Liquidators versus Zombies?

[First published on Linkedin.com on 17 October 2016]

It’s no surprise that ASIC’s move to a user-pays model will impact the restructuring and insolvency community, but the proposed model – reported by the Sydney Insolvency News blog (SIN) – is unexpected.

Most practitioners had anticipated that ASIC would follow the model used by the personal insolvency regulator, AFSA, to recover costs involved in the regulation of personal insolvency practitioners.  AFSA charges a “realisation levy” against the value of assets recovered by the trustee, calculated by practitioners and directly charged to each insolvency administration i.e. directly reducing the pool of assets available to creditors. The applicable rate has varied over time: from 8% in 1997 when it was introduced in its current legislative form, to as low as 3.5% in 2007, increasing to the current 7% as at 1 July 2015. The concept of a levy based on asset realisations is therefore well established, and well understood by all stakeholders: creditors, practitioners, and the regulator.

SIN reports that it is proposed that ASIC will charge practitioners an annual fee of $5,000 per annum, and a further $550 for each formal insolvency appointment, to recover a targeted $9m. Notably, the $550 charge cannot be directly on-charged as a cost of the administration – practitioners must absorb that cost.

What will be the consequences if the new regime is introduced as proposed?

Rationalisation of registrations

The additional cost is likely to prompt some semi-retired and part-time practitioners to hand back their registrations.

Whilst this will reduce the number of industry participants and thereby reduce competition, it may in part be a positive if it clears out practitioners who are not properly investing in their own skills, or their practice resources. However, there are clearly some practitioners who may be temporarily sub-scale, that we should not be seeking to push out:

• Start up practitioners: new entrants who will add competition once they build up scale.
• Practitioners that may be temporarily scaling back a practice to accommodate a work/life balance: in reality more likely to be the female practitioners that the profession needs to improve its diversity.
• The next generation: senior employed staff undertaking a transition to partnership. Again these are more likely to include the female practitioners that the profession needs to improve its diversity.

Fees will increase

Most practitioners charge on the basis of hourly rates. At one stage there was a standard (albeit suggested rather than mandated) scale of fees, however the scale was scrapped following concerns that it might be viewed as anti-competitive, and practitioners have complete freedom to charge whatever fees they set.

Some practitioners will respond to additional charges by increasing their hourly rates so that in effect the additional cost will be passed on to creditors. However, practitioners will estimate the increases required, some will “overshoot” in the absence of the upper limit imposed by a realisations charge, whilst some will fall short – so will there will not necessarily be an equitable distribution of the increase.

Zombies?

Until recently there were two classes of liquidators: “Official Liquidators” and “Registered Liquidators.”   The Insolvency Law Reform Act 2016 removes the position of Official Liquidator, and with it, the previous obligation that all official liquidators had: to accept all requests to act as a liquidator absent a disqualifying conflict of interest.

If taking a liquidation is guaranteed to cost a liquidator $550 – on top of the various costs that they already incur in searches and similar, and in addition to their own time – then it seems likely that some liquidators now free to decline appointments will do so. For creditors, the end result may be that they are unable to secure a liquidator to act at all unless they are prepared to provide an indemnity to meet at least a part of the costs and/or fees that a liquidator will incur in taking on such appointments. Of course creditors will have the option of declining such requests, but if so there is the risk that some companies may never be wound up, living on as corporate zombies!

The Australian Taxation Office – which is a significant creditor of almost all companies – is the most active creditor, initiating more winding up applications than any other creditor, and therefore is potentially the most affected should registered liquidators decide to change their approach.

Where to from here?

Implementing an AFSA-style model – albeit with a realisation levy that would surely be significantly lower than 7% – allows us to side-step the risk of consequences that may impair diversity and competition, as well avoiding the risk of corporate zombies. Hopefully, at what is presumably an early stage of consultation, there is scope to bring alternate models into the discussion.