Chapter 9Assetless administrations and the role of the state
9.1This chapter considers the issues that arise when a company with few or no assets becomes insolvent, and how the public interest purposes of insolvency processes might be better met in such cases.
9.2The operation and adequacy of the Assetless Administration Fund is examined, including potential changes to the fund. In turn, this chapter considers proposals to establish a government liquidator in corporate insolvency.
The public functions of insolvency processes: who pays?
9.3In administering an insolvent company, insolvency practitioners attend not only to the interests of private creditors and employees, but also to broader public interests. In particular, insolvency practitioner investigations of director misconduct are largely a public interest function, even allowing that such investigations also serve private interests inasmuch as they can assist efforts to recover creditor funds.
9.4The importance of insolvency law’s public interest function and the state’s role in funding a portion of the system is generally taken as a given. As MrMichaelMurray and Professor Jason Harris have pointed out, the need for public funding ‘is relatively uncontentious in relation to the system of courts, a public register, and relevant laws’ that support corporate insolvency.
9.5Questions remain, however, as to whether the state’s role should be expanded in places where there are currently funding gaps in the work of insolvency. These funding gaps are especially pronounced in relation to administrations of companies that have few or no assets available to cover an insolvency practitioner’s fees and expenses. Such work is currently either 1) undertaken by insolvency practitioners, and often unremunerated (as covered in chapter 8); or 2) not undertaken at all because an insolvent company does not go through a formal insolvency process.
9.6Professor Harris and Mr Murray proposed that the role the state might play in addressing funding gaps in the corporate insolvency system should be a foundational issue in a comprehensive review process:
We're saying that, ultimately, within that regime within which the system operates, there's really not enough money floating around coming out of insolvent estates for the work that needs to be done to be done properly. That's where we're saying there needs to be a greater role of the state. In my view, a root-and-branch review would start at that initial point.
9.7Proposals for the state to better fund or itself undertake the public interest work of insolvency, especially in relation to assetless administrations, is considered below.
Insolvency practitioners and the identification of misconduct
9.8As noted above, insolvency practitioners are required to carry out a range of public interest work in administrations. This includes investigations of misconduct under section 533 of the Corporations Act 2001 (Corporations Act) and related sections, and the referral of other offences to the Australian Securities and Investments Commission (ASIC). As the Business Law Section of the Law Council of Australia (BLS LCA) explains, the ‘putative purpose of that sort of obligation goes beyond the returns to stakeholders and extends to the discouragement of poor corporate behaviour generally and the provision of assistance to the regulator’. However, even where insolvency practitioners are providing statutory reports identifying potential misconduct, evidence received by this committee would suggest these statutory reports of misconduct are not met with a commensurate enforcement response from ASIC. Referring to evidence received by the committee, Mr Christopher Pearce explained that:
…there is a public good associated with the sorting out of the affairs of insolvent entities. Someone needs to ask the question: what is the extent of that public good, and what is required and what is not required? You've heard a lot of evidence about the extent of the work that goes nowhere and whether it needs to be done or whether perhaps more needs to be done with it.
9.9The current statutory reporting requirements on insolvency practitioners and the adequacy of ASIC’s responses to those reports, are matters discussed in further detail in chapter 10.
The problem of low- and no-asset insolvent companies
9.10Insolvency processes are ordinarily funded through the assets of the company in administration. However, where a company has few or no assets, this is not possible. As discussed in chapter 8, where an insolvency practitioner does engage in work on an assetless company, it is likely they cross-subsidise a large extent of unremunerated work through higher charge out rates where assets can be realised.
9.11However, it is also likely that in many cases involving insolvent assetless companies, no administration takes place. As the Harmer Report explained, faced with the prospect of no recovery, creditors are understandably reluctant to incur the costs of pursuing the administration of an assetless company. Directors of such companies, who may be ‘anxious to avoid any examination of their conduct’, will rarely take steps to wind up the company, and the company is simply left unadministered. Evidence to the committee suggests that a similar problem may persist today, with assetless companies left dormant before eventually being deregistered. However, as discussed in chapter 7, there is a lack of data as to the solvency status of these companies which needs to addressed.
