Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Is the Australian insolvency system insolvent?

That is broadly the topic of a paper tentatively titled “the Australian insolvency system (in voluntary administration) – the s 439A report” soon being presented to an eminent local and international insolvency gathering.

And as with Virgin Airlines, should government support be provided, as it is in the UK and New Zealand, assuming we rate an insolvency regime at least as important as an airline?  What if, as ASIC now warns, the system does not have enough private practitioners to attend to what ASIC sees as pending high numbers of insolvencies?

In unlikely places, there is much around on which to base this paper. Apart from ASIC itself, the on-going banter between ASBFE Ombudsman and ARITA is one source.

ASBFEO and ARITA

ASBFEO has issued its COVID-19 Recovery Plan of May 2020 which includes many recommendations for change including about corporate insolvency law reform. ARITA has responded, on 3 June, in similar terms to its original response when the Ombudsman set up its insolvency inquiry in 2019.

ARITA refers to a survey of its insolvency practitioner members revealing that they, at least, forego $100 million in fees each year for work done that is unfunded; news that might well explain the continued focus on the fee rates firms use to recoup that amount, and on who pays; and on ASIC’s lament that we may not have enough practitioners.

AFSA’s recent report that over 30% of bankrupt estates are administered by trustees for free indicates a worse situation, given there is a government Official Trustee to do unpaid work.

This puts a new meaning to ASIC’s mantra of insolvency practitioners’ “improper gain” from their remuneration.

But it also means that what the Australian insolvency system costs and what it produces seems to be anyone’s guess, impeding consideration of how its resources might be better focused, or the system restructured.

What the Australian government puts into the insolvency system is even less clear, but it is certainly limited. The government’s idea that creditors fund liquidations, including the ATO, does not seem to have taken off.

Even less likely would be the government’s response to ARITA’s earlier request to grant it $150,000 to fund “clear simple English guides to insolvency for individuals and small businesses”, including the cost of designers and writers, though there is time yet; and to any request for financial support for the industry, in light of the impact on it of the economic decline.

The UK

This is not a unique problem, at least with a government agency. Media[1] reported in 2013 that

“the UK government’s Insolvency Service is all but insolvent. … ‘It is fair to say that if this [were] a company it would be in deep trouble’”.

The problem was said to be that the Insolvency Service was dependent on fees and asset recoveries from insolvent estates and their numbers had fallen. And its cost cutting was

“hamstrung by its obligation to provide services even when there is no prospect of recovering fees from bankrupt people or companies”.

The same might be said of Australia’s practitioners.

There is no suggestion that the UK 2013 problem has any parallel in Australia, which has seen a significant decline in bankruptcies in recent times, and now, with the COVID-19 reforms, a further decline in bankruptcy notices and their $470 fee, and in sequestration orders being made, and in personal insolvencies generally.

The 439A report

As to our hypothetical voluntary administrator’s recommendation in her s 439A report, like that in Virgin, some legislative changes seem to be needed from government, reducing the unfunded public interest roles of IPs, and putting them back onto government. This may be the only way to find an interested party.

A concern would be though, that if the system went into liquidation, there would be some close investigation of how the system has in fact operated, resulting in claims for insolvent trading, for over-charging estates and for breach of government duties to the community, and more.

The 439A report is in train.

[1] Insolvency Service on verge of insolvency, Financial Times, 14 March 2013

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