September 2010 – ░░░ INSOLVENCY INTERFACE

Code of conduct for liquidators being revised

Australian Senate 2009-2010, Ethics, Official Inquiries, Regulation, Standards Comments Off

Sep 302010

Due to “various factors”, including the Senate Inquiry into Liquidators and Administrators, the Australian association of insolvency practitioners has drafted changes to its code of conduct.

On 29 September 2010 the latest version of the code (Version 2) was released to members of the Insolvency Practitioners Association of Australia (IPA) and made available to the public via its website: http://www.ipaa.com.au

Visitors to the site can view the existing Code of Professional Practice (COPP) — which is Version 1, issued in May 2008 — and a version of the proposed new code marked up for changes between versions 1 and 2.

Typically such codes set out the ethical principles, values, behaviours and standards of practice expected of members

The IPA says that its COPP is the standard for professional conduct in the insolvency profession. It says that: “The primary purposes of the COPP are to educate IPA members as to their professional responsibilities; and provide a reference for stakeholders against which they can gauge the conduct of Practitioners”.

IPA members have until 20 October 2010 to provide feedback or raise any concerns in respect of the draft Version 2. The IPA expects that Version 2 will be in operation prior to the end of 2010.

Hourly fees charged by liquidators, receivers and administrators

Australian Senate 2009-2010, Official Inquiries Comments Off

Sep 212010

A chart showing hourly fees charged by liquidators was supplied to the Senate Committee by the Australian Securities and Investments Commission (ASIC). See below:

Table supplied to the Australian Senate Committee Inquiry

Corporate insolvency regulator is “overburdened” says Senate Committee.

Australian Senate 2009-2010, Official Inquiries, Regulation Comments Off

Sep 142010

In its report released today (14 September 2010) the Australian Senate Committee that was set up to inquire into liquidators and administrators has recommended that the corporate insolvency arm of ASIC be transferred to ITSA to form the Australian Insolvency Practitioners Authority (AIPA).

In discussing this recommendation (one of many in its 190 page report) the Committee said:

“.. (we have) heard a range of evidence concerning the role and competence of the Australian Securities and Investments Commission (ASIC), the Companies and Liquidators Disciplinary Board (CALDB) and the Insolvency Practitioners Association of Australia (IPAA). The criticism of ASIC’s approach to monitoring the insolvency industry as outlined in chapter 6 of this report is of particular concern for the committee”.

“ASIC has consistently claimed that it has the resources to fulfil its current responsibilities in insolvency matters. It has also admitted that there are areas in which it could improve. Taken together, these comments suggest that ASIC believes it can address these areas without more funding, provided its responsibilities in insolvency are not increased.”

“However, the committee believes that regardless of funding, ASIC is overburdened. The oversight of insolvency practitioners is just one of 13 ‘stakeholder teams’ within ASIC’s organizational structure. Its 2008–09 Annual Report lists six strategic priorities, none of which relate directly to corporate insolvency matters. Understandably, the strategic priority of managing the domestic and international implications of the Global Financial Crisis has consumed much of ASIC’s time and resources.”

“The committee believes that corporate insolvency in Australia needs more priority and prominence in the regulatory framework. This will not be achieved through more funding and responsibilities for the same overburdened agency. Rather, … the committee argues that there is a need to combine the regulation of personal bankruptcy and corporate insolvency under the one body. This would be best achieved by transferring ASIC’s corporate insolvency responsibilities to within the Insolvency and Trustee Service Australia (ITSA). The new agency would therefore be under the Attorney-General’s portfolio.”

For a copy of the full report go to: http://www.aph.gov.au/senate/committee/economics_ctte/liquidators_09/report/report.pdf

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Why are reports of misconduct shelved?

ASIC, Australian Senate 2009-2010, Offences, Official Inquiries, Regulation, White collar crime Comments Off

Sep 132010

Statistics produced by Australia’s corporate regulator reveal that it treats only 11% of the unfavourable statutory reports it receives from insolvency practitioners as serious enough to warrant any action.

Insolvency practitioners must lodge a report with the Australian Securities and Investments Commission (ASIC) when they suspect an offence under any Australian law relating to the company to which they are appointed.