9.12The fact that the Harmer Report findings remain relevant today speaks to the possible persistence of the problem; indeed, when this committee conducted a ‘stocktake’ of corporate insolvency laws in 2004, it referred to the question of assetless administrations as ‘one of the more difficult, longstanding and important issues’ in the corporate insolvency space.
9.13While creditors do not stand to gain anything from the proper liquidation of an assetless company, allowing an assetless company to simply be deregistered is problematic for a range of reasons. The Harmer Report, as summarised elsewhere, concluded:
…that there were strong reasons for encouraging administrations of assetless companies. Allowing an assetless company simply to lie dormant, eventually to be deregistered, means that there would never be a review of the company’s activities by someone other than the company officers. Unscrupulous directors could improperly move assets out of companies into related companies or appropriate the corporate property themselves. As long as they do not leave enough assets behind to pay for an administration, their activities would probably not be subject to scrutiny and they would not be subject to clawback provisions and other remedies available to a liquidator. Furthermore, the regulator would not find out about the conduct so the directors would not be subject to action by the regulator. This would leave little in the way of deterrence for illegal conduct and entering voidable transactions—rather it would be likely to encourage abuse.
9.14When asked what value there was in an insolvency process in instances of low- or no-asset insolvency, Mr Murray noted that UNCITRAL explained the value in two ways. First, simply allowing assetless companies to disappear would ignore the possibility that some of those companies may be assetless by design:
In other words, the directors have just depleted the assets and moved onto another company, they've been phoenixed, or there might be some other untoward conduct. There should at least be some scrutiny of those, and that is one purpose.
9.15A more positive or ‘elevated’ purpose (and one that does not fit strictly within the public purposes that this chapter is primarily concerned with), is that good corporate governance should allow the compliant, law-abiding director of an insolvent company access to an insolvency process, however it is funded. This would then allow the company to ‘have its insolvent circumstances resolved through some formal purpose, at least to give some closure to those that have been dealing with it’. This would provide those who have been dealing with the company, including employees and creditors, some finalisation and would enhance transparency.
9.16Mr Murray noted the contrast between individual debtors with access to a free government trustee in bankruptcy and companies that are undergoing insolvency. He observed that it was broadly supported that:
…we wouldn't privatise or leave hanging those debtors who might have had to pay a trustee to go bankrupt. We wouldn't leave those debtors unable to go bankrupt in that sphere, in the personal insolvency sphere. I suppose there's not that much difference between all of these companies in the corporate sphere, where we say there should be at least an opportunity for a director of an insolvent company to have their company wound up, even if they don't have the funds in order to enable them to do that.
9.17Mr Pearce, BLS LCA, also drew the committee’s attention to the problem of low- or no-asset administrations, and who should pay for the work undertaken by insolvency practitioners. He noted the apparent current approach of cross-subsidisation of insolvency practitioner costs, with costs effectively passed to the creditor body able to pay, along with proposed alternative approaches whereby work would be funded by a company levy or through consolidated revenue. But ultimately, he told the committee, ‘if we decide that that public good is sufficient, that we require the work to be done, we have to work out who's going to pay for it’.
9.18UNICTRAL’s Legislative Guide on Insolvency Law points to four mechanisms for pursuing the administration of assetless estates:
levying a surcharge on creditors to fund administration;
establishing a public office or utilizing an existing office;
establishing a fund out of which the costs may be met; or
appointing a listed insolvency professional on the basis of a roster or rotation system.
Assetless Administration Fund (AA Fund)
Background to the establishment of the AA Fund
9.19The Harmer Report canvassed a range of options for funding the administration of assetless companies. Options included establishing a publicly funded office to administer such companies (similar to the Official Trustee in Bankruptcy), or, alternatively, retaining the existing system of ‘private sector’ administration but with a new funding mechanism, albeit one that did not ‘impose a further burden on consolidated revenue’.
