Liquidators: “… no obligation to conduct any investigations beyond the bare minimum …”

It has been said of liquidators that in no other profession is a highly qualified professional expected to work for free, referring to the fact that an obligation remains with a liquidator to investigate the insolvent company and report to ASIC on any misconduct even if there are no company funds to allow the liquidator to be paid.

A 2013 report estimated that the then official liquidators personally funded over $47 million annually in work that was not paid because the assets were not sufficient to allow the liquidators to recoup their remuneration and outlays: see generally, Liquidating the official liquidator, 2016.  

That position appears to continue.  According to a recent media report[1] an Australian insolvency practitioner, appointed by the Court as liquidator of a company at the request of the ATO, was then required to expend a substantial amount of his own money in investigating the affairs of what was an assetless company. 

According to the report, the director of that liquidated company is a director of a further 97 companies, all with the same registered address, and registered in the same month by the same agent.

The liquidator is reported as facing the prospect of a “whacking great bill …  of many thousands of dollars for company searches from the ASIC database”. He is also said to anticipate uncovering more companies indebted to the ATO that are associated either with the director or his immediate predecessors.

That raises a law reform idea of the government, and more besides.

A government liquidator

The government has raised the idea of a government liquidator (GL)

“to conduct a streamlined external administration of small-to-medium size enterprises with the option to appoint a private registered liquidator if circumstances warrant[ed] it”.

The government asks what insolvency administrations a GL might conduct and how it might be funded.  The government has yet to respond to this idea by way of any proposed structure.

Oddly, the government sees a GL in only a limited way, as a measure to ‘deter and disrupt illegal phoenix activity’, despite the significant gaps in corporate insolvency that the GL would fill and the advantages it would bring.  For one thing, assetless companies could be wound up, in particular voluntarily, rather than, as occurs in many cases, being simply deregistered with no investigation made.  Liquidators would be relieved of what seems to many to be their traditional generous attention to attending to these investigations and reports by way of their own time and own funds.

In contrast, GLs are features of the insolvency regimes of the UK and New Zealand, and others. The broad scope of the tasks of a GL is also the subject of international deliberations in relation to micro-small-medium enterprises (MSMEs), in determining what particular processes should be adopted to deal with their insolvency, given their limited assets, the need for streamlined processes, and other such issues.[2]

Reform proposal

A proposal in support of the government’s idea has been offered before and is being developed further, along the lines of the UK Official Receiver, with a GL being the initial insolvency appointee. The GL would conduct initial investigations, determine the extent of further work required, and funds available, and, if appropriate, then itself transfer the matter to a private liquidator.  The liquidator would then have a file of company records and initial investigations with which to progress the matter. There is some parallel with the respective roles of the Official Trustee in Bankruptcy and private registered trustees in bankruptcy in Australia.

Section 545 Corporations Act

As to the circumstance with which the reported liquidator was confronted, readers will recall that an interpretation of the law in relation to s 545 of the Corporations Act was offered in this comment – If there is little money in the winding up, the liquidator will have to cut corners he might not otherwise cut.  The section may not be as onerous as some claim.[3]

The ATO

Apart from this, and by way of separate comment on the sort of situation discussed, it seems odd that the ATO, as a model litigant and with responsibilities under the tax and other laws, including the Public Governance, Performance and Accountability Act 2013, and as a co-member with ASIC and others of the so-called Phoenix Taskforce, would ask any liquidator to consent to an appointment knowing that there were numerous related companies; or where the ATO reasonably should have known.

In addition to the ATO providing a liquidator with all the corporate details of the company being wound up, in terms of the ATO’s responsibility as the petitioning creditor, it should properly produce the details of other related companies.  Any liquidator relies on the petitioning creditor for information about the debtor company the creditor is pursuing.

That is not a comment on this particular case reported, given there may be particular issues not disclosed.  Suffice to say there must surely be some more to it than is reported, for example, that the ATO itself could not afford the ASIC search fees.

Open access to ASIC’s database

The government’s response on its GL proposal is awaited, as being at least one way to address the issue so usefully highlighted by this media report. The other response, to open up ASIC’s database to free public access, does not appear on the government’s law reform agenda yet.

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[1] ASIC supports DIN but what about liquidators, Insolvency News Online, 14 November 2018, Peter Gosnell.

[2] For example, see UNCITRAL Working Group V, Vienna, December 2018

[3] See also “ … the Corporations Act expressly confirms that liquidators are under no obligation to conduct any investigations beyond the bare minimum required for the statutory report”: Professor Helen Anderson, Insolvency – It’s all About the Money [2018] UMelbLRS 6. “The Corporations Act expressly states that the liquidator is not required to do this [investigative] work for free”: Professor Helen Anderson, Shelter from the Storm: Phoenix Activity and the Safe Harbour [2018] UMelbLRS. In contrast, see the comments about ARITA’s views in Insolvency Law Reform Act 2016 – more unpaid work for liquidators? at least as ARITA’s views were then.

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