Competing with phoenix operators, rather than combatting – a goverment liquidator

The World Bank has come out with reports[1] that support the Australian government’s attempts to control unlawful phoenix activity, by way of the creation of a government liquidator to handle a new streamlined process for handling the insolvencies of micro-small-to-medium size enterprises (MSMEs), the source of much phoenix activity. The reports sensibly examine personal and corporate business insolvency together. 

 A government liquidator to counter phoenixing

A public liquidator is an option raised by the government in its consideration of measures to ‘combat’ illegal phoenixing,[2] recently described by a judge as a

‘well-known but opprobrious practice’ of ‘consigning insolvent companies to the fires of liquidation, and creating new companies to arise from the ashes and take their place’.[3]

The idea, among others, is discussed in a recent article by Professor Helen Anderson, whose focus extends to the need to resolve the on-going and unresolved tension between the roles of ASIC, acting in the public interest, and the liquidator, acting in the interests of creditors.[4]

While that needs to be resolved, a government liquidator would allow a side-stepping around the complex issues surrounding it.

No funds

A fundamental issue in any insolvency, large or small, is the funding of its administration.  MSMEs in particular usually have insufficient assets for this; phoenixed companies never do.

As the World Bank says, many insolvent MSMEs are not formally wound up, with their remaining funds insufficient to cover even the administrative costs and fees, let alone provide any meaningful recovery to creditors. While creditors would prefer to pursue the recovery of hidden or transferred assets, this can entail significant costs that exceed the potential benefits.

Abandoned companies

That is the case in Australia, with Anderson estimating that there are five times as many abandoned companies as there are companies in liquidation each year, with the amounts lost to their creditors being unknown. Creditors here are invariably unwilling to provide funding.

Insolvent trading, deliberate phoenixing, or fraud

The World Bank says that inattention to dealing with no-asset insolvencies can negatively influence the conduct of the debtor on the verge of insolvency. This can lead to insolvent trading, deliberate phoenixing, or fraud.

International approaches

International approaches to no asset insolvencies in the EU range from the inattention of preventing a no asset business from going insolvent at all (Greece and Poland), leaving them as zombie companies; to requiring the petitioning creditor, or creditors collectively, to fund the administration (Bulgaria); or to establishing a public fund to cover the expenses of the winding up (Armenia).

Australia is in the category with Bulgaria.

Adverse impact on the integrity of the insolvency system

The World Bank makes the point that hurdles to the administration of MSME insolvencies can result in ‘zombie companies’ that are not properly liquidated and with the potential for their owners/directors to avoid liability for malfeasance.

For these reasons, the Reports say that no-asset cases present issues that

impact ‘the integrity of the insolvency system’.

And considering MSMEs are most likely to face a no-asset insolvency situation, the World Bank suggests that countries explore particular options for the administration of their insolvencies.

Comment

No fee for bankruptcy

The government once rejected the idea of a $200 filing fee for a person who wanted to go bankrupt with the government trustee, the Official Trustee in Bankruptcy.

The thinking seems to have been that it was unfair to impose a cost on someone who was insolvent.

So, an Australian debtor wanting to go bankrupt has no financial impediment in doing so.

But a $5-10,000 fee + for liquidation

But if a person is a director of a small insolvent company in Australia, the de facto ‘filing fee’ starts at say $5,000, perhaps $10,000, those being the range of rates for a private liquidator to take on the winding up of the debtor director’s company, if at all.

That is one option for the director; the other is to do nothing, often with no adverse consequence.

A government liquidator would be an answer.

While nefarious directors might avoid a government liquidator, many will think that the $5-10,000 fee for a private liquidator is not worth it; many others, genuinely seeking out what to do, will avoid shonky advisers and go straight to a government liquidator.

Compared with bankruptcy

The World Bank breaks through the unreal separation between personal and corporate business insolvency. In that respect, the intense debate in Australia as to whether an individual should be kept in bankruptcy for 3 years for $10,000 in unpaid debts, compares with the same person walking away as a director of their $2 company which has lost $10m, and starting up again the next day.

Who?

ASIC has a lot on its plate, with its numerous roles now under scrutiny following the Banking Royal Commission inquiry.  It does not have particular expertise in conducting insolvencies; the Official Trustee in Bankruptcy does. Comments that it may be conflicted when dealing with government debts are spurious, given its decades long role in adjudicating such debts in bankrupt estates. It has a track record of successfully taking on PPS responsibilities, family law, proceeds of crime and government trustee work.

A single insolvency agency

This would then allow a 2010 Senate Committee recommendation to be implemented, of having a single insolvency agency, to register and regulate practitioners, supplementing the harmonisation of personal and corporate insolvency law introduced by the Insolvency Law Reform Act 2016.

Combat or compete?

The government is yet to respond to its own idea of a government liquidator as one means of countering phoenix misconduct.  There are other benefits, and options.

It might like to consider whether a better or additional option would be to proactively compete with phoenix operators for MSME insolvencies, in the government’s own arena, rather that reactively combat them in their own territory.

 

Note: The issue of MSME insolvency will arise for public debate at the insolvency session of UNCITRAL in Vienna in December 2018, of which Australia is a member.

 

[1] Saving Entrepreneurs, Saving Enterprises: Proposals on the Treatment of MSME Insolvency, 30 June 2018; Report on the Treatment of MSME Insolvency, 4 May 2017

[2] Combatting illegal phoenixing, Treasury, September 2017

[3] Greenwood Futures v DSD Builders (No 2) [2018] NSWSC 1471

[4] Insolvency – it’s all about the money, (2018) 46(2) Federal Law Review 287-312, Anderson. See also Keay’s Insolvency, 10th ed 2018, Murray & Harris, at [1.220].

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