Winners & Losers - LexisNexis

Winners & Losers 

What is the future for corporate insolvency in Australia? 

Tim Somerville 

Partner, Somerville Legal 

February 2012 

The opinions expressed in this whitepaper are those of the author 

and not necessarily the opinions of LexisNexis Pacific.

Introduction 

In recent times, the collapse of such companies as HIH have emphasised 

the destructive impact of corporate insolvency, not only on companies as 

a whole but also on their employees, share holders, creditors and tax 

payers. Tim Somerville explores these impacts and the role of liquidators, 

as part of the government’s responses to the problems. 

. 

Background 

On 4 January 2012, the Australian Securities and Investments Commission (ASIC) published statistics showing how 

little creditors receive from companies in liquidation. This comes two years after Nationals Senator John Williams 

told the Senate of the “human and financial tragedy” caused by the collapse of the Australian financial services 

provider, Storm Financial in early 2009 1 . This led to the Senate appointing a committee to look into the insolvency 

industry, which reported in September 2010 2 . 

This paper considers the objectives of the Australian corporate insolvency system, whether it is meeting those 

objectives and what can be done to solve the problems. In particular, the recommendations of the Senate inquir y 

and their effect on corporate insolvency in Australia will be examined. 

Is the corporate liquidation system meeting its objectives? 

The website of the Australian Securities and Investments Commission (ASIC) states: 

The purpose of liquidation of an insolvent company is to have an independent and suitably qualified 

person (the liquidator) take control of the company so that its affairs can be wound up in an orderly 

and fair way for the benefit of creditors. 3 

Is the system working for the benefit of creditors? 

Companies often have secured creditors, such as banks and finance companies, who hold a mortgage or charge 

over company assets. They are not the creditors who need help. The victims of company liquidation are the 

unsecured creditors, referred to in this paper as “ordinary creditors”. They are generally the employees or suppliers 

of the failed company. 

1 Sen John Williams, Opinion Piece (2011) < http://www.johnwilliams.com.au/index.php?option=com_content&view=article&id=144:opinion - 

piece&catid=26:media&Itemid=176> at 17 August 2011. 

2 Senate Economics Reference Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a 

new framework (2010) Parliament of Australia < http://www.aph.gov.au/Senate/committee/economics_ctte/liquidators_09/report/report.pdf > 

at 17 August 2011. 

3 ASIC, Information Sheet 45 (2008) 

at 

17 August 2011. 

Winners & Losers: What is the future for corporate insolvency in Australia ? 

www.lexisnexis.com.au/practicalguidance 

2

The following table shows how many of the companies under external administration made payments to the 

ordinary creditors. 4 

Estimated cents in the $ dividend to unsecured creditors 

0 0-11c 11–20c 21–50c 51–100c 

Australian Capital Territory 96 8 3 4 8 

New South Wales 3596 151 46 28 22 

Northern Territory 14 2 - 1 - 

Queensland 1369 49 22 16 12 

South Australia 281 18 5 2 2 

Tasmania 54 3 - 1 - 

Victoria 1593 75 16 18 11 

Western Australia 422 63 13 19 9 

International 2 - - - - 

Total 7427 369 105 89 64 

According to the table, unsecured creditors of over 92% of the companies will receive nothing. In fact, ordinary 

creditors of over 99.2% of the companies will receive less than 50 cents in the dollar. 

Clearly, this system is not operating in the interests of the ordinary creditors. 

The winners 

There are no detailed statistics available on how much liquidators earn. Some published reports about particular 

companies give some insight, many showing multimillion dollar payments to liquidators. There are also countless 

smaller liquidations, where all of the company’s money and assets (other than money for secured creditors) go to 

the liquidator. 

Where do the countless millions of dollars paid to the liquidators come from? 

4 ASIC, Australian insolvency statistics (2011) < http://asic.gov.au/asic/pdflib.nsf/LookupByFileName/Insolvency-stats-series-1-issued-August- 

2011.pdf/$file/Insolvency-stats-series-1-issued-August-2011.pdf> at 17 August 2011. 



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The losers 

1. Creditors 

Virtually all the money paid to liquidators comes from the companies’ money, money which would 

otherwise go to the creditors. In other words, it is the creditors who pay the fees taken by liquidators. 

