With latest ABS data showing that Australia is primarily a nation of small business operators, largely successful, it is perhaps to timely to also report that the inevitable failure and then efficient disposal of some of them, with some accountability, is not well addressed by our laws.
While the focus of insolvency is invariably at the high end, there is also an international focus on the economic contribution of micro and small to medium enterprises (MSMEs) and likewise their turnover and re-allocation of their assets. MSMEs encompass individuals in business and small corporate entities, and trusts, with common and intersecting issues.
The insolvency of MSMEs has been referred to the insolvency group – Working Group V – of the UN Commission on International Trade Law (UNCITRAL) for its next meeting in New York from 10 to 19 May 2017.
This is in addition to the existing references of WGV on the recognition of insolvency related judgments, and on the cross-border insolvency of enterprise groups. I attended WGV in Vienna in December 2016 for UNCCA through LAWASIA to work on those two references.
WGV is asked to consider a framework to handle issues relevant to the insolvency of MSMEs, and in particular to consider whether the UNCITRAL Legislative Guide provides sufficient and adequate solutions for such entities.
WGV is to
“develop appropriate mechanisms and solutions, focusing on both natural and legal persons engaged in commercial activity, to resolve the insolvency of MSMEs. While the key insolvency principles and the guidance provided by the UNCITRAL Legislative Guide on Insolvency Law should be the starting point for discussions, the Working Group should aim to tailor the mechanisms already provided in the Legislative Guide to specifically address MSMEs and develop new and simplified mechanisms as required, taking into account the need for those mechanisms to be equitable, fast, flexible and cost efficient. The form the work might take should be decided at a later time based on the nature of the various solutions that were being developed.”
The Legislative Guide on Insolvency Law is a very useful statement and explanation of the fundamentals of insolvency law, as applied in different ways internationally.
An issue raised in Australia is the need for streamlining of the insolvency of MSMEs, which tends to occur through personal bankruptcy, but our one-size-fits-all corporate insolvency law and regime is less flexible. Consideration has been given by our Productivity Commission, academics and others to the need for a streamlined approach, but care needs to be taken in too readily allowing the deregistration of these small business structures.
The Legislative Guide gives this warning:
“73. There are a number of reasons, in particular of a public interest nature, for devising a mechanism to enable the administration of a debtor with apparently few or no assets under a formal proceeding. Where an insolvency law does not provide for exploratory investigations of insolvent companies with few or no assets, it does little to ensure the observance of fair commercial conduct or to further standards of good governance of commercial entities. Assets can be moved out of companies or into related companies prior to liquidation with no fear of investigation or the application of avoidance provisions or other civil or criminal provisions of the law”.
In Australia, of the 10,000 companies that enter formal insolvency each year, another 100,000 simply disappear off the register for inattention or disposal by their owners, a group of companies that has been described as having the risk of being “‘a ‘black hole’ of directors’ misdeeds and unpaid debts, through phoenix activity or otherwise”.
The Guide goes on to say that a mechanism for the insolvency administration of small businesses will assist in overcoming any perception that such abuse is tolerated.
“It may also encourage entrepreneurial activity and responsible economic risk-taking through the provision of a discharge and fresh start for entrepreneurs and others engaging in economic activities—the punitive and deterrent aspects of insolvency laws will be less appropriate where the debtor is honest”.
The Guide refers to examples of mechanisms for handling the insolvency of small estates as including:
· levying a surcharge on creditors to fund the administration;
· establishing a public office or using an existing office (such as ASIC or AFSA);
· establishing a fund out of which the costs may be met (for example a small levy on all company registrations); or
· appointing a listed insolvency professional on the basis of a roster or rotation system.
The lack of investigation of such companies’ affairs is one result of Australia having no ‘public office’, a government liquidator, comparable to the Official Trustee in Bankruptcy. Recent changes to the law in Australia will have a further impact, by way of the removal of an arcane professional obligation on liquidators to administer assetless companies. A consequence is the proliferation of phoenix misconduct and dubious advisers in the pre-insolvency field.
Law reform ideas for a $10 fee on company registrations to fund the handling of company failures have been rejected; the roster system of liquidators on a fixed fee basis has been raised but not considered further. The handling of small personal and corporate estates by the existing Official Trustee faces the hurdle of Australia’s legal separation between personal and corporate insolvency.
Australia is therefore de facto proceeding down a path of corporate insolvency becoming a strict commercial arrangement, where liquidators can now more readily seek an indemnity from a petitioning creditor before accepting an appointment as liquidator. Beyond that is the more privatised approach of US bankruptcy, where the right of a creditor to pursue a debtor to bankruptcy is much circumscribed.
WGV is to use some of the additional time allocated to its May 2017 session in New York to hold a preliminary discussion on how the work on this topic might be developed.
Australia is not represented at WGV, despite Australia actively seeking membership of UNCITRAL itself, and now being a member.
Any questions or thoughts about MSMEs, please contact me.
Michael Murray UNCCA Liaison Officer for WGV