding tax debts reported to a credit reporting bureaus (CRBs) to determine if the business is viable and provide support in line with the creditors risk appetite and not expose the creditor to additional risk.

- Creditors would be provided significant comfort to trade with businesses that do not have outstanding tax debts reported to CRBs. These businesses would benefit from better credit terms and less restrictive requirements for repayment arrangements.

The AICM recommends - the ATO urgently implements this measure immediately and at the latest before 1 January 2021. To minimise unintended consequences and provide immediate benefit to creditors reporting could commence with presenting as clearly insolvent and not viable. For example, initial focus could be businesses with outstanding tax debts prior to March 2020 (onset of economic impacts of COVID-19) and not in bushfire affected regions that have not effectively engaged with the ATO.

By implementing the transparency of business tax debts creditors will be able to self-quarantine from losses that could threaten their solvency and viable businesses will have better access to the support they need. Any viable businesses reported will be in no worse position as the impact on their credit risk profile will be equivalent to the lodging of a notice of intent (or actual use) to use the Restructuring Process which provides a continued moratorium on enforcement.

AICM members raised concerns about the following elements announced in the Insolvency Reforms to Small Business – Fact Sheet:

- An eligible small business will be able to declare its intention to access the simplified restructuring process to its creditors, including through ASIC's published notices website.

Members concerns:

o The company's ability to continue to trade will be prevented as creditors will be on notice that the business is insolvent and therefore not willing to provide future supplies without payment before delivery and/or payment of all arrears.

o Creditors will be exposed to preference claims for any funds received from this point as they will be on notice of insolvency. This will further limit the company's ability to trade as the creditor may seek protections from preference claims e.g. bank/3rd party guarantees or payment by 3rd parties.

- Following the declaration, the existing temporary insolvency relief (relief from insolvent trading liability and around responding to statutory demands from creditors) would then apply to the business for a maximum period of 3 months, until they are able to access a small business restructuring practitioner or other insolvency practitioner. Relief would only apply to an individual business once a declaration is made.

Members concerns:

o This will be used by customers seeking to actively avoid paying debts for personal gain i.e. benefit from the restrictions to creditors issuing statutory demands.

o Assets and value of the business are likely to be eroded preventing a successful restructure plan being formulated.

- As a transitional measure, the ability to declare such an intention will be available until 31 March 2020.

We understand that will allow businesses to declare intention and receive protection until 30 June 2021

Members concerns:

o This extends creditors period of uncertainty and therefore hesitation when seeking to support small businesses as they may be prevented from enforcement which is resulting in debtors using this to actively avoid paying their liabilities

AICM recommendation – Considering these concerns and the significantly eroded asset position of companies it may be more appropriate that the temporary relief is provided for those seeking to use the simplified liquidation with viable companies using the period until commencement to seek arrangements with creditors and work with SBRP in advance of the 30 December 2020 expiry as best practice directors have been doing.

3 - Simplified Liquidation

AICM Members broadly support the implementation of a simplified liquidation process that reduces the requirement of liquidators to undertake work with little or no benefit to stakeholders.

A primary concern of AICM members is the growing incidence of insolvent trading which increases the burden and risk on credit providers. ASIC's statistics report that 71% of reports by administrators in July 2018 to June 2019 identified a misconduct of insolvent trading, this has increased from 69% in July 2017 to June 2018 and 63% in July 2017 to June 2018 .

Whilst liquidation costs are increased due to investigations, the AICM is concerned that a by not investigating and questioning this behaviour ASIC will not be informed to adequately act to deter this activity.

AICM recommendation - specific funding be provided that will enable this behaviour to be investigated without delay or increased costs to the liquidation process. Further a requirement for ASIC to take action and report to creditors on action taken/intended or report to creditors why no action is being taken. This is in the interest of all stakeholders and ensures directors are encouraged to consider creditors and avoid insolvent trading.

Who determines if simplified liquidation is appropriate?

The requirement and ability for creditors to oppose a simplified liquidation is clear but it was not clear that the liquidator is also required to ensure the simplified process is appropriate. Considering creditors can often disengage from an insolvency process once it is known they will receive little or no return it is important that the liquidator is also empowered and responsible to oppose a simplified liquidation.

AICM Recommendation - there should be a requirement for the liquidator to adopt process if they have reasonable grounds to suspect directors have allowed the business to trade whilst insolvent or interests of creditors and other stakeholders (e.g. if liquidation is being triggered to avoid other obligations e.g. environmental issues, liabilities to customers etc) would be better served through normal liquidation. A review by a third party such as ASIC or an independent liquidator may be appropriate.

Reduced circumstances of unfair preferences claims

The AICM supports the intentions of the reduced circumstances liquidators are required to better target the sorts of unfair preferences that are pursued to circumstance where:

- A transaction of a certain value; or

- that transaction is voidable only if it occurred in a certain period.

AICM is a vocal advocate for reform of the unfair preference claims regime as currently the regime:

- Further detriments creditors that incur loss at the appointment of a liquidator;

- Penalises creditors who have supported the company in an attempt to avoid liquidation;

- Amplifies the ripple effects of insolvencies; and

- Reduces creditors capacity to support viable businesses that display signs of insolvency.

When businesses are displaying signs of insolvency creditors are on notice that there is a significant risk that payments received from this point may be subject to an unfair preference claim if the business is subsequently liquidated. This results in creditors taking reasonable steps to mitigate their risk with the corresponding affect being a reduction in support available to the business or delays accessing the support at a time when both parties would most benefit from simplicity.

The reasonable steps taken by creditors to mitigate unfair preference claim risks may include:

- Seeking additional security from the debtor company;

- Requiring more complex structuring or repayment arrangements; and

- Reducing credit terms offered or moving to cash before delivery terms.

ASIC statistics show that the current unfair preference claims doesn't support a better outcome for creditors with 92.1% of insolvencies expected to return zero cents in the dollar to unsecured creditors. Additionally, AICM members report that they are yet to see an unfair preference claim paid to a liquidator result in a benefit to creditors.

AICM recommends:

- Payments received by un-related creditors in the ordinary course of business should be exempt from unfair preference claims.

This is due to the time and cost to pursue claims including disputes regarding reasonable suspicion of insolvency "can take up time, money and resources, and have the potential to outweigh any benefit that might flow through to creditors" .

Ordinary course of business, in AICM members view, includes all lawful and responsible actions including legal action an arm's length creditor employs to obtain payment.

- Creditor must have used undue pressure to obtain payment such as intimidation or harassment (i.e. excludes stop supply etc)

- Requiring liquidator to substantiate their claim from first demand to enable quick and efficient negotiation.

This will reduce time and cost associated with disputes, negotiation, mediation and court action.

- Burden of proof explicitly stated to be on the liquidator.

- Reducing the time prior to point of insolvency during which payments are captured from 6 months to 3 months.

- Limiting the time to bring a claim to 12 months from 3 years.

- Excluding payments made during a Debt Restructuring Process

- Where an unfair preference claim is pursued a payment that did not put the creditor in a better position than other creditors should be exempt.

To expand, a creditor with aged debt of 6 months on appointment of a liquidator but other creditors aged debt is less than 30 days is not required to return a preference claim as this will further detriment the creditor in favour of creditors already in a better position.

- Review of the Assetless Administration Fund to increase funding and tailor access to funding to support the simplified liquidation process.

It is a significant concern to AICM members that there is a large volume of businesses whose assets have been eroded whilst the moratoriums have been in place which may result in these businesses not being able to appoint a liquidator. Ensuring liquidators are able to access appropriate funding for the requirements of the simplified process will empower liquidators to adopt best practice when considering pursing unfair preference claims.

These recommendations are consistent with observance of best practice liquidators' actions pursuing unfair preference claims including such as:

- Only pursuing significant amounts that will provide a meaning full distribution to creditors.

- Not issuing "scatter-gun claims" being claims issued to any creditor who received a payment within the relation back period without making any investigations or enquires as to the validity of the claim.

- Reviewing records and PPSR to validate claims prior to issuing demands.

- Entering open and honest discussions with creditors.

Meetings of creditors

Members raised concerns that information will be provided, and decisions reached without meetings. Low cost virtual meetings will enable:

- Liquidators to better communicate information included in reports;

- Allow creditors to ask questions and air concerns;

- All creditors have the opportunity to hear concerns of other creditors; and

- creditors make fully informed decisions.

AICM recommends – Meetings are held virtually after information is provided and before creditors are required to vote.

Clarifications sought

- How will creditors know simplified process undertaken? Will companies be referred to as ("in simplified liquidation").

This will be important to ensure creditors are aware of a different process being in place.

- AICM members seek confirmation that current rights to request information are not eroded.

As noted under the restructuring process this is an important measure for creditors to obtain important information to discharge their responsibility to oversee the process, make decisions and protect their interests.

- Will a reduced time frame be implemented for responding to requests for information to creditors noting the current requirement is within 20 business days of the request being made, which may not be appropriate in a streamlined process.

Review of the process

Considering the tight time frames for delivering a perfected legislation, regulations and rules we strongly recommend the amendment lapses if a comprehensive review is not implemented, responded to by government and tabled in parliament. This review should be commenced and completed within 12-24 months of commencement.

4 – Refinements to the registration of liquidators

Despite potential benefits to cost reductions, AICM members are cautious to support lowering the bar for registration of liquidators.

As stated earlier the calibre and competency of insolvency professionals ensures creditors have confidence in the insolvency process and minimise potential for abuse.

5 – Virtual meetings and electronic communications

AICM members strongly support measures to reduce paper communications and need for physical meetings and enhance transparency of the restructuring process.

The insolvency professional should be effectively assisted to ensure transparency is enhanced and communications are received by an appropriate person or location.

AICM members noted concern at use of generic email addresses that maybe available to the insolvency professional such as:

- Email address of creditors/grantors on the PPSR

Creditors are unlikely to have this addressed by an appropriately experienced person to escalate the notice correctly.

- Email addresses held by the debtor for in accounts payable systems such as for sending remittance advices.

These addresses are often monitored by electronic systems or in-experienced staff.

AICM members renewed their call for a registered email address to be collected and published alongside registered company offices.

AICM supports insolvency professionals being able to rely on locations and methods used in previous appointments of the professional or their firm, provided an obligation remains to address and resolve the following promptly so as to not to disadvantage the creditor:

- Failed deliveries e.g. email no longer active, out of office alerts and other failures

- Advice that the details are no longer correct e.g. individual no longer responsible or authorised, providing new details etc

AICM members also noted that once they are notified of insolvency appointments by CRB's alert services they may proactively contact the appointed practitioner to provide a point of contact.

If the restructuring process and simplified liquidation process are to be effective and embraced by business and credit providers, then government should enable information to be cost efficiently accessible by SBRP, insolvency practitioners and creditors and their advisors. We suggest that this would be achievable by:

- The government creating a web based "portal" hosted by ASIC, in which a 24/7 folder of all companies subject to restructuring/ voluntary administration and liquidation is maintained;

- Only registered SBPR, voluntary administrators/ liquidators can create a folder for each of their appointments, and then manage the material lodged by it and others (eg in case of defamatory or malicious material being lodged by creditors or others);

- All government searches required by the appointee are provided for free eg PPSR and ASIC searches;

- Various key documents can be suitably lodged and accessed for free by SBRP, insolvency practitioners, creditors and their advisors, and proposers of alternative restructuring plans, including any notices of appointment, proofs of debt and reports/ proposals, and

- The costs of maintaining the register is covered by ASIC/ the government.

Footnotes

[1] Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019

[2] REPORT 645: Insolvency statistics: External administrators’ reports (July 2018 to June 2019)

[3] REPORT 645: Insolvency statistics: External administrators’ reports (July 2018 to June 2019)

[4] Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 Exposure Draft Explanatory Materials

Download Submission

5 August 2020

Ms Jaimie Martin
Assistant Director, Adjudication
Australian Competition & Consumer Commission

By email: adjudication@accc.gov.au

Dear Ms Martin,
Australian Retail Credit Association (ARCA) application for re-authorisation — interested party consultation
The AICM represents the interests of over 2,700 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies across a vast array of industries.

AICM supports ARCA's application for the re-authorisation of the Principles of Reciprocity and Data Exchange (PRDE).

Our members seek access to reliable data to make fully informed credit decisions which is facilitated by the PRDE. Without this information the ability to make informed credit decisions efficiently and effectively will be removed for these credit providers. The impacts will include increased cost of credit and we expect a restriction in the amount of credit available to businesses unable to demonstrate excellent borrowing and repayment capacity.

AICM has been a long-time advocate for Comprehensive Credit Reporting data including Repayment History Information being expanded to encompass more credit providers outside the current population of Australian Credit Licence holders to include trade credit providers.

When providing credit to small to medium businesses, who are the largest employer of Australians, consumer credit information is highly relevant to the credit decision. The business owners' underlying character and credit capacity is tightly linked to the credit worthiness of the business. Access to a deeper data set would allow these businesses to access funds at cheaper rates and make credit applications more streamlined due to standardisation of the way the information is stored, presented and viewed.

AICM strongly recommends further review of the credit reporting system to allow information and credit decisioning to develop, creating a more robust credit market and thereby stronger and more resilient economy through:
- Better informed credit decisions reducing risk for credit providers and ultimately impacting the price of goods and services paid by SME's.
- Providing SME's better access to trade credit to fuel their business by addressing the current shortage of financial information available to credit providers to make fully informed credit decisions.
- Greater power to quality small businesses. SME's will be able to use their strong credentials to negotiate preferable payment terms and credit limits as well as easily switch providers.
- Reduce red tape and administrative burden when applying for credit. Preparation of proper books and records to support a credit application can be a significant burden for small business. This could be reduced by leveraging the RHI information and reduce the need for credit providers to request financial statements and additional information from the SME.

While we acknowledge the expansion of access is not contemplated under this re-authorisation, the re-authorisation of the PRDE ensures that the structure established can continue to be leveraged for better credit.

I welcome the opportunity to discuss this matter further.

Yours sincerely

Nick Pilavidis
Chief Executive Officer

Download submission

6 July 2020

Education and Employment Legislation Committee By email: eec.sen@aph.gov.au

PAYMENT TIMES REPORTING BILL 2020

The Payment Times Reporting Bill 2020 requires several amendments to ensure it improves payment times and resets Australia's current poor culture on payment times.

Our core recommendations for improving payment practices in Australia are:

- Address the imbalance across all business sizes

The effects of Australia's poor payment culture is not limited to small business suppliers.

Our members are dedicated credit professionals who manage accounts receivable ledgers of businesses of all sizes and represent all sectors. Our members face the same challenges obtaining prompt payments from their clients as do small businesses.

Currently the power to set payment practices is in the hands of the customer and this power distorts significantly as the market power of the organisation increases. Our members believe it should be equitable or favour the supplier who bears the costs and risk providing quasi capital to their customer base as a point of differentiation in the sales process.

The AICM recommends the Payment Times Reporting Framework (PTRF) require reporting entities to include payment information regarding payments to all suppliers. Information relating to small businesses should remain a primary focus.

This recommendation will improve payment times to all entities (large and small) resulting in broader benefits. Benefits to small business will also increase as all entities in their supply chain are better able to pay promptly due to improved cashflow.

- Establishing a legislated maximum payment time.

The AICM strongly recommends that a maximum payment time is legislated of 30 days, with scope to reduce this timeframe in the future.

While society accepts 30 days as a reasonable payment time there is little direct incentive for businesses to meet this expectation.

To support this recommendation, we note:

o The federal governments practices of paying within 5-20 days is setting a standard that shifts our society to best practice. This policy aligns with adoption of technology and automation removing many outdated and inefficient manual processes that can be removed through the adoption of technical solutions enabling faster and prompt payments.

o The implementation of the e-invoicing initiative and New Payment Platform means it's reasonable to assert that within the time frame of this legislation there will be no technical barrier to invoices of all sizes and complexity being transmitted, received, processed and paid within minutes.

o All firms must have single touch payroll and thereby upgraded accounting systems meaning previous statements of red tape and administrative overload are no longer correct. Accounting transactions must be processed promptly with teams appropriately resourced.

o A theoretical consequence in legislating a 30 day payment time is that business with good payment practices (i.e. less than 30 days) may delay payments.

This argument is countered by:

? The PTRF which will provide an incentive to meet or exceed best practice payment behaviour as entities will be recognised as a customer of choice.

? The PTRF enables suppliers to make fully informed decisions related to risk and cost of extending credit terms and provides information relevant to pricing and setting credit limits, benefiting prompt payers.

? The economic benefits that will flow from the improved payment practices, reduction in working capital needs and the identification of those poor payers using capital that could otherwise be redeployed to firms who are working to current best practice

? Our members see the current low interest rate environment as a haven for zombie companies who don't pay their suppliers on time, continue to operate due to low interest costs while accumulating more debt, not paying tax and contributing to the economy. Prompt payments will reduce this leakage and misallocation of resource.

- Transparency and financial consequences for non-compliance with appropriate legislated payment practices.

Despite prolonged focus on improving payment times and holding to account the biggest and most egregious offenders, poor payment practices persist.

Recent late payment analysis of Equifax and illion show that payment times have deteriorated in June 2020 compounding the effects of the COVID-19 pandemic.

Without transparency of these practices and financial consequences (such as fines, penalties and/or interest charges) short term and self-interest will prevail at the detriment of the Australian economy.

The AICM supports the penalties prescribed by the legislation and recommends strong and frequent enforcement to rapidly reset payment culture.

- Aligning Australian payment practices with international best practice.

Legislating payment times and providing transparency of payment practices aligns with initiatives implemented in similar jurisdictions namely the United Kingdom and European Union which resulted in significant benefits.

Multiple reports have shown Australia's payment times lag behind comparable jurisdictions. In 2016 the AICM conducted a review of global payment times through discussions with similar organisations and comparisons of trusted reports. After adjusting for various different reporting methods it was clear that Australia's average payment times and days late were significantly worse than economies with positive economic growth and only slightly better than those with negative economic growth.

While payment times have gradually improved since 2016 this has been largely in line with economic conditions and recent reports (including the 2019 AlphaBeta report into payment times) indicate this is still a significant drain on the economy.

International experience supports our recommendations that initiatives such as the PTRF, legislated payment times and transparency should not be limited to payments between big and small businesses.

The AICM provides the following additional recommendations and comments related to the Bill.

- Authorisation of report

It is AICM's members experience that the poor payment practices of many organisations is contrary to board expectations and policies, therefore strongly support the requirement for the governance structure of reporting entities to be a key participant in the submission of payment time reports.

- Encourage acceptance of e-invoices

Requiring reporting of additional information could further leverage the government's leadership stance to pay e-invoices utilising the Peppol standard within 5 days.

The AICM recommends including a related reporting requirement such as:

o Does the reporting entity accept e-invoicing?
o Shortest and longest payment periods for e-invoices.
o Proportion of invoices paid using similar periods as proposed with the addition of a 1-5 days period.

Broad adoption of e-invoicing by reporting entities will have significant benefits to small businesses as current delays caused by sending invoices to the wrong place or with missing information will be eliminated as errors will be known when an e- invoice is transmitted.

- Clarify payment time calculation

AICM members report frustration that the definition of when an invoice is received varies significantly by entity. This variation creates an inefficiency for suppliers and customers due to unnecessary reviews and queries.

The AICM recommends clarity is provided to ensure clear definitions as to when an invoice is received being the time the time the invoice is actually received at a reasonable physical or virtual location, not when it is entered to the reporting entities system as this may involve delays outside the suppliers control.

Below is an extreme but not uncommon example of how different definitions can cause significant inefficiencies:
o Customer No1 Pty Ltd defines receipt as when invoice an invoice is
"processed" which requires:
? Invoices to be sent with goods to stores.
? The stores forward the physical invoice to the central office.
? Central office "processes" the invoice in their system and time starts.

Due to the inherent delays and potential human error it is common for invoices not to be processed at all. Suppliers are generally not aware that invoices have not been processed despite being received until the invoice is beyond normal terms when they re-issue with additional documentation to prove delivery before the time starts. In the above example the reporting entity may calculate that the invoice was paid in 30 days but the supplier has extended 60 days credit.

Additional examples can include changes to email addresses or processes without notice, system failures and other issues within the reporting entities control by out of the suppliers control.

Ensuring onus is on the reporting entity for accurate timing of invoices will address the current lack of focus by many organisations to ensure these processes are robust and accurate.

