The Senate Economics References Committee is loading up submissions received on its reference into ASIC’s capacity and capability to “undertake proportionate investigation and enforcement action arising from reports of alleged misconduct…”. Australian Securities and Investments Commission investigation and enforcement – Parliament of Australia (aph.gov.au) The Committee reports that it has received many submissions “due to the high level of interest in this inquiry” which are being progressively published.
This reference is connected with various other inquiries into ASIC, including through the Parliamentary Joint Committee’s corporate insolvency inquiry. Corporate Insolvency in Australia – Parliament of Australia (aph.gov.au) See ASIC beleaguered – updated – Murrays Legal.
The particular gripe in insolvency is that ASIC does not act on enough reports of breaches of the law concerning insolvent companies referred by liquidators under s 533 of the Corporations Act and related sections.
While there are many criticisms and useful suggestions for change, I’m a little sympathetic to ASIC’s position as outlined in its submission.
ASIC’s reality
For one thing, liquidators need to see this in proportion of all the other conduct reports given to ASIC in its very wide brief. In its submission to the Senate Economics Committee, ASIC refers to the fact that in 2021–22,
“we finalised our consideration of 8,688 reports of misconduct from the public and the Australian Financial Complaints Authority (AFCA), 4,645 reports from registered liquidators, 1,969 breach reports from Australian financial services and credit licensees, and 1,393 reports of suspected contraventions from auditors”: [10].
Necessarily, ASIC has to have regard to priorities. These are set out in INFO 151 ASIC’s approach to enforcement | ASIC which puts liquidators’ reports in context with all the other breach reports that ASIC receives. It also sets its priorities into the future and publicises these: Australian Securities and Investments Commission.pdf at [19].
The breaches often reported by liquidators, including failure to maintain books of the company, also have to be seen in proportion. If ASIC or some agency with liquidator type powers were to check on the compliance of all trading solvent companies on any given day, I’m sure they would find reportable defects. Section 533 reports have to be seen in that context.
That is related to the larger issue of there being an assumption that an insolvency almost necessarily involves some breach of the law. While that may have been the case in much earlier times, the assumption should properly be the reverse, or at least seen in the context of varied legal compliance by all companies.
Section 533
In that respect, section 533 is ridiculously broad in referring to all breaches of any state, territory or federal law, and the law of negligence and more, in relation to the company.
Do we ask the regulators of laws other than the Corporations Act as to what action they might have taken over breaches of environmental, tax, or employment laws reported under s 533?
The section needs reform, to be narrowed down to material breaches. The arrangement whereby private liquidators pursue public interest investigative tasks at creditors’ expense also needs review.
ASIC has been responding to these issues in the PJC inquiry, for example in its submission and its response to a question on notice about s 533 and the use of AI to assess breach reports ASIC002 Automatic responses from Ai.pdf. It is difficult and unwise to be critical of ASIC rejecting liquidators’ particular reported breaches – a claim of $250,000 against directors for breach of duty and insolvent trading is one – when there might be another one hundred such breaches, each with its own degree of alleged wrongfulness. As ASIC submitted, there are always “competing priorities with reports of more substantial misconduct”. It also noted that liquidators themselves “may also address illegal phoenix activity by taking a variety of actions to seek to recover assets for the benefit of creditors, and reporting misconduct to ASIC”.
ASIC’s answer to another question on notice, responding to various criticisms of it, is also instructive ASIC001 Response to ASIC mentions and claims made by hearing participants.pdf
As to s 533 reports, ASIC says they are
“automatically triaged. We use digital tools to make an initial assessment, using a conditional logic framework that takes into account a range of different factors depending on the conduct being reported by the liquidator. We use the responses to automated questions to determine whether a supplementary report is requested from the liquidator. We also provide information from initial statutory reports made by registered liquidators to the Australian Taxation Office (ATO) to help identify illegal phoenix activity.”[87].
Proportion
A point made by Professor Jason Harris and myself is that while the current law requires close scrutiny by liquidators of companies entering insolvency under Ch 5 of the Corporations Act before they are deregistered, with thousands of breach reports lodged, there is limited or no examination of companies that simply go through the default deregistration process under s 601AA and in particular s 601AB. That imbalance needs evening up. That is not for mere consistency or tidiness reasons. Government funded academic research over time has warned that a high proportion of phoenix companies are or have been deregistered by the default process under s 601AB, “with ASIC thereby unintentionally assisting Phoenix offenders to escape prosecution and detection by deregistering the company and closing off the trail”: see Oversight of deregistered companies – Murrays Legal.
That does not mean that all these deregistered companies must go through the liquidation process, as ASIC seems to assume (ASIC001 Response to ASIC mentions and claims made by hearing participants.pdf), but some increased level of scrutiny is required. Nor need the liquidation reporting process be reduced, but a more streamlined and directed process is needed.
That is, there needs to be some moderation of the extent of breach reporting of insolvent companies and some increased inspection of companies that somehow avoid the process. We would say that a revised government role would allow a more strategic public interest focus in respect of both, as permitted by a change in the law, and using the data analysis and AI techniques which ASIC outlines in its submissions.
A single regulator
That leads into another topic of having a single insolvency agency and regulator. While the detail of that is not covered here, the role of a single regulator may well be an answer to concerns about how insolvency is regulated and how it performs. AFSA’s regulatory performance is generally seen as superior to that of ASIC, the obvious difference and perhaps reason being that AFSA has a largely sole focus on personal insolvency whereas corporate insolvency is but one small part of ASIC’s range of responsibilities.
Resources
ASIC’s resources invariably come up in such inquiries. As a matter of principle and proper administration, more resources should only be considered in respect of an already efficient and focused system, which we don’t have; otherwise the additional resources are merely embedding inefficiencies. For example, the director identity number should make a big difference to the efficiency of ASIC enforcement. Ideally, that should be embedded and its impact on regulation and enforcement assessed before any resourcing is considered and before any change in the law is made.
Reporting
This Senate Economics References inquiry has a long lead time, with the Committee not due to report until June 2024. In the meantime, the report of the corporate insolvency focused inquiry by the PJC is due by 30 May 2023.
