“ … the state is, effectively, paying insolvency practitioners to end the life of small companies … a sub-optimal solution ….”
“the standard liquidation process in NZ is simpler and more streamlined than the Australian simplified liquidation process. The new Australian procedure provides no useful model for NZ”.
“the statutory regime under the [NZ] Companies Act favours allowing liquidators to make decisions which they, as the persons appointed to exercise these responsibilities, are better qualified than the courts to make.”
International comparisons can be very useful in law reform, even if at an elevated level such that non-relevant differences in detail can be accommodated.
Two recent articles from opposite side of the globe – Scotland and New Zealand – are instructive for Australia’s insolvency law reform tasks following the July 2023 PJC Report on Corporate Insolvency.
Small and State Funded: An Empirical Study of Liquidations in Scotland[1] concludes that most of Scotland’s liquidations have no or limited assets such that the costs of the liquidations leave no funds for creditors; and that the state, the government revenue service, steps in and winds up companies and funds liquidators. The authors – Jonny Hardman and Alisdair MacPherson – call for either a cheaper and more streamlined liquidation process, or an official receiver’s office, or both.
In A comparative analysis of the Australian and New Zealand liquidation schemes [2] Professor Lynne Taylor explains in particular how NZ’s streamlined liquidation process might be worth considering in Australia.
Scotland
The authors undertook surveys of liquidations upon which to base their empirical findings. In one sample of 505 companies, the average total amount of assets per insolvent estate was only £48,138.64.[3]
Of those 505,
- 8% had no assets at all,
- 4% had average total assets between £0.01 and £4,999.99,
- 6% had total assets of between £5,000 and £49,999.99;
- 4% had assets of £50,000 and over.
As expected, the data showed that the smaller a company, the greater proportion of its assets would likely be used to pay insolvency expenses.
- For the 17.4% of companies with total assets under £5,000, almost all assets were used to pay insolvency expenses.
- For the next category, up to £50,000, this dropped slightly to 92.25% of compulsory liquidation assets, and 86.35% of CVL assets, still dwarfing the rest of the estate.
- Even in the highest category, the 18.4% with gross assets of over £50,000, the average amount of the estate swallowed by insolvency expenses was 53.67% of compulsory liquidation assets and 52.37% of CVL assets.
Assetless estates
The authors saw Scotland as a useful jurisdiction for study as there is no corporate state-backed public official to fulfil the same role as the official receiver does in England.
They explain that a creditor seeking to appoint a liquidator will often have to agree to underwrite the liquidator’s expenses if it transpires that there are insufficient assets to pay for them, otherwise the insolvency practitioner will simply refuse to accept the appointment.
But while there is no state official receiver, it seems that the state nevertheless plays a considerable role in liquidations in Scotland, through HMRC as the tax authority and as a creditor. HMRC[4] petitioned for the liquidation of 55% of compulsory liquidations within the authors’ dataset. It also contributed to the insolvency expenses of 100 companies, being over half of those which the state petitioned to have liquidated. In sum, the state was financially supporting 31.2% of compulsory liquidations within the sample.
According to the authors, this demonstrates that in Scotland there is significant state involvement in practice but in a less formalised way than exists in English law due to the role of the official receiver.
“A body of the state acts as a creditor to enforce its rights to put the company into terminal liquidation, especially in smaller companies, and then pays a private party to undertake the insolvency process”.
“The lack of a streamlined insolvency process in Scotland means that the state is, effectively, paying insolvency practitioners to end the life of small companies. This is a sub-optimal solution ….
We propose that our data indicates that at least one reform is drastically required: either the introduction of a streamlined insolvency process for smaller companies, or the creation of a Scottish equivalent of the official receiver, or both”.
“It is time to put the state’s involvement onto a formal footing that avoids the diversion of funds from the state to private parties”.
The authors suggest that the Accountant in Bankruptcy, a Scottish government agency and statutory official broadly equivalent to the Australian Official Trustee, may be considered best placed to take on an equivalent role in relevant insolvent liquidations, although other bodies could also feasibly undertake such a role.
New Zealand
Professor Taylor’s article is timely in that NZ insolvency law generally has much to commend in any reform of Australia’s highly regulatory approach. The PJC heard from Professor Taylor and reported on aspects of NZ insolvency law. It recommended that reforms to Australia’s simplified liquidation processes be assessed.
While Australia introduced a small corporate business restructuring regime in 2021, including a simplified liquidation process, Professor Taylor’s conclusion is that
“overall, the standard liquidation process in New Zealand is simpler and more streamlined than the Australian simplified liquidation process. The new Australian procedure provides no useful model for New Zealand”.
In contrast to Australia, the New Zealand scheme provides a single process for all liquidations, no matter how they commence.
