Does deregistration short cut conflict with Court judgment?

 ASIC, Forms, Insolvency Laws, Regulation  Comments Off on Does deregistration short cut conflict with Court judgment?
Nov 252010
 

A controversial ASIC-approved short cut to deregistration in a creditors’ voluntary liquidation  seems to be at odds with sentiments expressed in a decision of the Federal Court of Australia.

In my post headed “Obscure short cut through insolvency law on company deregistration” (24/11/2010) I questioned whether this officially sanctioned short cut or escape mechanism – which allows  liquidators to bypass  sections 509(1) to (5) of the Corporations Act 2001 (the Act) in loosely defined and very common circumstances – was warranted.

Now it stikes me that it might actually be unlawful.

His Honour, Jacobsen J, examined section 509 of the Act in considering the case of  Emergen X Pty Ltd (In Liquidation) ACN 114 579 510 [2010] FCA 487.

His Honour’s written judgment (May 2010)  illustrates the importance attached to the requirements to convene a final meeting and to let 3 months elapse after that date.

A shareholder of the company applied to the Court for an order under section 509(6) to bring forward the date of deregistration by shortening the 3 month period that is otherwise required to elapse. (The shareholder wanted deregistration to occur on the earlier date so that it (the shareholder) could obtain a tax benefit, under CGT rules, by being able to claim a loss on the shares in the current tax year.)

 His Honour took the view from examining legal authorities that the 3 month period is a “period of grace”, designed to allow “for claims by creditors or other aggrieved parties so as to ensure that they can make a claim against a company without having to go through the process of seeking an order reinstating it.”

I find it difficult to see how the sentiments expressed by His Honour sit in harmony with the short cut – as ASIC has approved with companies Form 578 – which allows liquidators to bypass giving  notice of a final meeting of creditors and also removes the 3 month period of grace.

Let’s have a debate.

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Note: The following quote is from His Honour’s judgment in Emergen X Pty Ltd (In Liquidation) ACN 114 579 510 [2010] FCA 487:

“The reason why there is a period of grace of three months allowed after the filing of the return seems to be explained in a Victorian authority from the nineteenth century. The decision, which is relevant, is John Birch & Co. Limited v The Patent Cork Asphalt Co. Limited (1894) 20 VLR 471 (“John Birch”). In that case Madden CJ said at 472 that the suspension of a dissolution for three months in the then relevant section of the legislation means that a purpose is to be served. His Honour said the only easily understandable purpose is to enable persons who are affected to come in and make a claim. Thus the period of grace is allowed for claims by creditors or other aggrieved parties so as to ensure that they can make a claim against a company without having to go through the process of seeking an order reinstating it.   

Although the decision of Madden CJ in John Birch was reversed on appeal, the discussion of the Full Court does not affect the primary judge’s explanation for the rationale of the three month period, see John Birch & Co. Limited v The Patent Cork Asphalt Co. Limited (1985) 21 VLR 268.”

Note:  For the full text of this judgment, issued in May 2010, click HERE.

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The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.          

Obscure short cut through insolvency law on company deregistration

 ASIC, Insolvency Laws, Regulation  1 Response »
Nov 242010
 

Here’s a tip for the student of insolvency law and practice.  Don’t look to legislation or legal judgments for all the answers.  Some of the official rules are contained in  “regulatory guides” which can easily escape your attention. 

But even more problematic is the occasional, obscure,  almost unwritten, rule which is the result of a pragmatic arrangement between regulators and insolvency practitioners. 

A good, current example , is deregistration of a company following a creditors’ voluntary liquidation.  Here, the pragmatic twist to the law dwells in the text on a non-prescribed form, and in the text of an even more obscure document, a statement issued by the Insolvency Practitioners Association of Australia (IPAA or IPA) to its members.

But I’m getting ahead of myself.

Look up Part 5.5 of the Corporations Act 2001 (the Act), under the heading “Final meeting and deregistration”, and you will find law (section 509) which states that “ASIC must deregister the company at the end of the 3 month period after the (final) return was lodged.”  This requirement  is sometimes referred to as “automatic deregistration”.

To get to this point in a creditors’ voluntary liquidation where the liquidator lodges a final return, the Act states that the liquidator “must convene a general meeting of the company, or, in the case of a creditors’ voluntary liquidation,  a meeting of the creditors and members of the company, for the purpose of laying before it the account and giving any explanation of the account” .

On the face of it, these provisions would appear to be the law.  Put simply, a company which has entered into a creditors’ voluntary liquidation is deregistered automatically 3 months after the liquidator’s return of the final meeting is lodged. 

If you, the student, wanted this confirmed, you might consult a book on corporate insolvency law  in Australia, where you would almost definitely find such confirmation.