9.20The Harmer Report recommended the second option to establish an Assetless Administration Fund (AA Fund) to ‘enable the winding up of and investigation into assetless companies’, funded by a levy on all companies payable annually at the time of the filing of a company’s annual return. The fund, to be administered by the corporate regulator (then the National Companies and Securities Commission) would pay prescribed amounts to both creditors who brought applications to wind up an assetless company ‘in respect of the taxed costs of the winding up’; and the liquidator, ‘for the costs of inquiry into the business, property and affairs of the company and reporting to creditors’.
9.21The recommendation was unimplemented at the time of the Parliamentary Joint Committee on Corporations and Financial Services’s (PJC’s) 2004 ‘stocktake’ of corporate insolvency. The PJC report recommended the establishment of an ASIC-supervised AA Fund along the lines suggested by the Harmer Report:
The Committee is of the firm belief that the problem of assetless companies must be addressed. It recommends that the Government establish an assetless company administration fund to finance preliminary investigations of breaches of directors’ duties and fraudulent conduct using the skills of registered insolvency practitioners.
Overview of the AA Fund
9.22In response to the PJC’s 2004 report, in October 2005 the government established the AA Fund, which ASIC explains, supports:
…preliminary investigations and reports by liquidators into the failure of companies with few or no assets, where it appears to us that enforcement action may result from the investigation and report. A particular focus of the AA Fund is to curb fraudulent phoenix activity.
The AA Fund enables a liquidator to carry out a proper investigation and report, which then helps us decide whether to commence enforcement action. It also funds a liquidator to take action to recover assets when fraudulent or illegal activity is suspected.
9.23In 2021-22, ASIC approved grant funding totalling just over $9million to liquidators through the AA Fund, with 210 of 475 grant applications to ASIC successful. Grant amounts vary depending on type—for example, director banning grants (144 of the 210 successful grants) are fixed at $10,500, and abandoned companies grants at $12,000. The AA Fund is funded for approximately $4.7million in 2022-23 and $5million in 2023-24.
Productivity Commission 2015 recommendation on the AA Fund
9.24In its 2015 report, the Productivity Commission recommended changes to the way low-asset liquidations were funded, including through changing and renaming the AA Fund the ‘Public Interest Administration Fund’, to better reflect a public rather than creditor interest in most small liquidations:
In instances of small liquidations where a liquidator is unable to recover funds to cover their own fee, and where the Australian Securities and Investments Commission (ASIC) is satisfied that the activities are not excessive, the liquidator should be able to apply for the balance of their fees to be paid through ASIC.
The existing Assetless Administration Fund should be renamed the Public Interest Administration Fund and its objectives and funding modified to reflect this new function.
To the extent that this requires additional funding, it should be raised by increasing the annual review fee for company renewals.
Funding should also be available from the Public Interest Administration Fund in instances where ASIC initiates further investigations beyond those required by the small liquidation process.
9.25Explaining its 2015 recommendations, including that additional funding be raised through an increase to the annual review fee for company renewals, MsRosalyn Bell, Productivity Commission, advised:
In general, you would be looking to avoid situations where there is a substantial amount of cross-subsidisation [of insolvency practitioner work], particularly where you have public and private interests, but it's a matter of, if there are public interests, who actually funds those public interests, and it's not always a situation where it's appropriate to push that back onto taxpayers at large, either.
9.26In its response to the Productivity Commission’s recommendation, in May 2017 the then government noted the recommendation, while observing that the Public Interest Administration Fund (PIAF) proposal would extend:
…the existing purpose of the Assetless Administrative Fund, which is to finance preliminary investigations or recovery actions, with a particular focus on curbing illegal phoenixing activity. The fund was not designed to support small scale liquidation more generally.
9.27The Australian Restructuring Insolvency and Turnaround Association (ARITA) wrote in support of the Productivity Commission’s recommendation, suggesting:
- It will have no impact on the fiscal position of the Commonwealth as the additional costs are borne by those who benefit most from the insolvency system – companies.
- It is likely to encourage entry of new practitioners which may help with the diversity issues faced by the insolvency profession.