The AICM encourages rapid adoption of the PTRF with incorporation of these recommendations to further support the Australian economy's recovery from COVID-19 and provide resilience to future shocks.

Should you have any queries arising from our submission I welcome and encourage you to contact me.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

Download Submission

30 June 2020

The Hon Josh Frydenberg, MP

By email: josh.frydenberg.mp@aph.gov.au

Dear Treasurer,

 Urgent measures required to maintain access to credit and to limit business failures from unfair preference claims

 The AICM represents the interests of over 2,700 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries and applauds the steps taken which recognise the critical importance of maintaining the availability of commercial credit. 

Our members continue to express their frustration that steps have not been taken to address the unintended consequences that the temporary relief for directors from personal liability for trading while insolvent has created.

The exemption is complicating and reducing their ability to support businesses to recover from the economic crisis and continue to provide goods and services on credit terms. Further the exemption will have long lasting (over 3 years) unintended consequences that may contribute to the prolonging of the economic crisis.

The current law treats payments made by a company to creditors within 6 months of Liquidation as potentially voidable transactions.  Section 588FA Corporations Act 2001 (Cth), deems such a payment as an unfair preference if the liquidator can establish that:

-        The creditor was unsecured, was paid within 6 months’ of the Liquidation and received more than they would have, had they proved in the Liquidation.

Section 588FG sets out the limited defences available to a creditor who has allegedly received a preference payment.  By operation of section 588FG (1) (b) (ii) (A) and (B) the defences are not available if at the time of receipt of payment, there were reasonable grounds for the creditor to suspect the company was insolvent.

Unless addressed, businesses that extend credit whilst the “insolvent trading” relief is in place, will be at heightened risk that payments received are later subject to claims by Liquidators, as unfair preference payments.  To counter this risk, credit providers will react by refusing or reducing credit limits and/or terms effectively resulting in a credit crunch for the businesses that the current statutory relief is intended to support.

There is in effect a mismatch where Directors are encouraged to continue to trade but creditors are on notice that their customer may be insolvent and so creditors will react by reducing credit so as to manage the risk of preference claims. The overwhelming majority of businesses who provide credit while the relief is in place, will have limited grounds for defending the fact there were reasonable grounds for suspecting insolvency.

A generic example of how this scenario operates is as follows:

  • Supplier Pty Ltd provides parts/materials/goods to ABC Trading Pty Ltd and is owed $60,000 for these goods.
  • ABC Trading are unable to pay on normal terms as their business has reduced dramatically.

  • From 15 March, ABC Trading is technically insolvent but expects to recover once government restrictions on movements ease.  They are relying on stimulus payments protections for cash flow and the directors have comfort from the exemption to insolvent trading.

  • On 20 April ABC Trading paid Supplier $30,000 in part payment of the debt owing of $60,000 to Supplier.  The payment was required before ABC Trading allowed a further $40,000 of new supplies on credit.
  • By 25 September, social distancing measures have reduced and then temporary exemption to insolvent trading ends. 10 October, ABC Trading enters into voluntary Liquidation.

 

In this scenario, Supplier incurs an immediate loss of up to $70,000 (being the remaining aged debt of $30,000 and the further supplies of $40,000 of goods on credit).  That trading risk was considered and assessed as a part of the supplier supporting its clients to ensure the trading viability of both businesses.  In addition to the $70,000 of trading loss, the $30,000 received, will be claimed as a preference.  It will not be possible for the supplier to avail itself of the statutory defences because ABC Trading must have been at least suspected to be insolvent.  In reality, many businesses are by definition currently trading insolvent.

The Liquidator has three years from the commencement if the Liquidation on 10/10/20 to commence the claim so there is a lengthy period of commercial uncertainty and a long term latent unintended consequence of this specific period of trading during the COVID-19 crisis.

Strict credit policy and cautious credit control would dictate a stop supply to ABC Trading and the refusal of any further credit.  That policy would however be exactly the opposite of what current economic conditions require and government policy seeks to promote/induce. 

The Reserve Bank of Australia in 2013 calculated that over $80bn of commercial trade credit was outstanding at any one time.  It is a form of broadly disseminated credit which operates across all industries, all sectors and of all levels.  Supply chains across all industry sectors often have longstanding and closely interconnected business credit supply arrangements.  SME businesses rely upon the availability of ongoing trade credit and its value in sustaining and then positioning for recovery, is difficult to calculate but is substantial.  The availability of trade credit mitigates and disburses risk across the whole supply chain across all industry sectors.  It is nuanced, and credit managers and business owners are uniquely and intimately placed to understand the commercial micro dynamics of their particular sector or commercial niche and the role and strength of their customers.  Suppliers are uniquely placed to make informed credit risk assessments to encourage their own business to trade and support their clients and customers during the hibernation and recovery phase.  The need is for flexible trade credit arrangements.  The likelihood is that flexible, responsive, creative credit arrangements will be stymied for fear of later being challenged as preferences.  This at the core of the unintended commercial consequence of allowing a Director’s statutory protection from insolvent trading, without recognising the consequences for creditors in facing preference claims.   This is a scenario credit providers experience daily and which will continue beyond the end of the statutory moratorium from insolvent trading.

While credit providers wish to support their customers, commercial realities mean that credit providers will be reluctant to maintain current credit limits or grant additional credit. In other words, without counter measure to protect from unfair preferences during the relief period and after, many credit providers will not offer or extend credit.

A moratorium on preferences for payments received while the temporary exemption to insolvent trading is in place and then after for a defined “recovery period”, will remove a significant barrier to accessing credit.

The relief from preference claims should not apply to related party transactions, only 3rd party transactions.

Additionally we note:

-        It is inequitable to expose credit providers to the risks of preference claims and yet expect them to fulfill the critical commercial rate of continuing to extend credit.

-        The risk of preference claims undermines the good will of all businesses to work collaboratively.

-        The bringing of preference claim actions after this initial crisis could extend the long term impacts with additional insolvencies being triggered.  A specific concern exists of a “domino effect insolvency” in sectors utilising subcontractors and interdependent entities within a supply chain.

-        Changes to the preference regime will reduce credit providers escalating legal recovery.

 I welcome the opportunity to discuss this matter further to ensure the economic impacts of the COVID-19 pandemic are minimised and viable business receive the support they need at this time.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

Download Submission

30 March 2020

Consumer Affairs Australia and New Zealand

By email: uctprotections@treasury.gov.au

Submission to the Consumer Affairs Australia and New Zealand – Enhancements to Unfair Contract Term Protections

The Australian Institute of Credit Management (AICM) represents the interests of over 2,600 credit professionals who are custodians of cash flow. They assess and mitigate credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

Without our members, businesses are exposed to reputational damage, poor cash flow management, inefficient processes, breaching regulatory requirements and risk of not getting paid for hard won sales and services delivered.

On behalf of our members, the AICM is a vocal advocate for reform that enables all businesses to manage their credit risk and increase resilience to economic shocks and downturns.

We provide these comments from the perspective of our trade credit members. These members are involved on the supply of goods and services on extended payment terms in all sectors of the Australian economy. The value of trade credit to the Australian economy is significant, an RBA report put the total value of outstanding trade credit to be in excess of $80bn at any one time . Additionally, this source of credit is supplied without interest and other charges associated with other types of credit.

Below we have provided specific comment on questions of the Regulation Impact Statement relevant to our members views and emphasise the following:

1- Focus on conduct not existence of terms in contracts

To ensure best out comes for all parties AICM members believe the mere existence of a term should not result in penalties.

From discussion with our members there are very few terms that would be deemed unfair across all situations and scenarios. The inclusion of terms in standard form contracts that may be deemed unfair in certain circumstances but fair in others enables the credit provider to efficiently operate across their customer base and minimise the risk of excluding the term where required. In these circumstances the terms are only relied on when reasonable to do so.

Further AICM members report:

(a) They routinely provide opportunities for standard terms to be amended and will remove terms not necessary in specific circumstances.
(b) If a term is not reasonably required, they will not rely or enforce the term.
(c) Considering the inherent credit risk of trading with small businesses, if trade credit providers were at risk of significant penalties for the existence of an UCT, several members have reported their business may restrict the credit terms offered to small businesses in order to mitigate the risks.
Considering the above the AICM believes that strong enforcement and penalties should be applied when a business unreasonably relies on or enforces an unfair contract term but not the mere existence. To penalise due to existence may create a greater unintended consequence of restricting small businesses access to credit.

2- Courts should retain powers to impose sanctions.

Determining whether or not a term and/or conduct is unfair requires a significant element of judgement and assessment of evidence, therefore we are in favour of retaining the courts role as an arbitrator in the issuing of penalties or enforcement of legislation.

3- Access to information on small businesses

AICM members are less concerned with the metrics of the thresholds such as revenue and staff numbers but with the ability to asses this information.

Unlike most comparative jurisdictions, credit providers in Australia are not able to efficiently access reliable information on revenue and staff numbers. For example, in the UK companies of all sizes are required to submit revenue and other information to Companies House . In Australia only companies with a revenue over $50 million submit any financial information to ASIC .

As the minimum threshold for reporting financial information to ASIC is multiples that of all small business definitions, this is of no benefit to credit providers in determining when small business obligations apply.

Only once credit providers can efficiently obtain size of business information with reference to trusted source will they be able to effectively manage all requirements currently in place for trading with small businesses.

Questions for comment

• "Please provide any relevant information or data you have on the use of UCTs in contracts involving small businesses, including where possible, the types of UCTs (or potential UCTs) used and the characteristics of businesses affected"

Whilst most AICM members have reviewed and updated standard form contracts as a result of the legislation, we are aware of businesses that have:

a) Not reviewed agreements to alter terms that may be deemed unfair

Or

b) Retained terms that may be unfair in some circumstances but required for a significant portion of their customer types.

Where these businesses have retained UCTs they do routinely remove these following negotiations with customers or don't enforce them unless reasonable to protect their interests.

• "Are you aware of any industries in which UCTs (or potential UCTs) are regularly included in standard form contracts? If so, please provide details including which industries, the types of UCTs (or potential UCTs) and the prevalence of UCTs (or potential UCTs)"

The industries in which unfair contract terms appear to be most prevalent are often the building and construction industry, or waste disposal industry, where their customers are being supplied goods and services on credit. However, from a general position many credit providers are unsure of the specifics around what in fact makes a term unfair, as there are not consistent regulations around unfair contracts and only a number of decisions have been made in our courts. It is the AICM's experience that number of big and small business are unaware of the legislative changes the took place in 2016.

• "Do you have any suggestion as to how regulatory guidance and education campaigns could help reduce the use of UCTs? This includes any suggestions on improvements to current guidance or areas where further guidance is needed"

The AICM considers that more regulation and educational campaigns on unfair contract terms would be of far greater benefit to the industry as opposed to harsher penalties.

Education should not just sit with credit providers on unfair contract terms but also new small business start-ups and business generally to ensure that business engaging in contracts are aware of their obligations in a running a business and accepting credit in the first instance.

Businesses should be automatically supplied with an information guide covering topics but not limited to the following:

(a) the relevant laws applicable to their business;

(b) preparing finances accordingly;

(c) protecting your business;

(d) debtor and cashflow management; and

(e) continuous operations.

In the AICM's experience, when credit providers can be provided with clear and simple information about unfair contract terms in the form of presentations which are often easily understood can have a very positive impact on the industry.

AICM considers that specific education should be provided around the following:

(a) What an unfair contract term actually is and providing examples of unfair contract terms.

(b) The impacts it can have on credit providers from a legal standpoint; and

(c) Where to seek proper legal guidance on the terms and the alternatives that can and should be used.

• "Do you consider making UCTs illegal and introducing financial penalties for breaches would strengthen the deterrence for businesses not to use UCTs in standard form contracts? Please provide reasons for your response"

The AICM does not necessarily consider that making unfair contract terms illegal or introducing financial penalties will strengthen deterrence. However, certainly does support the notion that there must be more regulation around the use of unfair contract terms as they do have a negative impact on small businesses.

There needs to be an appropriate balance between regulating the use of unfair contract terms in standard form contracts, and protecting the credit providers, as it will ultimately be those credit providers who have to absorb the liability. As mentioned previously, an unintended consequence could be credit providers reducing the terms and credit limits offered to small businesses to otherwise mitigate risks.

The AICM therefore recommends, as opposed to making terms illegal and attaching severe financial penalties, the regulation should be increased, especially in circumstances (as outlined for question 4 above) where some credit providers may not in fact be aware of the legislative changes that came into force.

Further, the AICM considers that most credit providers would not intentionally want to disadvantage small businesses, and therefore they should not be unduly punished and there should instead be more of a focus, regulation and education around what unfair contract terms are, and the legal impacts surrounding the use.

• "Do you consider a regulator should be able to commence court proceedings on behalf of a class of small businesses on the basis that an unfair term has caused or is likely to cause the class of small businesses to suffer loss or damage? Please detail reasons for your position, including the possible impact this might have on your business"

Similar to the reasons as outlined in question 3 above, the AICM does not consider that this would be an appropriate solution to the problem that unfair contract terms present.

Additionally, any taking of action should be as a result of the enforcement of an UCT not simply its existence.

• "What impact has the current headcount threshold had on your business (or those
businesses you represent)? Please include any relevant information including, costs, benefits, impact on business practices, etc"

The AICM considers that particularly the hospitality industry is impacted by the current headcount threshold of 20 employees. During busy periods as a seasonal business, the number of employees may increase over the prescribed 20 employees for that period. This is confusing and it is unclear as to whether they are considered a small business.

Additionally, in the transport industry it is recognised that there are a number of potential UCT, however many of the businesses employ more than 20 people.

However, the major concern of our members is there is no efficient and independently verified way of assessing headcount.

• "If annual turnover was used to determine whether a business should be covered by the UCT protections for small business, what impact might this have on your business?"

The AICM have regard to the impact certain businesses may be faced with if the annual turnover was used to determine whether a business should be protected. The problem that arises is if a small business is doing well and has an annual turnover higher than the threshold they will not be covered by the UCT protections.

• "Do you consider $10 million annual turnover to be an appropriate threshold? Please detail reasons for your position, including the impact this might have on your business"

Upon consideration of the ATO's threshold of $10 million aggregated turnover for small businesses, the AICM considers $10 million annual turnover to be an appropriate threshold. As it is the AICM's view that the threshold for small business originating from the ATO's threshold and should be uniform to minimise confusion for small businesses.

• "Do you have any specific examples of contracts that would benefit from, but which are not currently captured by, the UCT protections due the current value threshold?"

The AICM consider the threshold may be too low for some industries, such as the agriculture industry for heavy farming equipment or the supply of produce. Additionally, the AICM recognises that in certain contracts there is a fixed volume and price for the duration of the contract, the upfront price exceeds the threshold resulting in the UCT protection not applying.

• "Please provide information on how the current contract value threshold has impacted your business"

Similar to the reasons outlined in question 9 above, the AICM considers that businesses with certain limitations are restricted from benefiting from the UCT protections.

• "Are there likely to be any negative impacts if the contract value threshold were to be removed completely? Please provide details"

It is considered by the AICM that if the contract value threshold was removed completely, however the headcount and annual turnover threshold still be upheld then it would likely have minimal impact.

The AICM also notes that the contract threshold level is an efficient way credit providers can assess the application of the legislation.

• "If the law were to be amended to set out the types of actions which do not constitute an 'effective opportunity to negotiate', what impact could this have on your business?"

The AICM members tend to negotiate on contract terms with customers where customers raise any issues they have with any clause/s.

Having greater clarity on what this means, and the types of action which do no fall in to the category would assist in reducing the current confusion by several of our members on UCT's generally.

• "Do you have any suggestion as to how regulators could better promote and enhance guidance on what constitutes a 'standard form contract'? Please provide details, including any suggestions around improvements to current guidance and areas where further guidance is needed"

The AICM considers that the best way regulators can promote and enhance guidance on what constitutes a standard form contract is to have the information provided in a simple, and easy to understand format, providing clear examples of what may constitute a standard form contract.

This information should be readily available on platforms such as the ACCC and ASIC websites.

AICM further considers promotional guidance on standard form contracts or unfair contract terms themselves could be introduced. This could be distributed through an optional "subscription" service for credit providers or credit users to allow the industries to keep appraised of updates to the legislation or comments from government bodies.

Should you have any queries arising from our submission please contact me.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

Footnotes:

[1] https://www.rba.gov.au/publications/bulletin/2013/sep/5.html

[2] https://www.gov.uk/government/publications/life-of-a-company-annual-requirements/life-of-a-company-part-1-accounts accessed 30 March 2020

[3] https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-financial-reports/are-you-a-large-or-small-proprietary-company/ accessed 30 March 2020

[4] Rod Sims, Chair, Council of Small Business Organisations Australia’s national Small Business Summit, Major changes needed to get rid of unfair contract terms, 31 August 2018 < https://www.accc.gov.au/speech/major-changes-needed-to-get-rid-of-unfair-contract-terms>. 

[5] https://www.accc.gov.au/speech/major-changes-needed-to-get-rid-of-unfair-contract-terms

Download Submission

 

6 March 2020

Department of Jobs and Small Business

By email: PaymentTimes@jobs.gov.au

Draft Payment Times Reporting bill and associated Minister’s Rules

The Australian Institute of Credit Management (AICM) represents the interests of over 2,600 credit professionals who are custodians of cash flow. They assess and mitigate credit risk in all sectors and manage credit terms for the supply of goods, services and finance.

Without our members, businesses are exposed to reputational damage, poor cash flow management, inefficient processes, breaching regulatory requirements and risk of not getting paid for hard won sales and services delivered.

On behalf of our members, the AICM is a vocal advocate for reform that enables all businesses to manage their credit risk and increase resilience to economic shocks and downturns. A core aspect of this advocacy are measures that improve payment times.

The Payment Times Reporting Framework has potential to change the poor payment culture in Australia and benefit all suppliers regardless of size. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has repeatedly stated that “The minimum standard for all supplier payments (regardless of supplier size) should be 30 days”[1]. This statement recognises that improving payment practices for all businesses will provide benefits to the broader economy and even greater benefits to small business than just improving payment times to small business.

Improved payment practices will benefit the broader economy by providing resilience during economic shocks and economic down turn. The trauma experienced by businesses in communities impacted by the 2019/20 Australian Bushfires was exacerbated by slow payment times creating severe cash flow issues and slowing their ability to recover. Many government and business leaders called for businesses to accelerate payment times to affected businesses. Additionally, COVID-19 is creating cash flow issues for numerous businesses across a broad range of industries, improved payment times would enable these businesses to better adjust to these shocks, recover quickly and minimise reduction of their workforce.

Annual reports by ASIC[2] have identified that the number one cause of business failures for the last 6 reporting years has been inadequate cash flow or high cash use.  The prevalence has also increased in recent years as shown by the below table summarising the % of external administrations where inadequate cash flow or high cash use was sighted as the primary cause of failure.

In the UK it was recently identified that 23% of insolvencies are caused by late payment issues . While this is a slightly different measure to that above, it is significantly lower than the above rates. Policies and initiatives in the UK such as The Late Payment of Commercial Debts (Interest) Act 1998, successful implementation of a Prompt Payment Code and legislated payment times are key drivers of the improved payment practices in the UK all of which are lacking in Australia and are not addressed by this draft bill.

The AICM strongly recommends that the draft legislation is amended to ensure the maximum improvement in payment practices is achieved as quickly as possible. Our key recommendations are summarised below:

Require reporting on payment times to all businesses.
By reporting on payment times to all suppliers, not only small business suppliers, the following benefits will flow:
- All suppliers will have access to valuable data relevant to the costs of supply and risk of slow payment.
- Ensure that all businesses are paid promptly and able to pay their suppliers promptly.
- Avoids the risk of big businesses further extending payment times to big businesses to compensate for shorter payment times to small businesses.
- Reduce burden on reporting entities as small businesses don't need to be identified.
- Big businesses with large numbers of small business suppliers will be incentivised to prioritise small business payments as the higher number of invoices and lower dollar values will drive lower average payment times.

If businesses are not required to report on payment times to all suppliers, there maybe an unintended consequence of payment times to big business suppliers being further extended threatening the solvency of these businesses and their ability to pay their suppliers promptly.