But what you and the author of the book (and, of course, creditors and the general public) don’t know is that ASIC  has modified the law. 

How?  Well not – as far as I can see – through the official process of issuing a regulatory document, such as a Regulatory Guide or Information Sheet (of which there are a great many).

Instead, the modified rule finds its expression in companies Form 578 (which is not a prescribed form).  The form is headed “Deregistration request (liquidator not acting or affairs fully wound up)”.  One of the two tick boxes on the form, which constitute the basis for requesting deregistration, states:

“There are no funds left in the creditors’ voluntary liquidation to hold a final meeting and also the affairs of the company are fully wound up.”

So, dear student, the “law” relating to deregistration of a company following a creditors’ voluntary liquidation has been modified by inserting an escape clause.  If there are no funds left in the liquidation and the affairs of the company are “fully wound up”, the requirement to hold a final meeting is nullified or overlooked, and deregistration can be achieved by simply ticking a box and lodging a form.

This change is a result of ASIC “exercising its discretion”,  says the IPAA in a submission to Treasury in 2009:

“This issue concerns the application of s 601AB of the Corporations Act in finalising a creditors’ voluntary liquidation as an alternative to holding a final meeting of the company’s members and creditors under s 509.  After consultation with ASIC, the IPA issued a Practice Update in the June 2008 issue of its journal.  The Update informs members that ASIC has advised the IPA that in situations where the liquidator is without funds to cover the cost of holding the final meeting, ASIC will exercise its discretion and accept lodgement of a Deregistration Request (Form 578) under s 601AB(2).  It may be that the words of that subsection need clarifying to accord with what appears to be this intent of the section. “

But, dear student, you should also know that there is apparently a proviso attached to the phrases “no funds left to hold a final meeting”  (ASIC) and “without funds to cover the costs of holding the final meeting” (IPAA). Whether the staff in ASIC who process Form 578 applications are aware of this proviso is not clear.  Nevertheless, in a statement to members in 2008 (which was published again in July 2010 due to a number of queries from members) the IPAA states that:

“Only liquidators that are without funds are eligible to use section 601AB(2). “Without funds” does not include situations where the liquidator distributes all available funds via a dividend to creditors. Therefore, liquidators should ensure that sufficient funds are retained to cover the cost of a final meeting when a dividend is paid.”

Personally, and like most people, I am strongly opposed to obscure  or unwritten rules in any area of law, and especially so when they come into being with little debate and are at odds with the principle or intention of the law as it is expressed in applicable legislation. 

No doubt there are practical reasons for the procedure authorized by Form 578:

1.  Liquidators receive a benefit, particularly when they are winding up a company that does not have enough funds to pay the costs of calling a final meeting of members and creditors.  Without this short cut to deregistration these liquidators would be out of pocket.  However, the saving in each case may not be great, given that there is (apparently) no requirement to give notice of the final meeting other than by means of one advertisement in the Government Gazette.

2.  The government regulator (ASIC) receives a benefit by getting more dead companies off its Register with less “fuss”, thus reducing its workload in this area and thereby saving taxpayers some government expenditure. 

But what of the creditors of the company in liquidation? 

Financially, the Form 578 short cut to deregistration appears to make no difference to the creditors, for if the company is able to pay them a dividend the procedure cannot be utilized; and if  the company is unable to pay them a dividend, it  remains unable to pay them a dividend.

From the intangible views of justice and equity, it can be seen that,  in the case of creditors of a company which is unable to pay a dividend, the Form 578 short cut deprives creditors of the right to receive a final account of the winding up and the opportunity to discuss the winding up with the liquidator and others at a final meeting. 

Apart from the fact that these rights and opportunities seem to be enshrined in sections 509(1), the short cut method overlooks one of the main themes of recent attempts to reform insolvency laws, namely the need to improve information to creditors.

Is this short cut justified by the financial savings and improved efficiency?   Let’s have a debate.

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The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.          

Legal opinion warns external administrators about personal liability for company taxes

 Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues  Comments Off on Legal opinion warns external administrators about personal liability for company taxes
Nov 162010
 

A paper presented recently by two Melbourne barristers to a group of insolvency practitioners suggests that administrators, liquidators and receivers (external administrators) who do not take precautions risk personal liability for post-appointment capital gains/income tax liabilities.

Helen Symon SC is a Senior Counsel at the Victorian bar specialising in taxation and insolvency.  Mark McKillop has been a junior barrister at the Victorian Bar since 2008 specialising in insolvency, banking and taxation. 

