ARITA – the main Australian industry body representing insolvency practitioners and lawyers – has asked the government[1] for funding to enable it to address various issues in corporate insolvency highlighted by the current crisis.
ARITA raises aspects of long held concerns[2] of myself and Professor Jason Harris which we raised again this week, our views running parallel with ARITA’s but with a very different suggested outcome.
Request for funding
In essence, ARITA asks the government for
- $150,000 to fund ‘writers, illustrators and designers’ to prepare ‘very plain English, highly visual, simplified guides to insolvency’;
- a ‘massive injection’ into funding liquidators for otherwise unpaid insolvency work; and
- further funding, or a takeover, of ARITA’s law reform initiatives.
With no response having been given to its 18 March 2020 letter, ARITA then lists some requested law changes to meet the current crisis, including that insolvency practitioners be declared an ‘essential service’.
A concern about assetless insolvencies
Consistent with our concerns,[3] ARITA contemplates what it calls a ‘major uptick’ in numbers of insolvencies, but in particular assetless insolvencies.
Australia has under-funded the corporate insolvency regime over the last century, since we adopted a privatised service rather than the UK and NZ models of state co-administration. This is the case particularly in the SME sector, where the bulk of Australian businesses are found. Rather we relied on the arcane ‘official liquidator’ role to meet the reality, for example, even over 50 years ago, that 70% of court liquidator appointments were assetless.[4]
Hence, while ARITA correctly acknowledges that assetless insolvencies present a ‘particular challenge’ for us, this has been a long term issue, one that may have worsened, and which possibly may lie behind unlawful phoenix activity and tax evasion.
Australia is not alone; the problem is well recognised in all jurisdictions and is currently the subject of international guidelines for reform.[5]
As to the problems assetless companies present for practitioners, insolvency practice presents what is termed an ‘implementation gap’, between what the law says and what practitioners think or want it to say.[6] That has good and bad consequences.
As to the latter, ARITA claims that liquidators must still ‘undertake comprehensive investigations and reporting, deal with ‘myriad red tape compliance’, and meet ASIC’s data gathering requirements. It refers to its ‘research’ that ‘Australia’s 650 liquidators write off some $100 million in unrecoverable fees each year on assetless work’.
There is too much to respond to in any detail here but, repeating my earlier comments throughout this website:
- whether those obligations are now ‘imposed on liquidators’ is legally questionable.
- if not, and without being unkind, that $100m may represent either a major failure of risk management, or an overly generous pro bono effort.
The government clearly stated in 2017 that involuntary insolvencies are to be creditor funded, in default of which more assetless companies would go into default deregistration.[7] But it made no mention, nor directly does ARITA, of the limited options those unfunded companies seeking to go into voluntary insolvency.
- ARITA’s repeated claim that Australia’s insolvency regime is among ‘the most complex in the world’ does not quite bear up, even in relation to the outdated corporate insolvency regime which is the sole focus of its request for funding.
- Comments about a ‘significant sense of helplessness’ and ‘frustration and anger’ among those impacted by insolvency may well be real, though not necessarily valid, nor about insolvency as such.
- The risk of exploitation by ARITA’s often described ‘dodgy, unregulated [pre-insolvency] advisers and illegal phoenix facilitators’ remains a reality across all sectors.
- And ARITA’s concerns about the state of the industry it represents and the demands now on it are real but are comparable with others.
Finally, ARITA refers to its long-time project of a ‘law reform commission’ to conduct a ‘root and branch’ review of Australia’s insolvency regime, saying that it is now unable to fund it and asking for government support, or wholesale adoption.
‘How does Treasury fund all of this?’
ARITA properly asks this question and it suggests that a fee of $30 per company would cover the costs of all of its proposals, a revenue mechanism that has been suggested over the last 50 years or so. One near example is the NZ$1.15 company charge proposed to fund the cost of the regulation of New Zealand’s corporate insolvency practitioners.
Personal insolvency
This is enough except to point out that again, personal insolvency does not feature in ARITA’s request, probably because there is, properly, a government trustee to take on the country’s numerous – 85% – assetless bankruptcies.
But as AFSA has only just recently revealed, in the supposedly ‘assetful’ remaining 15% of bankrupt estates, trustees are unpaid in 63% of them.
And the extent of intertwined personal and corporate SME insolvencies will continue to present a significant hurdle, at least under current code standards.
The request?
Whether the 2017 government view of ARITA and the industry remains[8], further enlightened by the Streten thesis and other issues, may well be tested in this current funding request.
As to whether the request should be granted, let’s only say it is agreed that, as ARITA says, ‘the government needs to come to the party’, but rather in a substantial and realistic ‘root and branch’ way though government recognising its responsibilities in supporting the valuable role played by insolvency and its practitioners in what is now a critical time.
[1] Letter Insolvency, bushfires & COVID-19 of 18 March 2020 to the government, provided to me.
[2] From INSOL 2013 to now, including in our various editions of Keay’s Insolvency.
[3] I write only on my own behalf
[4] References available
[5] UNCITRAL Working Group V.
[6] References available.
[7] Ex Memo ILRB 2015.
[8] Ex Memo ILRB 2015