- It will significantly reduce, or eliminate, the need for cross subsidisation between large and small matters, with the benefits of lower fees being most likely to be felt in relation to medium size matters.
- It in no way restricts registered liquidators pursuing matters they feel should be pursued in the absence of funding support from the PIAF, nor from taking action to recover through other means their costs in doing so, such as by way of a creditors’ indemnity or litigation funding.
Other views on the AA Fund
9.28A number of inquiry participants suggested the AA Fund needed to be broadened to properly support the administration of assetless companies.
9.29The BLS LCA submitted that the AA Fund ‘is not the all-encompassing programme of the type anticipated by the Harmer Report recommendation’, and thus the establishment of a formal assetless companies fund remained one of the unimplemented reforms recommended by the Harmer Report.
9.30The Society of Corporate Law Academics (SCoLA) suggested that the AA Fund was underfunded and difficult to access, making it currently inadequate in addressing most instances of unfunded insolvency work. It noted:
…anecdotal evidence from conversations with multiple insolvency practitioners suggests that it can cost up to $6-10,000 work of WIP to complete an application that may itself only provide $10-15,000 in funding.
9.31Deloitte submitted that the AA Fund should:
…be better funded to fund the reasonable costs and expenses of [external administration] in all assetless administrations. Alternatively, the Government could consider empowering ASIC to perform this unfunded work.
9.32Deloitte added that funding can be difficult to obtain through the AA Fund, and:
…the time required to prepare an application is not funded and we believe corporate abuse often goes un-investigated. This is not in the community’s interest. The funding of the AAF should be expanded considerably.
9.33KPMG also submitted that an increase in the AA Fund would ‘help assist with winding up insolvent assetless businesses where there is no opportunity for a corporate rescue or that a rescue has failed’. It noted that additional funding would benefit:
…the broader community as external administrators are required by law to undertake certain tasks which may not benefit creditors directly, including investigating whether any offences have been committed and reporting to ASIC.
9.34CPA Australia emphasised the importance of a properly funded AA Fund:
The task of investigating offences and collecting evidence of offences serves an important function in the economy and in protecting creditors. Registered Liquidators should be viewed as the gate keepers of the economy. Without adequate funding of the Assetless Administration Fund, these offences may not be prosecuted by ASIC. This funding should be seen as an investment in compliance by directors, who would then be seen as upholding their obligations and duties.
9.35Addressing the problem of directors who are unwilling to comply with their statutory obligations to assist a liquidator, including to deliver up company books and records, the Australian Credit Form questioned whether the AA Fund was current adequate to its policy purpose:
The liquidator, in order to properly comply with its statutory duties, often incurs costs to compel compliance where prospects for recoverability on behalf of creditors is low.
While the Assetless Administration Fund (AA Fund) does provide some assistance and resources in the liquidation process, it is often insufficient for liquidators to properly finalise the investigative work required of them, particularly if court proceedings are involved and require the liquidator to retain solicitors and barristers to properly prosecute those claims.
9.36Ashurst also questioned whether the AA Fund was effective in achieving its purposes. Ashurst noted that the AA Fund had been established to:
…encourage effective administration of assetless companies and the enforcement of director-misconduct by providing liquidators funding for investigations where the company is without sufficient assets to do so. However, the effectiveness of the AAF in achieving its initial aims is questionable in light of reportedly low levels of applications being approved and funding granted. A fundamental limitation of the AAF is that the application criteria requires a liquidator to lodge a section 533 report. As such, liquidators may be disincentivised to apply for funding as the preparation of the report and preliminary investigations may deplete funds in the administration available to pay their remuneration and expenses, particularly where it is unlikely they will receive approval for their application and subsequent funding.
9.37Ashurst also wrote in support of the Harmer Report’s recommendation that an assetless administration fund should be funded by an annual levy on all companies, although it indicated this funding should be supplementary to—not in place of—Commonwealth funding. Ashurst also submitted that the current definition of ‘assetless’ was problematic, insomuch as it takes into account assets (or lack thereof) available to a company within 12 months of application for AA Fund funding. Ashurst noted that ‘this prospective assessment is disadvantageous for liquidators who must prove the company is “assetless” in circumstances where it is uncertain whether those assets can in fact be realised’.