Their paper, “Taxation – Common Issues for Insolvency Practitioners” (10 November 2010),  looks at external administrators as viewed through the eyes of taxation legislation. The authors make three key points:

“(a)      Insolvency practitioners are required to ensure that the entities to which they are appointed comply with most common tax obligations;

(b)        although the entities to which they are appointed are legally separate, insolvency practitioners can be personally liable, under some circumstances, for the payment of post appointment tax liabilities of the insolvent entity: income tax, capital gains tax, PAYG collections and GST;

(c)        choice of the type of appointment may affect the practitioner’s personal liability to pay capital gains tax liabilities of the appointee and, accordingly, the assets available to the secured creditor.”

Personal Liability under Taxation Law

In the debate so far the most troublesome law for external administrators has been Section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with agents and “trustees”, and raises the prospect that, as an agent or “trustee”, a external administrator may be personal liable for a company debt.

Section 254(1)(d) states that  every “trustee”, as defined in ITAA 1936 (*), and every agent is “hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

Section 254(1)(e) states that  every “trustee”, as defined in ITAA 1936, and every agent is “hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he has retained, or should have retained, under paragraph (d); but he shall not be otherwise personally liable for the tax.

According to Helen Symon SC and Mark McKillop, “Section 254, then, preserves the position of the Revenue vis a vis tax liabilities which arise following appointment of a liquidator, receiver or administrator …. Casting personal liability on the liquidator or receiver or administrator ensures the tax liabilities are met before funds are applied to satisfy creditors.”

Personal Liability under Other Laws

Helen Symon SC and Mark McKillop also refer to instances where personal liability may arise outside the income tax legislation.

In this context they refer to the case of Deputy Commissioner of Taxation v Tideturn Pty Ltd  (In Liquidation) [2001] NSWSC 217 (26/3/2001).  This case concerned a liquidator who kept the business of the company going after he was appointed and, in the process, deducted income tax instalments (group tax) from the post appointment wages of the employees.  The court held that the group tax deductions gave rise to a post liquidation debt payable in the liquidation as a priority payment under Section 556(1)(a) of the Corporations Law, as an expense properly incurred by the liquidator in carrying on the company’s business. 

The liquidator failed to pay any of the group tax, but paid other priority debts.  By failing to ensure that priority debts were paid proportionately in the circumstances of there being insufficient funds available (as is required by section 559 of the Corporations Law) the Court stated that this “would be a breach of duty by the liquidator”.  For this breach of duty the court ordered that “The liquidator must pay personally the sum of $75,000”, which was the group tax debt discounted for certain mitigating circumstances. (**)

Other interesting  judicial comments on “expenses properly incurred by a liquidator in carrying on the company’s business” and liability for breach of duty in not paying post appointment debts include:

  • Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd and Others [2002] VSC 576 (20/12/2002);
  • Bell v Amberday [2001] NSWSC 558 (4/7/2001); and
  • Charlie Pace & Anor v Antlers Pty Ltd (In liq) [1998] FCA 2 (12/1/1998).

Conclusion

Helen Symon SC and Mark McKillop conclude their paper with the following warning:

“Practitioners need to be aware that, in effect, they will be liable either directly or under penalty provisions for CGT, income tax and GST applying to the entity to which they are appointed.  They are also required to ensure that administrative requirements, such as filing returns, are completed.  Accordingly, prudent practice requires withholding sufficient funds to cover the liabilities until they are paid.”

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Note: The profile and contact details of Helen Symon SC are available at http://www.vicbar.com.au/find-a-barrister/advanced-search/search-results/barrister-profile?RollNumber=1884.  Mark McKillop’s profile and contact details are at http://www.vicbar.com.au/find-a-barrister/advanced-search/search-results/barrister-profile?RollNumber=4135    

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ADDITIONAL NOTES:

(*) A “trustee” for taxation purposes is defined in Section 6(1) of the ITAA 1936 [and ITAA 1997] as: “in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of the law, includes –

(a) an executor or administrator or, guardian, committee, receiver, or liquidator; and

(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession control or management of the income of a person under any legal or other disability.”

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(**) It is worth noting also, that as a result of his behaviour in this external administration – including his failure to pay all the expenses incurred in carrying on the business of the company after his appointment – the liquidator (William Edward Andrew) was brought before the Companies Auditors and Liquidators Disciplinary Board (CALDB) in 2001 and was persuaded to cease acting as a liquidator.  (See ASIC Media Release 01/312 at  http://www.asic.gov.au/asic/asic.nsf/byheadline/01%2F312+Time+limit+imposed+on+liquidator’s+registration?opendocument#. )

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(***) For my previous posts on this subject see “Post-appointment income tax debts of liquidator” and “Taxing capital gains made during liquidation.”

The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.          

$154 million used under GEERS to pay employee entitlements.

 Employee Entitlements, GEERS, Priority Debts  Comments Off on $154 million used under GEERS to pay employee entitlements.
Nov 092010
 
An annual report recently tabled in Parliament reveals that under the Australian Government’s “safety net” scheme over $154 million had to be paid out in 2009/10 to compensate 15,565 Australian workers who lost their jobs as a result of their employers’ insolvency.
 
