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Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related policy and law reform, in Australia and internationally. No legal advice is offered or given.

Managing the insolvency curve – a new government role is needed?

There is expected to be a wave of businesses and individuals going into liquidation or bankruptcy despite the huge financial measures being taken by the government. These insolvencies will occur despite the recent measures limiting the rights of creditors to bring insolvency proceedings, and despite the additional safe harbour protection from insolvent trading for company directors: see the Coronavirus Economic Response Package Omnibus Act 2020.

While those changes serve the goal of avoiding unnecessary forced insolvencies, insolvency is also a protective process, for the business and the community. The changes do not stop people voluntarily availing themselves of a formal insolvency so as to leave their financial woes behind them while they focus on their more immediate needs. Voluntary liquidation and voluntary administration for companies and debtor-initiated bankruptcy for individuals will continue to operate as usual. Those insolvencies will inevitably increase and significantly.

This is where we have concerns about the capacity of our system to cope with the expected numbers without government involvement.

SMEs – too poor to go broke

Putting aside the major corporates, by far most businesses in Australia are in the small to medium enterprise [SME] sector, with a large proportion operating as sole traders. They are the businesses that are often on edge at the best of times, but that are now hugely impacted by this crisis. Many of these businesses that get into financial trouble will end up being ‘too poor to go broke’, as they won’t have the assets to pay an insolvency practitioner to manage their business’ financial affairs in an orderly external administration.

That is because of Australia’s reliance upon a private profession to administer all corporate insolvencies, with no government involvement. The profession’s expertise is available, but its members are themselves running a business and need to be paid. This reality runs headlong into the fact that SME businesses entering insolvency have few, if any, assets and creditors usually get no return out of insolvency procedures.

This is compounded by the high costs of insolvency administration, which labours under close and expensive regulation that is excessively focused on process, all under the mantra of the ‘interests of creditors’ who invariably receive nothing from it. Our corporate insolvency laws try to achieve a Rolls Royce standard of insolvency process for all, a task that they were already unfit to achieve even before the pandemic. Recommendations of the Productivity Commission in 2015 to streamline the liquidation process for SMEs were never considered.

The prospect of tens of thousands more businesses needing insolvency assistance over the next year may strain the system to breaking point, or leave many business collapses unattended.

As one of the authors has explained, our corporate insolvency system:[1]

‘is barely supported by the assets of companies that enter external administration, and certainly is not designed to produce meaningful recoveries for unsecured creditors’.

The numbers of bankruptcies will also rise. Australian has its government Official Trustee in Bankruptcy, which handles the majority of consumer personal insolvency cases in Australia, and which is supported by the private profession of some 200 registered bankruptcy trustees. The reality is that corporate insolvency is, by stated policy,[2] creditor or debtor funded.

Government liquidators

In contrast, both England and New Zealand have had government liquidators, and trustees, for over 100 years, operating side by side with the private profession, an acknowledgement not only of the fact that insolvency impacts matters of public interest but also that a government role in an inherently unprofitable industry is required. This is illustrated by the fact that the UK Official Receiver is already administering several nationally and economically significant collapses, including Thomas Cook and British Steel, along with the numerous small insolvencies. There will be more of both, and in Australia and elsewhere.

This brings us to the point made earlier, that while ordinary creditors invariably receive nothing from an insolvency, the government is often a priority creditor, and as such, recoups a good proportion of its losses through special powers given to the Australian Tax Office and special priority given to the Fair Entitlements Guarantee (FEG) scheme (which pays employee entitlements in liquidation and bankruptcy).

This raises an obvious question

‘why doesn’t the government fund the system?’

This could be done by creating an Official Receiver role in corporate insolvency, a role that has operated in Australia for personal bankruptcy for over 100 years.

An Australian Official Receiver

Building on the UK and NZ models, an Australian Official Receiver could ‘triage’ all matters according to regulatory criteria, thereby shaping needed attention to each insolvency as to the extent of initial investigations, notifications and reports to creditors, and narrow down the few matters for investigation of conduct. Those outside the criteria could be processed quickly. In most cases, the private profession would take on matters involving asset investigations and recoveries.

The existing government bankruptcy administration under the Australian Financial Security Authority (AFSA) would be ready made for such a responsibility. It was recommended by a 2010 Senate committee to take on the corporate insolvency regulation role in place of ASIC,[3] which was never accepted. The need for such a role now is heightened.

AFSA has the capacity right now, given what have been the lowest number of bankruptcies in decades; it administers personal insolvencies in what is, since 2017, a legal regime harmonised with corporate insolvency, with largely dual-registered practitioner; and many of those in business difficulties will find that they have both corporate and personal liabilities.

AFSA could have both a hands-on administration role and, given its advanced IT and risk-based regulatory approach, an important oversight and co-ordination role to ensure the processes of insolvency are best and most efficiently directed and regulated in these times of crisis.

None of this reflects on the quality of insolvency practitioners in Australia who are called upon to meet what will be high demands placed upon them. We agree with a view that, given a choice between a good insolvency regime and a good practitioner, the latter is the more important. While Australia, by any international standards, has both, we consider the regime could be improved in the way we suggest.

Michael Murray[4]

 

 

 

Jason Harris[5]

[1] Corporate Insolvency by the Numbers, Jason Harris, 27 February 2018.

[2] Explanatory Memorandum to the Insolvency Law Reform Bill 2015 [9.137].

[3] The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, Senate Economics References Committee, September 2010.

[4] Murrays Legal Commentary www.murrayslegal.com.au michael@murrayslegal.com.au

[5] Professor of Corporate Law, The University of Sydney jason.harris@sydney.edu.au

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