Company deregistrations for failure to return statutory forms and pay fees have increased from nearly five times the number of companies liquidated in 2016 to thirteen times in 2021. Speculation as to the reasons should be followed up by closer investigation.
ASIC has released annual data on the deregistration of companies under s 601AA and s 601AB of the Corporations Act, seeking to discount speculation that the impact of COVID-19 led to an increase in companies simply being de-registered rather than being wound up during the pandemic.[1]
The data covers 2016 to 2021 and shows for example that during 2020/21, 80,735 companies were deregistered under s 601AA and 52,368 under s 601AB, compared with 85, 061 and 52,973 in 2019/20.
Oversight of the deregistration process
Now that this data from ASIC is available, it will assist in following up on earlier research, up to 2016, that compared the number of annual company de-registrations with windings up, suggesting two things, one, that some insolvent companies could not afford the liquidators’ fees in a winding up; and two, that many deregistered companies were potentially by products of phoenix activity. A concern was expressed about a lack of regulatory oversight of the company deregistration process.
Going back to 1995, the need for that oversight was raised in an ASC research paper into phoenix activity and insolvent trading, which estimated that over 90% of phoenix companies were being deregistered by the default process under what is now s 601AB of the Corporations Act.
“Effectively the ASC is unintentionally assisting Phoenix offenders to escape prosecution and detection by deregistering the company and closing off the trail. This is particularly the case in circumstances where debts may be many, but small and no creditor action is taken to place the company under administration”.[2]
That research was later developed by the Melbourne University Phoenix Research Team[3] led by Professor Helen Anderson which involved a major examination of unlawful phoenix activity of which deregistered companies were an element. It relied upon ASIC statistics up to 2016. These later statistics post 2016 from ASIC will add to the existing research in this area.
The Melbourne team reported that in 2016 there were
“about 37 600 companies deregistered by ASIC each year for failure to return forms and pay fees. This is nearly five times the number of companies liquidated…”
As to these latest figures, there were 3941 windings up in 2020-2021 and 52,365 default de-registrations, which is thirteen times the number of companies liquidated.
Government policy?
This accords with a scenario acknowledged back in 2016 when the government removed the old official liquidator role, with its obligation to take assetless appointments. The Explanatory Memorandum to the Insolvency Law Reform Bill 2015 contemplated that creditors of an assetless insolvent company would have to fund a court appointed liquidator themselves and if not
“this may mean a reduction in the number of assetless companies liquidated as corporate insolvency practitioners would not be expected to commence such administrations without some form of guarantee or where they do not believe they are likely to be remunerated”.
As to voluntary liquidations, the government considered but did not proceed with proposed reforms, one being to provide access to government funded liquidators on a cab rank system for voluntary liquidations of low or no-asset companies, the other to establish a government liquidator to conduct a streamlined liquidation with the option of appointing a private registered liquidator if circumstances warranted it.
Why?
In the end result, nothing changed except the removal of the official liquidator role. In light of the government’s market based expectation expressed in the Memorandum, the numbers of s 601AB default deregistrations seem to have increased as expected, from 37,600 in 2015-2016 to 52,365 in 2020-21. Some reasons for this are suggested by Professor Anderson:
- as to the position of creditors, “ … both employees and general unsecured creditors … are 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”.[4]
- as to directors walking way from an assetless failed business, “being a good citizen and voluntarily winding up a company involves extensive paperwork, liquidator costs and the payment to ASIC of a fee. Abandoning the company means ASIC removes the company with no costs and no repercussions. It is, therefore, perhaps not surprising that so many companies are abandoned”: Anderson, Helen — “Illegal Phoenix Activity: Practical Ways to Improve the Recovery of Tax” [2018] SydLawRw 10; (2018) 40(2) Sydney Law Review 255 (austlii.edu.au)
Systemic problems?
Professor Anderson also wrote that any lack of oversight by ASIC of deregistered companies raises the risk of
“deregistration becoming the ‘black hole’ of directors’ misdeeds and unpaid debts, and through phoenix activity or otherwise. … ASIC provides no statistical data about involuntary deregistration”.[5]
In the end, the director identity number, initially proposed by Professor Anderson several years ago, should address most of the difficulties in ASIC and others tracking deregistered companies. As to those difficulties, ASIC’s article refers to two convictions for what it says are breaches of s 601AA; and apparently none under s 601AB.
The ASIC data is no doubt useful in responding to the speculation to which it refers and it prompts further inquiry and research.
That is being pursued by Professor Jason Harris and myself, apart from any others. An outline of our focus and concerns is contained in the enclosed article in the latest Insolvency Law Bulletin: Rebuilding the structure of the Australian insolvency system — (2022) 22(1&2) INSLB 14; see also chapter 1 of Keay’s Insolvency, 11th ed, 2022.
Comments are welcome.
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[1] Is ASIC deregistering more ‘abandoned companies’? What the data shows, (2022) 34(2) ARITA J 40, Thea Eszenyi.
[2] Modernising Business Registers, Submission to Treasury by Professor Helen Anderson, Professor Ian Ramsay and Mr Jasper Hedges, Melbourne Law School, and Professor Michelle Welsh, Monash Business School, 23 August 2017
[3] Regulating Fraudulent Phoenix Activity, Australian Research Council Discovery Grant of over $422,000. Regulating Fraudulent Phoenix Activity (unimelb.edu.au)
[4] Anderson, It’s all about the money. (2018) 46(2)Federal Law Review 287-312
[5] The Protection of Employee Entitlements in Insolvency, H Anderson, Melbourne University Press, 2014, at pp 94-95.
