Insolvency—It's all about the Money

Date01 June 2018
Publication Date01 June 2018
DOI10.1177/0067205X1804600205
AuthorHelen Anderson
SubjectArticle
INSOLVENCYITS ALL ABOUT THE MONEY
Helen Anderson*
ABSTRACT
The most desirable outcome from corporate insolvency is one that a chieves the greatest
return for all creditors including revenue authorities; minimises the cost of
administering the system so that money is not pointlessly consumed; lessens reliance on
government safety nets; and deters and punishes those who would use insolvency to
their own advantage. This paper explores these inters ecting priorities and argues for a
new approach to insolvency administration that achieves these objectives.
I INTRODUCTION
Broadly speaking, there are four pots of money that matter when a company becomes
insolvent. The first is the money that the failed company owes to its unsecured trade
creditorsthe general creditor pot. The second is the tax that is lost to federal and state
revenue collect ors through the non-pa yment of taxes including company income tax,
goods and services tax (GST), Pay-As-You-Go (Withholding) tax (PAYG(W)),
superannuation guarantee charge (SGC) and payroll taxthe revenue pot. The third less
obvious pot is the money that the government must pay by way of safety net supports
for employees unpaid by the insolvent employer, either through the Fair Entitlements
Guarantee (FEG) scheme or as extra aged pensions where superannuation is lostthe
safety net pot. The fourth is the money needed for enforcement, whether in the hands of
ASIC, other government departments and agencies, or the liquidatorthe enforcement
pot. Into this fourth pot is contributed the money paid by liquidators to ASIC by way of
the industry cost recovery levy.
Since the liquidator needs to be paid from the companys assets before the unsecured
creditors and employees are paid, the general creditor pot, the safety net pot and the
enforcement pot interact. They also interact through ASICs contribution to enforcement
via the Assetless Administr ation Funds payments to liquidators, which is beneficial to
the general creditor pot. Because the FEG Recovery Program (FEGRP) is now funding
liquidators to recover FEG advances, the enforcement and safety net pots further
interact. This is not to forget that revenue authorities at federal and state level are major
creditor victims of improper behaviour at the time of insolvency, such that additional
contributions to the enforcement pot can directly offset their own losses from the
* Professor, Mel bourne Law School, University of Melbourne; Australian Research Council
Discovery Project: DP140102277, ‘Phoenix Activity: Regulating Fraudulent Use of the
Corporate Form’. I thank the two anonymous referees for their helpful comments.
288 Federal Law Review Volume 46
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revenue pot. Nor does it overlook the fact that the new ASIC cost recovery levy imposed
by the government on liquidators reduces the money available to liquidators in the
enforcement pot and that this might impact adversely on liquidators ability to recover
assets for the benefit of the general creditor pot and the revenue pot, causing financial
harm to the government.
This quick sketch is designed to illustrate the p oint that different types of spe nding
and losses at the time of insolvency cannot be considered separately. They are
unavoidably connected, as a result of which decisions in one a rea will have
consequences in one or more of the other areas. The aim of this paper is to chart these
connections and to make the case for greater awareness of the links between these
expenditures and losses. In particular, it recommends a commitment of money to the
enforcement pot, and a reallocation of that money, that will benefit not only unsecured
creditors in general but also the government in multiple ways. Ultimately, the most
desirable outcome from corporate insolvency is one that achieves the greatest return for
all creditors including revenue authorities; minimises the cost of administering the
system so that money is not pointlessly consumed; lessens reliance on government
safety nets; and deters and punishes those who would use insolvency to their own
advantage.
The examination of expenditure and savings in the insolvency context is particularly
timely because of the ongoing debate about insolvency practitioner remuneration and
their role as law enforcers and ASICs gatekeepers, set a gainst ASICs role in regulating
insolvency practitioners and its own role in enforcement under the Corporations Act 2001
(Cth) (‘Corporations Act’). It is clear that ASIC is not a public liquidator; what is less clear
is the division of enforce ment responsibilities between ASIC, acting in the public
interest, and the liquidator, acting in the interests of creditors. A lack of resources in the
hands of liquidators, and judicial commentary about the public interest served by
liquidators in taking action,
1
complicates the matter. Add to that the juxtaposition of
enforcement by liquidators against direct ors, in lieu of ASIC action, with ASICs action
against liquidators t hemselves for wrongdoing, especially where it involves collusion
with the directorswrongdoing.
For the sake of length and coherence, this paper concentrates on corporate, rather
than personal, insolvency. Part II begins by explaining and seeking to estimate the losses
and costs f rom the first three potsgeneral creditors, revenue and safety nets. Part III
then considers the contentious area of enforcement, including who has the power to
enforce, who has the money to enforce, and where t hat money comes from. Part IV
brings together the previous two parts by way of analysis, integrating the understanding
of the four pots of money and making recommendations for change. Part V summarises
and concludes that neither spending nor reve nue raising should be viewed in isolation;
rather, decisions should be made based on where the money is most effectively spent
and what other expenditure might be saved, or losses averted, as a result.
1
See cases noted below at n 69 and accompanying text.

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