9.38Representing Ashurst, Mr Richard Fisher also noted a ‘chicken and egg’ challenge for insolvency practitioners in accessing the AA Fund, in that they are required to determine that a company is assetless, when it may not be possible to do so until the work was already undertaken:
The threshold issue seems to be that, in order to access the fund, firstly, it requires a deal of work to put the application together; and secondly, it's necessary not only to put a value on the assets which have come under the control of the liquidator but to estimate the value of assets which will come under the liquidator's control within the following 12 months. So it's the threshold challenge of establishing that the company is assetless for the purposes of accessing the fund, which is a primary barrier as we understand it.
ASIC’s response to criticisms of the AA Fund
9.39ASIC provided some acknowledgement of the limitations of the AA Fund, in terms of the amounts provided to insolvency practitioners and the overall quantum of funding available. When asked about the $10,500 fixed amount limit on director banning grants made under the AA Fund, Ms Thea Eszenyi, ASIC, explained that in administering the fund, ASIC was mindful of the budgetary constraints it faced, and noted that the appropriation for the fund had decreased in the current funding year:
We're very mindful that we need to make careful decisions, given that last year we had $7.1 million and this year we've got $4.7 million. That's a consideration we need to have, as far as the balancing of individual grants versus the fund in total.
9.40When asked how often cases where the AA Fund was accessed resulted in successful enforcement action, Mr Warren Day from ASIC acknowledged that enforcement outcomes were low, relative to the number of grants made (see Figure 9.1 below):
Often we will approve funding per the request for assetless administration funding, and, after the work has been done, either there is insufficient evidence that we think we can take to make the relevant standards, depending on if it's a director banning or a criminal action et cetera, or it may be that what they thought was initially the case actually, on further investigation, wasn't the case.
The other thing is that there are a large number that we will approve that may not actually get an outcome for that matter, but effectively we're propping one up so that we can take a director-banning for another matter because we will need two reports—good, solid 533 reports often—to take a successful director disqualification action.
Figure 9.1: Director Banning Grant Applications Received and Approved, Total ASIC Director Bannings, and Total AA Funded Director Bannings, by financial year
Source: ASIC, Submission 29, p. 36.
9.41Mr Yanco, ASIC, also explained that ASIC was working to improve the quality of applications to the fund:
On the assetless administration fund, generally, and outcomes, the team has done a lot of work in the last four years to get better applications. […] There are about six different initiatives to improve the quality, including a guide on how to do the application, and having our enforcement team engaged in assisting with making sure that the applications we get are ones that they're likely to accept when it comes to consideration of the final report. This is a really important fund, and we want to make sure we get really good value out of it, so we have put this extra effort in.
Reforms announced in March 2022
9.42In March 2022, the then government announced an additional $20million in funding over two years to the AA Fund, with liquidators able to apply for up to $5,000 per assetless liquidation without needing to provide evidence of potential misconduct. No legislation was introduced into the Parliament to implement the measure, and in its submission the Department of the Treasury (Treasury) advised that ‘it was decided as part of the October 2022-23 Budget that the measures would not proceed, allowing the Committee to conduct its inquiry without prejudicing the outcomes’.
9.43KPMG recommended that the additional funding for the AA Fund outlined in March 2022-23 Budget proceed.
Committee view
9.44The AA Fund, as currently designed, seeks to address an important public interest purpose—namely, supporting the investigative functions of insolvency practitioners in companies with few or no assets, as a precursor to possible enforcement action.
9.45However, evidence put to the committee would suggest that the AA Fund is not adequate to meeting this purpose. The committee agrees with this assessment and considers the enforcement outcomes achieved through the fund underwhelming. The committee is recommending that the government consider changes to the AA Fund to ensure that it is achieving its intended policy objectives and that this should be done independently of the comprehensive review.
9.46The committee recommends that the government consider changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives.