She also contrasted the extent to which Australian liquidators are regulated and must seek court or creditor approval. In NZ, there is less supervision and control of liquidators, by the court, and by creditors.
Given that most liquidations are in the SME category, she comments that the comparatively reduced supervisory role for the court and creditors in NZ, when combined with a co-regulatory regime under NZICA and RITANZ, might better address the reality that many SME creditors have little incentive to engage in the liquidation process because of the limited pool of assets available to meet their claims. That is a reason Jason Harris and I have given why reporting requirements to creditors, and the cost involved, could be reduced.[5]
Australia, in contrast,
“intentionally increased creditors’ oversight of and powers in relation to liquidators and liquidations, and this was combined with the retention of the court’s jurisdiction to approve the exercise of certain liquidators’ powers. The larger role and powers of the court and creditors in Australia are combined with greater investigatory and enforcement powers vested in ASIC”.
She said that the difference in the role of court in New Zealand from that in Australia was summarised in Levin v. Lawrence:
“the statutory regime under the Companies Act favours allowing liquidators to make decisions which they, as the persons appointed to exercise these responsibilities, are better qualified than the courts to make.”[6]
Professor Taylor also examines the issue of assetless estates and concludes that “neither country deals effectively with assetless companies and the issue of liquidator remuneration…”.
It should be noted that NZ has a government liquidator, the Official Assignee (OA), supported by a private regulated profession. But, uniquely, the OA is the sole trustee in bankruptcies, based on a policy view that bankruptcy should not be the subject of service for profit.
Comment
The Scottish comments might well have been made about Australia; in fact, broadly, they have been. Jason Harris and I have raised similar issues, based on similar statistics, and analyses, in relation to corporate insolvency in Australia, with a recommendation for an official receiver.[7] And New Zealand is a useful jurisdiction for other SME reforms we are considering.
Since then, the July 2023 PJC Report on Corporate Insolvency has addressed the issues, and recommended consideration of “the merits of creating a public liquidator for corporate insolvency”: [18].
The PJC Report noted the opposition to the idea on costs grounds, and the Scottish authors report a similar response in the UK. But as they say “the public are bearing the cost anyway, through imperfect mechanisms”.
Among other issues we have raised in Australia, including by the PJC, one is the large number of companies deregistered (dissolved) by default – several times more than are formally wound up. The reason for this, it is argued, is that the directors cannot afford to put their companies into liquidation, nor can the creditors. At the same time, there are indications that the deregistration process may mask unlawful conduct and it is contrary to international best practice.
This contrasts with the excessive attention given to liquidations for which streamlining and other costs efficiencies are required. This extends to the reporting requirements imposed on Australian liquidators.
Another issue in Australia, also briefly referred to by the Scottish authors, is the extent to which private insolvency professionals are performing public interest work on behalf of the state, for which creditors are paying. The approach to clarifying those respective responsibilities in insolvency has been explained as being that
“private functions should be performed by the private sector and paid out of funds otherwise available for distribution among creditors, while public functions should be performed by public officials and paid for out of public funds …”.[8]
And yet another issue is that unfunded work done by IPs on limited or no asset estates is unfairly cross-subsidised by larger estates and their creditors. The PJC has recommended [13] that this issue be further examined, including as to the extent to which public interest work carried out by liquidators for no or limited pay is sustainable and the impact of that on all stakeholders in external administrations.
Conclusion
Both the Scottish and the New Zealand insolvency law articles give many ideas for Australian law reform under the proposed comprehensive insolvency law review.
===========================================================
[1] ‘Small and State Funded: An Empirical Study of Liquidations in Scotland Small and State Funded: An Empirical Study of Liquidations in Scotland’, Forthcoming in the International Insolvency Review, 22 Pages Posted: 25 Sep 2023, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4558695&dgcid=ejournal_htmlemail_bankruptcy%2C%3Areorganization%3Acreditors%3Aejournal_abstractlink
[2] A comparative analysis of the Australian and New Zealand liquidation schemes – Taylor – 2023 – International Insolvency Review – Wiley Online Library
[3] 1 Pound sterling equals 1.91 Australian Dollars.
[4] His Majesty’s Revenue and Customs
[5] Rebuilding the structure of the Australian insolvency system’, Mr Michael Murray and Dr Jason Harris (2022) 22(1&2) INSLB 14 at 16
[6] Levin v. Lawrence [2012] NZHC 1452, [54]
[7] ‘Rebuilding the structure of the Australian insolvency system’, Mr Michael Murray and Dr Jason Harris (2022) 22(1&2) INSLB 14; ‘Centring debt justice in insolvency reform’, Salman Shah, (2023) 22(5) INSLB 64.
[8] P Heath, Insolvency Law Reform: The Role of the State (1999) NZLRev 569
