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INSOLVENCY AND THE EFFICIENT USE OF SCARCE RESOURCES

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by Paul Gidley08.03.21

Insolvency practitioners and insolvency legislation have never been top of the pops when it comes to public perception, the media and of more recent times the Government. There are obvious reasons why this is of recent years, but every profession has its bad eggs. It is however difficult to be cool and easy to be a target when what you do usually leaves most stakeholders in tears and financially scarred.


But I would argue, in a self-serving sort of way, insolvency, insolvency practitioners and insolvency legislation do not cause insolvency and corporate failure. The reality is that insolvency law and its proper administration are fundamental to ensuring our economy has accountability, along with an efficient, reliable, competitive and transparent marketplace.


What has insolvency law and practice got to do with this you may ask. In a nutshell, its fundamental economics – that is the efficient use of scarce resources in the marketplace.


Whether you operate in a micro or macro economy, be it a small or large enterprise, to facilitate an efficient, reliable, competitive, and transparent marketplace, insolvency practitioners must do the job most other professionals in finance and law don’t want to do – clean up someone else’s financial mess, see what it is left over and return it to stakeholders, freeing up market forces to redistribute the scarce resources previously being consumed inefficiently by the ailing enterprise.


Enterprise has failed since the beginning of trade and will continue to fail until the end of trade. The reason most enterprises fail is because at some point in time they become unable to pay their debts as and when they become due and payable. That is, they have become insolvent. The causes of this insolvency range far and wide and for most are uncontrollable and irresolvable.


Most insolvent enterprises cease operating when insolvency has become endemic. At this point in time the insolvent enterprise usually has little in the way of working capital or net asset value. It is not uncommon for insolvency practitioners to be blamed for zero returns to creditors however, like Old Mother Hubbard, the liquidator usually arrives only to find the corporate cupboard bare.


It is for this reason most insolvent enterprises simply cannot be saved. The losses are that significant there is simply no way back to solvency. Others should not be saved only if because to do so contravenes the primary principle of economics - allowing other solvent enterprises in the marketplace to employ those scarce resource in a more efficient manner.


I would argue, at a minimum, insolvent enterprise if allowed to continue to trade unchecked will distort competition, interfere with the laws of supply and demand for scarce resources and increase the cost to do business resulting in wider ranging losses in the marketplace. The efficient removal/liquidation of insolvent enterprise allows for the timely redistribution of trade and scarce resource to profitable enterprise.


It is also imperative that Australia has legislation which also facilitates corporate reconstruction and turnaround, however these laws should encourage underperforming enterprise to act well before the likelihood of insolvency and also provide the enterprise with the appropriate protection to conduct a proper reconstruction.


In creating that environment we should not lose sight of the importance of removing insolvent enterprises from the marketplace. It stands to reason that when an insolvent enterprise closes its doors the trade it was conducting, and scarce resources it was consuming (materials, labour, capital etc) are redistributed to solvent enterprises, improving the solvent enterprises profitable trade.


When a company is liquidated the wealth is not lost to the economy, its simply shared around. Its dirty job but someone must do it.