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Now is the time to shatter the insolvency stigma

COVID-19 has wreaked havoc on many Australian businesses, and the stigma associated with insolvency, particularly around fear and shame, could also play a destructive role in the coming months.

Insights Andrew Spring, Jirsch Sutherland 11 September 2020
— 3 minute read

The stigma comes from the widely held belief that insolvency is for incompetent or crooked business owners, directors and individuals: it’s a sign you’ve failed and that your reputation will be forever tarnished. As an accountant, I’m sure you’ve heard this many times before.


This centuries-old belief overshadows the fact that insolvency is a legal and orderly way to save or wind up a business, or free an individual from debts. The fear and shame associated with insolvency often:

• Deters them from talking about their situation with their accountant and other trusted advisers.

• Stops them from gathering the appropriate information to make informed decisions.

• Delays them from both exploring and actioning an early intervention procedure that can save their business or an insolvency procedure to wind it up with minimal losses.

I fear the stigmas and the government’s support measures are working together, delaying many from exploring insolvency options that can reduce further losses and set them up for a fresh start.

Like all stigmas, the insolvency one thrives on lack of information and misinformation. During my 20 years in insolvency, I’ve found many people have a limited knowledge of insolvency simply because they haven’t had a first-hand experience of an insolvency procedure.

To empower your clients with the right information and help me in my quest to shatter the stigma, here are six little-known facts about insolvency: 

  1. Many businesses go into liquidation and people become bankrupt due to no fault of their own, often as a result of circumstances out of their control, and not because they are incompetent or crooks. Customer default, supply-chain failures, regulatory reforms, technological advancements and changing consumer behaviours are all difficult to predict and can derail a business. This year and, unfortunately, into 2021, COVID-19 will force countless business owners and individuals into liquidation or bankruptcy due to no fault of their own; they are victims of a pandemic with no rule book and no end date in sight. 
  1. Entering into an insolvency process doesn’t necessarily mean it’s “the death” of the business. Insolvency isn’t just the process of liquidation and bankruptcy. It also includes legal and effective early intervention procedures that can save or turn a company around. This includes personal insolvency agreements, safe harbour and voluntary administration which, appropriately utilised, can provide individuals and viable businesses that have had some “bad luck” with a second chance. 
  1. Australia’s insolvency procedures are legal processes designed to support an efficiently functioning economy, by reviving businesses that are viable and recycling the resources of those that are not. This process minimises economic loss in our society, and provides an opportunity for resources, human and tangible and intangible assets, to be put to profitable use.   
  1. Talking to an insolvency practitioner does not make you insolvent, just like talking to your doctor does not make you sick. Insolvency practitioners are registered gatekeepers; their role is to provide transparency and business support mechanisms designed to protect the people involved in the business — owners, employees, customers and creditors — even if that results in the closure of the business. 
  1. Understanding insolvency is good business practice and, as a company owner or director, it is their responsibility to act when their business is in financial distress. Refusing to consider or explore insolvency options is not a personal choice, regardless of whether it is driven by fear or shame — it’s bad business practice which only leads to further losses and personal asset exposure.
  1. Delaying taking action on an insolvency solution affects many people: owners/directors are exposed to increased mental stress due to a feeling that they are letting everyone down; employees don’t know if they’ll be paid and whether they can support themselves and their families; creditors worry about the impact on their business’s financial position; customers are unable to meet their own obligations; and the families of all involved can be affected financially and emotionally. 

With just 631 registered liquidators and around 200 bankruptcy trustees in Australia to help the many distressed businesses over the coming months, it’s crucial that these outdated and destructive stigmas be shattered.

In addition to the above six facts, perhaps we can change the way people regard insolvency by changing how we talk about insolvency. Instead of referring to insolvency as “a last resort”, we say it’s “the right decision”, and rather than “undertaking a procedure”, we say “finding a solution” to put an end to the damage and stress of being in financial distress. That sure appeals to me!

Andrew Spring, partner, Jirsch Sutherland

Now is the time to shatter the insolvency stigma
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