However, they are not the only losers. 

2. Creditors of creditors 

Where a company goes into liquidation, with nothing paid to creditors, this can cause unpaid creditors also 

to become insolvent and end up in the hands of liquidators. 

3. The taxpayer 

The largest loser from Australian corporate insolvency is the Australian taxpayer. 

Payment of liquidators’ fees. 

The Australian Tax Office (ATO) is a large unsecured creditor of most companies going into 

liquidation. In effect, the Australian taxpayer is footing the bill for a large percentage of the fees 

taken by liquidators. 

Tax losses 

Creditors of failed companies claim a tax deduction for their bad debts. How much more tax would 

be collected if the money and assets of the companies taken by the liquidators went to ordinary 

creditors? 

Preferences 

Payments to creditors in the 6 months before the commencement of the winding up must be paid 

back to the liquidator, subject to certain exceptions. A large percentage of these payments 

collected by liquidators come from the ATO. There are no published detailed figures, but the 

amounts involved are many millions of dollars. 

The GEERS scheme 

The General Employee Entitlements and Redundancy Scheme (GEERS) is a government payment 

to employees for unpaid entitlements from failed companies. Since its inception, it has cost the 

Australian government the better part of one billion dollars. If money otherwise payable to 

employees were not taken by liquidators, there would be hu ge savings to the Australian taxpayer. 

Again, no detailed published figures are available to calculate this loss. 

Incentives not to pay tax 

Insolvency law strongly encourages company directors not to try to pay the tax owed by the 

company. Company directors are personally penalised for making payments of tax from a struggling 

company and for trying to trade their way through financial difficulty. 



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The mystique of the liquidator 

Under s 532 of the Corporations Act, only registered liquidators can liquidate insolvent companies. Also, once you 

appoint a liquidator, you cannot disengage them, without an expensive court case. 5 

This raises a number of questions. Why should these special rules apply to this exclusive club? Why can’t any 

chartered accountant liquidate an insolvent company? Why can’t a liquidator be removed from the case? 

The liquidators’ response is that the system is so complex that only they have the specialised knowledge to be 

trusted with the job. 

However, modern technology makes the application of the insolvency laws readily available to any accountant or 

lawyer. The laws on insolvency are far simpler than the tax laws which chartered accountants deal with every day. 

Liquidators’ fees 

Liquidators generally charge according to hourly rates set b y each individual liquidator. The following chart shows 

the rates charged by a typical firm. 6 However, some charge much more. 

Classification 

Hourly Rate 

(excl. GST) 

Description 

Partner 520.00 Registered liquidator or bankruptcy trustee. Brings his or her specialist skills to the 

administration or insolvency task. 

Director 1 375.00 Typically CA or CPA qualified with in excess of 10 years experience on insolvency 

Director 2 340.00 matters with a number of years at manager level. Answerable to the appointee but 

otherwise responsible for all aspects on an administration. Capable of controlling all 

aspects of an administration. May be appropriately qualified to take appointments in 

his/her own right. 

Manager 1 260.00 Typically CA or CPA qualified with 6 to 8 years experience working on insolvency 

Manager 2 220.00 matters. Will have experience conducting administrations and directing a number of 

staff. 

Senior Analyst 1 200.00 Typically completed or near completion of CA or CPA qualifications with 4 to 6 years 

Senior Analyst 2 185.00 insolvency experience. Assists in planning and control of smaller matters as well as 

Senior Analyst 3 160.00 performing some more difficult tasks on larger matters. 

Analyst 1 155.00 Typically studying towards CA or CPA qualification with 2 to 4 years insolvency 

Analyst 2 145.00 

Analyst 3 135.00 

Graduate 130.00 

experience. Works under supervision of more senior staff in performing day -to-day 

fieldwork. 

Support A 130.00 Generally a person currently undertaking a university degree. Works under 

Support B 115.00 supervision in providing assistance on tasks involved in insolvency matters. 

Vacationer 125.00 

5 ss 473, 503, 536, Corporations Act 2001 (Cth) 

6 Richard J Hughes and John L Greig, Guidance to Creditors on Remuneration (9 March 2009) Deloitte Touch Tohmatsu (2009) 

. 



