An alternative to a possible Official Corporate Receiver

I recently read a discussion paper prepared by two industry experts in all things insolvency. (see https://australianinsolvencylaw.com/2021/09/20/rethinking-insolvency-law/). Michael Murray and Jason Harris have played a significant role in my development and learning as they have for many other insolvency specialists in Australia. It is hard to imagine there is anyone who has something to do with insolvency in Australia not having read or referred to Keay’s Insolvency of which these gentlemen are the current authors.

Now, somewhat apprehensively, I take a very different view to that set out in their discussion paper titled “The roles of the state and private sector profession in the insolvency system: do we have the right balance? These views are my own and not the Rodgers Reidy group. They are high level views that do not seek exact numbers or consider all aspects of a proposed new system. There are many experts that will flesh out that detail should there be any interest by others to this proposal as a solution.

Regrettably I was not aware of the online discussion held 4 August, it would have been very interesting to listen to that discussion and the comments of those attending. Nevertheless at risk of ridicule and reputation I raise my alternative suggestion which I hope will provoke further discussion and hopefully continue the momentum toward an outcome that resolves the issues before us all.

Australia has privatised everything it can. The call for an Official Receiver (or perhaps better labelled Official Liquidator) seems to ignore the government’s ongoing efforts to have everything done by commerce rather than the public sector.

Michael and Jason’s paper recognises the tremendous cost burden faced by liquidators and trustees and looks to create a new public office which will require staffing and the usual inefficient cost structure that accompanies such endeavours. Someone, the public, will need to pay for this. My proposal is in line with the government objectives of users pay and privatise everything.?The proposal addresses the elephant in the room being the corporate aspect. Whether the proposal would or could be utilised for personal insolvency is a discussion for another day.

There is the need to properly identify the user from the outset being those members of the public that decide to avail themselves of the benefits of a corporate structure. That is the shareholders and in the case of small one or two director companies, the shareholder-directors. The general public should not bear any cost associated with these entities in their creation, operation or collapse. There is no equity in allowing one group of people to utilise a company structure for their benefits and then have them either abuse that structure resulting in loss or simply fail to close the structure in accordance with their obligations. The economic impacts of their actions is left to others while they escape (potentially) the ramifications via the protection of the corporate veil.

Michael Murray rightly identifies the disparity between a person that operates a business as a sole director and one who trades in their own name where those businesses become insolvent. There are clear differences in the way each individual is dealt with in liquidation v bankruptcy. Those not aware should refer to his Linked-in pages for the matters he raises.

I note that traditionally the purpose of a company was to provide a mechanism for like-minded people to combine funds to operate a business. In modern Australia the predominant reason to use a company is that it provides a separate legal entity thereby minimising financial risk. Companies are a key component of managing risk and minimising tax. It is the go to structure for most SMEs and this situation gives rise to the problems Michael identifies in the treatment of a director versus a sole trader/partnership.

The actual or perceived benefits of using a company should not and must not be at the expense of the community. On any view, this must be at the cost of the user being the shareholders. They seek to divest themselves of risk and enjoy other benefits yet the system as it stands see them:

? able to leave a shell in limbo to be forcibly deregistered by ASIC;

? avoid paying for the community cost or push the cost of liquidating a company to the creditors or liquidator depending upon the circumstances;

? receive all benefits of the structure while it is usually uncommercial to pursue them where they have acted inappropriately, thereby avoiding any accountability and leaving creditors and the community to absorb the result in lost income and higher prices for goods and services.

The present industry funding model sees liquidators pay per event to lodge documents where they have been appointed. The model sees the liquidator as the party being monitored, yet it is the liquidator performing a service the government will not. The liquidator currently performs the role of the missing Official Receiver. He/she does so balancing the very high risk of no payment for service while paying the very government body that should be funding his/her appointment. Where the liquidator has an engagement that has assets, he/she is forced to charge rates that on any view are high. It is the creditors of that particular engagement that bear the brunt of the costing model. They do so already having suffered loss as a creditor.

Before outlining my proposal it is worth noting that Australia will soon introduce DINs (Director Identification Numbers). I expect this will result in a clean out of some dubious entities presently littering the statistics of current companies. It will also provide a database of more accountable persons which is what is required.?

