Company owners and sole traders

In the government’s proposed 5 year review of the Insolvency Law Reform Act 2016 changes, one particular issue needing attention is indirectly prompted by the government’s recently proposed bankruptcy reforms.

That issue concerns non-compliant directors of insolvent corporate businesses, and the obvious disparity in their treatment with that imposed on non-compliant bankrupts. 

That disparity is increased given that, while the government introduced reforms in 2021 it said would

“reduce costs for small businesses, reduce the time spent during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses through the recovery phase of the COVID-19 crisis”,[1]

the government was only talking about Company Directors.

As to individual small businesses, in 2022, the majority of small business in Australia, the government has accepted what it is told by its “stakeholders” that the impact of COVID-19 on that sector of small business should not influence the proposed bankruptcy reforms.

Comparisons

There are several ways to make the comparison between the two types of individual, one basic being that a Company Director may ineptly run a business which fails and goes into liquidation owing creditors money, with no default or proximate legal consequence for the director; but an individual may properly run a good business until it is hit with the impact of COVID-19 and it fails, and the individual goes bankrupt, with the consequent period of legal restrictions and labelling imposed.

Obligations to provide details of assets and liabilities

But for present purposes the comparison is kept simple and is made in relation to the duties imposed on both directors and on bankrupts to provide the liquidator or trustee with a list of assets and liabilities following a court ordered winding up or sequestration.

A director must supply a list of the company’s assets and liabilities – a ROCAP, as ASIC has named it – within 10 business days: s 475(1) CA.  It is a strict liability offence: s 475(10).

Similarly, a bankrupt must prepare and file a statement of affairs within 14 days; it is likewise a strict liability offence: s 54 BA.  But there are default consequences in bankruptcy, that the 3-year period of bankruptcy does not commence until the SOA is filed: s 149. Separately, it is a ground to extend the bankruptcy: s 149D. The merits or otherwise of these sanctions are not discussed right now.

What is in issue is that while Directors have comparable duties to assist the liquidator to provide a list of their company’s assets and liabilities, the consequences are comparatively minimal.  There are certainly no default consequences. If the need is to have the director comply, the threat of prosecution at some later date is a costly and inefficient way to go.

Past proposals to regulate director misconduct

That is why there were proposals at the time the ILRA was being debated to legislatively impose at least some comparable and more effective default sanctions on non-compliant directors.  One was to impose some administrative suspension on a director who fails to comply, an option that “would seek to achieve a similar outcome as that currently provided for in personal insolvency”.

Criticisms by “company directors” included that the penalty was not proportionate to the misconduct; better court oversight of ASIC’s powers was needed, and procedural fairness; and that the proposal failed to recognise the significance of disqualifying directors.  The government accepted this, despite its view that the reform would have also assisted in regulating phoenix misconduct.[2]

In fact the government went so far as to accept that rather than the non-compliance being all the directors’ fault, the problem was the “incomprehensibility” of the RATA form that the directors had to complete.  The government undertook to review the form.  Of itself, that is generally the better way to go, as behavioural economics will tell us, but supported by back up by way of more effective sanctions.

So, in 2018, with ASIC assisted by input from behavioural economics,[3] the RATA then became the ROCAP which ASIC advised it intended to revise periodically, “with a Version 2 anticipated following industry feedback after a period of use”. Its impact on compliance rates, if any, is not yet disclosed.[4]

Meanwhile, if a bankrupt fails to file a statement of affairs, the law continues to automatically imposes a penalty, and further sanctions are available.

(What’s) The Point?

The point is, the conduct can be the same, the consequences for the liquidator and the trustee are the same, but Company Directors seem to be treated more favourably when their business fails.

A certain levelling occurs when Company Directors/owners become bankrupt through personal guarantees or tax liabilities.  As AFSA reports, 50% of recent construction industry bankruptcies included a proportion of those in business in a corporate capacity.[5]  In September-December 2021 quarter, over 37% of bankruptcies were business related.

There are more examples available of the disparity in treatment of individuals who have been involved in business failures. These can be examined when the review of the ILRA 2016 reforms proceeds. They should also be considered by the 2022 review of small business and consumer bankruptcies, where the disparity becomes so evident.

——————————–

[1] Insolvency reforms to support small business | Treasury Ministers

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

 

[3] The Impacts of Behavioural Economics on Financial Markets and Regulations Symposium (asic.gov.au)

[4] ASIC tells us that 123 persons were convicted for failing to help liquidators, which would include failing to lodge a ROCAP.  AFSA reports that failure to file a SOA is the most often prosecuted offence: enforcement_statistics_q2_21-22.pdf (afsa.gov.au)

[5]

Leave a Reply

Your email address will not be published.