In one of ASIC’s submissions to the Senate Committee’s inquiry into liquidators and administrators (see page 76 of the March 2010 submission), there is a chart showing the number of such reports – described as “reports of alleged misconduct or suspicious activity” – received in the financial years 2007, 2008 and 2009, and in the 6 months to December 2009.

See the copy of ASIC’s chart at the end of this article.

[All public submissions to the Committee may be found at http://www.aph.gov.au/senate/committee/economics_ctte/liquidators_09/submissions.htm ]

The chart in ASIC’s first submission reveals that during the period 1/7/2006 to 31/12/2009 ASIC received 20,225 “inital” statutory reports alleging misconduct or suspicious activity. Of those only 2,918 (14.4%) were flagged or escalated for further consideration.

In the 06/07 and 07/08 financial years the number of reports escalated equalled 17%. But in the 08/09 financial year and the half year to December 2009, that figure dropped to 11%.

Why are 89% of reports by liquidators and administrators not acted upon? There would be several reasons. Isn’t the public entitled to know what those reasons are and how many cases there are in each category?

Treasury’s Answer to Senate Questions

Australian Senate 2009-2010, Official Inquiries Comments Off

Sep 102010

AUSTRALIAN SENATE INQUIRY INTO LIQUIDATORS AND ADMINISTRATORS

TREASURY DEPARTMENT’S ANSWERS TO QUESTIONS ON NOTICE

Circa March 2010

Senator Williams

‘Can you take this on notice for me: how many countries actually have receivers? I believe in recent times in the UK they have actually banned receiverships. Could you fond out whether the UK has banned receivers? Could you also tell me how many countries around the world actually have a system of receivership and appointing receivers?’

Answer:

“Administrative receivership is the process in the United Kingdom where in the event of a default an a loan, a tender may be entitled to appoint an insolvency practitioner (i.e. an administrative receiver) who may have the control of the whole or a substantial part of a company’s property and wide powers over its business; for the purpose of realising the lenders security. In many ways, an administrative receivership is akin to a receiver and manager under Australian law.

“In the United Kingdom, the Enterprise Act 2002 (UK) restricts the use of administrative receivership. Subject to exceptions, rights to appoint an administrative receiver are limited to those who have a floating charge that was contractually agreed prior to 15 September 2003.

” Treasury notes that Professor David Brown appeared before the inquiry in Adelaide on 9 April 2010 and Treasury refers to Professor Brown’s explanation of the current law in relation to receiverships in the United Kingdom.

“Non‑administrative receiverships are still available in the United Kingdom. The availability of receiverships is legislated by the Insolvency Act 1986(UK).

“Receivership in one form or another is present in most modern insolvency regimes such as Canada, United States of America and New Zealand.”

Senator Fierravanti‑Wells

‘I would be really interested to know from Treasury’s perspective how much tax alone is foregone in corporate failures on a per annum basis.’

Answer:

“The Australian Taxation Office (ATO) has advised that during the financial year ending 30 June 2008, an estimate of $1.06 billion in taxation was forgone as a consequence of known corporate failures. The estimated amount for the financial year ending 30 June 2009 was $1.3 billion. These amounts relate to known or reported taxation liabilities and do not include unpaid or uncollected superannuation liabilities.”

Senator Cameron

‘You may want to take this on notice but could you advise the committee of how many companies operate within Australia under that $10 million gross annual turnover threshold?’

Answer:

” ASIC advise that there are approximately 1.7 million companies in Australia, with approximately 32,000 required to report under Chapter 2M of the Corporations Act. Of those that report, approximately 12,000 are proprietary companies and approximately 20,000 are public companies.

“Small proprietary companies are generally not required to prepare financial reports, unless requested by their shareholders or ASIC. Even if required to prepare the reports, small proprietary companies are not required to lodge the reports on the public register. For the purpose of these provisions, a ‘small proprietary company’ is one which satisfies two of the following three criteria: having less than 50 employees, less than consolidated revenue greater than $25 million or assets under $12.5 million.

“Excluding the approximately 20,000 public companies, almost all of the companies that do not lodge financial reports have consolidated revenue of less than $25 million.”