9.47In addition to an immediate increase to the overall AA Fund, the committee considers further consideration should be given to expanding its design and purpose to support the administration of assetless companies more generally.
9.48The committee considers the Productivity Commission’s 2015 proposal to expand the purpose of the AA Fund and rename it as the Public Interest Administration Fund (PIAF) worthy of further consideration. The response from then government to this recommendation simply noted the recommendation and observed that it would expand the existing purpose of the AA Fund to fund small scale assetless administrations more generally. However, the committee notes that this expanded purpose was in fact the intent of the Productivity Commission’s recommendation. The committee also observes that the proposed PIAF would likely better realise the broader purposes of the assetless administration fund originally recommended in the Harmer Report. More broadly, the proposed PIAF would better meet the public purposes of insolvency processes and help address the problem of apparent cross-subsidisation of insolvency practitioner costs.
9.49It would be worthwhile to, at a minimum, better understand the costs and benefits of the Productivity Commission’s proposal. It would, for instance, be useful to understand if, in fact, ARITA is correct in its suggestion that the PIAF would have ‘no impact on the fiscal position of the Commonwealth’ and ultimately be of net benefit to companies.
9.50Rather than repeat the Productivity Commission’s recommendation, the committee instead recommends that the government prepare further analysis on the likely costs and benefits of the proposal, including an estimate as to the resulting increase of the annual review fee for company renewals. Subsequent to preparing this analysis, the government might consider implementing the proposal, or alternatively provide its analysis to a comprehensive review for its information.
Recommendation 17
9.51The committee recommends that the Department of the Treasury consider assessing the potential benefit of the Public Interest Administration Fund proposed by the Productivity Commission in 2015, including the impacts of the required increase on the annual review fee for company renewals; and either consider implementing the proposal, or provide that analysis to a comprehensive review.
Public liquidator
9.52This section of the chapter considers calls to create a public liquidator to address the issues arising from assetless administrations.
9.53SCoLA noted that in other common law jurisdictions, such as the United Kingdom, Singapore and New Zealand, a government liquidator performed both personal and corporate appointments. Contrasting this with the unremunerated public interest work undertaken by insolvency practitioners in Australia, SCoLA submitted that a:
… system that depends on professionals working for free is a broken system in our view and needs more government support, either through increased funding to the Assetless Administration Fund to provide a basic level of funding for low and no asset insolvencies, or through a government liquidator’s office (such as an Official Receiver) to take on public interest work (which is what occurs in the UK).
9.54When this committee considered the ‘market failure’ presented by assetless administrations in its 2004 inquiry, it noted (although did not recommend) that one option for addressing this market failure would be the creation of a public office in Australia similar to the Insolvency Service in the United Kingdom:
This Service undertakes, in every winding up order, the initial investigation into a company’s failure, the causes of failure and generally the promotion, formation, business dealings and affairs of the company and makes its report to the court. If assets are available to fund the administration a private practitioner is appointed. This suggestion was rejected by the Harmer Report which preferred to use the skills of private practitioners to investigate assetless companies.
9.55The Australian Council of Trade Unions (ACTU) argued a public liquidator could better realise the public interest objectives of the insolvency system, while emphasising the ACTU’s broader concerns regarding the overreliance on private insolvency practitioners. The ACTU argued in favour of the creation of a Commonwealth Company Insolvency Service, noting:
…while the cost of administrating assetless failures are partly covered by the taxpayer via the Assetless Administration Fund (AAF) the cost of sustaining the insolvency industry has largely been shifted onto employees and creditors of less distressed but still insolvent companies. This results in longer and more expensive administrations and liquidations. Others have noted this cost shifting dynamic reduces the, albeit, small chance of turnarounds. As such the ACTU supports the creation of a Commonwealth company insolvency service that employs insolvency practitioners and oversees both administrations and liquidations.
9.56The ACTU added that a Commonwealth Company Insolvency Service:
…would complement work of the Bankruptcy Trustee. For this reason, it is likely that administrations, liquidations and business-related bankruptcies would become more coordinated and efficient. Although abolishing floating charge receiverships is preferable, the creation of such a service would allow the appointment of disinterested receivers and allow the public examination of companies where individual creditors holding floating charges are concerned about default.