Mandate maximum payment times of 30 days
We strongly recommend following the UK's lead and calls by the ASBFEO and legislate maximum payment times of 30 days, legislating an interest rate to be applied to undisputed delayed invoices and penalties for repeated breaches of maximum payment times.

This recommendation replicates UK legislation (The Late Payment of Commercial Debts (Interest) Act 1998) which mandated payment of interest when invoices remain unpaid for 30 days or more. The importance of coming into line with the UK is emphasised by the fact that although these measures have achieved significant improvements there is still more to be done. In November 2019 Labour Party leader, Jeremy Corbyn, and Liberal Democrat leader, Jo Swinson, pledged to tackle the issue3 and in January 2020 amendments to The Late Payment of Commercial Debts (Interest) Act 1998 have been tabled.

It is also the experience of the Chartered Institute of Credit Management, who administer the UK's Prompt Payment Code, that without legislative force poor practices businesses are not incentivised to amend their poor payment practices.

As currently drafted some reporting entities may voluntarily improve their payment practices due to the transparency it provides. However, as the Bill does not mandate a maximum payment time it is very likely that most will enforce extended payment terms.

The urgency for legislating maximum payment times should not be underestimated considering compliance and enforcement requirements of this draft Bill do not come into effect until 18 months after the Framework begins i.e. after 1 July 2022.

On the assumption companies with poor payment practices will only commence reporting towards the end of the transitional period the effectiveness of the measure will not be known until 2023. This could result in 11,523 companies failing due to poor cash flow (based on 3,841 companies failing due to cash flow in 2018-192).

Inclusion of a review mechanism
As improving payment times is essential for the resilience of the Australian economy the AICM also recommends that a review mechanism is included in the draft legislation
as was the case with the Whittaker Review commissioned under the Personal Property Securities Act (2009).

This review would ensure a focus on improving payment times is a key focus of government and business.

Reporting information of reporting entities payment, complaints and disputes procedures
Allowing suppliers to easily access this information will be a significant benefit to the many businesses that do strive to pay correct undisputed invoices within terms as suppliers will be able to self-rectify the majority of issues.

AICM members report that while many large businesses do publish this information on websites it is often hard to find, missing or out of date. Incorporating this in the reporting process will ensure this is up to date and accessible.

By requiring reporting entities to supply this information for easy access by suppliers the following benefits are likely to flow:
o Suppliers and reporting entities will save time by reducing the number and frequency of calls to reporting entities.
o Increased compliant invoices submitted by all businesses improving the efficiency of reporting entities accounts payable function.
o Reduces the likelihood of the Payment Times Reporting Regulator receiving complaints from suppliers.
o Reporting entities will more efficiently meet their payment obligations and reduce potential for reputational damage from unintended delayed payments.

We trust our submission assists the implementation of legislation that achieves its intended goals of addressing the systematic problem of poor payment practices in Australia.

Should you have any queries arising from our submission please contact me.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

 

[2] REPORT 645: Insolvency statistics: External administrators’ reports (July 2018 to June 2019) https://download.asic.gov.au/media/5416956/rep645-published-18-december-2019.pdf

[3] Pbctoday article 21 Nov 2019 https://www.pbctoday.co.uk/news/planning-construction-news/late-payments-construction/67860/

29 January 2020

Ms Kate Carnell
Australian Small Business and Family Enterprise Ombudsman
GPO Box 1791
CANBERRA ACT 2601

By email: inquiries@asbfeo.gov.au

Dear Ms Carnell

Insolvency Practices Inquiry
The Australian Institute of Credit Management (AICM) represents the interests of over 2,500 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries.

The credit provided by our members supports businesses of all sizes through the provision of various types of credit and finance. A significant portion of our membership provides unsecured trade credit which enables businesses to fund trading and manage cashflow. The value of trade credit to the Australian economy is significant, an RBA report put the total value of outstanding trade credit to be in excess of $80bn at any one time.

AICM members are regularly involved in the insolvency process and report that poor outcomes from formal insolvency situations restrict their businesses tolerance to support small businesses experiencing temporary financial difficulties. The poor outcomes include high incidence of preference claim demands, prevalence of insolvent trading and low distributions to creditors. As a result, credit terms are managed tightly in order to mitigate potential loss.

Our submission focuses on our members' experience with the insolvency process. Whilst managing exposures to insolvency is a core element of a credit professionals' value to a business and small businesses are unlikely to have access to this level of expertise, the experiences of our members closely replicates that of small business.

We welcome the opportunity to contribute further detail on the topics included in this inquiry. Specifically, the AICM is able to provide a unique perspective of the below issues drawing on our members daily experiences at an operational level:
- Unfair preferential payment claims
- Identifying excessive remuneration, disbursements and fees
- Obtaining information relevant to creditors
- Impacts of poor and inefficient practices
- Navigating complexity of current legislation

Responses to questions for comment:
1. At the initial consultation with a registered liquidator, should the registered liquidator be required to provide a small business with:
a. a hard copy plain language fact sheet that outlines the various types of external administration and the role of directors and owners in each?
b. the reasons for recommending a particular course of action to the directors?
The AICM supports the simplification of information related to formal insolvency processes.
By clearly highlighting the risks of not engaging a registered insolvency professional the document may also deter activity such as illegal phoenixing and insolvent trading that has a significant impact on business owners, creditors and the broader Australian economy, specifically:
- Phoenix activity is estimated to have an annual direct to the Australian economy of between $2.85 billion and $5.13 billion .
- Reports by external administrators identified possible insolvent trading in 71% of reports to ASIC between July 2018 and June 2019 (up from 69% or 5,264 instances in the prior year) .

2. Should there be a control mechanism to prevent the total costs of an external administration from consuming the value of the company's assets? What form could this take?
Recent law reform provides a control mechanism by providing creditors the power to challenge remuneration, disbursements, fees and other aspects of insolvency processes. However, it is clear that these powers have not been widely used with the following factors limiting their use:
- Fear that a challenge my result in unfair preference claims being pursued more vigorously.
- The challenge may result in further fees being generated therefore reducing return to creditors.
- Cost of creditors enforcing their rights is prohibitive.

However, the AICM does not support preventing the consumption of a company's assets via caps or limiting remuneration and disbursements as this may limit the effectiveness of the important roles and outcomes such as:
- Ensuring orderly wind up
- Identifying breaches by directors
- Maximising returns to creditors

3. Should an information sheet of the average costs for a 'day in court' and the average numbers of court days for particular actions be included with each creditors report?


While this information may be beneficial there are numerous variables that will prevent relevance in all circumstances. The most relevant factor is if legal costs are incurred for a reasonable purpose i.e. likely to result in a better outcome for creditors or necessary to comply with the requirements of the insolvency process.

The AICM advocates for the approach detailed by Thea Eszenyi Senior Executive Leader, Insolvency Practitioners, Australian Securities and Investments Commission in the July 2019 article in Credit Management in Australia. This article recommends that remuneration reports "should explain:
- what work has been done
- what has been achieved
- the cost of that work
- the future milestones.
Standard remuneration reporting templates that simply list tasks performed and the RL's hourly rates may not provide enough information."
This approach allows creditors to provide informed consent and understand why the cost are incurred.

4. In consideration of technology available today, how beneficial would it be to automatically provide the Annual Administration Return report lodged with ASIC to creditors, directors, owners?
Providing information is important however providing clear and relevant information is more important than volume. Providing more reports as a matter of course may create additional work and fees which is unlikely to be offset by benefits to the creditors, directors and owners.

Improving the ability and reducing costs for creditors, directors and owners to access relevant reports to ASIC as required would be beneficial to all parties. This should be a future consideration of the Modern Business Register currently being developed.

5. Should valuations be provided to, and proposed marketing strategies require approval from, creditors?
Realisation of assets is a commercial activity with liquidators often at a disadvantage due to the fire sale nature. Disclosures that further undermine the liquidators bargaining position would have detrimental consequences on realisations and therefore returns to creditors.

Equally, AICM members are often frustrated when realisations do not reconcile with their assumptions of asset values.

The AICM supports post sale reporting to creditors with explanation of factors that were used to maximise realisations and what conditions affected these. For example, where an asset is sold below its book value the liquidator could report on factors that impacted this such as obsolescence, expert reports or limited pool of potential purchasers.

Simple, clear and outcome focused reports enable creditors to efficiently review the reasonableness of asset sales and seek detailed clarification as required and/or make appropriate referrals to ASIC.

6. Should demands to recover payments determined to give a creditor an unfair preference in a winding up require the registered liquidator to include the evidence they relied on in making that determination?
The AICM strongly supports this recommendation and is able to supply numerous examples where the absence of this requirement has caused detrimental impacts, such as:
- Receiving demands for significantly inflated values.
- Issuing demands without reference to security interests registered on the PPSR.
- Significant time costs reviewing archives and contacting past employees to investigate claims which can be issued 3 years after the point of insolvency.
- Recoveries absorbed by legal fees, often much of the fees relate to work that could be performed by the liquidator.
AICM members are continually frustrated at these impacts as:
- They have simply followed responsible and best practice collection practices.
- They have not used a position of special knowledge or power such as a related party.
- Recoveries commonly do not result in distribution to creditors which is the intention of the legislation.
In addition to providing evidence the AICM advocates for the following amendments to legislation:
- The time frames related to preference claims be reduced as follows:
o Payments subject to preference claims be reduced from 6 months prior to the point of insolvency to 3 months.
o Time for liquidator to bring a claim following appointment reduced from 3 years to 12 months.
- Reduce the number and type of payments captured to:
o Where creditors have actual knowledge of insolvency, rather than the current suspicion or reasonable grounds to suspect insolvency.
To expand, currently if a creditor did suspect (or should have suspected) that their customer was insolvent they are exposed to preference claim liability. The AICM attests that credit professionals are employed to suspect insolvency and many customers will display several signs of insolvency without actually being insolvent.
o Where undue influence is used or there is a non-arms lengths relationship.
The current practices are a significant concern to AICM members who regularly obtain legal advice, training and formal education on how to minimise and avoid preference claim liability. This adds to the bad debts incurred and is a misallocation of economic resources.
Addressing these issues, whilst maintaining the integrity of insolvency processes, will provide significant benefits to all businesses and the AICM welcomes the opportunity to further elaborate on this topic.

7. Should it be mandatory for individuals seeking to be directors of companies to undertake core education on running a business and the potential risks of personal exposure to liabilities before being eligible for appointment?
The AICM supports the recommendation that all new directors complete a course and knowledge test to ensure they understand directors' duties, components of good corporate governance and financial management.
This may help to dispel some commonly held mis-conceptions (e.g. directors are fully protected from personal liability) that result in poor outcomes for the business owners and the broader Australian economy.

A better understanding of the consequences of breaching director responsibilities could also deter directors being seduced by unscrupulous advisors that proliferate illegal phoenix activity.

8. Should it be mandatory for individuals seeking to start a company or register an ABN to undertake core education on running a business and the potential risks of personal exposure to liabilities?
AICM supports this education for reasons outlined in question 7.

9. Where a small business seeks advice when facing financial difficulties, should the individual proposing a course of action be required to provide the small business with:
a. a hard copy plain language fact sheet that outlines the various types of external administration available and the role of directors and owners in each?
b. the reasons for recommending a particular course of action to the directors?

Similar to our response to question 1 the AICM supports the provision of this information and notes if the individual proposing a course of action is not a part of a registered population (e.g. accountant, lawyer or insolvency professional) the avenues for enforcing non-compliance may be limited. To be effective on the unregulated population the requirement would require significant legislated penalties backed up by repeated and strong enforcement. Specifically, due to the often exorbitant rates charged by illegal phoenix advisors significant penalties would be required to adequately deter the practice.

10. How can the safe harbour provision be improved to encourage small businesses to take action early and gain time to assess the viability of the business?

The AICM believes the regime is appropriate with the exception of not requiring directors to seek advice of an advisor with appropriate insolvency qualifications. Considering the process is inherently not transparent this requirement ensures the rights of all stakeholders are fully considered with a full understanding of the complex factors involved in insolvency. Specifically, The absence of insolvency expertise brings increased likelihood of plans failing and creditors being unknowingly exposed to greater risk.

Rather than further legislation the AICM believes that promoting the benefits of early action and the consequences of not proactively seeking appropriate assistance to manage insolvency situations will have the best return for all stakeholders.

11. How can accountants and bookkeepers best support small businesses to seek help early?
The AICM recommends that accountants and bookkeepers are educated on the need to refer small businesses to appropriately qualified and registered insolvency professionals.

12. Should increased funding and resources be provided to the financial counselling sector to enable them to provide services to small businesses experiencing financial difficulty?

The AICM strongly supports additional funding for the work financial counsellors currently do.
It is the AICM's understanding that financial counsellors are focused at assisting individuals therefore they should be competent in areas relating to bankruptcy.

A strong understanding of the corporate insolvency process would aid financial counsellors to better assist directors and business owners through these processes and ensure they are directed to appropriately qualified professionals to provide insolvency services.

For clarity financial counsellors would be best placed to assist the individuals and the corporate insolvency process by not providing services related to corporate insolvency but by having a strong knowledge of corporate insolvency processes (at a similar level as credit professionals) in order to help individuals understand their rights and obligations, how to best engage with the process and to identify situations that do not conform with legislation and best practice.

13. Should the impact on the mental health of small business owners and directors be cause for a pause in proceedings?

While the small business owner's mental health should be a high focus and consideration for the insolvency professionals we are hesitant to agree that a blanket pause would provide the best outcomes considering timeliness of many aspects is vital to preserve the value of the company.

The AICM strongly supports training and resources being made available to insolvency professionals so they can adequately identify mental health concerns, support and refer individuals to appropriate services and adjust proceedings accordingly.

As a minimum the processes should be capable of adjusting for mental health concerns as it would for other health concerns. Further, legislation prescribes numerous strict time frames which may warrant review to allow for variances when mental health issues arise.

14. Are there other changes that could assist the parties where there are mental health issues?
Despite the real and potentially life changing impacts the insolvency process is likely to have on the individuals involved, the communication does not consider the recipient of the information instead is very technical and prescriptive.

The vast proportion of directors of insolvent businesses may only engage with an insolvency process once in their lifetime and most are facing significant personal impacts that have played a part in the cause of the insolvency and/or as a result of the insolvency.

Similarly, many small business creditors experience an insolvency process for the first time when a major customer enters insolvency. For many businesses this may threaten their business and personal solvency creating significant stress and mental health impacts.

We understand that the Australian Restructuring Insolvency and Turnaround Association has commenced work with other parties to improve these communications and the AICM advocates for the government to fund this initiative.

15. General submissions are sought on the fairness of having one system and the benefits and risks of implementing different processes so the costs and time to complete an external administration achieves the optimum outcome for creditors, employees and the company.

The AICM supports simplified processes generally and for small business insolvencies that reduce costs increase returns improve outcomes generally, whilst ensuring breaches of duties are identified.

A key requirement of credit professionals is that there is transparency and fairness in the process, therefore the AICM does not support the use of pre-packs arrangements where outcomes are predetermined and credit providers provided little or no opportunity for overview, especially where significant losses arise.

Should you have any queries arising from our submission please contact me.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

Footnotes
[1] https://www.rba.gov.au/publications/bulletin/2013/sep/5.html

[2] https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/The-economic-impact-of-potential-illegal-phoenix-activity/

[3] https://download.asic.gov.au/media/5416956/rep645-published-18-december-2019.pdf

[4] https://aicm.com.au/files/1815/7594/0915/AICM_Iss_5_July_2019_p25-28_-_Thea_Eszenyi_-_Fair_pay_for_fair_work.pdf

Download Submission

 

2 December 2019

Department of Jobs and Small Business
By email: PaymentTimes@jobs.gov.au

Payment Times Reporting Framework (Stage 2)

The Australian Institute of Credit Management (AICM) represents the interests of over 2,600 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies across all industries.

Our members and affiliates are the custodians of their businesses cashflows. Improving payment times in Australia is core to our mission as our members are the custodians of businesses cashflows.

Strong cashflow driven by prompt payment practices fuels a multiplier effect enabling all businesses to pay promptly, make capital investments with less reliance on finance, employ more staff and/or provide confidence to innovate that again creates additional benefits throughout the economy.

The AICM has been a long-time advocate for the implementation of a scheme similar to the United Kingdom's Prompt Payment Code (PPC) administered by our sister organisation the Chartered Institute of Credit Management (CICM). This scheme has driven significant change in payment practices in the UK.

The AICM supports the Payment Times Reporting Framework (PTRF) initiative as a steppingstone toward improving payment times and resetting Australia's current poor culture on payment times.

A key focus of our submission is that the PTRF would achieve its intended outcomes for small business plus additional benefits for the broader Australian Economy by following the example of the United Kingdom's Prompt Payment Code (PPC) and the United Kingdom's payment times reporting scheme by not limiting the scope to payments between large and small businesses but requiring large businesses to report on payment times to all businesses.

In response to the questions raided in the November 2019 discussion paper we provide the following feedback:

Question 3. What information should be included on payment terms in the PTRF? For example, could we consider an approach similar to the UK model?

A fundamental reason for payment delays are invoices not being presented in the required format or omitting information required for payment. For example, there has been a recent growth in businesses requiring supplier declarations relating to the modern slavery scheme, anti-bribery and matters of best practice and good corporate governance.

Ensuring small businesses are aware of these requirements will provide a significant improvement in their ability to obtain prompt payment.

AICM members invest significant effort ensuring their invoices comply with large businesses invoicing requirements. Therefore, the AICM strongly recommends reporting entities are required to provide information relating to their invoicing requirements is in line with the requirements of the PPC which requires signatories to:

- provide suppliers with clear and easily accessible guidance on payment procedures

- ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers

This information should be recorded directly on the portal and not links or references to websites. AICM members report that while many large businesses do publish this information on websites it is often hard to find, missing or out of date.

An additional benefit of including this information within the framework is that disputes and non-compliance complaints would be minimised and/or efficiently resolved.

Question 4. What are the positive and negative effects of identifying small businesses? If there are negative effects, how could they be mitigated?

The AICM strongly advocates for the framework to be implemented irrespective of the supplier size.

As stated earlier both the United Kingdom's PPC and payment times reporting scheme take this approach.

Question 5. Which approach/es do you favour for small business identification, and why?

Should the approach be to limit or segment reporting in relation to small businesses our preference is for "c) using an expenditure threshold".

While this method may result in invoices from medium and large businesses also being captured, the AICM's members attest that large and medium businesses face similar challenges as small businesses due to the imbalance in bargaining power that exists. Ensuring smaller value suppliers are paid promptly will enable them to pay their downstream small business suppliers promptly and harness other benefits of improved cashflow including the ability to invest, employ more staff or increase wages.

The AICM strongly believes that these benefits will offset any reduction in incentive for large businesses to offer preferential payment times to small businesses. Further, an incentive to provide preferential payment times to small businesses would be maintained by aggregate payment time performance being reduced when the business identifies small businesses (by a method appropriate for their business) and paying these entities on significantly reduced time frames. For example, the large business pays all suppliers under the expenditure threshold on 20 day terms and identified small businesses on 5 day terms thereby ensuring the aggregate payment time below 20 days.

In relation to the other listed alternatives:

a) large businesses identifying their small business suppliers

The AICM believes similar benefits as those identified under the expenditure model could be achieved under this model by allowing large businesses to report on their payment times irrespective of business size to eliminate cost/complexity of identifying small businesses. This will therefore result in a broader improvement in payment practices driving more significant benefits to the broader economy.

Where large business suppliers are identified these could be excluded from reporting on an exception basis. Further, the AICM suggests this exemption is only permitted where payment times have been mutually accepted ensuring both parties have agreed to non-standard payment times and the large business has not taken advantage of a superior bargaining power.

b) developing a public small business register and d) confidentially identifying small business suppliers using government or third party data

The AICM supports the implementation of mechanisms to identify small businesses and recommends this may be most effectively implemented and beneficial if integrated with information contained in the ASIC and ABN databases, therefore best explored post completion of the current Modernisation of Business Registers initiative.

Additionally, the AICM believes that the imprecise nature of identifying small businesses has an indirect benefit of improving boarder payment culture in Australia, for example unfair contracts legislation extension to small business resulted in contracts with large and medium businesses complying with the legislation not just small businesses as detailed in the legislation.

Question 7. What are the advantages and disadvantages of reporting at a group or entity level?

