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. 

Should a person be subject to restrictions after an insolvency?

The default period of restriction on a person following their personal insolvency is under consideration in Australia. It prompts the wider question whether there should be a general default period right across insolvency.   

Generally, only personal insolvency imposes a default period of restrictions as such, for 3 years in Australia, but, given what seems to be the support for such a period of restrictions to apply, there is much to be said on the grounds of fairness and consistency for a general default period across insolvency generally. But a default period of restrictions is not well based on the reasons generally given.

Those reasons are typically said to be that not having an adequate default period:

  1. does not provide adequate time for investigations into complex insolvencies, where those involved can be subject to inquiry and examination;
  2. is likely lead to significant scope for abuse by ‘well resourced’ or high-profile insolvents, who might use the process to unfairly avoid corporate or personal debt;
  3. encourages insolvency ‘recidivism’, evident more in corporate insolvency; and
  4. potentially assists in unlawful phoenixing.

The first two are arguable, if not spurious – investigations, including into abuse of the process, are not dependent on the debtor/director having some legal status, rather they may be dependent on the legal obligations of the debtor/director to assist the insolvency practitioner or to be sanctioned for failure to do so.

On the other hand, 3 and 4 may have validity, but again, not in the way generally explained.  It is the lack of any default restriction in corporate insolvency that may well encourage insolvency ‘recidivism’, with serial insolvent directorships not uncommon; and that lack might be said to even encourage unlawful phoenixing.  Serial bankrupts are not common and there are legislative means to counter those.[1]

As to there being some need to hold a person to account after an insolvency, this appears to be required more in corporate insolvency.  In fact, liquidators are said to report thousands of offences to ASIC each year, including phoenixing and insolvent trading and failure to keep records, giving more reason why some default period should apply in corporate insolvency. It appears these corporate reportings far outnumber the commission of personal insolvency offences.

The separate legal entity concept in corporate law can be raised against this.  But there are existing and necessary exceptions to that in the insolvency context – for example to prepare a statement of the company assets and liabilities and to deliver up company property and books to the liquidator. It is the inadequate and inconsistent consequences of non-compliance, compared with bankruptcy, that is in question.  There is no question of imposing personal liability on a director for the company’s debts, although insolvency law does this in other respects.

 If there are to be restrictions, what should they be?

The question would then be what restrictions or obligations should be imposed on the person during the relevant period, if any; or what compliance by the person with their insolvency obligations should be required before the period expires.

These could be set at the minimum – the completion of statements of assets and liabilities and giving assistance to the trustee or liquidator, failing which the person is restrained from defined activity.  One focus would be in respect of existing directorships of the director, or new directorships.

But this is where there is inconsistency in thinking.  While the requirement of a bankrupt to file their statement of affairs is more than effectively regulated in Australia by the potential default extension of their bankruptcy,[2] there is no default regulation of directors who likewise fail to file details of their company’s assets and liabilities.[3]

A proposal to impose at least some default sanction on such directors in the past was rejected as being too severe on their continued business activity;[4] no comparison was raised with what is imposed on a person operating a business who becomes bankrupt.

Hence, a director of an insolvent company who refuses to assist a liquidator can leave the country, obtain new credit and start up a new company any time; unless and until some action is taken.

That inconsistency needs attention.

But beyond that, the person could be ‘released’ within a short period.  They would, like anyone involved in the insolvency, remain subject to any summons or claims that might be made on them, and any on-going obligations.  Demands for money on bankrupts and directors and others, and public examinations and warrants of arrest, always remain available to both trustees and liquidators throughout the period of the administration of the estate.

 Credit reporting

In any event, if we are looking at the ‘protection of the community’, that in itself is problematic given that insolvency per se imputes no unlawful conduct. But assuming that a person’s bankruptcy or their directorship of an insolvent company is a matter of valid interest, credit reporting generally takes care of that, subject to privacy and related restrictions, and tax reporting is looming.

Again, directors have had an advantage here in that they have been able to in effect conceal their identity such that any serial liquidations are difficult to detect. That should change soon in Australia with the introduction of the director identity number (DIN); though other ruses remain available.

Behind every insolvent business is a person

A final but important point is to see this issue from a business perspective, in particular given the far-reaching impacts of the coronavirus and the need for consistent legal responses to the adverse financial outcomes. Reports from the Ombudsman’s office[5] show a mix of corporate, partnership and sole trader structures conducting micro to small to medium enterprises (MSMEs) in Australia, with companies in the minority.  As the Ombudsman says, whatever type of business fails,

“behind every number in this report is a person [and] it’s particularly important to remember this [2020] year”.

 

[1] Section 55(3AA)

[2] Section 149(2); and it is an offence: s 54.

[3] It is a strict liability offence: s 474.

[4] Explanatory Memorandum to the Insolvency Law Reform Bill 2015 at [9.325]ff.

[5] Small Business Counts, December 2020, ASBFEO. Small Business Counts report (2020) | Australian Small Business and Family Enterprise Ombudsman (asbfeo.gov.au)

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One Response

  1. It pains me greatly to acknowledge that i agree with the sentiment of the Small Business Ombudsman. Behind every insolvency is at least one person, usually more than one. This is very often forgotten.

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