I’ve been reading over several ASIC statistical reports recently while working on my PhD and some figures really jumped out at me in the Series 3.3 (time series) report from December 2017. These figures put into perspective arguments about the cost of insolvency and the returns to creditors.
ASIC compiles a statistical report based on completion of the EX01 Schedule B of RG 16. This form is completed by receivers, administrators and liquidators, although more than 93% of the reports are filed by liquidators and just under 6% by administrators (with less than 1% by receivers).
There were 7,765 reports filed for FY16-17. The reports showed that less than 10% of reports involved companies with estimated assets in excess of $250,000 and almost 40% had no assets whatsoever.
This is important because if we look at the cost of insolvency proceedings (at least as measured by remuneration of insolvency practitioners, which does not take into account disbursements or costs of ASIC’s ‘user pays’ model) then it is clear that Australia has a system that is barely supported by the assets of companies that enter external administration, and certainly is not designed to produce meaningful recoveries for unsecured creditors.
Almost 79% of companies had assets estimated at $50,000 or less. This is not a recent development as the exact same percentages were reported 5 years ago and the figures were even worse 10 years ago.
Almost 78% had an asset deficiency of less than $1 million. 66% of reports involved no amounts owed to secured creditors. 80% of reports involved less than 25 unsecured creditors.
Where the reports related to voluntary administration, 77% involved remuneration for the administrator of $50,000 or less. Of those reports that related to DOCAs, 95% involved remuneration of $50,000 or less. So a large number of administrations that end up in a DOCA involve total remuneration of less than $100,000. But again, the vast majority of companies have less than $50,000 in assets which means that administrations and DOCAs are not suitable for the majority of companies because their assets are simply not enough to fund the basic cost of the procedure. Liquidator remuneration was less than $50,000 in 86% of reports and was $0 in almost 26% of reports.
It is well known that returns to unsecured creditors are low in corporate insolvency. Of all reports lodged for FY16-17, 92% estimated a 0% return to unsecured creditors, with 4% involving estimated returns between 0-11c, 1% of between 11-20c, 1% between 21-50c, 1% between of 51-100c.
Lastly, almost 79% of companies in the FY16-17 reports had less than 20 FTE employees. This shows that the vast majority of insolvency appointments are:
- MSMEs with little or no assets;
- where the liquidator is paid less than $50,000 (but a large number are paid little or nothing);
- where there is no secured debt; and
- where creditors receive nothing.
These figures show that Australian corporate insolvencies exist in two very different universes: that of the large mega insolvencies and restructurings (such as Arrium) where there are large amounts of assets and large numbers of creditors; and that of the small firm with few employees, little assets and few creditors who almost always receive nothing.
What I’m wondering is why corporate insolvency law (particularly following the ILRA) is designed to give unsecured creditors more information and more power? We hear a lot about the need for transparency and accountability to unsecured creditors, but it is a legitimate question to ask if it worth their time to actually listen? If unsecured creditors are rationally apathetic to most corporate insolvencies, then we need to turn our attention to those creditors who are active, most of which are government entities (particularly revenue authorities).
Is corporate insolvency (or at least liquidation) really just for the benefit of the government? If it is, then why doesn’t the government pay for it?
A very interesting summary and analysis Jason. I am certainly seeing a lot of entities entering insolvency where the only creditor is the ATO or it is the largest of a very few creditors. The ATO rarely funds any recovery action or takes an active role in liquidations. So I agree, there is a lot of power given to unsecured creditors now for little return to anyone.
Thanks Fatima, I see the danger in the ILRA changes as giving power to incentivised creditors who want to cause problems and make the IP’s life difficult (eg related parties). All that will do is drag out appointments and increase costs through increased compliance and litigation.
Thanks for this, Jason. I think you make a very valid point at the end and look forward to hear more.
Given the prevalence of small, virtually assetless liquidations where insolvency practitioners receive little if any remuneration, what are your thoughts about DIY liquidations?
Not sure there is the right set of incentives for that, but I’m interested in the government liquidator idea. I think we need to separate enforcement from winding up and allow at least some low asset liquidation’s to be a purely administrative process.
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