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However, the main issue is with the number of hours recorded. In the HIH meltdown, one firm of liquidators was 

appointed to liquidate all of the Australian companies. Fees up until August 2005 are shown in the following table. 7 

Company 

HIH Casualty & General 

Insurance Limited 

Liquidators’ Liquidators’ fees 

fees paid 

unpaid 

$22,043,549 $885,019 

Total Liquidators’ 

fees 

$22,928,568 

FAI General Insurance 

$13,869,656 $630,649 

Co Limited 

$14,500,305 

CIC Insurance Limited $4,450,097 $134,565 $4,584,662 

World Marine & 

General Insurances Pty 

Limited 

$204,075 $135,156 

$339,231 

FAI Traders Insurance 

Co Limited 

$10,340 $24,187 

$34,527 

FAI Reinsurances Pty 

Limited 

Nil $24,274 

$24,274 

FAI Insurances Limited $1,195,098 $54,925 $1,250,023 

HIH Underwriting & 

Insurance (Australia) 

Pty Limited 

$13,517 $40,193 

$53,710 

Total $41,786,332 $1,928,968 $43,715,300 

The total of over $43m assuming an average rate of $200 per hour would equal a person working for 40 hours per 

week for 114 years. 

The need for liquidators 

There are two sides to every story. While creditors feel aggrieved that their money is going to pay liquidators’ fees, 

liquidators are a vital part of the insolvency regime under the Corporations Act. 

For simplicity, insolvency practitioners are referred to in this paper as “liquidators” whether acting as 

administrators, receivers or liquidators. In all of these roles, they are an essential part in the way the law deals with 

insolvent companies. 

Deeds of company arr angements 

A deed of company arrangement (DOCA) is an agreement binding on an insolvent company and its creditors, under 

which payments are proposed to be made to the cr editors, usually by the company continuing to trade. The DOCA is 

proposed by the liquidator and adopted by a meeting of creditors. 

DOCA’s can give real benefits to creditors, compared to liquidation. As soon as the DOCA is signed, the company is 

generally handed back to the directors. Provided they generate the money to pay the liquidator’s fees and the part 

payments to creditors required by the DOCA, they can then continue to run the company in the future. 

7 McGrath Nicol and Partners, Form 524 Presentation of Accounts and Statement by Liquidator (For the period ended 26 August 2005) 

. 



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There are many companies still in business today, after going through the DOCA process. Those companies would 

be out of business, if they had simply gone into liquidation. The creditors of these companies often receive more 

than they would have received under a liquidation. 

The Corporations Act requires a liquidator to act as administrator of the funds collected under the deed. 8 

Preventing insolvent trading 

It is clearly in the interests of the community to stop companies trading while insolvent. Otherwise, they continue to 

run up debts to creditors, who may never be paid. 

It is illegal for directors to allow a company to continue to trade while insolvent. 9 However, many directors ignore this 

as they refuse to face the reality that their business has failed. 

In such cases, creditors can apply to the cour ts to have the company placed into liquidation. The ATO, more than 

any other creditor uses this process to put insolvent companies into liquidation. This stops them incurring further 

debt and also stops the directors from using the company’s tax losses to reduce future tax. 

Of course, this process requires a registered liquidator. 

Receivership 

Banks and other lenders often require a registered charge before they will lend money to a company. A charge over a 

company is like a mortgage over a house. It gives the lender security over the company’s assets. 

What makes a charge different from a mortgage is that it usually applies to all of the company’s assets. However, 

these assets change from day to day as the company buys stock, sells goods, obtains payment of invoices, etc. Such 

a charge is described as a “floating charge”, meaning that it floats above the company’s assets and only attaches to 

them if the company defaults. 

When there is a default, the creditor needs to appoint a receiver to go into the compan y and take possession of 

whatever assets are then on hand, for the benefit of that creditor. By law, a receiver must be a registered liquidator. 10 

If this system did not exist, businesses would be unable to raise loans on the security of assets such as stoc k. 

Accordingly, the receivership system is a vital part of corporate commerce. 