The proposal

I propose that there is no Official Receiver to deal with corporate collapses. Rather the proposed solution lies in a responsible government ensuring users of companies pay for that right. In doing so, a fund should be created to ensure users are encouraged to do the right thing and be accountable while paying for the privileges associated with the vehicle in which they operate.

Currently Australia has circa 2,900,000?companies. Of these circa 760,000?related to self-managed superfunds as a requirement under the SIS Act. Each year 230,000 new companies are registered, circa 6,000 (2019 figures used to avoid Covid effect) are liquidated and circa 7,800?deregistered by ASIC (estimated only) because the directors/shareholders don’t do as they should by winding up the company voluntarily or de-registering it in the appropriate circumstances.

I do not pretend to know or estimate what a new Official Receiver (Corporations) office would cost to staff and administer, but there is no doubt it will not be as efficient or have the same level of in house expertise as a private liquidator’s office.

It is my view that the solution lies in the following:

Each new company (Newco) be charged a $2,000 fee on initial registration. Of this fee, $1,000 is refunded when the entity is closed in accordance with proper practices such as a member’s voluntary liquidation or de-registration at the request of directors in the appropriate circumstances. An exemption will apply for a trustee company of a SMSF (self managed superannuation fund) such that the fee is restricted to the $1,000 non-refundable component only.

Each existing company at the date of commencement of the new regime pays $500 non-refundable fee.

An amnesty period is applied where directors may take action to close up companies in accordance with existing procedures.

New Proposed Law - A new section is introduced to create a strict liability offence where a director does not take action to deal with a company that has not lodged annual returns and ASIC is forced to wind up the company (i.e. no ASIC de-registrations moving forward). This will resolve a current situation where ASIC or a creditor must re-register a company so FEG can pay out unpaid employees or a creditor can pursue recovery actions. The strict liability offence would be $10,000 per director to assist in cost recovery and enable the director to be bankrupted if not paid thus creating some parity between the non compliant director and an individual that trades in the absence of the corporate structure.

Modelling the expected incomes and outgoings provides the following:

One off $500 charge for the existing circa 2,900,000 companies. This fund will earn interest to further fund the system. 1,450,000,000

New Strict Liability Offence where directors fail to lodge annual return and ASIC refers to a Liquidator. ?

Each year the circa 230,000 Newcos will pay a one off amount of $2,000. This will comprise a non-refundable component of $1,000 and a refundable component of $1,000. Superannuation Trustee companies will not pay the refundable component. While there are circa 600,000 Superannuation companies, it is not known how many Newcos will be superannuation trustee companies.

NB Corporate Trustee Companies will pay the full amount. It is anticipated that a future review of the Corporations Act will address corporate trustee companies and the present issues with them. $460,000,000

Repayment of the refundable component for each Newco that is closed through legitimate de-registration or MVL only. Assume zero for year 1 but growing each each.

Liquidator funding at $15,000 per liquidation (CVL and OL) circa 6,000 pa $90,000,000

Liquidator funding at $15,000 per liquidation (old ASIC forced de-registrations) circa 7,800 pa. This is expected to drop off significantly due to new proposed laws above. $117,000,000

Based upon the above figures, ASICs role in overseeing the current system and liquidators who privately run the system will be adequately covered. The actual figures will be subject to annual review and budgeting.

The benefits of the above system are:

1. The community bears no cost burden from those that seek to utilise a corporate structure for their own benefit.

2. The cost base per company is low and not ongoing, thereby not discouraging the use of a company or creating any barrier to entry for industries that require a company such as under the SIS Act or contractors.

3. The model is in line with modern government policy of user pays and avoids the inefficiency of statutory bodies while ensuring the system is privately staffed by highly trained experts.

4. The model will permit lower rates by liquidators not having to recoup for unpaid work that dominates the industry.

5. Removal of the current inequitable IFM for liquidators.

6. Removal of search fees for liquidators performing an important role as privately running what would otherwise be a government funded role.

Applying the rough figures it appears the system will self-fund and stop the inequities in the system as they currently exist.

As a final note, references for the data sourced in this paper are available, the skills of the writer using this platform however are limited making the traditional referencing of sources impossible.