While the government is no doubt considering a range of options to allow the insolvency system to cope with what is predicted to be a very large number of small to medium enterprise (SME) insolvencies, it has one option that was put in place a short time ago, now needing only a few tweaks.
The option is that the ATO become the funder and overseer of these mass liquidations, with ASIC assisting.
It’s all up to the creditors
When the government’s major insolvency reforms were announced in 2016, the need for funding of SME assetless insolvencies was raised. In acknowledging that liquidators can’t be expected to do these for free, the government’s answer was that the creditors should fund them – something like user pays, or perhaps loser pays. If the creditors chose not to, then those debtor companies could simply be deregistered and, as the law provides, “cease to exist”, debts and all.
As to the detail:
- which is the largest and most common creditor in Australian business collapses? The ATO.
- And which agency oversees the company deregistration process? ASIC.
Why the ATO?
Some realities are that tax debt is by far the most common debt in business insolvencies, and SME tax debt in particular, last reported in the tens of billions. It is the main unlawful phoenix sufferer. But at the same time the ATO has the strongest authority in insolvency both as a creditor and as a de facto regulator, more so than ASIC. The ATO has long had the powers, in effect, to demand the winding up of companies – through penalty notices and garnishee orders, and those powers have been broadened over time and others added. Consistent with that 2016 government policy, it must already be funding liquidators’ assetless liquidations. The ATO also has more data tracking capacity, its use of single touch payroll (STP) will inevitably be extended and in a show of confidence in its organisational ability, it is also now in charge of the director identity notice (DIN) and related business databases.
As for ASIC, it has legal responsibility for what is estimated to be 5 times as many deregistered companies as companies entering insolvency.
The plan
An option is therefore to have the ATO take on the task of funding the liquidation of SME companies, still at the voluntary choice of the directors, but perhaps prodded by some ATO pressure. Depending on the fees offered to liquidators, a ‘liquidation lite’ would deal with the bulk of matters – enough to report to creditors, report any misconduct, with the main focus to account for and write off the debts. ASIC can monitor those businesses that seek to go by the default deregistration route. Where more investigations or recoveries are required, the ATO can fund those as being the main interested creditor in most cases; or invite others to fund. Consistent with the 2016 policy, ATO would need to fund the liquidator where it ask the court to order a winding up; other petitioning creditors would need to provide their own funding.
More?
This outline is obviously a simple journalistic explanation, for skype news and the like, to get the government’s attention. However a more considered and substantiated case will follow.
In the meantime, comment is welcome.
7 Responses
I wonder. If for appointments made during Oct 2020 – Sep 2021, the ATO volunteered to pitch in a suitable capped amount (eg 5%) of prima facie unfair preferences received by it (even if only in VA, to help fund IP or a DOCA if other creditors vote for one) and ASIC suspended all ASIC fees and charges (including free searches), it would be a big step in solving the problem. ATO would not even have to kick in the 5% if no prima facie preferences received (eg Zombie). Better to let one go into a DOCA then another 5 companies go insolvent just fighting a liquidators preference claims (to pay ASIC charges and fees to do reports hardly anybody reads). Just sayin.
Peter, yes we need that sort of thinking although I don’t see my idea as necessarily dependent on spare or conceded funds from either ATO or ASIC. Properly the funds should come from a $5? levy on each company registration, as Harmer and others suggested years ago. Certainly free access to ASIC data is needed.
I liken it to the need for a Medicare for sick or dying companies, many of which are too poor to access Medibank.
Thanks for your comments.
Michael
Would there be any concern about the ATO’s relationship with liquidators? I recall several years ago a creditors’ group challenged one of the FH liquidators because they had done a lot of work for the ATO. Not suggesting any actual independence issue here, but if the ATO becomes the main instigator of liquidations could there be a concern that those liquidators might not push hard on recoveries that might affect the ATO, would the ATO rethink potential liquidations where there is a large preference recovery implication? Personally I’d prefer to see the AAF given a funding boost so that court liquidators could automatically seek default funding without all of the hurdles currently in place. If the AAF gave every court liquidator $5k-$10k that would not be more than about $30-50m a year. Some of that might be recoverable through subsequent actions (eg make the AAF a priority creditor). The AAF could maintain a panel of liquidators who would simply be appointed on a cab rank basis. If the petitioning creditor wants their own liquidator, they pay for it.
Jason
Yes, valid point. I’m suggesting the ATO as the one with the main reason, and incentive, to fund and be involved because of its almost universal interest as a creditor and its already accumulated body of powers and access to data.
Does it soften any adverse perception that it is a government agency accountable to parliament?
But can I clarify and emphasis an important point – it is the voluntary liquidations I focus more on, that is, the assetless ones which would be rejected by private liquidators as providing no remuneration – their option is default deregistration, or the director could go bankrupt through the government Official Trustee and leave the OT to sort out the company.
That is where a government liquidator is the best option.
Further discussion needed.
Thanks.
Michael
The role of the government will probably need to increase during, and for a period after, the financial impact of Covid-19 and by extension the role of a government agency such as the ATO. Your idea of having the ATO assume this role is certainly of interest and worth exploring further. Thank you for sharing!
One concern is that the ATO is also the greatest source of clawbacks for Liquidators, primarily through preference recoveries. Can they be funder and defendant at the same time?
Mark makes a good point, particularly when another Govt Dept, FEG, is involved and demands a dividend.