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Company Liquidation

Liquidators Body Wants Liquidations Without Investigations!

The peak body for liquidators, the Australian Restructuring Insolvency & Turnaround Association (“ARITA”) has issued a discussion paper for how it proposes company liquidation should be dealt with in the future.

ARITA is concerned that registered company liquidators should receive proper remuneration for their services and that practitioners should not be required to work or incur expenses without appropriate payment.

That sounds fair. If you work, you should be paid. If you won’t be paid, don’t work.

In fact, this principle is enshrined in Section 545 of the Corporations Act that states “…. a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property”.

At the same time, however, subsection (3) states, “nothing in this section is taken to relieve a liquidator of any obligation to lodge a document (including a report) with ASIC ………”

ASIC requires liquidators to report to it on the failure of a company and the conduct of its directors so in practice, a liquidator must perform a detailed investigation in order to satisfy the regulator and retain registration as a liquidator.

This means investigations must be performed and reported on whether or not there are sufficient assets in a company to pay the liquidator for his work.

In Australia,

  • 40% of all company liquidations are assetless at the time of liquidation

This means that in a great proportion of cases, a liquidator will not be paid for their investigative work and also that there will be little prospect of pursuing any legal claims they may indentify.

While the government has set up the Assetless Administration Fund to counter this situation,  the fund is very limited, and company liquidators are placed in the unenviable position of having to undertake unfunded investigations in order to be able to make an application for funding, with little real prospect of ever obtaining that funding.

Overall, ARITA has determined that unfunded work performed by company liquidators is valued at $48 million per annum and that this is an unsustainable cost to the profession.

What is ARITA’s Suggested Solution?

In its discussion paper, ARITA points out that:

  • 40% of all company liquidations are assetless
  • $48 million of unfunded work is performed each year by liquidators
  • 43% of all company liquidations involve companies that have less than $250,000 in liabilities (it terms these as “micro” companies).
  • 97% of companies with liabilities of <$250,000 return 0-11 cents in the dollar to creditors.

ARITA suggests the following for micro companies:

  1. A streamlined or reduced process for conducting “micro” company liquidations be implemented. This would remove the need to:
    • undertake any investigations into the company or the directors’ conduct
    • report to the ASIC or creditors
    • call meetings of creditors
    • account for or seek remuneration approval

Note: It is envisaged that a micro liquidation would be performed for a fixed fee set by government.

  1. Upon appointment, the liquidator would be required to write to creditors and give them the option of converting to a full liquidation with normal reporting obligations to creditors and the ASIC. (the question is who will pay for this?)
  1. The liquidator would not have the power to convert a matter from a streamlined liquidation into a full liquidation without a majority resolution of non-related creditors.

Note: I presume this would mean that if there were $100,000 of assets in a “micro” company, the liquidator could not spend these funds on any investigation or his own remuneration without creditors agreeing to that work.

  1. If the liquidator becomes aware of a matter which may require investigation, they can seek creditor direction as to whether to convert to a full, investigative liquidation

Note: If no investigations are to be performed by the liquidator, it seems likely that it would be up to a creditor to provide compelling information to put to the group of creditors in order to convince them of the need to conduct an investigation

  1. If liabilities to unrelated parties exceeded $250,000 at any time, the streamline liquidation would not be available and the matter must be converted to the existing regime.

In main point here is that the ARITA proposal would see “micro” companies with debts of less than $250,000 being wound up without any investigation whatsoever.

One has to ask if you were a creditor who had lost money as a result of the failure of a “micro” company, would you consider that loss to be insignificant? Further, would you believe it appropriate that directors of “micro” companies should potentially be able to avoid scrutiny just because total debts are under $250,000?

This is a disturbing concept particularly considering the ASIC statistics show that of the 10,073 reports submitted by practitioners in the last year, 7,218 identified misconduct by directors.

In other words, over 70% of all company liquidation reports contain instances of director misconduct. Surely this statistic points to a need to conduct investigations.