Reporting at entity level will reinforce the importance of small business suppliers identifying the entity they are trading with. This benefit of this should not be underestimated as correct identify verification reduces credit risk and broader benefits such as improving small businesses access to security afforded by perfected Personal Properties Securities registrations.

Question 11. Should the PTRF central publication portal include information on trends over time or provide information to allow comparisons by industry and location?

The ability to report on trends will be highly valued by stakeholders and maximise the benefits of the framework.

Publication of trends in mainstream and industry publications will contribute significantly to small business awareness of the PTRF, thereby significantly justifying investment in establishing the mechanisms for reporting the trends.

Additionally, the AICM advocates for information providers to be provided access to the information for purposes of aggregating this information into credit reports and accounting systems. This will have the benefit of ensuring small businesses are able to efficiently access the information and enable informed credit decisions.

Question 15. What are your views on the above categories of expenditure?

The primary consideration for inclusion of expenditure should be whether the large business has taken advantage of extended payment times i.e. anything other than payment on or before receipt of the goods or services should require inclusion.

In regard to the specific categories:

- Types of payment – The method of payment should not enable businesses to avoid reporting, for example many businesses pay large supplies by credit card.

- Types of payees – All payments to entities outside the control of the reporting entity should be included.

- Types of purchases - The type of purchase should not influence reporting and payment practices as payment delays have significant financial consequences and (especially for small business) can impact on physical and mental health.

- Size of payments – Omitting small value transactions is not recommended as inclusion of these items will ensure large businesses are as focused at processing these transactions.

AICM members can attest that one missed payment of a small value invoice (especially when amongst a series of invoices) can create similar pain points as missed payment of a large invoice. Pain points include time spent reconciling transactions, allocation of payments and chasing the large business for payment.

Question 16 What are your views on the two options to determine the start of the payment period? Are there others?

The AICM believes that invoice date will provide the most appropriate date to start the payment period and provide a calculation that can be replicated and verified by all stakeholders.

The disadvantage of potential delays in transmission are minimal considering the pending take up of e-Invoicing and the proliferation of PDF emailed invoices. Further large businesses will be incentivised to expediently process invoices received and provide clear invoice requirements detailing transmission requirements.

Additionally, in our members experience, date received gives rise to an incentive/opportunity for administration staff to manipulate the date in order to meet KPI's related to processing times. This circumstance has been reported repeatedly by AICM members.

In response to additional points raised in the November 2019 discussion paper we provide the following feedback:

• What approach to compliance should be adopted?

A key driver to the success of the Framework will be ensuring reporting is viewed as a key part of corporate governance. Therefore, a tiered approach where repeated civil offences and poor payment practices result in criminal sanctions for senior managers and/or directors may be a balanced and effective approach.

• Mechanisms to ensure accurate information is reported

The AICM expects that suppliers will be best placed to identify when information reported is not accurate, therefore a simple and clear complaints procedure would be an effective way for targeting compliance activities.

• Additional suggestion related to compliance

As suppliers, not just small business suppliers, are naturally hesitant to lodge complaints related to poor payment practices, incorporating a "help function" may be effective in improving outcomes for all.

The help function could be available to suppliers that have already followed the large businesses disputes or escalation procedures and enable the non-payment or serial late payment of compliant invoices to be forwarded by the PTRF administrator to the large company for resolution prior to an official complaint.

While the AICM has not seen this type of process elsewhere it is a result of reports from the CICM that PPC complaints have been very low and all complaints were resolved very promptly once escalated to the signatory.

Should you have any queries arising from our submission please contact me.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

FOOTNOTES

[1] http://www.promptpaymentcode.org.uk/

 Download Submission

6 September 2019

By email: TaxDebtTransparency@ato.gov.au

The ATO's administrative approach to the disclosure of business tax debt information to credit reporting bureaus

The Australian Institute of Credit Management (AICM) strongly supports the implementation of legislation allowing the ATO to disclose tax debt information to Credit Reporting Bureaus (CRBs) and welcomes this opportunity to provide feedback on the ATO's administrative approach which is vital to ensuring the measure meets its intended outcomes including providing information to enable fully informed credit decisions.

Effectively implemented, the measure will address the current issue of credit providers not being alerted to significantly aged tax debts in a timely manner, encourage business owners to address solvency issues in a timely manner and disrupt dodgy operators such as phoenix and others seeking to avoid tax obligations. Further, implementation of this measure will benefit credit providers, Australian taxpayers and levelling the playing field for entities that do meet their tax obligations.

Key feedback and recommendations of AICM include:

1. Ensure the measure is implemented in a timely manner to address the current information gap exposing credit providers to significant risks and allowing dodgy businesses to gain an unfair advantage.

2. Should the final legislation maintain the $100,000 threshold and require removal of information from CRBs once criteria for reporting is no longer met, the ATO should be vigilant for entities manipulating these elements.

Detail of our concerns are included in the joint submission of AICM, Australian Finance Industry Association (AFIA), Australian Retail Credit Association (ARCA) and Australian Restructuring, Insolvency and Turnaround Association (ARITA) annexed to this feedback.

While these requirements are matters for legislation the ATO should be alert to the manipulation that will occur so that alternative action (such as litigation and windup) can be taken in a timely manner.

3. Ensure all other actions to encourage engagement are taken before tax debts age beyond 90 days. This will allow timely disclosure and assist the ATO to respond to disputes/complaints about disclosure.

AICM members report that the most common dispute in relation to reports made to CRBs is that contact/recovery attempts were not made prior to reporting to a CRB. By ensuring all viable options have been exhausted and documented prior to reporting our members are able to respond to this dispute in a timely manner and move toward resolving the debt.

4. Consider review of current policy for outsourcing tax debt collection activity and agreements with third party collection agents.

It is AICM's understanding that agreements with third party collection agents may prevent the ATO from disclosing information to CRBs for up to 90 days and a second collection agent is often engaged.

If agreements and policy prevent disclosure while collection agents are engaged this could result in debts being aged over 270 days prior to reporting to CRBs, limiting the effectiveness of the measure.

For clarity, AICM encourages the use of collection agents as an effective method for encouraging entities to engage with the ATO and resolve tax debts. It's AICM's recommendation that the ATO reviews policy and agreements to ensure it maintains the ability to report tax debt information in a timely manner.

5. A phased implementation to ensure accuracy and integrity of the measure with a focus on entities that pose a significant high risk is supported by AICM.

AICM encourages the ATO to prioritise entities that pose the greatest credit risk to suppliers and financiers such as those identified by the phoenix taskforce or are displaying signs of likely insolvency.

AICM supports awareness building of the measure however our strong feedback is that the community already expects that non-payment of tax debts is reported to CRBs. As this measure replicates community expectations, AICM suggests the awareness building phase is not critical to the success of the measure and considering the importance of the measure it is vital that this does not delay the reporting of tax debt information.

AICM recommends providing additional information in the ATO's communications with the qualifying entities prior to reporting rather than delaying the implementation of the measure until completion of a community awareness program.

6. AICM understands the criteria for reporting is determined by legislation not the ATO's administrative process however we note:

6.1. The $100,000 is too high as it does not adequately deter dodgy businesses/advisors and phoenix operators and sends the message that it is OK not to pay tax debts under this level. The ATO should consider its messaging of this threshold in all aspects including the community awareness phase and in notices to qualifying entities.

6.2. As information will be removed or not reported when an entity enters a payment plan, AICM encourages the ATO to consider the impact on the entities creditors when approving payment plans.

Supporting businesses ability to weather temporary cashflow issues is in all stakeholder's best interest, however entering payment plans can be detrimental to the intended outcomes of the measure when the entity is at high risk of insolvency. An example is as entities with multiple failed repayment plans or long term repayment plans with low likelihood of resolving the debt. In these circumstances the absence of a disclosure to CRBs will mean credit providers are unable to make fully informed credit decisions. Therefore it may be more appropriate to refuse a formal payment plan, so that tax debt information is reported, and the entity encouraged to make payments which the ATO will consider when considering legal enforcement.

7. AICM considers the 21 day notice period as adequate on the understanding all other options to engage the entity have been exhausted.

The paper indicates the notices will only be sent once an entity has met the criteria for reporting, AICM recommends the ability for the notice to be given prior to the 90 day criteria being met. This ensures timely engagement with the ATO is encouraged and the reporting measure can be used to alert credit providers to high risk entities and disrupt dodgy operators such as those identified by the phoenix taskforce.

A brief word about AICM

AICM's membership is primarily credit professionals working in organisations providing trade credit. These organisations are identified in the PricewaterhouseCoopers (PwC) report released by the Phoenix Taskforce that found the direct impact of illegal phoenix activity to trade creditors is between $1.16 and $3.17 billion annually.

The Australian Institute of Credit Management (AICM) is Australia's leading professional member body for credit management professionals across all industries and sectors, and the only credit industry specific Registered Training Organisation in Australia.

AICM represents, develops and recognises the experience of over 2,700 individual members working in over 1,350 companies including 34 of the ASX 100 and global organisations in all industries and sectors.

More about AICM is available here

I thank you for the opportunity to provide our member's feedback and welcome the opportunity to continue to work with the ATO to ensure this measure is implemented effectively.

Yours Sincerely

Nick Pilavidis
Chief Executive Officer

Download Submission 

14 March 2019

Mr Mark Fitt
Committee Secretary
Senate Economics Legislation Committee
PO Box 6100
CANBERRA ACT 2600
By email: economics.sen@aph.gov.au

Dear Mr Fitt,

Inquiry into Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 [Provisions]

Thank you for the opportunity to make a submission to this inquiry.

The Australian Institute of Credit Management (AICM) is very supportive of measures that seek to disrupt illegal phoenixing considering our members see the impacts of up to $3.1 billion in direct cost to unpaid trade creditors . However, our members have not called for more legislation to combat illegal phoenix activity preferring instead that existing laws and mechanisms are used to their fullest.

In AICM's view the new laws to pursue illegal phoenix operators would not reduce the need for regulators involvement in addressing this issue. Any laws designed to combat illegal phoenix activity will be ineffective if they are not supported by a tough stance by regulators. The laws must be enforced in as many instances as possible from the low value and low prospect of recovery through to the high value and systemic operators.

The AICM has been an active participant in seeking to address illegal phoenix activity including past submissions and active involvement in industry and government forums including the Director Identification Number reforms and appeared as a witness in the Senate Economics Legislative Committee's inquiry into Commonwealth Registers Bill 2019 and 4 related bills (including Director Identification Numbers) on 13 March 2019.

We have included our previous submission on this bill as an Annexure.

Key Points
While many of the amendments from the exposure draft version are welcomed, we note concern on the following points which are expanded in our previous submission

- Advisor and Facilitators of Phoenix activity
The AICM remains concerned that section 588GAC Procuring creditor-defeating disposition, will be largely ineffective due to the requirement for the advisor/facilitator to have engaged in of pro-active/recruitment like activity.

We recommend that an entity/person that does not actively recommend or convince a company to dispose of an asset but provides advice or facilitates the transaction with recklessness (Criminal offence) or reasonable knowledge (Civil penalty) so that a creditor defeating disposition would occur should also be captured within the provision.

- Resigning Directors
The AICM recommends that the time frame for notification of resignation is reduced to ensure credit assessments made in this time are accurate and fully informed. As stated in our earlier submission:
"Considering the 28 days presents risks to credit providers and is not required to protect directors who don't intend to manipulate the registration process, the AICM prefers that notice is required immediately and liability remains until notice is provided to ASIC. A defence should be available where it can be shown the deregistration was actioned within a reasonable time such as the Director actioning resignation themselves within 28 days of resigning after being aware the company had not done so immediately. A director that did not make reasonable steps to ensure notice of resignation was provided to ASIC would not be eligible for the defence."

In reviewing submissions to this inquiry by Australian Restructuring Insolvency & Turnaround Association (ARITA) and Professor Helen Anderson, Melbourne Law School we support their submissions most notably:

- The most effective measure to combat illegal phoenix is a zero-tolerance stance taken by an adequately funded regulator.
- The objects now refer to phoenixing and the benefits this has on the ability to reset the culture around phoenixing.
- The amended definition of creditor defeating dispositions to include abandoned companies, is welcomed. However, the AICM holds some concern that the time frames still leave room for manipulation but expect that existing laws may be utilised in these instances and/or this provision reviewed in the near future.
- Improvements to the issue of assessing Market Value through the inclusion of "best price reasonably obtainable" and the presumption that a disposition was for less than market value if it is proved the company failed to retain financial records relating to the disposition.

Should you have any queries arising from our submission please contact myself on 0408 445 014 or nick@aicm.com.au.

Yours Sincerely 

Nick Pilavidis
Australian Institute of Credit Management

6 March 2019

Mr Mark Fitt
Committee Secretary
Senate Economics Legislation Committee
PO Box 6100
Parliament House
CANBERRA ACT 2600

By email: Economics.Sen@aph.gov.au

Dear Mark

Senate Economics Legislation Committee
Inquiry into Commonwealth Registers Bill 2019 (and related 4 bills)

The Australian Institute of Credit Management (AICM) represents the interests of over 2,500 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries.

Our members support businesses of all sizes through the provision of credit, with a significant portion of our membership providing unsecured trade credit. The RBA estimated the value of outstanding trade credit in March 2013 alone was $80bn .

Trade credit enables businesses to fund their growth, general trading and manage cashflow without additional costs associated with other forms of credit and finance. Efficient access to accurate and up-to-date information is essential for trade credit providers to maintain this vital source of finance for the economy.

AICM has provided submissions and taken part in consultation on the Treasury's Modernising Business Registers Program (MBR) and related matters such as illegal phoenix activity with these being of significant interest to our members due to the impact on their ability to fulfil their roles.

Below is a summary of these matters with further detail contained in annexures:

Modernising Business Registers
Our members role in supporting businesses with the provision of trade credit relies heavily on their ability to assess credit worthiness efficiently, accurately and complete.

Credit professionals seek to provide credit within the risk parameters of their business. When data is not efficiently available, complete or accurate credit assessments cannot be completed with confidence leading to a negative bias and risk adverse approach which results in restricted/reduced credit terms and amounts.

The impacts of current problems with efficiency, completeness and accuracy related to the provision of trade credit include:
- Small businesses required to provide additional security such as guarantees from directors/owners or a being offered "cash/payment on delivery" terms.
- Larger businesses required to provide additional financial information or offered lower credit limits and terms restricting businesses ability to grow and operate efficiently.
- The broader economy is impacted by the economic loss due to inefficiencies, additional costs of alternative financing, increased risk and growth opportunities reduced.

The AICM supports the intent of the related bills to create a central and modern register and provide the following comments and recommendations:
- Improving the availability and integrity of data will allow better credit assessments and empower credit providers to support growth and disrupt illegal phoenix operators.
- AICM Recommends - Reducing or eliminating cost for accessing data due to the broader economic benefits including strengthening credit providers ability to disrupt dodgy directors and illegal phoenix activity.
- The AICM is not aware of the publication of analysis into the costs and benefits of the intended registrar and recommends they are vigorously and transparently considered.
- Reliance on data standards and disclosure frameworks rather than detail in legislation is a concern to the AICM considering the data and access is so vital to our members and the broader economy.

We provide additional detail on the above points and additional in annexures.

Director Identification Numbers
DINs will rectify a significant gap in the accuracy of the information that credit professionals rely on to assess risk and make fully informed credit decisions.

For too long credit professionals have been exposed to unnecessary risk as a result of poor director validation. Most notably the risk relates to illegal phoenix activity with trade credit providers bearing a significant proportion of the $2.9 billion and $5.1 billion cost to Australian economy . Errors in director identification also routinely lead to incomplete credit decisions due to information such as a director related entity not being identified.

The AICM strongly supports the intent of the related bills to create a Director Identification Number and provide the following comments and recommendations:
- AICM recommends - Legislation should encompass further detail currently left to data standards and administrative instruments specifically core elements such as identity verification and continuity of current data on registers.
- AICM recommends - Legislating the requirement for identity verification and including a physical step in the process that cannot be delegated to a third party.
- AICM Recommends – the 28 day time frame to apply for a DIN is reduced or eliminated to avoid manipulation by dodgy directors and to improve governance around director appointments.
- The AICM supports inclusion of an educational requirement as part of DIN application to ensure director roles, responsibilities and liabilities are explicitly understood and accepted.

We provide additional detail on the above points in comments and prior submissions included in annexures.

As a significant stakeholder in registries information the AICM and its members appreciate the opportunity to contribute to these initiatives to ensure they achieve the intended outcomes.

Should you have any queries arising from our submission I can be contacted on 02 8317 5085 or nick@aicm.com.au

Yours sincerely

Nick Pilavidis
Chief Executive Officer

ANNEXURES

Annexure A

Modernisation of Business Registers

 Improving the availability and integrity of data will allow better credit assessments and empower credit providers to support growth and disrupt illegal phoenix operators.

 Credit professionals can play a key role in disrupting dodgy directors and illegal phoenix activity.

 By improving access to data, credit professionals will be able to identify phoenix activity and aid in the disruption by reporting the activity and withholding credit from the new entities, in addition to avoiding financial losses of their own.

 Through the services of Credit Bureaus (such as illion and Equifax) our members are well served in terms of efficiency, however many of our members and small businesses will benefit by improved efficiencies accessing information directly from government registers.  The greatest issue to availability of data for credit providers are cost barriers.

 AICM Recommends - Reducing or eliminating cost for accessing data due to the broader economic benefits including strengthening credit providers ability to disrupt dodgy directors and illegal phoenix activity.

 The costs for assessing credit risk in Australia, currently limits credit professional’s ability to assess credit risk in comparison to other jurisdictions for example:

-        In the USA it is common practice for our trade credit equivalents to obtain at least 2 credit reports from different bureaus due to the comparatively low cost of reports.  In Australia our members will only obtain one report and limit the amount of information obtained based on levels of credit exposure.

-        In the UK and New Zealand company registry information is free of charge.

 By removing the cost barrier to accessing basic company information the benefits to the broader economy are likely to exceed the costs to government. Benefits include:

-        Entity validation, ensuring the correct entity is reflected in contracts and invoices would be significantly improved, especially for small businesses.

-        Increases corporate transparency.

-        Improvise the efficiency of the Australian business environment.

-        Allows for better risk mitigation.

-        Reduction in the minimum cost of data will lead to additional and multiple data sources being obtained.

-        Assist innovation and development of data and risk solutions.

 Accuracy and completeness is a significant issue for our members.  For example, the lack of integrity of director identification exposes our members to significant risk by creating uncertainty. Further, this prevents assessment of all relevant risks as director related entities are often not linked.  These situations lead to:

-        A negative bias being assumed with restricted credit terms being extended. This is most common where additional sources of information are limited e.g. company financials.

-        In efficiencies for the credit provider and customer.  Often additional enquiries, security and information is requested of customers.

 Consideration of the appropriate registrar

 Due to ASIC’s role in regulation and the likely efficiencies of combined regulatory and registry functions, we question the proposal to remove registry powers from ASIC without clear benefits.

 A specific concern is inefficiencies and duplications that may result for the regulated populations as a result of the from removal of the registry function from ASIC and ensuring the ability to incorporate other registers is not compromised.

While we question the removal of registry functions from ASIC we believe efficiencies could be obtained by centralising all complimentary registers such as those considered in this proposal and others such as the Personal Property Securities Register.

 A central government body with the sole responsibility of acting as registrar for all registers would also provide significant benefits to businesses of all sizes by providing a single touch point. Small businesses and other unsophisticated credit providers would benefit significantly from this approach, for example:

-        Awareness of the registries and available information is a current challenge and a one-stop-shop would address this issue significantly.

-        A search for one specific purpose, such as ABN verification, could also return additional search options such as PPSR information.

 To date the AICM is not aware that this analysis has been conducted as to the best option for the future registrar and recommends that it is considered in a thorough and transparent way.

 Reliance on data standards and disclosure frameworks rather than detail in legislation is a concern to the AICM considering the data and access is so vital to our members and the broader economy. 

While we understand the flexibility and efficiencies in defining certain elements in data standards and administrative instruments and that extensive consultation is being conducted to develop these with industry our concern is that the less onerous processes may result in unintended consequences or specific users interests not being considered.  A  specific concern relate is ensuring director identity details remain accessible due the importance of these to the credit assessment process and later recovery and enforcement actions.

