ASIC’s power to wind up abandoned companies – a drop in the ocean?

ASIC has revised its guidance on the exercise of its powers to order the winding up of an abandoned company, noting that “directors sometimes abandon their companies without paying employee entitlements”: RG 242 ASIC’s power to wind up abandoned companies | ASIC – Australian Securities and Investments Commission

ASIC wound up 19 such companies in 2020-2021, appointing liquidators from a panel of 32: Abandoned Company Liquidator Panel members | ASIC – Australian Securities and Investments Commission

There are in fact many more abandoned companies that we should worry about – the 19 is a mere drop in the ocean.

ASIC’s powers

The term “abandoned” is a loose term for the many thousands of companies, perhaps more so following a change in the law some years ago, where the business folds and the owners simply walk away, leaving unpaid employees and creditors behind.  Remaining assets may well be moved over to a new business. The company will fall into default of its legal obligations under the Corporations Act and ASIC will deregister it under s 601AB.

The Fair Entitlements Guarantee Act establishes a scheme to pay employees certain unpaid entitlements on the liquidation of a company, but not if the company is merely abandoned.  ASIC’s order that a company be formally wound up therefore activates this payment process.

(It all seems odd, that one arm of government must activate an insolvency for another law, and government agency, to respond, and under a section – s 489EA – that does not refer to the rights of employees only the “public interest”).

Criteria for and cost of winding up

In any event, in deciding whether to act, ASIC lists various criteria in RG 242, including whether there is a creditor capable of applying to wind up the company.

ASIC says it does not “consider it to be the best use of government funding to wind up a company before sufficient time has passed to allow a well-resourced creditor to take action through the usual court process”; and even then, if the cost of taking winding-up action would exceed the amount of employee entitlements claimed. ASIC points out that employees may apply.

ASIC estimates its cost of taking winding-up action at about $15,000, comprising ASIC’s costs and the liquidator’s remuneration.

Putting all this in context, while ASIC ordered the winding up of 19 abandoned companies in 2020-2021,[1] in comparison, the number of companies that are deregistered as having been abandoned are in the tens of thousands, estimated at least 5 times as many – say 50,000 – that go through a formal external administration under Ch 5.[2]

As for creditors taking action, apart from the costs involved, well over 90% of liquidations produce no return for creditors.

Nevertheless, the government has a policy that the funding of the liquidation of the many abandoned companies is largely a private commercial choice for the creditors and the employees.

Creditors and employees should fund?

That’s all very well but creditors and employees are seen to be in a

“difficult position. They will need to fund the company’s liquidation themselves if they hope to recover anything of what they are owed, and risk further losses if it eventuates that company has no assets. As a result, many of these creditors do nothing, and the abandoned companies are eventually deregistered by ASIC for failure to return documents or pay annual fees”.[3]

The phoenix and other problems

That is seen as an issue of concern because those companies:

  • they may involve wrongdoing that needs investigation
  • they may have ‘victims’ who lack access or resources to the usual means of redress
  • the powers of ASIC have “proven to be inadequate to tackle the problem”
  • these companies may continue to operate to the detriment of many. [4]

Importantly, they can facilitate harmful phoenix activity. The potential for this was advised to the government over 20 years ago, that is, harmful activity of abandoned companies “that is likely to go undetected because they are not the subject of much regulatory scrutiny”.[4]

The normal political response followed of passing a series of laws to “combat” phoenix activity, without addressing the underlying issue.  The director identity number (DIN) will assist, although laws to ensure beneficial ownership of companies are still a way off.

International – the insolvency of assetless MSEs

Australia was recently re-elected to UNCITRAL – the trade law association of the UN – and was involved in the issue of international guidance on the particular issues that need to be addressed in dealing with the insolvency of MSEs.  The particular guidance on the question of abandoned companies with insufficient assets is useful – based on two different principles:

  • one, that to allow such companies to disappear without inquiry “does little to ensure the observance of fair commercial conduct or to further standards of good governance of commercial entities”, such that for example the transfer of assets with no fear of investigation can lead to a perception that such abuse is tolerated; but also
  • two, that a business owner should have ready access to a discharge and fresh start from a failed business as a means of encouraging entrepreneurial activity and responsible economic risk-taking.  And at least putting some order and accountability in closing down the privileged limited liability process which they used.

Regulation?

None of this should be seen as excluding the need for duties of company owners to be better regulated.[5]

But with the ‘opportunity’ element of the misconduct being much in company owners’ favour, ‘tough’ regulation some time later will likely be ineffective, apart from being resource intensive.  Nevertheless, the legislature passing another law telling people to stop doing wrong things will probably happen, rather than putting in place a formal and structured process of review of such companies, using AI and other mechanisms, so that we at least know what regulatory law reform, if any, we need.

Next

This is one of a number of issues of insolvency law reform being discussed and solutions offered in a new book by myself and Professor Jason Harris: The Rebuilding of Australian Insolvency Law, Edward Elgar Publishing, 2023.

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[1] ASIC Annual Report 2020-2021. 21-193MR ASIC action assists employees of abandoned companies to access almost $450,000 in employee entitlements | ASIC – Australian Securities and Investments Commission

[2] Insolvency, it’s all about the money, [2018] U Melb LRS 6, Anderson

[3] Phoenix Activity: recommendations on detection, disruption and enforcement February 2017, Anderson et al.

[4] Phoenix Activity Recommendations on Detection, Disruption and Enforcement, February 2017

[5] See for example The plight of a creditor of a deregistered company (2022) 39 C&SLJ 73, RI Barrett

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