Fast-tracking insolvent assetless companies through a default de-registration process was introduced, in effect, by the Insolvency Law Reform Act 2016 (ILRA).
In removing the arcane obligation of an official liquidator to work unfunded, the government said that it would be up to creditors to fund an assetless liquidation, or, if not, then “this may mean a reduction in the number of assetless companies liquidated …”.[1]
The main option of those insolvent companies is to simply be deregistered by default.
That approach seems to have been promoted by ASIC at a recent parliamentary inquiry,[2] in the context of the CODID-19 crisis and the anticipated large number of insolvent businesses.
ASIC said that it will be “putting a little bit more focus” on issues like “insolvency, insolvent trading, phoenix activity and those sorts of things”, but at the same time it is explaining to the community that a formal winding up may not be necessary. ASIC told the committee it is
“putting out a lot of information to businesses about what it takes to orderly close and wind down a business so that they don’t need to have external administrators appointed at the winding up of that business. …”.
As ASIC explains on its website, an insolvent company can’t simply be de-registered,[3] but the default process offers a way, as the government anticipated under the ILRA 2016.
Given that 2016 change in the law and policy, one would have thought there would be statistics on any increases in deregistered companies. But a problem exists, as Professor Helen Anderson writes, that ASIC stopped reporting on the numbers of involuntary de-registrations some years ago.
The numbers?
From what we have, it is a large figure to start with. In 2014-15, of the 112,714 companies that were deregistered, only 6.2% or 7,044 companies were first formally wound up under Ch 5 Corporations Act.
Of the remaining companies, 42,059 were deregistered at ASIC’s instigation under s 601AB of the Act, around 90% by default – failure to respond to a return of particulars, lodge documents and carry on a business, or for non-payment of fees: see ASIC’s Information Sheet 10 (INFO 10), April 2016.
A problem?
These figures come from a 2017 submission to government.[4] The submission refers to the fact that companies that are deregistered by default are not subject to the scrutiny of a liquidator and that there may be unpaid taxes and unpaid employee entitlements among them.
As the authors say,
“the risk that insufficient oversight of the deregistration process may be facilitating illegal phoenix activity was identified more than 20 years ago in the ASC’s 1995 research paper into phoenix activities and insolvent trading … ‘it would appear that approximately 92% of Phoenix companies are deregistered under the ASC’s section 574 program …’”.
The submission then goes on to make suggestions as to law reform, which may or may not have found their way into the new director identification number laws: Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 .
Liquidation or deregistration
Formal liquidation, mostly on the ground of insolvency, is essentially privatised; that is, it is activated only by the debtor company or by a creditor – and this happens to the 6.2%.
If neither takes action – and neither the debtor nor the creditors may have the funds or interest to do so – the company will remain insolvent but may be deregistered by default. That appears to be the government position.
This process is subject to ASIC’s various powers, one being to ‘order’ the winding up of what is termed an ‘abandoned’ company, simply to activate a mechanism so that their employees can access the FEG. In 2014–15 ASIC wound up 31 such companies – a drop in the deregistered companies ocean.
One could therefore say that of the 112,000 companies deregistered annually, most of the 6% that go through insolvent liquidation receive too much attention from ASIC and the law, and an unknown proportion of the 94% that disappear by default, too little attention.
As an expedient response to the closure of many corporate businesses in the wake of the virus crisis, ASIC seems to be saying that an “orderly close and wind down” can simply proceed by way of default deregistration, without oversight. Let the creditors pursue matters as they wish.
Given the COVID-19 impact, that proportion of deregistered companies will probably increase – 97%?
All this has been well explained by Professor Anderson and others in their work on phoenix misconduct. She has described the consequence as the large pool of deregistered companies being a
“likely black hole of director misconduct and unpaid liabilities”.
As to the fact that their numbers are not recorded, she suggests that perhaps
“the only reason there is not an outcry over these companies is that no-one knows the extent of what they conceal”.[5]
That is more the case given that, as the law says, the companies have ceased to exist: s 610AD.
The public interest?
In the end, from a public interest perspective, business closure is much about risk management, and assessment of risk requires disclosure and transparency, of which we have little. That the process is dictated by default determined by whether the insolvent company has the money to have itself wound up is poor policy; one often adopted through financial necessity by developing countries with less supported insolvency systems.
[My final paragraph remains under construction … words are failing me].
[1] Ex Memo ILRB 2015 [9.137]
[2][2] PJC – Oversight Of ASIC, the Takeovers Panel and the Corporations Legislation No.1 of the 46th Parliament (Public), 15 July 2020.
[3] “We cannot deregister the company if it owes money, or if it is insolvent”.
[4] Treasury Modernising business registers, Submission by Professor Helen Anderson, Professor Ian Ramsay and Mr Jasper Hedges, Melbourne Law School, and Professor Michelle Welsh, Monash Business School, Monash University. 23 August 2017.
[5] The Protection of Employee Entitlements in Insolvency, MUP Academic, 2014, 185-186, Helen Anderson.
2 Responses
Great article Michael.
Thanks, more to come, I think.