 Annexure B

Director Identification Numbers

 AICM recommends - Legislation should encompass further detail currently left to data standards and administrative instruments specifically core elements such as identity verification and continuity of current data on registers.

 To ensure a very high level of verification/identification is established and maintained we feel the legislation should detail the minimum requirements.

 While we support the ability of the registrar to determine appropriate data standards, the minimum standard for director verification should not be subject to variation. We strongly recommend that the legislation details a minimum standard including:

-        A 100-point style identification process drawing on identity verification from multiple government and non-government sources.

-        Preventing the application process from being delegated so there is no possibility that an individual obtains a DIN without their knowledge.

-        A physical step in the process, such as lodging the application in person.

 The current information on directors is vital to informed credit decisions therefore the legislation should require that the current information including directors (and previous directors) full name, address, date of birth and place of birth and must be provided in perpetuity. In making this recommendation we consider that the benefits of obtaining a corporate vehicle creates a requirement for credit providers to have access to this information and to be able to verify the identities of the controllers of the entity.

The director details are specifically relevant to credit professionals when;

-        providing credit as director signatures are often required for execution of credit agreements, contracts or guarantees. It is essential to verify that the correct person has executed the document. This is only completed effectively by comparing details on the government register to verification documents provided at the time of execution.

-        serving of notices and enforcing liabilities.  Directors generally don’t keep all suppliers up to date with their contact details therefore, government register information is important to ensure documents are provided to directors when required.  This becomes even more important when obligations of the company are not being meet and may result in liability to the directors, without these details being accessible on the government register both the director and the supplier could be impacted.

 AICM recommends - Legislating the requirement for identity verification and including a physical step in the process that cannot be delegated to a third party.

 We emphasise the importance of preventing directors from delegating the application process to a third party. Any capacity to delegate the process will prevent the measure achieving its goals, specifically the below issues will continue:

-        Directors being appointed without full knowledge/understanding. If a director is only required to action a minor part of the application, it remains possible for individuals to accept directorships without their knowledge or full understanding.

-        Directors not understanding the importance of their role. A thorough application and verification process that cannot be delegated makes it clear that obtaining a directorship is not a matter to be taken lightly as opposed to the current situation which makes applying for a library card seem more significant.

-        No understanding of director duties or potential liabilities. By undertaking the application personally, the process could ensure individuals have seen and acknowledged their obligations and responsibilities as a director.

 The importance of the verification process should not be compromised in anyway including if this precludes the use of some technology. “Verification” not “Simplification” should be the priority of the DIN.

 AICM Recommends – the 28 day time frame to apply for a DIN is reduced or eliminated to avoid manipulation by dodgy directors and to improve governance around director appointments.

 In addition to our comments of earlier submissions the AICM supports comments of other bodies such as ARITA that the 28 day time frame to obtain a DIN may be manipulated by phoenix operators appointing dummy directors and exploiting this window of opportunity to siphon assets to the new company.

 We disagree with the need to allow 28 days to apply for a DIN as very few directorships would be appointed without a high level of prior knowledge/expectation.

 Requiring prospective directors to obtain a DIN prior to appointment could maximise the value of the DIN by assisting companies to fully consider all appointments. For example, the appointing board/company could check that the director has been correctly identified, is not currently disqualified (or previously disqualified), if they have other current directorships and other factors that may influence the applicant’s ability to discharge their governance obligations.

 Additionally, during the 28 days credit providers will be making credit decisions on incorrect and incomplete information. This could be significant in cases where directorship changes are linked to ownership changes.

 Finally, allowing 28 days to apply for a DIN may also impinge on the company’s obligation to advise ASIC of new appointments when a director obtains their DIN towards the end of their 28 day period, leaving the company with little or no time to notify within their allowed 28 days.

 The AICM supports – inclusion of an educational requirement as part of DIN application to ensure director roles, responsibilities and liabilities are explicitly understood and accepted.

 In addition to the comments made in our earlier submission to Treasury, the AICM supports calls of others such as Australian Restructuring Insolvency and Turnaround Association and Australian Institute of Company Directors for the DIN application process to include an educational requirement to ensure new directors understand the roles, responsibilities and liabilities are explicitly understood and accepted. 

 Ensuring directors are aware of their responsibilities when taking on an appointment will provide many benefits including:

-        Disrupting the activities of phoenix advisors such as appointment of dummy directors who are mislead into believing there are no duties or responsibilities associated with appointment.

-        Ensuring directors are financially literate and aware of all director duties under the Corporations Act.

-        Ensuring directors are aware of other potential personal liabilities depending such as work health and safety, environmental and other liabilities dependent on their industry.

-        Incidence of Insolvent trading may be reduced through awareness of director liabilities and opportunities such as Safe Harbour.  Insolvent trading has been identified in 69% of external administrations during 2017-18[1].

 The AICM advocates for a scalable approach that allows all directors to comply with minimum time commitment (e.g. a less than 2 hour online training) and emphasises the need for deeper and continual education especially as company size and complexity increases.

FOOTNOTES

[1] https://www.rba.gov.au/publications/bulletin/2013/sep/5.html

[2] https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/The-economic-impact-of-potential-illegal-phoenix-activity/

[3] ASIC REPORT 596: Insolvency statistics: External administrators’ reports (July 2017 to June 2018) 

Download Submission

 

4 March 2019

Department of Jobs and Small Business
By email: PaymentTimes@jobs.gov.au

Payment Times Reporting Framework

The AICM represents the interests of over 2,500 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries.

The credit provided by our members supports businesses of all sizes and significant portion of our membership provides unsecured trade credit. Trade credit enables businesses to fund their trading and manage cashflow. Efficient access to accurate and up-to-date information is essential for credit trade credit providers to perform this function.

Poor payment times are a problem for all businesses and the broader Australian economy as payment times impact cash flow the life blood of all businesses enabling them to grow, improve efficiencies and employ more staff.

Improving payment times in Australia has been a key objective of the AICM since 2014 when it became obvious that poor payment practices of large corporations were a major driver of payment times in Australia languishing behind those of most other developed nations and many developing nations.

AICM membership comprises of a high proportion of professionals working in accounts receivable. These specialist roles manage the invoice to cash process of businesses of businesses from $20 million revenue and above. Despite our members being professionals in the collection of payments, improving payment times is an increasingly challenging prospect. The AICM recognises that these challenges are multiplied for small business.

The AICM is committed to improving payment times for small business as:
- Small businesses are generically viewed as high risk due to their susceptibility to cash flow issues. Improved payment times to small business will lead to an increase in their capacity to pay our members.
- Stronger cashflows will reduce insolvencies of small businesses. ASIC reports have shown that inadequate cash flow has been the number one cause of insolvencies for the last three years .
- If payment practices of large businesses are improved with small business these practices are likely to flow to all businesses.
- The culture of slow payment times in Australia needs to change to ensure strength and stability of our economy in future economic down turns.

The AICM strongly supports a requirement for large businesses to publish payment information, to shine a light on poor payment practices, and allow all businesses to understand the cash flow implications of transacting with these entities. We also believe this will go a long way to changing the culture around payment times in Australia.

Our firm recommendation is that in addition to a focus on payment times to small business payment times generally should be a core focus of the proposed framework. A framework that encourages improved payment times throughout the business community will lead to significantly more benefits for the broader Australian economy and supply chains.

In response to the discussion paper we provide the following feedback:


Key Design Questions for the Framework


1. What should be the Scope of the Payment Times Reporting Framework
The AICM strongly advocates for the framework to encompass large organisations' treatment of all suppliers and supports the statement in the discussion paper that "reporting on the treatment of all suppliers would provide some insight into these supply chain payment practices."

The challenges small business face with poor payment practices are replicated by large businesses. Many large businesses are prevented from paying small business quicker due to the delays they face in receiving payments from their suppliers. While there is a significant benefit to encourage all large businesses to pay small businesses many large businesses are also reliant on the payment times in order to pay small businesses on-time.

If there is a lack of focus on payment times generally and large businesses are unable to extract better payment times from their large business customers these businesses may need to incur additional finance costs in order to meet best practice payment times with their small business suppliers.

A framework that encourages best practice payments between all business will deliver sustainable and significantly higher benefit to small businesses and therefore the broader economy.

Additionally, the AICM believes that the framework should also consider requiring reporting on accounts receivable times of large corporations which will add significant clarity to the payment practices. For example, payment times of 60 days may not be deemed as such poor practice if accounts receivable times are within 5 days of this. However, if accounts receivable times are significantly less it can be seen that the large corporation is receiving an advantage over its suppliers.

The monitoring and reporting of receivables is common practice amongst large corporations in order to manage the associated risk, therefore reporting entities will be able to easily comply with this requirement.

The AICM's preference is a segmented approach to reporting based on payment times to small business, other businesses and all business. However, considering the reporting and definition challenges may make this requirement burdensome and prone to error.

Defining small business
The AICM prefers the approach of specifying a turnover and/or employee definition for all large organisations rather than other approaches.

However, we note the complexity of this approach considering the multiple revenue or employee thresholds that exist to define a small business and there is no efficient way to verify these factors.

The expenditure model may lead to benefits for all size organisations including large organisations that fall within the thresholds but will not provide a true reflection of payment times to small businesses.

The above comments also apply to the proposal of allowing the reporting entities to provide their own definition. Additionally, without standardised definition comparison cannot be made regarding payment times.


2. Which entities will be obligated to report?

With the reporting threshold of annual turnover being set at $100 million it is the AICM's view that all types of corporate entities should be required to report including trading trusts, charities and not for profits as all of these entities are highly likely to be engaging with multiple suppliers and/or with suppliers that have significant exposure to their payment practices.
A defence to non-compliance penalties may be established or application for exemption requested by entities that do not engage more than a certain threshold number of suppliers annually. This should be very low recognising the capacity of these entities to comply and maintain good payment practices.

Consolidated groups
The framework should require reporting by each entity that triggers the threshold and any consolidated group that triggers reporting requirements, to expand:
- Suppliers contract with a specific legal entity and therefore the payment times of that entity is relevant to their purposes, more so than the aggregated consolidated group.
- Consolidated groups that trigger the threshold should also report in aggregate considering:
o This will incorporate the payment times of smaller entities not required to report. Potentially these smaller non-reporting entities should still be recorded in the framework so that enquires can be directed to the parent entity.
o Suppliers to the controlled but non-reporting entities will have visibility to the payment practices of the consolidated group.
o The consolidated groups payment in aggregate are relevant to suppliers to the whole or majority of the entity as well as providing some understanding of expected payment times for suppliers to smaller entities.

3. What information should be reported

Determining the information fields to be reported on
The AICM believes it is very valuable to have additional company and payment related information available in the same place as payment time information as this will enable users quick and efficient access. While this this may create duplication for reporting entities where information exists in other forms e.g. ASIC filings or company websites the AICM does not expect this will exceed the benefits.

Descriptive information
The AICM strongly supports the mandatory reporting of:
- ABN*
- ACN*
- Company name*
- Trading names*
- Subsidiaries/controlled entities
- Primary industry
- Annual turnover
- Date published,
- Reporting period,
- Date assured, and by whom it was assured

Considering this information may be relied on by many parties it is recommended that where possible data, such as those marked with *, be verified or prepopulated with reference to other government databases.

All other data proposed (i.e. segmentation, supply chain descriptive information and a narrative field to contextualise results) will be beneficial to suppliers but believes it is appropriate that these fields should be optional. Reporting entities may be encouraged to submit this information to contextualise their results. For example, a business with high payment times may contextualise this by showing that they are in the construction sector and providing narrative such as "standard payment times are XX days for small business and XX days for all businesses our actual payment times are a result of a small number of contracts where agreed terms are in excess of these".

Additionally, the AICM supports the inclusion of actual documents or at a minimum hyperlink to dispute resolution processes and invoicing requirements. Locating this information in a standard central place will enable suppliers to self-serve by ensuring they have complied with their customers' requirements and are able to escalate payment issues in a way that allows the organisation to address most efficiently. This recommendation is sourced directly from our members who report that accessing accurate information is challenging and many large organisations do not adequately resource the accounts payable functions to handle even routine enquiries.

To better understand the value of the initiative to the economy, requiring reporting entities to disclose the value of supplies with extended payment times and the associated number of invoices will allow a calculation of the benefit of faster payment times and accurate quantification of the value of trade credit in Australia, a figure that is currently not available to the AICM's knowledge.

Standard terms
The AICM supports the use and reporting of standard payment times as defined in the discussion document.

The AICM does not support the use of the following terms due to the fact they align with poor payment practices and incorporation in the framework indirectly validates the use of these terms far outweighing benefits of including:

• End of month (EOM) as commencing time to pay from the end of the month in which invoices are received can mislead suppliers and is generally not required in today's modern businesses. In days gone past it may have been necessary to batch process all invoice especially when payment was made manually by cheque and post. Today payments can be processed and authorised digitally 24/7.
• Discounting for on-time payment: The AICM is strongly opposed to organisations requesting or requiring discounts for on-time or early payment centred on the fact that a direct charge is not levied for credit sales in fact large organisations generally obtain discounts on the standard "cash" price. Further, large corporations are generally the setter of payment times or have the power to set payment times therefore obtaining a discount for prompt payment further benefits them over the small business.
• Supply chain and /or loan financing: Suppliers should not bear the cost of financing their customers working capital.
The AICM considers the following terms worthy of incorporation:
• Late payment interest – Following from the example set by the Commonwealth governments pay on time policy it would be appropriate for the framework to consider encouraging this practice.

• Maximum Standard Payment times – Reporting maximum payment standard payment times will allow business to plan for expected cashflows of the organisation.

Performance data
Performance data must be more granular than average or median number of days as this does not significantly improve on the information currently available through reference to annual financial reports.

It is the AICM's position that the government should legislate maximum payment times not exceeding 30 days or as specified in approved industry standards or codes.

In absence of a legislated maximum payment time the AICM supports the use of a performance measure based on the proportion of invoices paid within 30 days (in line with the BCA Supplier Payment Code) but to be substituted with a legislated a maximum payment time, or an industry standard or code with that code defined and hyperlinked.

Reportable invoices
Considering the driver of this initiative is to encourage improved payment practices and AICM members report that many large corporations do not allocate sufficient resources to manage the accounts payable function let alone disputed, incorrect and lost invoices the AICM strongly encourage the inclusion of these invoices in reporting.

Inclusion of these invoices and the potential for them to adversely affect the metric will play a highly valuable role in encouraging large organisations to ensure their organisation has appropriate procedures and resources to address these issues.

To illustrate this point the AICM is aware of a large multi-national organisation which in response to complaints from suppliers set KPI's for processing invoices, while the team met these KPI's without fail complaints escalated. On investigation it was revealed a rejected invoice would be marked as processed therefore at the end of the day if staff hadn't reached the KPI they would reject invoices until it was reached, further there was no process to advise the supplier of the rejection, so payment times escalated.

Reportable days
The AICM supports the use of a standard definition of days to pay to ensure entities report on a like-for-like basis and strongly encourages the use of the actual invoice date rather than any date determined by the supplier.

This position reflects the understanding that invoices are produced at a time agreed or according to industry practice and generally after costs have been incurred by the supplier. To allow time to payment to be determined by the large organisation further favours the large corporation to the determent of the supplier.

Further, a metric that doesn't reflect the time frame suppliers are able to independently calculate is not efficient for either when time is spent following up payments before the large corporations deems payment due.

It is acknowledged that this may be contrary to current practice of large corporations however it is a change that will have significant benefits to all parties involved.

Specifically allowing days to pay to be calculated by the large corporation is a significant factor in the issues suppliers currently face. The discussion paper sites the use of "end of the month in which the business's accounting department logs an invoice (EOM)" as an example that allows large corporations to gain extended payment terms, the AICM is aware of much more convoluted rules for determining payment due dates. One large corporation deems payments made well in excess of agreed 30-day terms as being made on-time due to very complex payment practices best summarised as:
- A widget supplier delivers on 15 January
- The widget is receipted into store on 2 February
- Payment falls due on 30 March (30 days after end of month in which goods receipted into store)
- But payment not being made until 15 April as the last payment run was on 29 March, despite other payment runs being made daily.

4. How should entities report

The AICM strongly advocates for a centralised model for the following reasons:
- Ease of access for users
- Efficient controls will add integrity to the information e.g. preventing a large corporation displaying aged information as if was current.
- Potential reduction of governments costs to monitor compliance as all data would be in a central location.
- Uniformity of presentation will be very valuable to users.
- Integration of the data into credit reports, a centralised model will allow for the possibility of the information to be made available to credit reporting bureaus (CRBs).

The government costs could be partially recovered by licencing access to CRBs and data innovators.

Reporting frequency
In the AICM's opinion, requiring qualifying entities to report six monthly, in line with on their financial year would be sufficient to ensure relevance of the information provided this is accompanied with information such as the date submitted and the date range it relates to.

The time frame for reporting after the end of the reporting period, should be no more than 1 month to ensure relevance of the data.

5. How should the framework be administered

Legislative basis of the framework
The AICM is in favour of the reporting requirements being primarily contained in legislation rather than regulation. However, we acknowledge that as many of the factors such as definitions of small business and best practices around payment times are subject to change, these elements may be best addressed through regulation.

The use of non-binding instruments such as industry codes is a concern for the AICM as many suppliers operate across industries and are not able to effectively influence the standards set by these codes.

The power to publish information
The framework will only be effective if information is publicly available and easily accessible so as to shine a light on payment practices, good and bad.

Allowing access to the information by the credit reporting bureaus such as Equifax, illion and other technology providers (such as accounting software) will provide an effective mechanism of disseminating the information to suppliers. For example; suppliers that already conduct credit checks will be alerted to this information through the CRBs and small business may be presented with the information through accounting software or be further motivated to conduct credit checks. These CRBs and technology providers will also be motivated to educate the users of the availability and value of this information both through their services and free platforms.

The power to monitor and assure data collected under the framework
The AICM's view is that monitoring and compelling entities to report is essential.

While large corporates with good payment practices may be motivated to report for the reputational benefits, the uptake of the BCA's Supplier Payment Code and the ASBFEO's National Payment Transparency Register show that this will not be anywhere near the population of entities required to report and especially not the entities with poor payment practices. If the uptake of the measure is not rapid and thorough it will fail to achieve its objectives.

Suppliers including AICM's members could play a role in targeting the compliance activities through reporting qualifying entities who are not reporting and/or whose current practices do not reflect those reported.

Effective compliance and assurance activities of the administrator are an effective use of government/taxpayer funds where the outcome of the activities highlight poor payment practices and lead to the improvement of payment times.

The power to enforce compliance with the framework
The AICM believes enforcement powers are essential to ensure entities with poor payment practices comply and therefore encouraged to improve their practices.

In the AICM's opinion any transition period should be minimal and mainly tied to any testing or practical considerations of the framework rather than the willingness or capacity of reporting entities to comply. This view is based on the fact that the qualifying entities have been on notice to improve their payment practices due to the actions of numerous parties including the Commonwealth Government, State Governments, the ASBFEO, BCA and many more. Further the cost and complexity of complying with the requirements does not receive sympathy from AICM members as these organisations continue to benefit from the free credit terms they are obtaining through poor practices.

The power to accept complaints and lead investigations into payment practices
As stated above the ability to accept and investigate complaints would be highly beneficial to achieving the goals of the framework as they will ensure the compliance activities are targeted at the entities with poor payment practices.

Further, it is the AICM's understanding that complaints received by the UK's Prompt Payment Code have resulted in good outcomes for the signatories and suppliers as vast proportion of companies do want to maintain relationships with their suppliers, so signatories have resolved any complaints extremely quickly and rectified any process issues as a result.

A key factor of a successful complaints process would be to ensure that complaints are first made directly to the reporting entity and their internal dispute resolution but are then escalated to Senior Executives with authority to resolve the complaints and ensure any systemic issues are addressed.

6. Government obligations

While the AICM commends the governments actions to be a model payer it is also aware that obtaining prompt payment from government entities remains a significant frustration for businesses of all sizes. With this in mind the AICM recommends that the data reported by government entities is set above and beyond what is required by the framework with the core data i.e. days to pay an invoice being calculated, reported and published in line with commercial entities.

Further, the additional elements and data contributed by government entities should be optional fields for commercial entities enabling these entities to demonstrate their best practice approach to payment times.

