Deregistered companies – UK reforms and some Australian comparisons

The UK Insolvency Service is to be given powers to investigate directors of companies that have been dissolved, or in our terms, deregistered, in order to prevent misuse of the process, it is said, “as a method of fraudulently avoiding repayment of Government backed loans given to businesses to support them during the Coronavirus pandemic”.[1]

Australia might have a similar deregistration concern, but we don’t really know, because it is a market issue.  Perhaps though it would be good to find out.

Companies are often deregistered by default, that is, on non-compliance with their fee payment or filing obligations, under s 601AB Corporations Act.  That may be because of the company is no longer needed and the directors don’t attend to the proper process required under s 601AA; or because the business the company has been conducting fails and the directors simply walk away.  There could be unpaid employees and creditors.  While either could apply to wind up the company, there may be little purpose in doing so, and there is also the cost involved, including the need to fund a liquidator.  Similarly, directors may not bother or see it as a necessary expense to fund a formal winding up; for some, in particular, when it involves scrutiny of their corporate trading conduct.  COVID-19 may have exacerbated this.

Creditors in a difficult position

In such cases, it has been said that both

“employees and general unsecured creditors of insolvent companies, where the directors have not sought liquidation or VA, are in a difficult position. They will need to fund the company’s liquidation themselves if they hope to recover anything of what they are owed, and risk further losses if it eventuates that company has no assets. As a result, many of these creditors do nothing, and the abandoned companies are eventually deregistered by ASIC for failure to return documents or pay annual fees.

It is estimated that there are five times as many abandoned companies as there are companies in liquidation each year,[2] but the amounts lost to their creditors are unquantified”.[3]

In due course, with the company showing no activity, but with creditors and unpaid employees, ASIC will de-register it under s 601AB.  It then “ceases to exist”: s 601AD.  As much as we know from ASIC, it says it deregistered over 53,000 companies for non‑payment of review fees in 2019-2020.[4]  ASIC does not seem to keep any detailed statistics.

Default deregistration

The government has accepted that s 601AB default deregistration outcome, in effect as being a necessary consequence of insolvency operating in a private market. Even pre-COVID-19, the government said there would be an increase in numbers of default deregistered companies over time.[5]

It seems an easy option, and keeps the numbers of insolvencies down and allows the government to use more populist approaches, like new anti-phoenix laws.

The current speculation in 2021 as to why insolvencies remain low in Australia despite the impact of the pandemic often mentions the numbers of failed assetless companies just fading away.

The trouble is, it is not satisfactory from a corporate law perspective that directors are so in default of their duties, and not only that that happens, but also that we know little of the nature of these companies that disappear.

There is the ultimate right to have a deregistered company reinstated, under s 601AH, but often by then investigations are the more difficult and the lack of funds remain.

Is there a phoenix concern?

In the context of phoenix activity and director identity numbers (DINs), a 2017 submission to government[6] referred to a government research report of some years ago showing that only about 6% of companies that were deregistered went through a formal Ch 5 process.  It pointed out that

“the risk that insufficient oversight of the deregistration process may be facilitating illegal phoenix activity was identified more than 20 years ago in the ASC’s 1995 research paper into phoenix activities and insolvent trading”.

It referred to approximately 92% of Phoenix companies being deregistered under the ASC’s predecessor to s 601AB of the Corporations Act.

“Effectively the ASC is unintentionally assisting Phoenix offenders to escape prosecution and detection by deregistering the company and closing off the trail. This is particularly the case in circumstances where debts may be many, but small and no creditor action is taken to place the company under administration”.

The submission saw a

“significant risk that deregistration of Oldcos (the company left behind in a phoenix transaction) may be effectively ‘writing off’ debts to creditors and employees on a large scale, as a result of the lack of scrutiny of abandoned companies”.

The submission made a number of important recommendations, in this context one being that directors be required to also disclose their deregistered companies when the director identity legislation is implemented.  We’ll see.

The Australian government could look at the 5 or 10 times as many companies that fall off the radar by way of ASIC’s s 601AB processes; rather than passing more anti-phoenix legislation to deal with the problems well after they have occurred. And reconsider creating a government liquidator, to at least provide access to insolvency for the assetless companies which are too poor to go broke: Insolvency law failing small business – The University of Sydney.

We should not have needed a prompt from the UK, and its concerns may be different, but we will follow the progress of its new dissolution laws with interest.

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[1] The measures will be introduced under the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. They will have retrospective operation.  New powers to tackle unfit directors of dissolved companies – GOV.UK (www.gov.uk)

[2] Based on informal emailed information from ASIC.

[3] “Insolvency – It’s all About the Money” [2018] UMelbLRS 6, Helen Anderson

[4] ASIC Annual Report 2019-2020.

[5] Ex Memo to the ILRA 2015 at [9.137]

[6] Australian Government Treasury Modernising Business Registers Submission by Professors Helen Anderson and Ian Ramsay and Mr Jasper Hedges, Melbourne Law School, and Professor Michelle Welsh, Monash Business School, 23 August 2017