9.57Mr Bruce Billson from the Australian Small Business and Family Enterprise Ombudsman(ASBFEO) supported calls for a public liquidator. He explained that such an entity could provide a streamlined approach for winding up small businesses with limited debts and assets, leaving those with assets to private insolvency practitioners. Mr Bilson also suggested this would help prevent such businesses from being deregistered in the absence of any processes required to appropriately close the business down.
9.58Representatives from the Small Business Debt Helpline noted that the organisation typically talks to clients who are financially unable to access formal insolvency processes. While sole traders are afforded free access to the bankruptcy services provided by the Official Trustee in Bankruptcy, no such option is available to small businesses operated through a company. It suggested this should be a priority issue for policy reform, with consideration given to, among other things, the relative merits of various delivery models, including ‘private liquidators, an official liquidator or a hybrid model’.
9.59Mr Murray described the lack of an official receiver in corporate insolvency in Australia as a ‘historical quirk’, noting that both England and NewZealand had adopted official receivers in both bankruptcy and corporate insolvency in the early 20th century.
9.60Professor Harris contended that a greater role for the state in corporate insolvency, comparable to the role it already played in personal insolvency, would help to address the current gap in the system. The current system, he argued:
…sets unrealistic and unachievable goals in a system that cannot afford to pay for the work that is currently required. We say that a greater role for the state is needed to address this gap. This is recognised in many other countries, including the UK, Singapore and New Zealand, with a government liquidator's office. It's been recognised here, in Australia, for more than 100 years in personal insolvency with the government bankruptcy trustee's office.
9.61The concept of a public liquidator encountered some resistance from various inquiry participants. Mr Pearce indicated that the BLS LCA had reservations about a proposed public liquidator, suggesting that private practice in Australia does good work. He added that in countries with a public liquidator in place, such the United Kingdom, work is often funded out to the private sector anyway.
9.62The BLS LCA also submitted that:
…there appears to be little appetite amongst the profession for the introduction of a Government-run (and Government-funded) official liquidator akin to the Official Trustee in Bankruptcy. Avoiding such a body may be wise given the tendency for insolvency stakeholders to be aggrieved at what they consider to be uncommercial outcomes, coupled with material recent criticism of State-run public trustees.
9.63Treasury noted some of the considerations that would be relevant to any proposal for a government run liquidator. Mr Tom Dickson observed that in addition to the question of cost, it would also be necessary to weigh ‘the onboarding of risk and responsibility to the Commonwealth’. Questions would also need to be considered as to the benefits of a public liquidator:
Would there be benefits in how liquidations are conducted? Would they be more efficient or less efficient? Would there be sufficient independence to make sure that those things are conducted in a certain way?
9.64Mr Dickson also noted that the concept of a public liquidator did not necessarily reduce system costs, but instead shifted them elsewhere:
In terms of the question around where the cost should be borne for insolvency practitioners, the costs are borne somewhere in the system. There are suggestions that we've heard that those costs should be borne by taxpayers—that the government should provide some sort of service that helps with the liquidation of corporations. Of course, what that doesn't do is reduce the expense; it just shifts the expense from one place to another place.
9.65On the fact that there is an Official Trustee for Bankruptcy but no equivalent office for corporate insolvency, the Attorney General’s Department (AGD) drew the committee’s attention to the differences between the profiles of corporate and personal insolvencies, with 50per cent of personal insolvencies involving debts of less than $50,000. At the same time, Treasury acknowledged that many small businesses in the corporate insolvency space were carrying similarly small debts, and there was considerable overlap between people in the personal and corporate insolvency spaces.
9.66Mr Michael Brennan, Liquidator and Bankruptcy Trustee, Offermans, contended that a public liquidator for corporate insolvency was unlikely to be realistic in an Australian context, given the resources that would be required:
As both a Trustee in Bankruptcy and Registered Trustee I can speak from experience on this issue. I do not believe that a government liquidator is realistic or workable in Australia. Given the number of companies likely to be administered, the workforce and funding required to do this job properly would be prohibitive.
