A threshold issue in relation to the design and operation of any insolvency regime is as to who operates it and with what funds.
Insolvency addresses a mix of private interests of the creditors and of public interests. Even the private interests have a public element in ensuring fairness and order in the community. Any review of the regime in determining its purposes and objectives has to consider the mechanics of how they are to be achieved.
In his article Insolvency Law Reform: The Role of the State (1999) NZLRev 569, Mr Paul Heath KC offers guidance as to this saying:
“private functions should be performed by the private sector and paid out of funds otherwise available for distribution among creditors, while public functions should be performed by public officials and paid for out of public funds . . .”.
In our article Rebuilding the structure of the Australian insolvency system (2022) 22(1&2) INSLB 14 Jason Harris and I listed data (as at that time) as to the inadequacy of remaining funds in insolvency.
The data showed liquidators conducting unfunded work to the value of over $48m annually; 92% of external administrations paying no dividend returns to creditors; around 58% of liquidations having under $10,000 in assets, and 37% having no assets; with over 30% of bankruptcies handled by private trustees paying no remuneration; and with five or more times as many companies being deregistered by default as are deregistered following an external administration. And more.
That is, we say there is not enough money left over in insolvent estates to fund the system.
We then say there is an unsatisfactory and unclear delineation between public and private tasks and in fact public tasks are imposed upon the private profession, without recognition of the costs involved.
For that reason we suggest there is a need for a public role in the nature of an official receiver comparable with that in bankruptcy. Even if the end result is that the private profession is required to pursue public interest tasks, that should be more clearly explained in the law and as necessary funding arrangements made.
Example
A simple example highlights this central question. If a company trades and incurs liabilities which it cannot pay such that on its liquidation there are no assets remaining whose responsibility is it to do some justice by way of seeking recovery of those assets?
One answer might be that it is simply and solely the creditors, as it would be outside the context of liquidation. If the creditors wish to pursue an action they can take that action themselves, or fund the liquidator.
But another response might be that the actions of the directors are so adverse to the insolvency system that the state should pursue them.
In all the current debate about rising government expenditure it seems that the first would be the preferred option. This approach should impose upon creditors greater attention as to whom they extend credit. That is how the free market works.
To what extent our present regime balances all these issues is rather opaque and from what we know, unassessed and unsatisfactory. Some financial and academic analysis is needed to understand how it works, or doesn’t.