Senator Fierravanti‑Wells

‘Following on from Senator Cameron’s question, in terms of sanctions that are imposed in this area on company directors, where does Australia rank? Could you take that on notice. For example, the stigma in this country in relation to bankruptcy and insolvency has disappeared and certainly is not comparable to the severity of sanctions that are imposed on directors in other countries where passports are removed and those sorts of things. We are nowhere near that. So, if you could take it on notice and give us a comparison, 1 would be interested in the answer.’

Answer:

“Australia has a robust system of corporate governance that is well recognised internationally.

“The principal duty of the board of directors is to act in the interests of the company as a whole. This means acting in the best interests of members, having regard to their future as well as current interests. Every member of a company has certain rights by virtue of their membership. These rights are conferred by statute and by the company’s own constitution. The Corporations Act protects members of the company from unjust treatment and provides a range of mechanisms for members to protect their rights and interests as members of the corporation.

” The Government has put in place a principles‑based framework for corporate governance to protect the integrity of the market, facilitate commerce and industry, and maintain investor confidence in Australia’s companies.

“The Corporations Act contains a range of duties setting out certain minimum obligations and responsibilities directors must fulfil. These include:

the duty to act in good faith; the duty to act in the best interests of the company;
the duty to exercise their powers with appropriate care and diligence that is reasonable in all of the circumstances;
the duty to not make inappropriate use of inside information;
the duty to not misuse their position for their own or a third party’s possible advantage (or to the possible detriment of the company); and the duty to avoid insolvent trading.

“Directors face penalties of $200,000 for civil contraventions of these provisions, and can be disqualified from managing corporations. Directors may also be required to pay compensation. Criminal contraventions face maximum fines of $220,000 or imprisonment for 5 years, or both.

“In relation to passports, where ASIC is conducting an investigation, a prosecution, or a civil proceeding against a person, the Court under section 1323 of the Corporations Act can require a person to deliver up to the Court their passport.

“Given differing legal frameworks and institutional arrangements, regulatory arrangements are not readily amenable to international comparison.”

Senator Cameron

‘Has Treasury done any analysis of the implications of phoenix companies for the overall economy? You may have to take this question on notice: does Treasury see phoenix companies as a problem generally in the economy?’

Answer:

“Phoenix activity involves the evasion of tax and other liabilities through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities. Minister Sherry released a proposals paper Action against Fraudulent Phoenix Activity in November 2009. We refer the committee to the overview and analysis of the problem of phoenix company behaviour set out in that paper.”

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Payment Priority for Child Support Debts

Priority Debts Comments Off

Sep 102010

Australia’s Child Support Agency (CSA) is reminding insolvency practitioners of the status of pre-appointment child support deductions.

CAS says that unremitted child support deductions withheld from an employee’s wages by an insolvent employer must be paid ahead of most other debts, whether preferential, secured or unsecured.

It is pointing out that liquidators, receivers, receivers and managers, company administrators and deed administrators are “trustees” as defined in section 4 of the Child Support (Registration and Collection) Act 1988 (the CSRC Act).

The CSRC Act makes trustees liable to pay the child support debt to CSA (Section 50(1)). It also endows such debts with priority over other preferential, secured or unsecured debts (S.50(2)(a)).

CAS says that this section takes precedence over the priority provisions of the Corporations Act 2001 because it is made applicable “notwithstanding any other law of the Commonwealth or any law of a State or Territory”.

Fortunately for insolvency practitioners/trustees the CSRC Act ranks the trustee’s remuneration ahead of the child support debt (S.50(2)(a)). Trustees remuneration is specifically included in the only class of costs granted priority over child support debts, namely “costs, charges or expenses of the administration of the estate or of the winding up of the company that are lawfully payable out of the assets of the estate or of the company”.

Also specifically included in this special class are the “costs of a creditor or other person on whose petition the sequestration order or the winding up order (if any) was made”.

To obtain this priority both the remuneration and the costs of the petitioning creditor must be “lawfully payable out of the assets of the estate or of the company”. Presumably this means that they must satisfy all relevant requirements in the Corporations Act 2001.

According to the Insolvency Practitioners Association of Australia (IPA), CSA is seeing an increase in letters from liquidators claiming, incorrectly, that a child support debt has no priority.

Notice of appointment and clearance from CSA

Although there appears to be no specific law requiring a “trustee” to notify CSA of his or her appointment, it should be done:

where the trustee is aware that a current or former employee or contractor of the company is or has been making child support payments to CSA; and
where there is amongst the company’s records a letter from CSA titled either Schedule of Child Support Deductions or Notice Pursuant to Section 72A.