Final comment from the AICM
It is significant to note that no professional body equivalent to the AICM exists for the accounts payable profession. We note this as the establishment a professional body is likely to lead to the elevation of the accounts payable profession within businesses such that the professionals are able to recognise and advocate for best practice within their business and consideration of all stakeholders. While the AICM foresees a role in establishing such a body financial support would be required such that establishment does not diminish its ability to serve its credit management membership.

Should you have any queries arising from our submission please contact me.

Yours sincerely

Nick Pilavidis
Chief Executive Officer

FOOTNOTES

[1] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2018-releases/18-342mr-asic-reports-on-corporate-insolvencies-2017-18/

[2] https://www.finance.gov.au/resource-management/spending/pay-on-time-policy/additional-information/

Download Submission

Dear Ms O’Rourke

Reducing the financial reporting burden by increasing the thresholds for large proprietary companies
This joint submission is made on behalf of members of the Australian Finance Industry Association (AFIA), the Australian Institute of Credit Management (AICM) and the Australian Restructuring Insolvency and Turnaround Association (ARITA), collectively referred to as the Associations. Further detail on each Association is provided at the end of this submission. Our general position follows and evidence to support is outlined in the attachment.

While representing different market segments and components of the financing transaction, the Associations have common ground in their support of a fair, sustainable and competitive market for small and medium-sized business owners to be able to access affordable finance. A policy position we understand is also held by the Government.

A key component of achieving this is for the provider to be able to assess and manage credit risk including when the business owner may get into financial difficulty requiring external intervention. Access to data, including financial statements or reports of small and medium-sized business borrowers, is integral; as is access to other relevant data.

Consequently, the Associations have been strong supporters of various Government initiatives designed to improve transparency and increase data availability for good decision making. These include open banking, mandatory comprehensive credit reporting and the new lease accounting standard. Enhancing data availability for automated credit-decisioning facilitates providers of finance meeting both their customers’ demand for a fast-turnaround and the need to make prudent and soundly based credit decisions.

The outcome for small and medium-sized business owners is that they will have:
• the working capital, trade credit or other finance they need to start or grow their businesses,
• when they need it; and
• provided in a cost-effective manner.

These initiatives underpin access to finance objectives by enhancing the ability of FinTech lenders and others to maximise the value of digital technology that differentiate them from other market participants.
Further, the Associations are aligned in their support of the Government’s policy of red tape reduction in particular for small and medium-sized businesses with the flow on benefits in efficiency and cost-reduction. We understand this policy objective underpins the proposed changes to the Corporations

Regulations 2001 to reduce financial reporting obligations on small and medium-sized business owners.
However, the Associations are concerned that in seeking to reduce red-tape, the Government is potentially putting at risk access to affordable credit by small and medium-sized business owners.

More specifically, the Associations are concerned that the huge potential from open banking and mandatory credit reporting for enhancing competition and enabling greater access by small and medium-sized business owners to finance will be devalued by the Government’s proposal to reduce the financial reporting burden. This is because the information contained in financial reports is key data that underpins current credit-decisions. The ease of access of financial reports impacts the ability of a financier or trade-creditor to be able to make automated or real-time finance-decisions. By reducing red-tape in financial reporting for some of these entities, the Government would be potentially increasing the time taken, or the data-available to make sound finance decisions. The outcome for a small or medium-sized business owner may be either that they:

• pay more for credit; or
• are declined credit because of information asymmetry and lack of data availability on which to base a credit decision rather than issues around serviceability or character.
Neither outcome is useful for the small or medium-sized business owner or the financier / trade creditor or the Australian economy.

Associations Recommendation:

The Associations are united in our strong recommendation:
• that the Government does not change the monetary thresholds for financial reporting. To increase the monetary thresholds puts at risk access to affordable finance by small and medium-sized business owners. The current levels should remain unchanged.

Evidence to support our position is provided in the attachment.

We would welcome the opportunity to meet with Treasury to discuss our position further to inform the Government’s consideration.

The Associations:
AFIA represents the interests of over 100 financiers, credit providers and industry participants, including credit reporting bureaus.
AICM represents the interests of over 2,500 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries.
ARITA represents the interests of over 2,000 insolvency professionals, including approximately 84% of registered liquidators.

The Associations are united in our strong recommendation:
• that the Government does not change the monetary thresholds for financial reporting. To increase the monetary thresholds puts at risk access to affordable finance by small and medium-sized business owners. The current levels should remain unchanged.

Our specific reasons follow:

1. Reducing transparency of these businesses – Credit providers rely heavily on the publicly available reports to provide an efficient and reliable source of information including financial viability, company structures and significant stakeholders.
Inability to easily access relevant information is one of the barriers to small business access to credit. Increasing the thresholds and reducing readily available and key financial report information will exacerbate this issue.
Without this information the credit providers will be less able to respond to expectations of immediate approvals utilising automated credit-decisioning processes as manual requests for information and assessment will be required.

2. Reduced access to credit – the Associations have identified that the reduction of transparency will lead to significant impacts on businesses accessing credit and notes the following to assist quantifying the scale of the issue:
o “In Australia, trade credit owed by Australian businesses (both listed and unlisted corporations) is estimated to have been over $80 billion in March 2013 (see RBA)”
o A market leader in business data, Equifax, advises:
? When assessing businesses with sales revenue greater than $5m, financial statements provide a 50% uplift in predicting default (across businesses in the highest quartile of risk).
? 72.5% of enquiries relating to financial statements (of entities having a financial reporting obligation) come from non-banking customers.
This highlights the importance of financial statements to the provision of trade credit and finance more generally for small and medium sized business owners
Should the financial reporting thresholds be raised, Equifax have identified that 17,200 companies will no longer lodge reports. Currently when these entities apply for credit or finance a significant proportion of credit assessments could be completed via automated means utilising the publicly available financial data with minimal intrusion on the company for additional details.
Should the thresholds be increased, the lack of publicly available information will require one or more of the following steps to be taken by AFIA and AICM members:
o Declining the request on the grounds that sufficient financial information is not available to support the credit application. This would kick in at various exposures.
o Requiring the customer to provide audited financial reports
o Requiring the customer to provide management accounts
o Requesting director/personal guarantees
o Requesting additional security e.g. caveats over real property
o Providing credit on reduced terms than that generally offered in the industry
o Providing a lower credit limit than required
These responses would result in the following impacts for the businesses:
o Reduced bargaining power with current suppliers as ability to switch is reduced
o Increased personal liability for directors/owners
o Less access to credit to drive growth and/or bid for new projects/contracts

3. Absence of information leads to a negative bias. Audited financial reports provide a highly reliable source of information and therefore provides confidence in credit decisions. Without this reliable information credit providers will take an adverse assumption leading to a restriction in credit or credit being provided on more restrictive terms.

4. The population of entities impacted is much greater than the 2,200 stated in the joint media release. Analysis by Equifax indicates that the proposed increase in thresholds will reduce the total number of mid-sized companies publishing financials by 17,200 (being 83% of the 20,700 unique businesses currently required to lodge reports).

5. Less oversight of business and accounting practices – Entities over the existing thresholds have significant impacts on a range of stakeholders in addition to credit providers. This includes tax payers, other businesses in the supply chain and employees.
The requirement to produce audited financial accounts provides a strong motivator for compliance with accounting standards forming the basis for sound decision making and governance.

6. Increasing incidence of insolvency and insolvent trading – Independent overview by Auditors of the financial performance of organisations provides a mechanism for businesses experiencing early warning signs of insolvency to be highlighted and corrective action taken in a proactive manner such as engaging with appropriately accredited insolvency professionals and utilising initiatives such as the Safe Harbour defence to allow orderly restructure.

7. Contrary to other jurisdictions - AICM has received commentary from the Chartered Institute of Credit Management (CICM) in the United Kingdom who note:
“All private limited and public companies must file their accounts at Companies House with the exception of small and Micro-entities who may prepare an abridged version if they meet two of the following conditions, which were reviewed as recently as 2018:
• annual turnover must be not more than £10.2 million ($17.93 AUD)
• the balance sheet total must be not more than £5.1 million ($8.96 AUD)
• the average number of employees must be not more than 50”
Considering the UK is a similar jurisdiction, using similar types of thresholds and has recently reviewed the thresholds it is significant that the Australian thresholds are currently significantly higher.

8. Contrary to the open banking and mandatory credit reporting initiatives. Increasing the thresholds is clearly contrary to these objectives aimed at increasing the data to fuel credit assessments.

9. Current thresholds are an appropriate definition of an economically significant entity - Businesses meeting the current thresholds are deemed to be economically significant entities in the opinion of the professional bodies and their members. These thresholds indicate the businesses will have multiple stakeholders reliant on the financial reporting and economic viability of these entities including but not limited to their employees, suppliers, financiers, minority shareholders and customers.

10. $300 million cost savings unlikely to be realised - Greater cost associated with a reduced access to credit and increased requirement to provide security is likely to exceed any savings from “removing the reporting burden” (joint press release). Further many entities will still need to incur the reporting costs to satisfy obligations to primary financiers and other significant stake holders.

11. Restriction of fintech Innovation – Access to publicly available data is vital to fuelling innovation in the Fintech space and provide further efficiencies to credit assessment and access to finance.

download submission

 

21 December 2018

Matthew Sedgwick
Consumer and Corporations Policy Division
The Treasury
Langton Crescent
PARKES ACT 2600

By email: Regmod@treasury.gov.au

Dear Mr Sedgwick,

Modernising Business Registers Program Review of Registry Fees

The AICM represents the interests of over 2,500 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries.

The credit provided by our members supports businesses of all sizes, a significant portion of our membership provides unsecured trade credit. Trade credit enables businesses to fund their trading and manage cashflow. Efficient access to accurate and up to date information is essential for credit trade credit providers to perform this function.

Efficient access to information enables credit providers to make informed credit decisions and fuels technology solutions that provide efficiencies to credit providers.

Although AICM members predominantly represent large businesses, search fees and accurate information are two issues that members regularly raise as a barrier to efficient, detailed and accurate credit decision making.

Company registry information is fundamental to all credit decisions and forms the basis on which additional data points are evaluated. ASIC search fees set the minimum cost of credit checks and credit reports provided by credit bureaus.

Current registry search fees limit the use of additional data sources especially at for low level credit applications, in trade credit (where there is not a direct fee for the provision of credit) and periodic reviews of credit limits as credit providers are under pressure to minimise costs. The AICM sees the impacts of this regularly when members report losses and risks that could have been mitigated by the use of additional data sets.

Additional impacts as a result of the cost of search fees includes:
- Risks post initial application not adequately identified and mitigated as updated reports are not obtained.
- Loss of sales as a result of unnecessary requests for security that could be avoided by a better understanding of the quality of business through additional data sources.
- Not implementing automated and real time credit assessment and risk management technologies that could support business growth.
- A reduction in credit limit and terms provided as limited information presents a limited view of the applicant.

The AICM also notes that many organisations have complex company structures and search fees often prohibit the understanding of these due to the additional fees required for each entity in the structure.

It has also been noted by the AICM that search fees often create potentially significant costs borne by creditors during insolvency process due to the administrator/liquidator being required to perform multiple searches to conduct their investigations.

Below are our specific responses to the questions raised in the consultation paper.

Questions:
1. Do you agree that the principles of making fees simpler, easier to understand and more equitable are the best guide to review registry fees?
The complexity of current fee structures has not been raised by members as a concern. The priority of members is to reduce the quantum of fees.

Members have commented that not only are fees restrictive to their credit roles but when seeking to obtain information for personal matters or to assist family members operating small businesses the fees have been seen as significant barriers.

Should any other principles be considered?
The AICM advocates for the minimisation of search fees to maximise the availability of information and provide accurate and efficient credit assessment.

As corporate entities create the need for the registries it is reasonable that they bear the costs for funding the services.
4. How could the late fee system be reformed to incentivise compliance and make the system simpler and more equitable?
Late lodgement creates significant issues for those seeking to understand the company as this may result in incorrect assessments being made. Specifically, late lodgement of annual accounts prevents accurate and timely information being available, see the attached submission of AICM, ARITA and AFIA which details the issues.

The current late payment fees do not discourage the intentional delay of lodgement by businesses that seek to delay lodgement for as long as possible due to their desire to limit the availability of information that may be detrimental to them but of significant benefit to credit providers and other users.

The AICM recommends a significant increase in late payment fees. This would be further justified by initiatives of the MBR such as regular and timely alerts.
5. Do you support the introduction of interest on late payments rather than the late payment fee?
We do not oppose the charging of late interest. However, note that the low value of late fees will make the late interest amounts very low.

AICM members report that charging late interest can cause administrative complication such as when the initial fee/charge is paid excluding late interest. The quantum of the interest generally does not justify enforcement so administrative burden is incurred manually reversing interest or continuing to accrue.

AICM recommends all current late fees be increased significantly with fees applying for each week/month of delay.

The late fee should be set so that it encourages all businesses to lodge on time therefore a fee relative to company size (Revenue, Assets and/or staff) would be appropriate.
6. Do you support lowering late payment fees but increasing late lodgement fees, or eliminating late review fees?
The AICM supports the increase of all fees related to delays in payment or lodging to encourage prompt action and as an alternative to search fees.

7. How could search fees be reformed to make data more accessible, the system simpler and more equitable?
The AICM welcomes implementation of models such as applies in the United Kingdom where no fees are payable for searching companies house.

The AICM asked Philip King CEO of the UK credit management association, the Chartered Institute of Credit Management (CICM) to comment on the effect of the move to free searches in the UK, he stated "Knowing your customers is imperative to ensure prompt payment and avoid bad debts. The availability of information supports profitable business and economic growth. Making information freely and easily available is a massive step forward."

The benefits of removing and reducing the cost barriers to accessing accurate company information are substantial including:
- Reduction of fraud and illegal practices such as phoenix activity
- Improving transparency of companies
- Public confidence in the entities
- Risk management
- Automation, efficiencies and increased productivity

In recent discussions with Credit and Collections associations in Canada, United States of America and New Zealand all agreed that removing barriers, such as cost, to the access to basic company information is beneficial to the whole economy including the registered entities, credit providers, tax payers and consumers. The types of information deemed basic by the group include:
- Registration status
- Director and office holder information (current and past)
- Company registered office and other contact information
- Shareholders
- Related entities
- Annual Financial Reports
- Revenue, Assets and staff numbers

8. Should an infrastructure fee be introduced if it is payable by users of an API or comparable technology?
The AICM does not support significant fees being charged to companies providing services that facilitate interaction with the registers so as to minimise the cost barriers as stated in point 7.

Minimising the cost structures of parties that facilitate interactions with the registries makes access to the basic company information more efficiently available and increases access to additional benefits, for example:
- Credit Bureaus can also provide additional information to further reduce credit risk
- Software providers that facilitate lodgements can provide efficiencies and productivities by further simplifying the processes and integrating the service into existing business systems.

9. Should funds raised from an infrastructure fee be set aside to cover the costs of upgrading the registry and/or a testing environment?
Due to the economy wide benefits of an efficient registry the AICM believes registry infrastructure should be funded by the entities subject to registration and/or from government/tax payer revenue.

Should you have any queries arising from our submission please contact me.

Yours sincerely

Nick Pilavidis
Chief Executive Officer

Download submission

26 October 2018

Matthew Sedgwick
Consumer and Corporations Policy Division The Treasury
Langton Crescent PARKES ACT 2600

By email: Regmod@treasury.gov.au

Dear Mr Sedgwick,

Thank you for the opportunity to participate in the recent discussions on the Modernising Business Registers and Director Identification Numbers legislation.

Our members rely heavily on publicly available company information and accurate director identification to make fully informed decisions and support businesses of all sizes with the provision of credit.

Currently access to information is not efficient and often inaccurate, we therefore support the modernisation of the registers and have been a long-time advocate for the verification of director identities.

While DINs and modernisation of the registers is urgently required, we raise the following concerns which we feel should be addressed prior to implementation of this legislation:

• Intended registrar
Due to ASIC's role in regulation and likely efficiencies to government and industry of combining regulatory and registry functions, we question the proposal to remove registry powers from ASIC without clear benefits.

While we question the removal of registry functions from ASIC we believe efficiencies could be obtained by centralising all complimentary registers such as those considered in this proposal and others such as the Personal Property Securities Register.

A central government body with the sole responsibility of acting as registrar for all registers would also provide significant benefits to businesses of all sizes by providing a single touch point. Small businesses and other unsophisticated credit providers would benefit significantly from this approach, for example:

o Awareness of the registries and available information is a current challenge and a one-stop-shop would address this issue significantly.

o A search for one specific purpose, such as ABN verification, could also return additional search options such as PPSR information.

• Verification of director identities
To ensure a very high level of verification/identification is established and maintained we feel the legislation should detail the minimum requirements.

While we support the ability of the registrar to determine appropriate data standards, the minimum standard for director verification should not be subject to variation. We strongly recommend that the legislation details a minimum standard including:

o A 100-point style identification process drawing on identity verification from multiple government and non-government sources.

o Preventing the application process from being delegated so there is no possibility that an individual obtains a DIN without their knowledge.

o A physical step in the process, such as lodging the application in person.

We emphasise the importance of preventing directors from delegating the application process to a third party. Any capacity to delegate the process will prevent the measure achieving its goals, specifically the below issues will continue:

o Directors being appointed without full knowledge/understanding
If a director is only required to action a minor part of the application, it remains possible for individuals to accept directorships without their knowledge or full understanding.

o Directors not understanding the importance of their role
A thorough application and verification process that cannot be delegated makes it clear that obtaining a directorship is not a matter to be taken lightly as opposed to the current situation which makes applying for a library card seem more significant.

o No understanding of director duties or potential liabilities
By undertaking the application personally, the process could ensure individuals have seen and acknowledged their obligations and responsibilities as a director.

The importance of the verification process should not be compromised in anyway including if this precludes the use of some technology. "Verification" not "Simplification" should be the priority of the DIN.

• Retrospective application for DIN
We disagree with the need to allow 28 days to apply for a DIN as very few directorships would be appointed without a high level of prior knowledge/expectation.

Requiring prospective directors to obtain a DIN prior to appointment could maximise the value of the DIN by assisting companies to fully consider all appointments. For example, the appointing board/company could check that the director has been correctly identified, is not currently disqualified (or previously disqualified), if they have other current directorships and other factors that may influence the applicant's ability to discharge their governance obligations.

Additionally, during the 28 days credit providers will be making credit decisions on incorrect and incomplete information. This could be significant in cases where directorship changes are linked to ownership changes.

Finally, allowing 28 days to apply for a DIN may also impinge on the company's obligation to advise ASIC of new appointments when a director obtains their DIN towards the end of their 28 day period, leaving the company with little or no time to notify within their allowed 28 days.

• DIN for life

We emphasise the need for individuals to be identified by a DIN that is unique to them and they only have one DIN for life.

As a unique identifier DINs will be used by our members for numerous functions such as linking customers with common directors.

Should it be necessary to reissue a DIN, the Registrar must be required to take steps that minimise the impacts e.g. by linking files when a new DIN is issued so both DINs can be tracked to the right individual.

• Continuity of data
The current information on directors is vital to informed credit decisions therefore the legislation should require that the current information including directors (and previous directors) address, date of birth and driver licence number be provided in perpetuity.

In making this recommendation we consider the benefits of obtaining a corporate vehicle creates a requirement for credit providers to have access to this information and be able to verify the identities of the controllers of the entity. We specifically note that DOB's and driver license numbers will remain an active verification method in practice to verify identities for director guarantees and confirming authority to enter agreements.

• Shadow and de facto directors
Considering the objective of the DIN to combat illegal Phoenix activity, we recommend the immediate incorporation of a requirement for individuals who act in the manner of directors to obtain a DIN. Excluding this requirement allows the true controllers to manipulate this and continue to appoint sham directors.
Additionally, this may provide an effective mechanism to disrupt the unregulated advisors and individuals who engage in illegal phoenix activity by acting against these individuals for not obtaining a DIN.

Should you have any queries arising from our submission please contact myself.

Yours Sincerely 

Nick Pilavidis
Chief Executive Officer

Download submission

Date 8 October 2018

By email: codereview@bca.com.au.

Thank you for the opportunity to provide our input to the review of the Australian Supplier Payment Code.

The AICM represents, develops and recognises the experience of over 2,500 individual members working in over 1,300 companies who supply goods and services on extended payment terms to businesses of all sizes.

