RSM Australia

Insolvency reform edition 8 - December 2016

Treasury’s User Pays Model         

Treasury’s ideological crusade

Despite intense lobbying by ARITA and insolvency professionals Treasury has refused to back down from the ideologically driven one size fits all approach to funding ASIC.

With the Government pushing ahead with its sale of ASIC’s registry services to contribute to the nation’s fiscal repair in the continuing budget emergency, money to fund ASIC’s ever expanding suite of responsibilities must be found somewhere. The populist impost on Australia’s much criticised financial institutions only goes some way to meeting ASIC’s funding needs.

Treasury has demonstrated their ignorance of both the role and business models of registered liquidators. In addition to a new annual fee of $5000 per annum they propose a fee of $550 per appointment.  It seems little though or consideration has been given to the numerous unfunded Court winding ups registered liquidators undertake.

Liquidators undertaking Court winding ups already provide a substantial pro bono service to the business community and the government. Less than 30% of Court windings up generate sufficient funds for liquidators to fully recover their time costs and out of pockets associated with complying with regulatory requirements and reporting to creditors. Who is going to do this work if they are expected to pay $550 for the privilege of writing off their time costs and out of pocket expenses?

Liquidators are described as gatekeepers in the financial system. Liquidators act as fiduciaries whose duties are owed to the company, its creditors, shareholders and directors. They perform many functions that have been delegated over the years from the Courts. Liquidators play an essential role in corporate regulation performing many roles that in their absence would have to be performed by ASIC or some other regulator. Liquidators play an essential function in the corporate life cycle. After all, only 50% of new businesses can expect to survive their first year.  

Reduction in liquidators

The impact on the small pool of insolvency professionals of the proposed user pays model could be catastrophic. The insolvency market in all States except Western Australia has been extremely quiet for at least 3 years. Many insolvency practices have contracted in size and many professionals have left the industry. There is a real risk of disruption to the proper administration of corporate insolvency resulting from insolvency professionals refusing to accept unfunded appointments and some simply choosing to change their area of practice.

Does Treasury propose the creation of a new statutory officer to undertake unfunded Court winding ups?

Increase in phoenix activities

The user pays system will present a business opportunity to the very people ASIC is presently targeting the pre insolvency advisers. If creditors are unable to find liquidators willing to consent and pay the proposed fee companies will not be wound up. Creditors including the ATO and therefore the Government will suffer as phoenix activity proliferates and creditors pay the price as more and more companies and directors walk away from their debts and immediately open up with new companies.

Options that should be considered immediately

This risk could be avoided by considering options and not simply adopting an ideological approach to policy making. A user pays system should not simply slug liquidators. A liquidator’s role includes realising assets which may involve prosecuting claims against creditors, directors and debtors, investigating and reporting possible offences, dealing with disputes as to ownership of assets, adjudicating on creditor claims and ultimately paying a dividend to creditors.

Options Treasury should consider include:

  • An asset realisation charge similar to that levied on personal insolvency administrations; and/ or
  • A levy on company registration and/or annual return fees; and /or
  • A charge on dividends paid.

Treasury have indicated they will consider a realisations charge in 2018/2019.

Who are the users of the regulatory system?

Obviously, insolvency practitioners can be described as users of the regulatory system. However, the investigative and disciplinary aspects of regulation are undertaken at the behest of creditors, shareholders, directors or even members of the legislature acting on behalf of a constituent. It is disingenuous to argue that the cost of insolvency practitioner regulation should only be borne by the registered liquidators.

Failure to fight white collar crime

ASIC is facing increasing demands on the limited resources it is provided with as the current Government gives it more responsibilities for political purposes. ASIC continues to face criticism regarding its performance despite respective Government’s actions to starve it of resources. It would not be unfair to argue that the Government is not serious about white collar crime and continues to fail to adequately address funding of an effective corporate regulator.

One rule for some

Recently the Government has passed the Insolvency Reform Act 2016 and released draft regulations and rules associated with the legislation. This legislation is aimed at improving overall confidence in the professionalism and competence of insolvency practitioners.

It has been many years since a Government has reviewed the effectiveness of the law as it relates to the prosecution of directors and their advisers when their companies are wound up. Only a small percentage of directors are prosecuted for matters other than failing to lodge a report as to affairs or deliver up company records. Liquidators continue to be frustrated that despite being required to report suspected misfeasance nothing is done. The problem is not ASIC, it is the failure of the Government and its predecessors to take seriously white collar crime and take the path of least resistance with reform.

ARITA’s role

ARITA has lead a largely unsuccessful lobbying effort to convince Treasury of the dangers of the one size fits all user pays system. ARITA has previously failed to support a standalone regulator of both personal and corporate insolvency practitioners and has not supported a wholesale independent review of insolvency law. ARITA members may now regret these stances.

 ARITA has recently moved to adopt disciplinary procedures for its members. This function historically had been left with the regulators, the peak accounting and legal bodies. This decision may require revisiting in light of the new Treasury proposals.

Should ARITA maintain this role in light of the user pays model that is proposed to be imposed on its practicing members? Is it reasonable for members to be paying the regulator and ARITA to do the same thing? Perhaps ARITA should concentrate on education, lobbying on behalf of members and the development of practice standards to influence regulatory attitudes to the profession.