Department of Liquidation? The possible creation of a Government Liquidator…

The anti-phoenix consultation paper released by Treasury last week (available here) raises the possibility of a “Government liquidator.”

The proposal is intended as an alternative to the ‘cab rank’ proposal (discussed here), to address concerns about phoenix promoters ‘hand-picking’ registered liquidators likely to cooperate in a strategy to ‘facilitate their client’s interests to the detriment of creditors.’

(Before moving on it is worth highlighting, here too, that a liquidator who did act to the detriment of creditors in such a way would be in breach of their duties both under the Corporations Act and the ARITA Code of Professional Practice, and should be subject to prosecution by ASIC and disciplinary action by ARITA, if a member).

To outsiders, the idea of a government agency operating in a market where there is no shortage of competitive players may seem unusual, but to turnaround and restructuring professionals it is more familiar.  A similar system operates in the UK, where by default the ‘Official Receiver’ is appointed to companies unless a private liquidator has been arranged, and in Australia where the Official Trustee (via AFSA) acts as the trustee of an insolvent individual’s affairs – unless a private bankruptcy trustee has been arranged.

The paper does not set out a view as to whether the Government liquidator would be appointed only where a person designated as a “High Risk Phoenix Operator” by the Commissioner of Taxation (under the criteria and process outlined in the proposals paper) is involved, or whether it would be an option in all liquidation proceedings – feedback is sought on that question.

Likewise it is also unclear whether the Government liquidator would manage the liquidation through to completion, or the involvement would only be temporary, pending a transition to an independent liquidator – as happens now with many, but not all, of the more complex personal insolvencies handled by AFSA.

The paper seeks feedback as to how a government liquidator should be funded. One part of the answer to that question is the fee charging model to be adopted.  If the AFSA model (a flat fee of $4,000 per file and commission of 20% of money received) is deployed, then there is likely to be a larger shortfall than if an hourly rate model is used.  The most significant question however is the scale of operation  – a national team that undertakes any and all liquidations through to completion will be quite large, and quite expensive.

Feedback is due by 27 October 2017.  It can be provided direct, and ARITA is also seeking member feedback.

Queensland is pursuing other measures to address phoenixing, discussed here