Obvious as it is to say, insolvency involves limited or no money, and how to fund its existence as a legal regime is an issue in many countries. An American academic has offered some ‘KISS’ thoughts based on a review of a number of countries. A comparative explanation of how Australia operates is given.
This commentary was first issued in January 2020. It is updated and re-issued in January 2023 as being relevant to any root and branch review.
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The financing of personal insolvency is the subject of a recent international review from Professor Jason Kilborn in the US: Fatal Flaws in Financing Personal Bankruptcy: The Curious Case of Russia in Comparative Context.[1]
The paper surveys the various approaches to funding personal bankruptcy institutions in Europe and Russia, and the US and Canada, though not Australia or New Zealand.
While he focuses on personal insolvency, the issue exists as much in corporate insolvency.
The following shows how the Australian system works for low or no asset insolvencies.
Bankruptcy
Debtors
A debtor can go bankrupt voluntarily quickly and without formality with no red tape or other impediment. In fact voluntary bankruptcy can now be done on-line.
Australia once toyed with a $200 filing fee for a debtor to go bankrupt, but the politicians reacted badly, and it did not proceed. This is despite the £680 [2023] fee in the UK, and, as we will see, the high ‘fee’ in Australian corporate insolvency.
Creditors
A creditor pursuing bankruptcy against its debtor suffers from high process, legal, and court and search fees, and then the limited likelihood of any dividend. The government says it expects creditors to fund the public process of insolvency, including the investigation and reporting of offences.
But the existence of a government trustee – the Official Trustee in Bankruptcy – at least means that neither the debtor nor the petitioning creditor need given any assurance of payment of the trustee’s fees.
The reasons for the bankrupt estate being assetless can be many and varied, including that the debtor transferred their assets out of their name before bankruptcy. A trustee will need funding from creditors, or elsewhere, to bring recovery proceedings, with many a hurdle in actually netting the creditors any reasonable dividend.
Corporate
Directors
A director or shareholder can voluntarily put their Australian company into liquidation but only after addressing some private sector red tape and other impediments.
Compared with the once proposed $200 filing fee in bankruptcy, Australian politicians don’t react badly to what can be a high fee in corporate insolvency given that Australia does not have a government liquidator – like the UK and NZ.
Options available
On the other hand, Australian private enterprise competition can keep the fees low.
Some no asset liquidation packs offer a guarantee to the directors that the only ‘fee’ for which they will be liable for is the set fee, assisted by streamlined computer-based processes; with offers that if the directors find a cheaper quote from another adviser, it will be ‘beaten’.
But necessarily and properly, these ‘packs’ come with a warning not to deal with a less than reputable adviser.
A director may of course choose to do nothing, as the government has contemplated, with what is said to be the 50,000+ assetless companies being deregistered each year without regulatory review, compared with the 7,000 companies [2023] going through the rigours of insolvency review.
Creditors
But a creditor in corporate insolvency suffers not only from high process fees, legal, and court fees, and then, the limited likelihood of any dividend – as in personal insolvency, but also the requirement to fund the liquidator. The government says it expects creditors to fund the public process of insolvency.
As in personal insolvency, the reason for the company being assetless may well be that the director instructed their lawyer to have all the insolvent company’s assets transferred to the director’s spouse under a family law agreement, with the lawyer duly obliging.
As with a trustee, a liquidator will also often need funding from creditors, or elsewhere, to bring recovery action.
Some comments
In his international review, Professor Kilborn raises issues concerning high processing costs including lawyers’ and trustees’ fees, hurdles in proof of insolvency, low fixed fees, and other issues.
The closest jurisdiction to Australia appears to be England which
“represents a transition, taking a hybrid approach, with mostly central control, but decentralized funding via user fees, essentially relying on a large cut of big business assets to subsidize low-value cases and ensure that the user fees, while substantial, are not as prohibitive as those in Russia”.
But Russia offers some parallels with Australia:
‘[w]orse yet, Russian trustees … can and do refuse to take low-value cases for the official fee of 25,000 rubles (about US$1000 PPP), leaving many debtors without access to the procedure for the ironic reason that they can’t afford to fund their own bankruptcy …
Russian private lawyers have stepped into this breach. But they have done so by ‘combining services with trustees in an unregulated market for bankruptcy access, costing a minimum of 100,000 rubles (about US$4000) and for any but the simplest of cases, much more than that’.
Private enterprise often finds a way.
Three takeaways
Professor Kilborn offers three takeaways, as paraphrased:
- Successful decentralized system funding models today seem to rely on large-asset business cases. Personal bankruptcy is not self-funding, and building that system separate from the business bankruptcy system, he says, is asking for funding trouble.
- It is not sensible to rely on personal bankruptcy trustees who can freely refuse cases. Either implement an industry norm of accepting low-value cases for an agreed/regulated affordable single fee or require trustees to take on low-value cases in exchange for the monopoly privilege of administering large-value business cases. Or, I would add, have a government trustee.
- Finally, he says the key to both of the foregoing is the classic business mantra: KISS – keep it simple, stupid! with a minimum of formality, with allowance for routinization, cost-reduction, and affordability. I would add that a streamlined liquidation process has been raised as an option in Australia but has not been pursued [as at 2020].
Kilborn says that the KISS approach
‘should not be limited to low-debt cases, as in the English DRO approach,[2] but to all cases not presenting the level of complexity seen in large corporate bankruptcies around the world. Too much heavy-handed regulation of trustees or complex administration, and it’s no longer worth it for trustees to engage. This results in a lack of access by the people for whom the system is designed, as Russia demonstrates’.
He finally asks in his introduction ‘how much complexity is worth it? Why make debtors pay for relief that ultimately benefits society?’ and whether ‘we should rethink the entire funding structure’.
These are worthy questions of any root and branch review of the Australian insolvency regime.
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[1] Professor of Law, University of Illinois at Chicago, UIC John Marshall Law School. Oxford Business Law Blog, January 2020.
[2] Debt Relief Orders (DROs) are a means of UK debtors discharging total debts of under £20,000 in one year.