Our members' primary focus is minimising slow and non-payments associated with the invoice to payment process. Efforts to reduce slow payments are strongly supported by our members and were a key reason the AICM participated in the inquiry conducted by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in 2017.

In addition to supporting the recommendations of the ASBFEO inquiry, the AICM believes that aspects of the Prompt Payment Code and register in the UK should be incorporated in Australian initiatives to improve payment times:
a) Signatories commit to paying all suppliers on time and setting a maximum payment time.
b) Strongly endorsed by the government.
Note: the UK Code is supported by government but not legislated, a heavier involvement by the government is now seen as necessary by the Chartered Institute of Credit Management (CICM).
c) A central repository (in standard form) of participants' payment practices, requirements for invoicing and internal dispute/complaints processes.
d) Monitoring of compliance, with a review process and potential removal from the register.
e) Potential mandatory registration via legislation.

Below we provide comments in relation to relevant items identified in the scope of the review:
What impact has the Code had on payment times?
Payment times have improved significantly since a peak in early 2017 as measured by illion .

While illion and Economic Advisor, Stephen Koukoulas notes "...that decline in late payments in recent years reflects broadly the decline in interest rates over those years"..., the AICM has observed that actions to shine the light on the impacts of poor payment practices such as the ASBFEO inquiry and the launch of the Australian Supplier Payment Code, have had a considerable impact on many large corporations intending to and actually improving payment times.

The AICM believes payment times and practices are still too lax which poses a significant concern for the ability of the Australian economy to weather an economic down turn.
Are any of the Code requirements unclear, that may require re-drafting or guidance?
The AICM has encountered confusion from members on whether the Code applies to supplies from businesses not defined as small businesses.

This is derived from the fact Point 2 of the Code states signatories must "Pay correct invoices from suppliers on time."

Members see point 2 as a catch all requirement to pay all suppliers on time (i.e. mutually agreed terms) with point 1 imposing a more defined obligation for signatories to "Pay eligible Australian small business suppliers within 30 days.

The AICM believes the relevance of the Code could be improved and the purpose more clearly understood by clarifying the requirement to pay all suppliers on time. The key reasons being:

o Improved payment times in all sectors has flow on benefits to all businesses.
Big businesses that receive payments faster have less pressure to slow payments to their suppliers including small business.

o Strong payment times are a foundation for economic resilience in periods of economic down turn.
When suppliers are forced to accept longer payment times their ability to assist customers in a down turn, to remain viable and avoid insolvency risks, is reduced.

o Large businesses are able to monitor compliance
Compared to small businesses, large companies that employ credit professionals have a more diverse customer base and are more willing and able to "blow the whistle" on signatories not complying with the Code.

Point 2 of the Code could be amended to state:

"Pay all Australian suppliers within 60 days of receipt of a correct invoice or receipt of a correct product from the supplier (whichever is the later) or on terms that are consistent with a standard industry practice.1 (Signatories can choose to pay within shorter timeframes.)"

The AICM does not support the inclusion of "mutually agreed terms" for supplies between any businesses. In our members' experience, the supplier is generally always at a disadvantage in any negotiation and any industry that require extended payment terms should be addressed thorough specific industry Codes.

The only situation where the AICM supports terms beyond 60 days, is where a specific interest rate is charged such as the General Interest Charge rates set by the ATO and incorporated in the Australian Government Department of Finance Pay on Time Policy.
Are further exemptions to the small business payment standard required?
The AICM is in favour of minimising exemptions to the small business criteria. While the criteria means there may be significant differences in the sophistication and perceptions of the businesses that fall under the various definitions, the one thing that is common to businesses of all sizes is that cashflow is critical.

Further, in AICM's opinion, maximum 30-day payment terms for all supplies is the goal that all business should be working towards and encouraged by government, industry codes and this Code.
Should any of the Code requirements change?
Engage signatories as ambassadors of best payment practices
The AICM recommends the inclusion of a requirement to encourage best payment practices within their supply chain. The signatories have displayed an understanding and intent to address the late payment issue in Australia and so should be enlisted as ambassadors of the Code and the issue of late payments.

Central repository for payment procedures
While the Code requires signatories to provide clear guidance on payment procedures, this requires suppliers to search websites and/or request details from the signatory. The AICM believes a central repository of information in a standard form would have significant benefits.

The UK Prompt Payment Code requires signatories to provide the register with copies of the payment procedures and complaints processes, this has been highlighted as a significant benefit to suppliers and resulted in many payment issues being resolved without referral to the signatory or Code administrator.
Should the Code focus on particular industries where the requirements are most relevant, such as retail, manufacturing and construction?
Focusing on the industries with the slowest payment times as indicated by the illion late payment report and insolvency statistics will minimise the impacts that flow from insolvencies of large corporations. However, the AICM does not recommend the Code be amended to tailor for these industries as maintaining a uniform approach is preferred.
Should the Code include some independent oversight of compliance, with implications for noncompliance?
The current Code does not seem to have a pathway for signatories to be de-listed. One of the strongest and most effective ways of ensuring compliance is through reporting of non-compliance by suppliers.

While there is a role Small Business Commissioners and ASBFEO should play in resolving complaints, the Code should incorporate a process for receiving and investigating complaints of non-compliance with potential sanctions ranging from providing information to help prevent further breaches, requiring certain steps to be taken (e.g. training or amendments to processes and procedures) through to expulsion from the Code.

Incorporating a requirement to pay all suppliers on time amplifies the need for the Code to have a role in addressing non-compliance as the Small Business Commissioner and Ombudsman services are not available to large businesses.

The inclusion of a process for resolving complaints would significantly improve the adherence to the Code and relevance to suppliers.

It is relevant to note that very few complaints received by the UK's Prompt Payment Code have progressed to investigation. Most if not all complaints were resolved by the signatory on receiving notice of a complaint.

Is the existing level of publication of payment timeframes and processes sufficient?
As mentioned above publication of payment requirements, payment processes and complaints procedures is highly variable between companies. The AICM believes the Code could play a significant role in standardising and ensuring the information is made public.

Much more needs to be done to highlight payment practices of slow payers. The AICM notes the work of the ASBFEO to provide transparency however a requirement to publish actual payment times should be incorporated in the Code. Without this, suppliers assessing costs of entering supply arrangements may be doing so on a false presumption that they will be paid on 30 day terms or less.
How can the Code be better promoted, and adopted more broadly?
Broadening the scope of the Code to incorporate supplies from large businesses and a process for addressing non-compliance will increase the relevance of the Code to credit professionals. Once credit professionals recognise and value the Code they are likely to be ambassadors for its broader adoption by:
- Ensuring their business is a signatory to the Code. While their focus is accounts receivable many credit professionals have responsibility and/or influence over accounts payable.
- Simpler credit assessment processes if customers are signatories to the Code.
- Better trading terms e.g. higher credit limits for signatories.
What could the Government do to assist with adoption of the Code?
The AICM supports action including legislation by the government such as legislating maximum payment terms and requiring large corporates to disclose their payment practices and actual payment times.

Potentially this legislation could contemplate mandated actions by the large corporates to achieve these outcomes via the Code.

Any action by the government toward adopting the recommendations of the ASBFEO inquiry are likely to have a significant impact in adoption of the Code and actual improvement in payment practices merely by shining a light on the need to improve payment times.
Is the application of the Code limited without an accompanying register of small businesses, to allow Code adopters to identify which of their suppliers are small businesses?
While a uniform definition of a small business is a challenge for many businesses, one of the outcomes of the Code is expanding the reach of initiatives targeted to small business. Using the example of the Unfair Contracts Legislation that deems certain clauses void in dealings with small businesses, it is the AICM's experience that many organisations amended their contracts with all customers not just small businesses, so that all contracts became compliant with the Legislation.

This leads to the AICM's position that the Supplier Payment Code could be simplified by requiring all payments to be made promptly and the maximum payment time of 60 days for all businesses ensures that any small business within the "grey areas" of the definition are protected by ensuring 60 days is the longest they should wait.
Other practices to consider
Suitable maximum payment times
While the AICM supports the use of 30 days for small business and 60 days for all businesses this is not a long-term position.

It is the AICM's view that all businesses should pay all invoices as soon as practical. The use of 30 days has become generally acceptable and fits with an assumption that some businesses will seek efficiencies by having only one payment run a month. In reality this is often used to benefit the cashflow of the customer to the detriment of the supplier, with these businesses having multiple if not daily payment runs.

Additionally, businesses of all sizes have access to systems that streamline the accounts payable process including the validation and authorisation of invoices which removes any physical or operational barriers to paying invoices virtually on receipt.

This position is reflected in the policies of the Australian Government, the UK government and the EU who have all instigated policy or legislation for payments to be made under 30 days.

Accordingly, we recommend that scope is included within the Code in the future to reduce the required time frames.

Charging suppliers for prompt payment and online portals
Many large corporations offer suppliers short payment time frames e.g. 7 days if the supplier provides a discount or pays a fee to subscribe to a portal.

The AICM views these arrangements as unfair when considering businesses that have the capacity to pay suppliers early should do so for broader economic benefits and to show they value their suppliers.

The discounts required are often higher than the benefit that would be obtained by the payer, this sees the payer further benefit if the supplier agrees to this. Alternatively, the supplier may be forced to consider debtor or invoicing finance to maintain cashflow, which comes at additional financial and time costs to the supplier.

Online portals for suppliers to lodge invoices and queries provide efficiencies to the signatory but few benefits to the supplier that could not be met by the signatory adequately staffing an accounts payable department. While many suppliers are happy to transact via the online portals and allow their customer to achieve efficiencies, the charging for access to these is generally seen as a further abuse of the purchaser's superior position. In addition to the financial cost other impacts on the supplier are:
- Increased invoicing complexity and room for error
As different customers will use different systems, and each will have different steps and procedures, business need to add additional manual administration processes to their invoicing procedures.
- In-ability to resolve non-standard transactions
As these systems reduce the head count requirement of accounts payable teams the ability to contact a person to discuss, escalate or resolve a non-standard transaction is significantly reduced.
- No improvement in payment times
As the reasons for slow payment are often not related to processing of invoices, the promised or expected improvement in payment times are often not delivered. Other causes are tight parameters deeming numerous invoices non-compliant resulting in delays (often not communicated to the supplier and not included in the purchaser's calculations of payment times), system problems and the purchaser unilaterally reducing the faster payment times offered for online submission.

In summary, the AICM and its members are very passionate and supportive of initiatives to improve payment times in Australia and we welcome the opportunity to contribute to the development of the Australian Supplier Payment Code.

Yours sincerely

Nick Pilavidis
Chief Executive Officer

Download Submission

Date 27 September 2018

Nathania Nero
Senior Adviser
Corporations Policy Unit
Consumer and Corporations Division
The Treasury
Level 5, 100 Market Street
SYDNEY 2000
By email: Phoenixing@treasury.gov.au

Dear Ms Nero,

Thank you for the opportunity to participate in the recent roundtable discussions and to formally provide our submission on the proposed reforms.

AICM is uniquely positioned to contribute to these reforms considering our members see the impacts of the up to $3.1 billion in direct cost to unpaid trade creditors . Despite seeking legislative action in other areas, our members have not called for more legislation to combat illegal phoenix activity preferring that existing laws and mechanisms are used to their fullest.

Our support of these reforms is predicated on the understanding that they are reforms that AISC and other members of the Phoenix Taskforce require to increase the amount of enforcement activity and that the government acknowledges that enforcement is needed to combat illegal phoenix activity.

The AICM supports the positions of ARITA that enhance the ability of registered liquidators to effectively pursue phoenix activity. Enabling liquidators to obtain a better outcome for creditors will benefit creditors by reducing the financial impacts of illegal phoenix activity and disincentivise the operators by reversing the current reality that there are little or no financial repercussions.

In AICM's view providing efficient mechanisms for liquidators to pursue illegal phoenix operators does not reduce the need for regulators involvement in addressing this issue. Any laws designed to combat illegal phoenix activity will be ineffective if they are not supported by a tough stance by regulators. The laws must be enforced in as many instances as possible from the low value and low prospect of recovery through to the high value and systemic operators.

With or without these reforms the problem of illegal phoenix activity needs to be addressed through adequate funding and regular measurement of the effectiveness through an annual assessment of the financial impacts.

The perception that illegal phoenix activity is a victimless crime needs to be addressed. This can only be achieved through a tough stance on all activity including low value and first-time offenders.

Additionally, our key points are:

- No Phoenixing offence included. A specific offence will significantly address the perceptions and cultural issues that fuel illegal phoenix activity.
- The related measures of Transparency of Tax Debts and Director Identification Numbers are required to ensure the effectiveness of the proposed measures to retain tax refunds and prevent back dating of registrations or abandonment of companies. Further both measures would have significant impact on illegal phoenix activity.
- Consideration needs to be made of the high volume and low value transactions involved with phoenix activity. Much of our members frustration with illegal phoenix activity stems from the fact that the costs of legal enforcement currently prevent ASIC and insolvency professionals pursuing many claims and when they are pursued no return is received due to the incurred professional fees, this is not only a frustration to creditors but a reason illegal phoenix activity flourish.

The enclosed annexure details our broader responses to the reforms.

Should you have any queries arising from our submission please contact myself or in my absence (between 22 October and 2 November) AICM National President James Neate can be contacted on 08 8236 7621

Yours scincerly

9 February 2018

By email: Businesstaxdebt@treasury.gov.au

Transparency of Business Tax Debts

This joint submission is made on behalf of the Australian Finance Industry Association (AFIA), the Australian Institute of Credit Management (AICM) and the Australian Restructuring Insolvency and Turnaround Association (ARITA), collectively referred to as the Professional Bodies.

The Professional Bodies consider the Bill is an important initiative by the Government to ensure creditors and prospective creditors can verify the financial integrity of organisations that they are doing business with. It will help to stem the use of the ATO as a non-consenting "lender of last resort" and to level the playing field for those who are doing the right thing (no unfair advantage to non-payers). It also will help providers of credit and trade credit, in particular small businesses, get a fair insight into who they are extending credit to. This should ultimately protect more businesses from unwittingly being dragged into insolvency.

The Professional Bodies consider that the transparency of business tax debts measure has the potential to support the Government's policy objectives to:

"increase the availability of credit", "putting the customer at the centre" and "empowering customers with a good credit history ... to demand a better deal on [their] interest rates, or shop around, armed with [their] data" (Comprehensive Credit Reporting);1 and

to "reduce the unfair advantage obtained by businesses that do not pay overdue tax debts, and encourage businesses to engage with the ATO to manage their tax debt (Business Tax Debt Transparency)."2

The Professional Bodies therefore welcome the opportunity to comment on the Exposure Draft of the
Treasury Laws Amendment (Tax Transparency) Bill 2018 (The Bill) and related documents.

However, the Professional Bodies share a significant common concern that the Bill, as currently drafted, will be largely ineffective in achieving its intended Business Tax Debt Transparency purpose and will detract from the Government's Comprehensive Credit Reporting purpose. This is because the Bill contains a provision which allows a debtor's credit history to be retrospectively cleansed in relation to business tax debts,3 thereby undermining the transparency and policy purpose of the measure.

The Professional Bodies are united in strongly recommending that the Bill be amended to ensure that business tax debt information remains on credit files for a relevant historic period and is not removed from the record following subsequent engagement with the Australian Taxation Office (ATO).4 The Professional Bodies understand that other representative bodies with expertise in retail credit such as The Australian Retail Credit Association (ARCA) share this view.

AFIA represents the interests of over 100 financiers, credit providers and industry participants, including credit reporting bureaus. AICM represents the interests of over 2,500 credit professionals responsible for maximising the cash flow and minimising the bad debt risk of companies in a vast array of industries. ARITA represents the interests of over 2,000 insolvency professionals, including approximately 84% of registered liquidators.

Recommendation and reasons

The Professional Bodies recommend the Bill be amended to:

(i) modify the provision to restrict the Commissioner's discretion to notify a credit reporting bureau that a particular taxpayer no longer falls within the class of entities whose tax debt information can be disclosed to circumstances where the initial listing was listed in error; and

(ii) insert a provision which allows the Commissioner to update a credit reporting bureau that a particular taxpayer has:
- paid the business tax debt in full;
- paid a reduced amount in relation to the business tax debt under a settlement with the ATO or a Tribunal or Court order, with the balance expunged;
- had the business tax debt expunged in full under a settlement with the ATO or a Tribunal or Court order;
- is currently paying the tax debt via a repayment arrangement; and/or
- has disputed the tax debt and it is currently subject to a formal dispute/review process.

The Professional Bodies recommend these amendments to the Bill be made for the following specific reasons:

1. Removal is contrary to industry practice. Current practice is for information to be retained for a relevant historic period, be updated on settlement, payment arrangement or dispute and only removed if reported in error.

2. The information remains highly relevant to credit decisions. Accurate credit decisions require knowledge of multiple data points. Knowing that a business tax debt was reported and subsequently settled, a payment arrangement entered into or dispute lodged is vital to mitigate and manage risks.

3. Removal is contrary to other jurisdictions e.g. New Zealand. Not removing information reported to credit reporting bureaus (CRBs) prior to the end of the relevant historic period is common industry practice in many countries. Specifically, a similar measure implemented by the New Zealand government in 2017 does not remove the tax debt information once reported.

4. Not a sufficient deterrent to those intentionally avoiding tax obligations and continuing to obtain credit. The removal of information is a significant loop hole that will be manipulated by those seeking to avoid their obligations and put credit providers at risk. This includes illegal phoenix operators.

5. Removal does not encourage early engagement. As information will be removed from credit files on subsequent engagement, businesses are not incentivised to engage with the ATO prior to the listing. Recalcitrant businesses will continue to use the ATO as a source of term finance and choose when to engage if they require a clear credit report.

6. Potential for erroneous information affecting credit assessments. As credit providers will not know if information was removed due to an error or extenuating circumstances, a negative assumption is likely, thus assuming the debt is still owed and adversely impacting credit assessments.

7. Contrary to the open banking and mandatory credit reporting initiatives. Key to enabling customers with a good credit history, particularly small businesses, to demand a better deal is comprehensive data. If data contained on credit files is selectively cleansed, other than by removal of information included in error, this will undermine the purpose of these other two important government reforms. In simple terms, potential borrowers who are good and bad credit risks will be assessed the same with respect to potential ATO business tax debt.

8. Not providing a stimulus to businesses that have fully complied with their obligations. The measure has the potential to allow credit providers to assume a positive bias and compliance with obligations where tax debt information is not present on credit reports. This stimulus will not result if information is removed as proposed.

9. Potential to incentivise payment to the ATO to the detriment of other creditors. A business may prioritise payment to the ATO to cleanse its credit record, in an attempt to be able to continue a business that is in a financially distressed position.

10. Continues information asymmetry between the ATO and other creditors or potential creditors which allows phoenix operators to proceed unfettered. By removing important information from a business' credit record, we again return to the situation where only the ATO holds information that would be relevant and important to any creditor or potential creditor of a business, thus enabling phoenix operators.

These reasons are further explained in the Appendix. The Professional Bodies welcome the opportunity to discuss this proposed matter in more detail.

Yours sincerely

Helen Gordon
Chief Executive Officer – AFIA

Nick Pilavidis
Chief Executive Officer – AICM

John Winter
Chief Executive Officer - ARITA

Footnotes

1 The Treasurer, The Hon. Scott Morrison, Speech to FinTech Australia Collab/Collide Summit, 2 November 2017.

2 Minister for Revenue and Financial Services, The Hon. Kelly O’Dwyer, Media Release, Transparency of business tax debts, 11 January 2018.

3 Draft Section 355-72(4), Taxation Administration Act 1953.

4 For example in the case of personal information section 20W Privacy Act 1988 requires credit reporting bureaus to delete information from credit information files within one month of the “maximum permissible period”, which is ordinarily five years.

Transparency of Business Tax Debts – Appendix

1. Removal is contrary to industry practice.

1.1 Currently default information can only be removed after being listed with a CRB prior to the end of a relevant historic period if the information was listed in error. When a bad debt is later paid or a repayment arrangement entered into, this is recorded against the default listing and retained for the relevant historic period. The original default listing is not removed until the end of the relevant historic period. This position is firmly upheld by the CRB's and supported by the credit industry at large for the following reasons.

