While we wait for the useful annual statistics from AFSA as to dividend returns in bankruptcies in 2022-2023,* an insolvency training body in the UK, NTI, has drawn attention to the minimal asset position of most bankruptcies and compulsory liquidations handled by the Official Receiver: Shock horror – insolvent people don’t have many assets
UK statistics
NTI reports on a series of tables published by the UK Insolvency Service[1] showing the percentage of cases in which the assets in bankruptcy and compulsory liquidations were sufficient to cover the statutory fees imposed on them. The UK, like many comparable jurisdictions internationally, imposes a fee of £1,990 where the debtor voluntarily goes bankrupt, and a fee of £2,775 imposed where the creditor presents a petition. In court ordered liquidations, the administration fee is £5,000 in most cases.
These fees are charged to cover the work of the Insolvency Service but “asset recoveries are uncertain and, in many cases, insufficient to cover the administration fee. Therefore, to cover this shortfall, an additional fee called the Official Receiver’s General Fee is charged in all cases.” This fee is £6,000. There is also a 15% fee on asset realisations.
Going back to the financial year 2017/18, 38% of voluntary bankruptcies had no assets, with a further 57% of cases able to pay some of the fees. By 2021/22 the percentage of no asset cases had risen to 57% and only 3% of cases had covered the fees in full.
As to court ordered bankruptcies, the no asset cases were 36% in 2017/18, rising to 61% in 2021/22. However, the cases where the fees were paid in full was higher with 27% and 11% respectively.
In court ordered windings up, in 2017/18 67% of cases had no assets and only 9% had assets sufficient to pay the fees in full. By 2021/22, these numbers stood at 77% and 7% respectively.
A better bet?
As the NTI says, unless the creditor is certain there are assets, “litigating and executing looks a much better bet”.
It’s more than that – unless the creditor is certain there are assets in the insolvent estate sufficient to pay itself and all other creditors, and the remuneration and expenses, litigating and executing looks a much better bet, in particular because no pari passu sharing is imposed.
Australia
Based on 2021-2022 figures, the position in Australia is comparable although, significantly, Australia is one of the few countries that does not impose a filing fee on voluntary bankruptcy, or liquidation. It does impose a 7% realisations charge on all asset recoveries in bankruptcies, and other fees. Corporate insolvency fees are another thing again.
These figures go to the current day purpose of basic insolvency law, and whether the long-time purpose of dividing up the debtor’s assets among creditors continues to have much relevance, in most cases; that is putting aside more constructive mechanisms available in larger cases. The motivations of creditors seeking to bankrupt or wind up must be mixed, including being ill informed.
Most creditors would want payment of their debt on service of a bankruptcy notice or winding up demand. Reforms are being considered in Australia to raise the money threshold for a bankruptcy notice from A$10,000 to A$20,000[2] in part to reduce their use for debt recovery, and to “ensure bankruptcy remains an option of last resort, while minimising the opportunities for debtors to continue to incur additional unmanageable debt”.
Other debt recovery measures can be used. That is consistent with a view that both Australia and England have too low a threshold for creditors’ bankruptcy applications, and that the threshold should include proof of some realisable assets of the debtor.[3] The ATO appears to take that approach, saying that bankruptcy would normally be used only after other collection and enforcement measures have been taken and proven unsuccessful, and the taxpayer is seen as high risk.[4]
Ill advised laws, whereby bankruptcy of a debtor is required only for the purpose of allowing the creditor to make an insurance claim, are not helpful.[5]
Overall, recent reports of AFSA have shown the limited debt position of most bankrupts. There is also the past report of AFSA showing that around a third of estates handled by private registered trustees had insufficient assets to pay the trustee any remuneration.[6] Corporate liquidation figures are comparable.
AFSA’s statistics for 2022-2023 will probably confirm this.
PJC Report’s recommendation for a comprehensive review
All of this data and these international comparisons are useful for what is recommended by the PJC Report to be a comprehensive review of Australia’s insolvency system, both personal and corporate. Following the evidence presented to the PJC, and its report, there should be no shock horror that insolvencies often have no or limited assets. If data can be produced to show otherwise, or if the issue of limited remaining assets can be addressed, well and good. But otherwise, this reality may lead to a reassessment of the purposes of insolvency, in particular in the SME sector of the business market.
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* Due in December 2023.
[1] Levels of statutory fee recovery on Bankruptcies and Compulsory Liquidations, 2017/18 to 2021/22 – GOV.UK (www.gov.uk)
[2] Personal Insolvency Consultation – Attorney-General’s Department – Citizen Space (ag.gov.au)
[3] Involuntary Bankruptcy as Debt Collection: Multi-Jurisdictional Lessons in Choosing the Right Tool for the Job by Jason J. Kilborn, Adrian Walters.
[4] PS LA 2011/18 | Legal database (ato.gov.au) Law Administration Practice Statement PS LA 2011/14 General debt collection powers and principles.) PS LA 2011/17
[5] See for example Ippolito v Cesco [2021] FCA 656, and Home Building Act (NSW) 1989, s 99 which refers to the need to show the “insolvency, death or disappearance of the contractor” before claiming on insurance, although there can be a deemed insolvency of the contractor: s 101. See also Building Work Contractors Act (SA) 1995, s 35.
[6] A regulator’s report on insolvency practitioner remuneration – Murrays Legal