Even if such circumstances don’t appear to exist but the company has used or is using the services of employees or non-corporate contractors, trustees should – with the possibility of a high priority debt existing – take the precaution of informing CSA of the insolvency appointment and requesting written advice as to whether CSA has anyone on its books for the company.

According to Ms Sue Saunders, Assistant Director of CSA’s Employer Services division, who I spoke to today, CSA is happy to check its records and respond to such requests.

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Tax Returns: ATO rules relaxed for Liquidators

Returns, Taxation Issues Comments Off

Sep 082010

[This post was updated on 24/3/2014.]

No one likes doing their income tax returns. So company liquidators and receivers must be relieved that the Australian Taxation Office (ATO) has relaxed its requirements for lodgment of returns, even if it is only for periods prior to the date of appointment.

The ATO’s viewpoint (from July 2010) is set out in a web document headed “Information for trustees appointed under the Corporations Act 2001”, specifically under the sub headings “Clearances – liquidators and receivers” (last modified 15/4/2013)and “Clearance notice issued” (last modified 15/4/2013).

See http://www.ato.gov.au/Tax-professionals/Insolvency-practitioners/In-detail/Responsibilities/Information-for-trustees-appointed-under-the-Corporations-Act-2001/?page=2#Clearances___liquidators_and_receivers

and

See http://www.ato.gov.au/Tax-professionals/Insolvency-practitioners/In-detail/Responsibilities/Information-for-trustees-appointed-under-the-Corporations-Act-2001/?page=3#Clearance_notice_issued

Pre-appointment returns

The ATO says that from July 2010 ” … a risk management approach may be adopted by the ATO to determine if lodgment (of outstanding income tax returns, fringe benefit tax returns or outstanding activity statements) is required”.

A risk is defined by the Australia/New Zealand Standard for Risk Management (AS/NZS 4360:2004) as “…the possibility of something happening that impacts on your objectives. It is the chance to either make a gain or a loss. It is measured in terms of likelihood and consequence.”

The ATO states that in making its risk assessment it will have regard to, but will not be limited to, certain factors. Those factors are listed in the text box below.

Of these factors the ATO’s says that they:

” … are intended to ensure that liquidators will only be required to lodge where the circumstances reasonably support that requirement. It is expected that, in many cases, the requirement to lodge income tax returns should not arise.”

The main risk management factors to be used by the ATO in deciding whether pre-appointment returns must be lodged.

The prospect for, and likely size of a dividend being paid to unsecured creditors ;
the likelihood that the return would, if lodged, reveal an increase in the tax liabilities owed to the ATO;
the availability of books and records which would make it possible to prepare the return;
the likelihood that the liquidator’s cost of preparing those returns would be covered by the assets of the liquidated company without resulting in an inordinate adverse impact on other creditors; and
the wider community benefits of having the returns lodged.

For receivers, as distinct from liquidators, the ATO has taken the view that: ” … where a receiver has only partial control of the assets of a company, a clearance can be issued to the receiver without the need to have all income tax returns up to date. If the company is not in liquidation, outstanding returns will be demanded.” Presumably this means that if the receiver has control of all the assets, the ATO will demand outstanding returns but will take a risk management approach if the receiver protests or refuses.

Legal principle

Under income tax legislation the ATO can require a liquidator to prepare and lodge any overdue documents for a company in liquidation, including documents for periods prior to the liquidator’s date of appointment. This statement of principle is restated for the record in document 62547.

Post-appointment returns are required

The document also makes it clear that post-appointment returns are required to be prepared and lodged by liquidators, receivers and administrators:

“Under section 254 of the Income Tax Assessment Act 1936, liquidators, receivers and administrators appointed under Part 5.3A of the Corporations Act 2001 are required to prepare and lodge income tax returns for the period in an income tax year from the date of their appointment. Liquidators, receivers and administrators appointed under Part 5.3A of the Corporations Act 2001, as trustees for tax purposes, are responsible for accounting for income or profits or gains derived in their capacity as liquidator or receiver or administrator appointed under Part 5.3A of the Corporations Act 2001. “

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