Weathering the storm of uncertainty: Print21 magazine article

After a string of recent failures, we have become increasingly de-sensitised to printing companies entering administration or receivership. But after a leading light of the Sydney print establishment – Pettaras Press – appointed administrators, there have been calls for a re-think on how insolvent businesses can be helped. Andy McCourt explores the minefield of insolvency law and suggests we need to look towards the USA for a better system.

Anyone can get into financial distress – anyone at all. Look at Greece, Iceland and Spain – entire countries technically ‘trading while insolvent’. It’s not new. In the late 1500s, King Phillip II declared Spain bankrupt, thus becoming the first sovereign state in history to go broke. The equivalent of his fleet of expensive 10-colour perfectors was, of course, the Armada.

More recently, a worrying raft of administrations and liquidations have blighted the Australian printing industry and the impact on lives, jobs, tax revenues and both secured and unsecured creditors is alarming. What can be done? The simplistic and unacceptable answer is ‘just don’t get into trouble’.

The most famous bankrupt in printing history was the man himself – Johannes Gutenberg. Court documents from 1455 show that he owed Johann Fust 2,000 guilders and was successfully sued, with Fust getting the print shop and half of all printed Bibles. There must have been a ‘scheme of arrangement’ since Gutenberg moved and re-started a print shop elsewhere.

A slave to debt
Insolvency laws were originally introduced to protect creditors, not the debtor. They allowed for punitive action against the debtor, his assets and even his family. In ancient cultures such as Greece, if a citizen could not pay debts, he and his immediate family became ‘debt slaves’ to whomever the debt was owed, until it was paid off with labour. However, under the Hebrew system, there was provision for a discharge of debts every seven years, with the 49th year being a jubilee where all debts were forgiven.

So what is the insolvency situation in Australia today? To be frank, we lag behind counties like the USA where court-appointed administrators can examine the bigger picture – not solely the interests of creditors – and work towards restructuring a business so that jobs, houses, health and the greater good of the community are preserved. Commonly known as ‘Chapter 11 Bankruptcy’, the US system enables a company to continue trading under an administrator appointed by a judge, and be protected from actions by creditors for a period of time. A prominent example of this is World Color (formerly known as Quebecor) which entered and exited Chapter 11 and is now being acquired by Quad/Graphics in a $1.2 billion deal.

Current Australian law tends to favour the winding-up or forced sale of companies in trouble. Why? Keeping in mind that, in Australia, only individuals – not companies – can declare bankruptcy, administrators are appointed to run companies either at the voluntary request of the directors, or by compulsion when a creditor forces the issue. Either way, the courts are not involved – an administrator is not appointed by a court.

Once appointed, an administrator is then personally liable for any new debts incurred by that company. This somewhat draconian risk is what drives many administrators to favour a ‘quick exit’ from the business. The better ones will explore turning-around or selling the business and returning it to profitability but, so long as the Damoclean Sword of personal liability for debts exists, if the opportunity for a fire-sale or liquidation gets the nod of creditors, this is the road most often taken.

Having said that, the Federal Government is currently reviewing Australia’s insolvency laws and, in January this year, the Treasury released an insolvent trading discussion paper which is available on the treasury.gov.au website. The gist of it is that there should be a ‘safe harbour’ for companies to be rescued, outside of an external administration. This is good news, but tragically too late for many companies. For an independent analysis of the proposed insolvency reforms, PricewaterhouseCoopers has kindly offered this  link.

Give folk a chance
Creditors often have directors’ guarantees to cover trading debts and more than once I have witnessed families losing their homes when their business goes broke. This is clearly not acceptable in a modern free-enterprise and fair society where everyone has the right to explore the Australian dream. Certainly, dishonest traders rorting the system should be prevented from benefiting from any ‘safe harbour’ changes to insolvency law but the majority of printing businesses I have seen in trouble are far from dishonestly run. They are run by good people who deserve a chance to weather the storm.

Currently, it is against the law to trade whilst knowingly insolvent. The proposed reforms will, effectively, enable ‘safe harbour’ trading while insolvent, so long as steps are being taken to restructure the business.

Roll on those reforms. In the end everyone will be better off, including creditors.

Unfortunately, for some great printers, they will be too late.