In order to assist in understanding each report, this explanation is provided.
AFSA comes under the Bankruptcy Act and the authority of the Attorney-General, ASIC comes under the Corporations Act administered by the Treasurer. The government Official Trustee administers most bankruptcies, with around 200 private trustees conducting about 15% of estates. Bankruptcy lasts at least 3 years. Around 600 liquidators conduct all corporate insolvencies; there is no government liquidator for low/no asset corporate failures. ASIC and AFSA are required to co-operate with each other in relation to the regulation of practitioners if the practitioner in question is both a trustee and a liquidator, as most are.
Most insolvencies are in the small business sector. Small business reforms to personal insolvency law, including to reduce the 3 year + period of bankruptcy to one year, first announced in 2015, have not proceeded. Small business corporate restructuring reforms were introduced at the beginning of 2021 but have thus far not had significant usage. Most small businesses are sole operators or otherwise assume personal liability. The Australian Taxation Office is a significant driver of insolvencies. Relevant courts are the Federal Court and the Federal Circuit and Family Court for personal insolvency, and the Federal Court and the State Supreme Courts for corporate.
Changes to the obligations of regulators to report on their performance commenced on 1 July 2021, with some transitional arrangements allowed: Regulator Performance Guide and supporting material | Deregulation (pmc.gov.au)
Hence, while each of ASIC and AFSA oversight Australia’s insolvency system, it is difficult to reconcile their different approaches. Here is a review of ASIC’s. AFSA’s corporate plan is linked below.
ASIC’s corporate plan is elaborated upon on its website: ASIC’s priorities for the supervision of registered liquidators in 2022–23 | ASIC.
ASIC says that it recognises that liquidators “faced challenges during and after COVID, including historically low numbers of insolvency appointments coupled with staff and resource challenges”. Unfortunately, it notes that the economic environment is again changing, and insolvency appointments are increasing.
Its work in 2022–23 is focused on three main areas:
High-risk liquidators and behaviours
ASIC’s use of the term “high-risk liquidators” is rather alarming. In the professions, the term risk usually refers to the nature of the client’s circumstances – being it medicine, law, accounting or mining; not, as ASIC uses the term, as a descriptor of potentially bad conduct of those regulated. Who are they and what action is ASIC taking?
In any event, ASIC then goes on to elaborate on these high-risk liquidators in the key areas of:
Competency: (which ASIC merely refers to as “compliance”), of which it has seen “significant failures” over the last year. This is said by liquidators to be in part because of loss of experienced staff, failure to maintain precedents and/or the liquidator has changed firms and no longer has the same level of support in either systems or precedents. ASIC says it can direct the liquidator to lodge documents; if there is no compliance ASIC can take further action, subject to AAT review.
This really does emphasise the compliance focus of insolvency practice, or ASIC’s view of it.
Remuneration: ASIC acknowledges that low numbers of jobs, and reduced asset realisations may have put pressure on liquidators to maintain levels of fees, [which would be difficult]. ASIC says it is monitoring excessive or inappropriate remuneration. It would be useful if ASIC were to also monitor what appears to be excessive unfunded work done by liquidators, including on behalf of ASIC. In personal insolvency, a review by AFSA showed that for a particular year, over 30% of finalised estates were unfunded.
Independence: ASIC now uses a “natural language processing (NLP) solution to identify independence risks”, using automation and machine learning to search all declarations of independence as they are lodged with ASIC. The “machine” flags “high-risk” declarations for review. There would need to be a review of the red flags by lawyers given the developing nature of independence law: see for example GD Pork  WASC 428.
Supporting liquidator investigations via the Assetless Administration Fund (AAF)
ASIC assists liquidators with funding from the AAF to carry out investigations and produce reports, or to take action to recover assets when serious misconduct is suspected. Its focus areas are illegal phoenix activity, the protection of consumers and investors from harm, recovery actions in particular those linked to misconduct and providing guidance on AAF funding requests.
Improvement of ASIC’s data, analytics, technology capabilities and reporting
ASIC has increased its focus on collecting and analysing data to identify those high-risk liquidators. Importantly, this data will allow ASIC to “report on the profile of corporate insolvency in Australia, including reporting to government to support government policy formulation/decision making regarding corporate insolvency”. During the year ASIC says it will improve data available through its insolvency statistics.
This is important. While much of insolvency data will soon come from the Australian Business Register (ABR) managed by the ATO, there is some core ASIC data that will assist in work being done by myself and Professor Jason Harris in finding out for example, the nature and extent of companies avoiding the insolvency process. Only recently, ASIC filled in a gap existing since 2016 as to the proportion of companies deregistered by default compared with the number of companies administered under Ch 5 Corporations Act, confirming concerns as to possible misuse of the process for phoenix activity: Oversight of deregistered companies – Murrays Legal.
The extent of unfunded work done by liquidators is another area where ASIC’s statistics could assist, mentioned earlier. And while liquidators appear to have an effective array of recovery rights, how much the exercise of those through litigation produces any real returns to creditors, when costs are extracted, is another area of inquiry; bearing in mind also that pursuit of litigation that may serve to recoup a liquidator for unfunded work is legitimate.
This is the corporate plan of the personal insolvency regulator, AFSA.
Maybe of more relevance is its compliance plan 2022-2023: Compliance program 2022–23 | Australian Financial Security Authority (afsa.gov.au)
AFSA explains the three areas it will focus on in its compliance program:
- one, to support at-risk users, using “risk” in a different way to ASIC;
- two, to make compliance the easiest option, mirroring the focus on compliance of ASIC. This will involve a “deep dive” into the bankruptcy forms and objections to discharge etc; and
- three, to address misuse in and of the system including to “proactively target Official Trustee administered estates where assets and income may have been concealed or disposed [of]”.
ASIC and AFSA
AFSA and ASIC have a joint data matching program Data Matching Program with AFSA | ASIC allowing notification about directors who have become bankrupt; and a memorandum of understanding: 14-259MR ASIC and AFSA announce refreshed memorandum of understanding | ASIC