ASIC calls for public interest test for winding up companies

The corporate regulator has put forward the option of using a public interest test to help figure out when it should use its new regulatory authority to wind up any businesses which haven’t paid entitlements to employees.

But one insolvency expert warns small businesses may risk missing out, noting the Australian Securities and Investment Commission says it may not consider it to be in the public interest if the cost of liquidation outweighs the amount of the entitlements owed.

“The original law would have been to protect the little businesses, but it appears they may not have that done for everyone,” Dissolve chief executive Cliff Sanderson said this morning.

ASIC released a consultation paper yesterday, outlining how it plans to use its new power to wind up abandoned companies to help employees access the General Employee Entitlements and Redundancy Scheme. In short, it can place these companies in liquidation in order to have employees access these entitlements, in any situation where a director has bailed.

But one of the new proposals suggests ASIC will wind up an abandoned company based on a public interest test, which would take into account the cost of a wind-up, how much staff are owed and how many employees the company has.

But according to the proposal, some companies may not meet that test at all.

“If the cost of liquidation would exceed the amount of entitlements owed, we do not generally consider it would be in the public interest for ASIC to order the winding-up of a company,” the discussion paper explains.

“(Also) when there is a significant creditor (apart from employees) that will benefit from the liquidation, we will expect that creditor to take action.”

ASIC also said it’s not proposing to reinstate companies that have been already deregistered just so they can wind them up later.

“Among other reasons, there are already court processes in place to facilitate the reinstatement of a company where that is needed,” it said.

Sanderson warns while the public interest test is a good idea, it may mean employees of smaller businesses miss out.

“And why not? Because of the cost they have to pay to the liquidator. If they’re paying $10,000 to a liquidator when they’re only getting $3-4,000 in entitlements, well, no one really wants to pay that cost.”

“My opinion of this is that they’ll hardly ever use it. We’re really talking about small companies that have two or three employees, and the director didn’t pay them, and just walked away.”

This article first appeared at SmartCompany.