  • What happens if this proposal succeeds?
  • What will directors be able to get away with if they know the prospect of an investigation or reporting to ASIC is small?
  • How will ASIC gather its intelligence on rogue directors if not for a liquidator’s investigations?
  • Does the concept of a “no investigation” liquidation really benefit the community and support the integrity of the financial system?

What is the Answer?

While the current system may not be entirely fair on registered liquidators, I do not believe the interests of creditors, shareholders or the community are served if a company is wound up without an investigation into the reasons for its failure and the conduct of the directors who had control of its assets. There must be some type of deterrent.

Option 1 – Do Nothing, Change Nothing

While liquidators may be entitled to be paid for work performed, they are nonetheless well aware of how the system works at the time they seek registration as a liquidator.

Further, some liquidators choose to accept all appointments regardless of whether a company has assets or not while others choose not to accept any appointment unless they receive a certain minimum amount.

This is a matter of choice and so long as there are liquidators prepared to take on liquidations regardless of funding, the system can be kept as it is.

If liquidators en masse refused anything but paid work, this would strengthen the need for change.

Option 2 – Change the System but Who will Pay?

If there is a view that the present system should change and that liquidators must be paid on each file (whether or not they are required to conduct an investigation), the question becomes how to raise the money to meet that cost.

Liquidators are independent experts who are required to take control of companies in difficult financial circumstances. Their role requires they act in the best interests of the company, the creditors, the shareholders and the community. In that way, it could be argued that:

  1. The cost should be borne by all, or any combination of:
    1. The company – any available assets are firstly to be applied to liquidators’ fees.
    2. The creditors who have lost money and who need the representation of an independent expert to investigate and report on why they have lost money and what may be done about it.
    3. The shareholders – often, but not always the directors that controlled the company.
    4. The community – the government has an interest in protecting the integrity of the system.

Option 2.1 – Let the Community Pay?

If the business community values the integrity of the system and a liquidator’s investigation, then it should contribute to the cost of enabling such an investigation.

Based on the ARITA report, unfunded work performed by company liquidators is valued at $48 million per annum.

According to the Australian Bureau of Statistics there are 2.1 million actively traded businesses (including companies, sole traders, partnerships, trust) in Australia as at June 2014. The government could give consideration to raising the amount to cover the unfunded work performed by liquidators by imposing an insolvency levy on all businesses as part of the annual registration fees. This would equate to under $30 for each active business.

Presently in 2014-15, the budgeted amount for the Assetless Administration Fund was only $3.6 million approx.  This amount is less than $2 per active business.

Option 2.2 – Let the Users Pay? (the creditors)

Under the ARITA proposal, the new, streamlined or reduced liquidation service would not include an investigation of any wrongdoing in a “micro” company.

However, the creditors will be given an option to convert the reduced service into a full liquidation as they are presently being performed.

The ARITA proposal does not say what would happen in the event that creditors elect to convert from the reduced to the full service involving a detailed liquidation except to restate that Section 545 would apply.

Again, Section 545 says:

“…. a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property”

I presume this means that if the creditors request a full-service investigation, it will be performed only if creditors agree to pay the price quoted by the liquidator.

If creditors refuse to pay, will the liquidator be compelled to investigate even if there is insufficient property in the company?

Section 545 of the C.A says this is not the case. Will the ASIC compel the liquidator to work for nothing or is this up for change?

Does the Community Value a Liquidator’s Investigation?

Does a “micro” company deserve an investigation? Are the losses sustained by a creditor any different in a “micro” company than in any other company?

The question is one of commerciality and whether the community and the system value the deterrent that is presently in place?

Are we prepared to pay for investigations or accept without question the losses in a “micro” company? What do you think?

 


Disclaimer
This article is not to be construed as legal advice but is presented for information and research purposes only. No guarantee implied or expressed is given in respect of the information provided and accordingly no responsibility is taken by The Insolvency Experts or any member of the company for any loss resulting from any error or omission contained within this article.