The policing role 

Companies can be used to commit fraud. For example, in some industries it is common to employ low -paid staff 

through companies, paying no superannuation, PAYG or other taxes. When these liabilities build up, the companies 

are liquidated and the staff are moved to another company to repeat the process. 

Part of the role of liquidators is to report these and other breaches of the Corporations Act to ASIC. This is a legal 

requirement under the Corporations Act for liquidators, 11 for receivers 12 and for administrators 13 . 

8 s 444A(2), Corporations Act 2001 (Cth) 

9 s 588G, Corporations Act 2001 (Cth) 

10 s 418, Corporations Act 2001 (Cth) 



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Only a small percentage of these offences are ever prosecuted. However, without the reporting role of liquidators, 

the number of prosecutions would probably be even smaller. 

Why liquidators need to be paid from creditors’ funds 

The need for liquidators to be paid 

The facts are simple. Our insolvency regime needs liquidators. Liquidators need to be paid. There is no system 

for paying liquidators other than from the funds of the companies, or from money able to be clawed -back 

from creditors, directors or other third parties. 

Cross subsidising small liquidations 

Most insolvent companies are small companies with little or no assets. The following table 14 , published by 

ASIC, shows that over 60% of companies placed into liquidation have less than 5 full time employees. Only 

5.4% are recorded as having more than 20 full time employees. 

Table 7: Initial external administrators’ reports—Size of company as measured by number 

of full-time employees (“FTE”) (1 July 2009–30 June 2010) 

Less than 5 FTE 4,766 60.3% 

Between 5 and 19 FTE 1,296 16.4% 

Between 20 and 199 FTE 392 5.0% 

200 or more FTE 28 0.4% 

Not known 1,421 18.0% 

Total 7,903 100.0% 

In many liquidations of these smaller companies, the only way the liquidator can be paid is by clawing back payments 

made to creditors in the period leading up to the liquidation. If they could not claim these payments back from the 

creditors and use them to pay their fees, they would often be unpaid. 

Being appointed as a liquidator of a company involves the liquidator spending at least several hours of work, even for 

a company with no assets. Under the present system, many liquidators will consent to being app ointed as liquidator 

of any company, sight unseen. They realise that in many cases, they will work for a number of hours and receive 

nothing. Their incentive is the hope of finding a company where they will be paid, often by clawing back payments 

previously made to creditors. 



13 s 438D, Corporations Act 2001 (Cth) 

14 ASIC, Insolvency statistics: External administrators’ reports 1 July 2007–30 June 2010 (2010) at 17 August 

2011. 



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Why liquidators need to be paid highly 

When one looks at the amount charged by liquidators for individual liquidations, their fees seem very high. However, 

one should also consider the number of companies they liquidate, where they are paid nothing. 

Under the present system, the creditors of larger companies, in effect, subsidise the liquidation of companies with 

no assets where the liquidators are not paid. 

Comparison with bankr uptcy 

The liquidation system may be contrasted with bankruptcy, where a trustee is appointed to handle the bankrupt 

estate of an individual. Like liquidations, many bankrupt estates yield no money to pay the bankruptcy trustee. 

However, the bankruptcy system has a different solution. 

The Insolvency and Trustee Service Australia (ITSA) is a government body which supplies a bankruptcy trustee to 

any bankrupt estate. There are also private trustees for bankrupt estates. However, ITSA handles the majority of 

bankruptcies, where there is no money to pay fees. 

ITSA obtains a substantial part of its funds from a small percentage levy on the assets of bankrupt estates. 

Alternatives to the present remuneration system 

Since 2005, ASIC has administered a fund to pay liquidators for “assetless administrations”. However, the budget is 

very limited and the liquidator has to carry out substantial work before being eligible for any such payment. 

In July 2011, the Insolvency Practitioners Association of Australia, which represents around 85% of liquidators, made 

a submission to Treasury. 15 It suggested that funds to pay for assetless liquidations should be obtained from placing 

a levy on all new companies, as they are registered. This money would be used to pay liquidators of companies with 

no assets. They also put forward, but dismissed, the idea that ASIC should simply deregister those small insolvent 

companies, without any liquidation at all. 

