Written by Michael Murray, writer for CCH’s Australian Insolvency Management Practice on behalf of Ferrier Hodgson.
The government has made a financially courageous decision in insolvency law reform, one that has the potential to overshadow the other “major” law reforms in its Insolvency Law Reform Act 2016 (ILRA).
The ILRA removes the position of “official liquidator” from the law of insolvency in Australia, under s 76 of sch 2 of the Act, thus also removing the long-standing obligation on official liquidators to take appointments to insolvent companies whether there are funds to pay for the liquidators’ services or not. It remedies a dysfunctional and opaque aspect of the funding of the corporate insolvency regime that has served to diffuse the its costs across the profession itself and those creditors receiving dividends from insolvent companies. It may mean that government agencies, ASIC and creditors generally may now have to pay, or pay more, for the actual cost of services and benefits provided by liquidators.
In this your author’s second of a series of commentaries on the ILRA,[i] that funding issue is addressed. In following commentaries, other aspects of the Act and other proposed insolvency reforms are discussed.
Section 76 of sch 2 of the ILRA is significant. It simply says that the definition of ‘official liquidator’ in s 9 of the Corporations Act be repealed. Consequential repeals of the term in other sections of the Corporations Act follow, in particular s 472, which allows a court to appoint an official liquidator when ordering the winding up of a company.
An official liquidator is a registered liquidator who assumes a professional obligation to consent to take on court appointed liquidations. In particular, this requires official liquidators to consent to an appointment whether or not there are funds in the company from which they would be paid.
That obligation is an old concept, enshrined not in the law, but rather in an ASIC Regulatory Guide – RG 186 – which itself is the product of Australian corporate insolvency history. That history includes, some decades ago, the existence in New South Wales of the old A List and B List of official liquidators, the “A” list comprising
“a small group of men who have become specialists in liquidation work [who] are required to accept all matters allocated to them and thus take ‘the good with the bad’”.
The “B” list was established to provide “a wider circle of competent practitioners throughout the State of New South Wales who could be called upon to act as liquidators because of some special circumstances”.[ii]
The A list appears to have originated for a number of reasons, including to “ensure that unremunerative liquidations were performed by official liquidators, with the inducement of taking profitable and unprofitable assignments by random appointment”.
While those lists no longer exist, the condition that ASIC has imposed for being registered as an official liquidator, is that an undertaking must be given “not to refuse consent to act as liquidator in a court winding up solely on the grounds that the company is assetless or appears to have insufficient funds” to pay the liquidator’s remuneration and expenses. Any refusal would, according to ASIC, be a ground for cancellation of registration.[iii]
It is a position that is based on the fact that no government liquidator role exists in Australia, as there is in personal insolvency with the Official Trustee in Bankruptcy. Comparable overseas jurisdictions – New Zealand and England – have government liquidators.
The removal of the concept of official liquidator is a significant move towards transparency in the allocation of costs in the administration of corporate insolvencies. At present, official liquidators take on, by reluctant choice or obligation, a significant amount of work in winding up companies that are ordered to be wound up by the court, without being paid, or fully paid. Not only without being paid for work done, but in many cases without even being reimbursed their necessary outlays. These include ASIC search fees incurred in investigating breaches of the law to be reported to ASIC, under s 533 of the Corporations Act and related provisions.[iv]
The reason for many such companies being assetless is that often by the time a creditor obtains a winding up order from the courts, the company’s assets may not exist, through depletion or unfair transfer. Also, many winding up applications by statutory or government authorities are simply ‘debt write off’ exercises of defunct companies. ASIC’s statutory power to “order” a company be wound up under s 489EA of the Corporations Act is in the same category.
Funding of the regime by official liquidators
The reality of this situation is revealed by a 2013 report that official liquidators personally fund over $47 million in work that is not paid because the assets are not there from which to recoup their remuneration and outlays.[v] A factor here is that the law requires liquidators to not only maintain and lodge accounts, but to conduct investigations and report, and carry out related work. This is irrespective of whether there are funds to pay for their remuneration, or expenses, in doing so.
As the professional body R3 in the UK has commented, in no other profession is a highly qualified professional expected to work for free;[vi] although to some extent, given the personal liabilities and risks assumed by liquidators, and the nature of insolvency recoveries, this may go with the job. To the extent that the profession carries those inherent losses, it is assumed that these are made up for in the charge out rates applicable to administrations with assets; or, on properly assessed and determined percentages of realisations.[vii]
The cost of administering the regime in Australia is therefore thrown largely on to the private profession which, over time, has devised profitable business models in how to function in this unique economic environment, and, more broadly, how to operate as a profession. No business can operate with a significant amount of unpaid work. How this is all costed out is difficult to assess, in particular while the economically unsound position of official liquidator has existed. Ultimately, it is the creditors of companies with assets who fund the regime, by way of reduced dividend payments.
Statistics in personal insolvency are kept that provide a clearer picture of these costs, including the comparative funding models and realisations-to-costs ratios between private trustees in bankruptcy and the government Official Trustee.[viii]
But now that the concept of an official liquidator is being repealed, some of the economic distortion and lack of transparency arising from the official liquidator role should be removed.
