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.
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.
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.