1.2 A prior default is a strong indicator of future credit issues such as defaults, insolvency and slow payment. Information on payment defaults even when paid in full, allows credit providers to provide credit with the benefit of a full assessment of relevant information. This information is weighted appropriately based on the age and value of the prior default. Where the underlying obligation has been satisfied, AICM members will not automatically decline credit obligations but are likely to prudently conduct a more in-depth analysis to ensure there are no systemic and continuing issues associated with the business.

1.3 Maintains integrity of the system. Users of the system rely on the information to make business decisions and those decisions should be consistent. If valid information is removed, a credit decision made one day could be dramatically different to a decision made the following day in the absence of that data. Additionally, it may not be possible for a decision to be verified retrospectively by ordering a new report.

1.4 Listings are updated rather than removed. CRB's and industry rely on the status of listings to be updated once payment is made in full or settled. This enables the information to be weighted appropriately according to the credit providers risk tolerance and other factors.

1.5 Reduces consumer harm by Credit Repairers. Credit repairers that charge customers significant fees promising to clear valid defaults are frustrated by the industry's strong stance on maintaining valid listings.

1.6 We note from discussions with several CRAs that information about defaults and credit
enquiries is generally retained on a business' record for five years

2. The information remains highly relevant to credit decisions.

2.1 The action taken to rectify the underlying default through payment does not negate the elevated potential risk of this entity. At the simplest level this is an indicator of the character of the entity which can be quantified by the increased incidence of businesses with payment defaults subsequently entering formal insolvency.

2.2 A listing that occurred due to cashflow/insolvency issues and was subsequently paid is extremely important to maintain. This could be deemed a near-miss insolvency. However, insolvency professionals report that a near miss insolvency is often a result of fundamental business flaws and subsequent actual insolvency is likely. Credit providers need to be afforded the opportunity to make a full and detailed assessment of that risk, taking into account relevant historic data that significantly impacts their financing decision.

2.3 When a listing status is updated this informs credit decisions in various ways, for example using the definition of engagement:

(a) Default paid in full

By maintaining the listing with a status noting the obligation has been satisfied, credit providers are alerted to a prior payment default and able to weigh the information against their risk appetite and other relevant factors.

For example:

(i) Recent payment

A business with low margins and tolerance to credit risk may choose to only supply this entity on "cash with order" terms. However, a more risk tolerant business may happily provide standard terms after obtaining other positive information such as average payment times (from the CRB's) or financial reports (from the applicant) alternatively the supplier may more tightly enforce the standard payment terms.

(ii) Payment made several years ago

Many credit providers will be likely to provide credit in these circumstances, in the absence of any other adverse information, and will have the opportunity to mitigate any additional risk through terms or close monitoring.

(b) Under Dispute

It is extremely important to ensure the information is available for a full credit assessment while the dispute is being resolved. This information not only allows assessment of the risk including the potential impact of this liability but ensures it is brought to the attention of the credit provider. The fact the listing is being disputed can be factored into the decision.

(c) Repayment arrangement entered

While a business may enter an agreement to repay by instalments it is very relevant to a credit assessment to include the extra cash outflow obligations above that of normal operations in credit assessments. Further it is common for many repayment arrangements to fail.

3. Removal is contrary to other jurisdictions e.g. New Zealand.

3.1 AICM colleagues in New Zealand have advised that the implementation of similar legislation allows for tax debt disclosures to remain on file for a relevant historic period which is in-line with current industry practice in New Zealand.

3.2 Further, these colleagues and NZ Inland Revenue (NZIRD) officials have advised that by retaining the listing, the warning letters issued by the NZIRD have been highly effective with the vast proportion of tax debtors subsequently engaging with the NZIRD and a very small proportion resulting in a listing with the credit reporting bodies.

3.2       The Professional Bodies hope that similar outcomes can be achieved in Australia. The best likelihood of this being achieved is if the Bill only allows for the removing of listings if listed in error.

 4. Not a sufficient deterrent to those intentionally avoiding tax obligations and continuing to obtaining credit.

4.1 If tax information is removed there is a significant risk this will be manipulated by those subject to the measure. See the below example which illustrates this point.

Example

After receiving an application a credit provider obtains a credit report showing a tax debt has been listed. This will trigger further investigation that may determine that the business is technically insolvent and potentially conducting illegal phoenix activity. The business then enters a repayment arrangement with the ATO and the tax debt information is removed from the credit report. The next day the business again applies for credit but with a different provider. In the absence of this vital information, credit could be provided. As soon as credit has been received the business defaults on the repayment arrangement. The company is later wound up (potentially by the ATO as a result of receiving an alert of phoenix activity following the initial assessment) leaving the credit provider with a significant debt and impacting their profitability and viability.

5. Removal does not encourage early engagement.

5.1 If the Professional Bodies recommendation is adopted it is expected the vast proportion of businesses that receive a warning letter from the ATO will engage to avoid the listing with CRB's. Conceptually there will be two main groups of recipients which receive warning letters:

(a) Those businesses that intend to meet their obligations but currently are not able to. While this group may be well intentioned, the fact that they have not met their tax obligations for more than 90 days indicates that the business is actually insolvent, and the responsible controllers need to take appropriate action (such as engaging with the ATO or entering an insolvency process). It is expected these businesses will attempt to engage with the ATO.

If a listing is to be removed on subsequent engagement these businesses may continue to hold onto unrealistic hopes for recovery and not engage with the ATO immediately but only when and/if their hopes materialise and/or they are applying for finance and require a clear credit file. Due to the delayed engagement, these businesses are likely to have a greater tax obligation to repay which increases the risk to potential creditors who may have provided credit unaware of the additional cash flow strain on an already vulnerable business.

(b) Those that have no intention to meet their obligations. A business which has no intention of meeting its tax obligations will be encouraged to engage with the ATO to avoid a listing that will impact their ability to continue operations.

If the listing is to be removed on subsequent engagement it is likely these businesses will ignore warnings and will only engage with the ATO when they intend to apply for credit or otherwise require a clear credit report. Clearly this is not in the interest of the public or other businesses that are meeting their obligations or credit providers that could be exposed to higher risk should the removal be manipulated.

 eous information effecting credit assessments

as proposed there are numerous situations where unintended consequences will arise due to the fact the information is highly relevant to credit providers, namely:

(a) Credit providers as part of their current processes record incidences of defaults via alerts provided by CRBs on their customer base. This information is stored on systems and customer files to guide future decisions around collections activity and new credit requests. Credit providers will be likely to retain this record even when/if alerted to the removal as they are unable to determine if the removal is due to an error listing, payment in full, a repayment arrangement or a dispute being lodged.

(b) Credit providers in industries with a high incidence of phoenix activity may seek protection from businesses attempting to manipulate the removal of defaults by proactively and potentially collaboratively storing information of tax defaulters.

(c) Un-regulated parties may establish services to provide lists of entities with prior tax default information.

(d) Credit repairers may take advantage of the removal following engagement and market their services to these entities, charging high fees that do not aid restoring solvency or clearing the underlying tax obligation.

6.2 The concern with these behaviours is that there will be no way to know if the removal was due to an error or exceptional circumstances. In the absence of clarity, a negative assumption is likely thus assuming the debt is still owed. This will mean that the impact of errors will be magnified and prolonged potentially indefinitely as there will be no expiry dates in these circumstances.

7. Contrary to open banking and mandatory positive credit reporting initiatives.

7.1 The Professional Bodies are supportive of the government's intentions and actions to improve the data available to enable accurate and responsible credit decisions. This will help customers with a good credit history, particularly small businesses, to demand a better deal.

7.2 This measure has the potential to positively contribute to the credit data available; however, removal of the information lessens access to relevant historic data critical to ensuring accurate credit assessments.

8. Not providing a stimulus to businesses that have fully complied with their obligations.

8.1 Once fully implemented this measure has the potential of a stimulus by reversing the current negative bias. A stimulus affect may be achieved as a result of more generous trade credit terms being extended, alleviating significant pressure on small and medium businesses, reducing reliance on traditional finance as well as supporting growth.

8.2 Currently a negative bias is held due to the lack of publicly available data to assess credit worthiness of small to medium sized businesses. Therefore, many credit providers assume all SME's are relatively high risk and provide restrictive credit terms and less flexibility with compliance to terms.

8.3 The proposal to remove the information will effectively eliminate any stimulus potential of the measure, as credit providers will not be able to conclude that the business has met its tax obligations but continue, as the default position, to assume all SMEs potentially have had an ATO debt.

8.4 It is in fact possible that a business has experienced multiple cashflow/insolvency issues and this will continue to be hidden and a false picture presented of low risk. Effectively, the situation we see today that results in significant losses to businesses of all sizes during insolvency.

9. Potential to incentivise payment to the ATO to the detriment of other creditors

9.1 If implemented as intended, a business may prioritise payment to the ATO in order to cleanse its credit record and prolong the trading of a business in financial distress. This is problematic for a number of reasons:

(a) poorly informed credit decisions as is discussed above;

(b) allows financial distressed businesses to continue to trade and obtain credit without dealing with the underlying problem;

(c) deferral of payment to other creditors, particularly small businesses, that may not have the power (either due to resource or knowledge constraints) to report non-payment;

(d) it returns Australia to a position where the ATO is treated preferentially to other unsecured creditors – even though a decision was made by the government in 1993 to remove the ATO's priority position in corporate insolvencies; and

(e) exposes the ATO to greater risk of recovery of preferential payments in a subsequent liquidation. Payments after listing, where there is a clear incentive to the business to pay the ATO in priority to its other creditors, are more likely to be recoverable.

9.2 The incentive is removed, and the ATO treated with the same priority as other credit providers if the credit record is retained and updated.

10. Continues information asymmetry between the ATO and other creditors or potential creditors which allows phoenix operators to proceed unfettered.

10.1 Currently the ATO holds information about business credit worthiness that no other creditor or potential creditor can access. This results in a raft of issues relating to the ongoing provision of credit or provision of new credit, where an informed person would not make such a decision. It also allows for phoenix operators to proceed unfettered as the common creditor in most phoenix situations is the ATO and this information goes unreported.

10.2 The failure by the ATO to report, or as intended – report and then remove, valuable information about a business' credit worthiness continues this information asymmetry.

10.3 The government is working on solutions to the phoenixing issue 1. The recording, and importantly, maintenance of information is one of the key parts of the solution to combating this problem.

Footnote

1 Reforms to address illegal phoenix activity consultation paper, The Treasury, September 2017

27 November 2017

By email: TaxDebtTransparency@ato.gov.au

Transparency of Tax Debt

Thank you for the opportunity to make this submission on the proposal to allow the Australian Taxation Office (ATO) to disclose to Credit Reporting Bureaus (CRBs) the tax debt information of businesses that have not effectively engaged with the ATO.

The AICM has been a vocal advocate for the introduction of this measure that will see the ATO, the most relevant creditor in Australia, contribute to the credit reporting systems that enable businesses of all sizes to manage their risk exposures. The measure importantly will also play a role in mitigating other issues faced by our members such as illegal phoenix activity and unfair preference claims (more information available here).

Further, once fully implemented this measure has the potential of a stimulus affect for all businesses especially small and new businesses (less than 5 years) where an absence of default information may provide comfort that obligations are being met. Currently, a negative bias is often assumed due to the lack of information.

The AICM has been actively involved with the ATO since the measure was announced in the 2016-17 Mid-Year Economic and Fiscal Outlook (MYEFO). While our members are significantly frustrated by the 1 July commencement date being missed the AICM is supportive of the considered and measured approach taken by the ATO in preparation for commencement.

Having reviewed the information made available on how the measure will be legislated and administered the AICM has the following concerns which it provides to aid the drafting of legislation that will meet the objectives set for this measure.

Removal of tax debt information from credit reports

The AICM and members are very concerned that the measure will see disclosures of tax debt information removed as if never occurred once subject to a dispute, payment arrangement or paid in full. This intention will significantly limit the effectiveness of the measure meaning credit providers will potentially be exposed to same or higher levels of risk.

This position reflects long established industry practice which exists to uphold the integrity of the credit reporting system as removing the default information without trace:
o leads to incorrect credit assessments due to the entity presenting as never having credit/solvency problems,
o removes an opportunity for credit providers to mitigate credit risk associated with entities that have experienced credit/solvency problems, and
o lessens the incentive for the entity to engage with the credit provider.

There is a common misconception that credit providers will not provide credit if a default information remains on file, even if the debt has been paid and is marked as such on the credit report. AICM members regularly extend credit to businesses when default information remain on credit reports, including currently outstanding defaults. The default information merely acts as a signal for further enquiries to assess risk and potentially implementing risk mitigation strategies. Further, the age and amount of default information is taken into account when applying weights to the information.

Disclosures of tax debt increases transparency. To remove the disclosures reduces transparency.

The AICM recommends tax debt information is disclosed to CRBs once the proposed criteria have been met and this information is only removed once it has been established that the information has been provided in error or the ATO is satisfied the tax payer was not able to engage with the ATO due to exceptional circumstances.

Exceptional circumstances may be personal in nature (health and family reasons) or due to other factors outside the control of the tax payer. The AICM also supports the ability of the ATO to use their professional judgement in determining genuine circumstances versus attempts aimed at avoiding or delaying payment of tax obligations.

The factors taken into account in reaching this recommendation include:
o All responsible businesses operators are aware tax obligations exist
o The ATO will take all possible steps to engage with the tax payer before reporting takes place

Therefore in the absence of exceptional circumstances a tax payer that hasn't engaged within the 90 days is either insolvent or is attempting to delay/avoid its liability for personal gain. Both these factors are relevant to credit providers while the tax debt is outstanding and into the future.

Below we provide further commentary on the reasons for maintaining tax debt information on credit reports by the various categories:

o Dispute lodged
The AICM supports tax debt information remaining on credit reports whilst the account is in dispute, on the understanding the status is updated to reflect this.

The information remains relevant to credit providers as it shows there has not been engagement prior to the 90 days and allows better assessment of the risk.

Importantly, to remove the defaults on lodging a dispute does not encourage entities engaging prior to 90 days and would encourage gaming of the system.

o Repayment arrangement entered
While a tax payer may have subsequently engaged with the ATO following a tax information being reported to a CRB it is important the information is updated to reflect this repayment arrangement and not removed as:
? The non-engagement for over 90 days is a relevant data point for credit assessment
? The fact that a significant aged debt exists above normal trading obligations is very relevant
? The entering of an arrangement and maintaining of the arrangement contributes positive information to counter the initial negative information.
? Repayment arrangements may be entered and maintained only long enough to clear credit reports and apply for credit that will be granted without the knowledge of this risk factor
? The fact that another 21 day warning period will be granted if the arrangement is not honoured provides an opportunity for the liability to be avoided and reporting delayed for significant periods during which information essential to risk management is being withheld from credit providers.

o Tax debt paid in full
As mentioned above this information is relevant to credit providers as this past performance carries indicates the character and capacity of the customer. Removal of the information as if it never occurred does not encourage engagement prior to 90 days.

If tax information is removed the following unintended consequences may arise:
o Storing of information by credit providers or third parties leading to defaults that are removed due to error still affecting credit assessments.
o In ability to conclude that in the absence of ATO tax debt information on credit reports the entity is effectively engaged with the ATO.
o Significant risk that credit will be provided to high risk, insolvent and illegal phoenix operators. To expand on this point:
? A credit provider may obtain a credit report showing a tax debt which triggers further assessment resulting in a decision that the credit would not be advanced as the company is technically insolvent and potentially the result of an illegal phoenix.
? The company then enters a repayment arrangement with the ATO and the tax debt information is removed from the credit report.
? The next day the company applies again for credit and with the absence of any this vital information credit could be provided.
? The company may then be wound up (potentially by the ATO or as part of an illegal phoenix activity) leaving this credit provider with a significant debt and frustration at the ATO i.e. the situation our members see today.

Tax information reported in error
As stated any information reported in error must be removed immediately. The longer erroneous information remains on file the greater the impact to tax payers and credit providers.

The AICM encourages the ATO to ensure adequate resources are allocated to ensure claims of errors (from tax payers or third parties such as credit repairers) are expediently investigated and responded to. Delays and inefficiencies in addressing these claims have the potential to undermine the effectiveness of this process.

Adverse effects on small business
The AICM strongly supports the proposal to only disclose defaults when the tax payer has not effectively engaged with the ATO. This engagement measure means that tax payers facing short term impacts on their ability to meet their obligations will be able to enter arrangements and not be disclosed provided they are engaging with the ATO.

Organisations that do not engage with the ATO or are unable to enter a repayment arrangement represent increase risk to credit providers, including small businesses.

The vast majority of small businesses that do meet their tax obligations will benefit through better risk assessment of their customers and lessening artificially low pricing of competitors that are not meeting their obligations (such as illegal phoenix operators), whilst maintaining the ability to work with the ATO when faced with short term cash flow problems.

Phased implementation
Once legislated the AICM encourages the ATO to implement in a methodical and phased manner to ensure the correctness of defaults and their processes but also encourages full implementation as the end goal to maximise the effectiveness of the measure.

$10,000 value and 90 days
The AICM supports the use of these criteria.

The AICM supports the $10,000 dollar value and strongly believes it should not be raised considering every entity that avoids it tax obligations is a potential credit risk. Therefore the AICM would support the lowering of the dollar value and suggests this could be an effective option to encourage payment of tax obligations not economically viable for legal enforcement. We also note that the $10,000 minimum may have potential for some organisations to manipulate by only paying obligations above this amount.

The 90 day time frame for engagement is supported by the AICM as it aligns with industry practice, with most recording payment defaults after 60 or 90 days. Several members do note that the time limits can be restrictive when it is evident that payment will not be made much earlier than this. The focus of this criteria should be that the time frame allows the ATO to take all viable steps to encourage engagement and warn of the possible listing.

The AICM suggests that a mechanism be included for the $10,000 and 90 days criteria to be reviewed in the future.

Avoiding manipulation
In the Transparency of Tax Debt Measure webinar on 22 November 2017 it was stated that 96% of tax debts are paid prior to 90 days and of the remaining 4% only 1.3% pay in the following 90 to 365 days. This statement supports the AICM's view that information on tax payers that meet the criteria are significant indicators of insolvency and/or active avoidance of tax obligations, therefore entities that do not meet their obligations prior to 90 days are exactly the entities that should be subject to stringent assessment before credit is advanced.

Considering the above, the AICM strongly encourages drafting of legislation and ATO powers to address the significant likelihood that the entities targeted by this measure are highly likely to take advantage of safeguards and loopholes such as the proposal to remove defaults.

The AICM also recommends that flexibility is afforded so this measure can be used in conjunction with targeting Phoenix activity. For example the ability to waive the 90 day aging and 21 day warning period should the Phoenix Taskforce indicate a likelihood of phoenix activity.

Reporting on the use of the measure
The AICM strongly encourages regular statistics on the use of the measure such as:
o Warning letters issued
o Payments within the 21 day warning period
o Payments made following reporting to a CRB
o Disclosures made in error
o Other statistics that indicate the effectiveness e.g. comparing payments made after reporting to a CRB compared to payments made after commencing legal action.

In summary, the AICM believes that the measure can have extremely positive impacts on our members, credit providers, small businesses, new businesses and the economy as a whole provided it allows for the tax information reported to CRB's to remain file (unless reported in error) and the measure is implemented in full.

Our key recommendations are:
- Tax debt information is disclosed to CRBs once the proposed criteria have been met and this information is only removed once it has been established that the information has been provided in error or the ATO is satisfied the tax payer was not able to engage with the ATO due to exceptional circumstances
- The ATO to ensure adequate resources are allocated to ensure claims of errors (from tax payers or third parties such as credit repairers) are expediently investigated and responded to. Delays and inefficiencies in addressing these claims have the potential to undermine the effectiveness of this process.
- The $10,000 dollar value is suitable and should not be raised
- The 90 day time frame for engagement aligns with industry practice.
- All possible steps to encourage engagement have been taken prior to reporting tax information to CRB's
- Flexibility is afforded so this measure can be used in conjunction with targeting Phoenix activity

This submission has been prepared after consultation throughout 2017 with members and industry. A draft copy of this submission was provide to our members on 22 November, a copy of this email and the responses specifically supporting our position is attached (Annexure A) also attached is a summary of the AICM (Annexure B).

Should expansion of our views be beneficial to the inquiry at any stage, we welcome your direct contact.

Yours sincerely

Nick Pilavidis
Chief Executive Officer

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