No liquidator will be obliged to take any appointment, court appointed or otherwise, unless they agree, and that agreement may be conditioned upon the requirement that their fees for doing so are recoverable from company assets, or paid for or indemnified, by choice. It would remain open for liquidators to take appointments “on spec”, with the good taken with the bad; or from some sense of professional obligation in a particular case.
The legislative removal of the position of official liquidator could therefore have these particular consequences:
- A creditor wanting to apply to the court for a winding up order against its debtor, and needing the consent of a registered liquidator, may well be asked by the liquidator to offer an indemnity or a cash payment to cover the liquidator’s remuneration and expenses. With the creditor paying court filing fees, ASIC search fees, legal costs and disbursements, that creditor would be liable for around $20,000.[ix]
- This may result in more insolvent companies not being wound up at all. The law is that unless a creditor obtains a court order, or the directors take some action, there is nothing to stop an insolvent company simply remaining on the record, or falling into the pit of unneeded companies, through the automatic process of ASIC deregistration. Such companies are not investigated and their extent and nature is difficult to determine from ASIC’s records. They have been described as being a “likely ‘black hole’ of director misconduct and unpaid liabilities”.[x]
- Should a liquidator have his or her registration suspended or cancelled, or retire, or pass away, as contemplated in s 40-20, s 40-25 or s 40-30 of the Corporations Schedule (the operative provisions under the ILRA), ASIC will need to find a new liquidator/s to take on those administrations. But a liquidator will have no obligation to agree to do so, without some guarantee from ASIC of being paid.
- Should ASIC or another regulator apply to wind up a company, for example under s 462 of the Corporations Act, the same process, and remuneration expectations, will apply.
The law, the courts and ASIC will ultimately have to try to avoid a circumstance of there being no liquidator of an insolvent company. There is no Official Trustee in Bankruptcy to take appointments by default: see s 160 Bankruptcy Act. There should be.
One existing avenue, referred to earlier, is that ASIC itself may “order” that a company be wound up, under s 489EA of the Corporations Act, on broad criteria. Liquidators appointed are paid an agreed fee by ASIC. That may not be enough for many. ASIC may find it needs to exercise that power more, and pay more.
The ultimate outcome of the removal of the position of official liquidator may be that the costs of putting many a company into compulsory liquidation will be payable by its creditors or the regulators; not directly by the profession. If that causes public or policy consternation, then there are a number of options:
- a reduction in the work required of a liquidator in winding up a company, by way of streamlined technology based processes, or a more streamlined process for smaller companies;
- removal or reduction of the investigative tasks of a liquidator, or clearer delineation of the liquidator’s public and private role;[xi]
- the creation of a government liquidator, or an addition to the responsibilities of the Official Trustee in Bankruptcy; and, overall,
- the modernisation of what still remains in parts a 20th and even 19th century insolvency regime.
- the ‘filing fee’ for voluntary liquidations – that is, the cost for members and directors putting their company into liquidation. While the government has rejected a $120 filing fee for debtors wanting to go bankrupt, it remains committed to imposing on company owners a fee of upwards of $10,000 to put their company into liquidation;
- creditors overriding a court’s decision to appoint a liquidator – while the ILRA 2016 will extend the power to remove a liquidator to corporate creditors, including one appointed by the court, the Act’s limited attention to the potential for abuse of the process may cause problems.
Australian Insolvency Management Practice
Readers will notice that the Practice is well progressed on being updated with the new law, along with commentary and guidance.
Any questions or comments about this article, or on the new law, or the Practice generally, can be directed to Michael Murray at firstname.lastname@example.org
[i] The first was The Insolvency Law Reform Act 2016 – not a racehorse but a camel, 10 May 2016.
[ii] Information recorded in Brian Cassidy Electrical Industries Pty Ltd (No 2) (1984) 2 ACLC 654. The history of the A and B lists is explained in that judgment. See also “What’s in a name? Is it official?”  2 A Insol J 4, David Cowling.
[iii] Information Sheet 59(INFO 59); RG 186 External administration: Liquidator registration
[iv] And other comparable sections for other types of administrations.
[v] See An analysis of official liquidations in Australia, Amanda Phillips (now Coneyworth), IPA (now ARITA) Terry Taylor Scholarship, February 2013, and her recommendations.
[vi] Worth the cost? Insolvency Practitioners’ fees: corporate insolvency, R3, The Association of Business Recovery Professionals, UK.
[vii] There is little analysis of how the costs of unremunerated work is recouped.
[ix] Perhaps unintentionally consistent with the policy of United States bankruptcy law to limit the right of an individual creditor to petition for bankruptcy: see Involuntary Bankruptcy as Debt Collection: Multi-Jurisdictional Lessons in Choosing the Right Tool for the Job, (2013) 87 American Bankruptcy Law Journal 123, J Kilborn and A Walters.
[x] The Protection of Employee Entitlements in Insolvency, An Australian Perspective, Professor Helen Anderson, Melbourne University Press, 2014, p 186.
[xi] See What do we expect of insolvency and of insolvency practitioners?, J Harris and M Murray, paper presented at the INSOL Academics’ Colloquium, The Hague 18-19 May 2013.