9.67Mr Brennan explained that the cost to the taxpayer of the government liquidator in corporate insolvency was likely to be multiples of the costs of the Official Trustee in Bankruptcy. He noted that the cohort of companies that a government liquidator might investigate—that is, the approximately 50,000 ASIC-initiated deregistrations per year (see chapter 7)—was more than five times higher than the number of personal estates administered by AFSA. Mr Brennan also noted that at the moment AFSA was outsourcing some of their files to the private sector so that more personal estates that would traditionally have been administered by the organisation are instead being sent to Registered Trustees. Appearing before the committee, Mr Brennan reiterated that while a government liquidator analogous to the official trustee might be useful, the question of cost was likely critical:
I think it would be great, but it would be very expensive. I don't know what the costs would be, but just the sheer size of the issue—it would be quite significant. I think whilst theoretically it's a wonderful idea, finding the funding for it would be problematic. If you look at AFSA, where they're trying to outsource their files again, I think it's probably impractical, particularly in the corporate space given the sheer volume of businesses. At the end of the day, you can fix anything if you're willing to throw enough money at it. It's just who pays.
9.68While expressing reservations about the idea of a government liquidator (as noted above), the BLS LCA nonetheless suggested that the cost to the taxpayer may be justified by the costs of misconduct that occurs in the absence of a proper administration process:
…the Phoenix Taskforce estimates that the economic impact of illegal phoenix activity on business, employees, and government to be between $2.85billion and $5.13billion annually. If improved funding of liquidators has a material effect on misconduct, the net positive on the taxpayer is likely to be substantial.
9.69Professor Lombard also expressed a need for careful consideration of the value and practicality of a government liquidator of last resort in corporate insolvency, particularly in the Australian context where there is a division between personal and corporate insolvency. While suggesting the idea ‘merits serious consideration’, she also wrote that Mr Brennans’ arguments regarding cost appeared sound:
…especially given the evidence that he provides regarding AFSA’s recent policy to outsource files to the private sector. It is also important to note that some of the jurisdictions that are held up as examples to demonstrate the utility of a government liquidator (particularly the United Kingdom and Singapore), possess uniform insolvency legislation, unlike Australia.
9.70Professor Sulette Lombard added that the successful operation of a government liquidator should not be assumed based purely on the operations of the Official Trustee, noting that the operating contexts were quite different and AFSA and ASIC were themselves very different regulatory bodies. However, in commenting on the government liquidator concept, Professor Lombard noted the broader importance of public support for insolvency work:
Should the costs of creation of an AFSA type body in a corporate context prove to be prohibitive, consideration should at least be given to improved funding for work undertaken by private liquidators to ensure that insolvent companies are not able to avoid existing regulatory measures.
9.71Professor Lombard observed calls for a comprehensive review of Australian insolvency law directed toward the adoption of a single insolvency law and for purpose regulator. Such reforms, she concluded:
…could likely prove to be more cost-efficient and could perhaps create a better environment and scope for the creation and operation of a body similar to the Official Trustee in respect of companies in liquidation.
Committee view
9.72On the basis of the evidence before it, the committee is not able to determine with any certainty whether a public liquidator would be the best means to address the problems arising from low- and no-asset administrations. There may be meaningful public interest benefits from the creation of a ‘liquidator of last resort’. However, further consideration is required to assess the cost of such a service and how it would be met, risks to the Commonwealth of taking on this role, and if there might be better ways of realising the same public interest objectives. The possibility of a public liquidator is properly one for a comprehensive review to examine, in the context of a broader consideration of how the insolvency system should attend to insolvent companies with few or no assets.
9.73The committee recommends that the comprehensive review consider and make recommendations on options for funding the administrations of assetless companies, including reforms to the Assetless Administration Fund (noting the committee’s recommendation 16) and the merits of creating a public liquidator for corporate insolvency.