A government liquidator, and more

Problems arising from Australia’s lack of a government liquidator have probably been hidden for some years by the choice of the profession to take on assetless liquidations, whether through some sense of duty, or some sense of risk taking that the matter may in fact be interesting paid work and that assets may be recovered.   This probably has the effect of distorting what market exists, including through its impact on the remuneration of liquidators.

One long-time market distortion was caused ASIC’s requirement, with an uncertain legal basis, that ‘official liquidators’ undertake to agree to be appointed to an insolvent company, even if without assets, and hence with an uncertain source of remuneration.

While that served some purpose, it was not economically transparent and it was removed as a duty of liquidators in 2017.

Although not disagreeing with the change, we predicted some difficulties would arise. [1]

The government’s message to creditors, and debtors

In removing the official liquidator duty, the government explained that

“where a person is petitioning the court to wind up a company the person will likely have to provide a guarantee of a minimum amount to the corporate insolvency practitioner in order for the corporate insolvency practitioner to agree to the appointment. This may mean a reduction in the number of assetless companies liquidated as corporate insolvency practitioners would not be expected to commence such administrations without some form of guarantee or where they do not believe they are likely to be remunerated”.[3]

Whatever was the situation on which INO reported, the government approach is therefore that creditors may now have to pay not only the legal and associated costs of obtaining a court order that their debtor company be wound up, but to also pay for a liquidator to agree to take the appointment at all.

And, although the problems of directors were not addressed, they themselves may have to pay a liquidator to take on the voluntary winding up of their insolvent company.

If the directors have no funds, and a creditor does not wish to incur the costs, any company that should have been liquidated and investigated – for its insolvency, or phoenix, tax or unlawful activity – may simply fall into what is a large and growing black hole of dormant and deregistered companies.  The term ‘bottom of the harbour’ comes to mind.

In personal insolvency, the Official Trustee in Bankruptcy, as trustee of last resort, is available as a trustee to a creditor or a debtor, and properly so.

The government also explained that the removal of the official liquidator role would address

“the current cross-subsidisation occurring within the industry where the costs incurred in assetless administrations are recouped through higher remuneration costs in larger administrations”.

Should a government agency take on aspects of the liquidator role?

The corporate insolvency process is privatised. Whether it should be, and what problems and distortions the current arrangements raise, are being examined with a view to a recommendation that a government agency take on a liquidator role, in designated areas, and perhaps more.

The government has itself raised the idea of a government liquidator but is yet to respond.[4]

———————————–

[1] Liquidating the official liquidator, CCH Law Chat Blog, 26 July 2016, Murray

[3] Explanatory Memorandum to the Insolvency Law Reform Bill 2015, Chapter 9.

 

[4] Combatting illegal phoenixing, Treasury paper, September 2017

Posted by admin

Leave a Reply

Your email address will not be published.