In Hong Kong, there is a system for practitioners to bid for the work, quoting a fixed fee for the administration of 

insolvent companies. 

The present system for paying liquidators for administering assetless companies can at times be haphazard and 

unfair. It involves the liquidator agreeing to be appointed to any company, hoping that there will be some money that 

can be recovered, probably from payments to creditors. If so, those creditors, in effect, pay the liquidator’s fees. If 

not, the liquidator is unpaid. 

15 IPA, IPA Submissions (2011) at 17 August 2011. 



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Suggestions for reforms 

The following are some suggestions for reforms to the insolvency regime: 

1. Employee entitlements 

The law providing that 100% of liquidators’ fees be paid before any payment of employees’ entitlements 16 

should be changed. Because of the GEERS scheme, most of these employee entitlements are paid by the 

Australian government. The question arises, why should liquidat ors’ fees come before the rights of 

employees, at the expense of the taxpayer? 

2. Preferences 

A creditor who was paid by a company before it went into liquidation should not have to give that payment 

back to the liquidator, unless at least the majority of t hat money will go to the creditors, rather than being 

taken for liquidators’ fees. 

3. Insolvent trading 

If the directors allow a company to run up a debt when the company cannot pay it, they are personally liable 

for that debt. This is fair. However, by law 17 the liquidator has control over collecting that money from the 

directors. In practice, almost all of the money received goes to paying the liquidator’s fees, unless the 

liquidator consents to or the court permits, recovery by the creditor. Those creditor s should have the right 

to claim directly from the directors, without the money going to the liquidator. 

4. Incentives not to pay tax 

The many incentives for a company not to pay tax should be removed. The most blatant is the law 18 that 

directors may be personally liable for PAYG paid before the company was liquidated. It means that the 

directors of a struggling company, which pays that tax, will probably end up paying the tax personally, after 

the liquidator claims it back from the ATO as a preference. This s hould be repealed immediately. It is 

unreasonable to punish directors because their company paid tax. 

5. Liquidators’ monopoly 

The law should be changed to allow insolvent companies to be liquidated by chartered accountants or 

lawyers, who can be appointed and disengaged by the directors. This will expose liquidation fees to ordinary 

market forces. 

6. Assetless administration 

The existing assetless administration fund should be expanded to pay a reasonable fee to liquidators who 

are prepared to administer companies with no assets. 


17 s 588M, Corporations Act (Cth) 

18 s 588FGA, Corporations Act (Cth) 



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Conclusion 

It is the view of this author that the Senate enquiry was sidetracked after receiving multiple submissions from 

liquidators and their lobby group. The Senate committee concentrated almost entirely on a small number of 

liquidators who broke the law. 

However, that is not the only problem. The main issue is the vast bulk of liquidators who legally pay themselves 

millions of dollars out of the companies’ money — money that would otherwise go to the employees and creditors, 

including the Australian taxpayer. 

The Senate committee’s first recommendation was that the Australian Insolvency Practitioners Authority (AIPA) be 

established as part of the Insolvency and Trustee Service Australia (ITSA), to take over from ASIC. It then 

recommended a further enquiry. These recommendations appear to have been ignored. However, we do not need 

another acronym or another enquiry. We need serious changes to the law to enable the funds of insolvent 

companies to go to the appropriate parties. 

About the author 

Tim Somerville is an 

accredited specialist in 

business law and provides 

business and taxation 

advice to small and 

medium sized businesses. 

He is the founding partner 

of Somerville Legal, 

established in 1983, and 

was also the president of 

the North Metropolitan 

Law Society from 2005 to 

2009, and has served on the Law Society Committee 

for specialist accreditation in business law. 

Tim Somerville is also the author of the Business Law 

module of LexisNexis Practical Guidance 

Since its establishment in 1983, Somerville Legal has 

rapidly grown to become North Sydney’s largest law 

firm, with accredited specialists in Business Law and 

Family Law, accredited Estate Planning practitioners, 

litigation specialists and notaries. For more 

information, visit www.somervillelegal.com.au. 

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The opinions expressed in this whitepaper ar e those of the author and not necessarily the opinions of LexisNexis Pacific. 

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