If liquidators in Australia are investigating and reporting to ASIC “thousands” of breaches of the law by those involved in insolvent companies each year, most of which are unactioned, something has to change.
A major company that has been found guilty of cartel misconduct, or sale of unsafe goods, or serious tax evasion should be appropriately sanctioned by the law, usually at the instance of the relevant regulator. On paying the penalty, that is the end of it, apart from reputational, financial or other such consequences.
In contrast, a company that goes into liquidation because of a change in market conditions, or a large unanticipated liability, or inexperience of its owners, is subject to statutory investigation by a liquidator whose obligation is to investigate and report to ASIC any offence in relation to the company against any law in Australia. Section 533 Corporations Act is very broad in its terms.
According to ARITA, 10,000 of such reports are sent to ASIC each year.
This is inconsistent. The pervasive nature of the conduct of a corporate cartel instigator or a tax evader is such that there may well be breaches of other laws or other misconduct going on in the company’s operations; but the law calls for no investigation into the company generally.
Why the law, and its reporting?
Apart from the inconsistency, when any reporting said to be required by the law results in thousands of breaches being reported, we should really question the purpose of the law leading to the breaches and their reporting. As a general comment, if all businesses were the subject of on the spot breach reporting, the reporting figure would go into the millions.
Insolvency and criminality
The reason for insolvency practitioners being required to investigate conduct at all appears to lie in the historic connection of insolvency with criminality, a connection that insolvency finds hard to shake, at least in Australia.
The nature of the conduct of the liquidated company should be such that, unless some indications exist, there may well not be any breaches of any laws.
Australian Bankruptcy Act
Further, to the extent that it is necessary to have a private professional conduct any investigations at all, the Bankruptcy Act at least limits these to offences under that Act; and AFSA offers its pre-referral enquiry to assist in the process.
New Zealand’s new ss 60 and 61 provide that if a liquidator has reasonable grounds to believe that a ‘serious problem’ has arisen in relation to the company to which they are appointed, they must report it to the Registrar. If it involves the possible commission of an offence, they must report to the NZ Police or the body responsible for investigating or prosecuting the offence. The liquidator must provide further information and documents as may be needed.
A ‘serious problem’ is defined to mean offences; taking company money or property; negligence, default, or breach of duty or trust; breach of a director’s duty ‘in a material respect’; or management of the company that has materially contributed to its failure.
Significantly, the liquidator is not required to take any steps to investigate whether a serious problem has arisen.
As to the need to report at all, the issue is that it is often the creditors who pay for the liquidator’s work on this public interest obligation; either directly, or through cross-subsidisation of the liquidator’s fees.
The liquidator’s need to investigate and report was initially confined in England to directors’ criminal conduct, subject to the liquidator not having “in his hands sufficient assets of the company to enable him so to do”; far more specific and helpful than s 545 of the Australian Corporations Act. The need to investigate and report on director disqualification misconduct was introduced in 1986 through the Thatcher’s government’s general privatisation agenda and delegation to the newly created liquidators of the enforcement of corporate misconduct. But the Official Receiver has a significant and broader investigation role that is not available in Australia.
Reform in Australia
Rather than the profession and the regulator exchanging barbs over who is responsible for the supposedly unactioned “10,000 suspected cases of illegal director activity [reported] to ASIC each year”, it would be better to re-examine section 533. This could be based on precedents in other jurisdictions, and ideas beyond those in the context of a broader review as to what public investigation and reporting tasks should be expected of private professionals, the cost of whose work falls either on themselves or on the creditors.
A more confined requirement, coupled with greater regulator responsibility and involvement in the investigative and prosecutorial process, might properly be the aim.
 And related sections like s 438D
 Company Directors Disqualifications Act 1986. See Business Rescue, Carruthers and Halliday, 1998.
 ARITA Financial Recovery 2020