This $154 million takes the total paid since the scheme began in 2001 to about $1,083 million.
 
The Department of Education, Employment and Workplace Relations (DEEWR) runs a scheme called the General Employee Entitlements and Redundancy Scheme (GEERS).  The scheme is officially described as follows:
 
   “GEERS is a safety net scheme which protects the entitlements of employees who have lost their jobs as a result of the bankruptcy or liquidation of their employers.  Eligible entitlements under GEERS consist of up to three months unpaid or underpaid wages for the period prior to the appointment of the insolvency practitioner (including amounts deducted from wages, such as for superannuation, but not passed on to the superannuation fund), all unpaid annual leave, all unpaid long service leave, up to a maximum of five weeks unpaid payment in lieu of notice and up to a maximum of 16 weeks unpaid redundancy entitlement.  Payments made under GEERS are subject to an annually indexed income cap, which was $108,300 for 2009–10.”     
 
In its  2009/10 Annual Report the department lists the “notable achievements” of GEERS as:
 

  “A total of $154,058,670 was advanced under GEERS to 15,565 eligible claimants. Of claimants who received assistance under GEERS, 87.3 per cent were paid 100 per cent of their verified employee entitlements by GEERS. More than 45,632 enquiries were received by the GEERS Hotline. Over $18 million advanced under GEERS was recovered during 2009–10.”

Note: After  a payment is made from GEERS, the Government seeks to recover the payment through the liquidation or bankruptcy process (as a priority debt).  As stated, the amount recovered in this way was $18 million, which apparently means that the net outlay of taxpayers’ money was $136 million. 

  
GEERS was introduced in 2001.  The following chart – prepared for this article using figures extracted from past DEEWR  annual reports, and an article in the Australian Journal of Management (June 2009, pages 51-72, authors Jeannette Anderson and Kevin Davis) – shows amounts paid out over past years:

 

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The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.          

Most reports of director misconduct are shelved

 ASIC, Insolvency Laws, Offences, Regulation, White collar crime  Comments Off on Most reports of director misconduct are shelved
Nov 042010
 

89% of the initial offence referral reports sent to Australia’s corporate regulator by liquidators and other external administrators end up consigned to oblivion.  Of the remaining 11%, approximately 66% receive a similar fate.

This data is revealed in the latest annual report by the Australian Securities and Investments Commission (ASIC), tabled in Parliament on 28 October 2010. 

Unfortunately ASIC’s annual report does not offer any explanation for the result, which is that the vast majority of offence allegations are dropped or rejected.

It would be instructive to know, for example, whether a lot of statutory reports of “misconduct and suspicious activity” are badly prepared, inadequate or unjustified; and/or whether ASIC regards a lot of the alleged misconduct and offences as minor or trivial.

The official ASIC analysis chart – “Statutory reports 2009-10” – is shown below, after my own description of what the chart means.  (This is my second post on this subject.)

What the ASIC chart means 

In the 2009/10 financial year ASIC received 9,074 reports from liquidators, administrators and receivers (external administrators).  Of these 6,509 (71.7%) contained allegations of “misconduct or suspicious activity”.

Normally ASIC does not act upon an external administrator’s allegations of misconduct or suspicious activity unless the allegations are supported by a detailed report by the external administrator.

ASIC refers to this detailed report as a supplementary report, since typically it supplements or expands upon an initial report by the external administrator.

Usually a supplementary report is put together at the request of ASIC.

In 2009/10 ASIC received 5,748 initial reports alleging misconduct or suspicious activity.  Presumably all of these were “analysed and assessed”.  Out of these 5,748 reports ASIC selected 11% (632) as worthy of further attention by way of a supplementary report. 

The end result for the other 89% of initial reports (5,116) was to be “recorded”.  This probably means that nothing worth mentioning was done about them.

The same fate befell 66% of the 761 supplementary reports alleging misconduct or suspicious activity.  Of the other 34%, ASIC referred 23% (175) “for compliance, investigation or surveillance” and referred 10% (76) “to assist existing investigation or surveillance”.  ASIC concluded that 1% of the reports (8) did not actually identify offences.

There is no data in the chart on how many reports by external administrators led to prosecutions for offences.

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The ASIC chart

ASIC’s notes to chart

“Initial reports are electronic reports lodged under Schedule B of Regulatory Guide 16.  Generally, ASIC will determine whether to request a supplementary report on the basis of the initial report.  Supplementary reports are typically detailed free-format reports, which detail the results of the external administrator’s inquiries and the evidence to support the alleged offences.  Generally, ASIC can determine whether to commence a formal investigation on the basis of a supplementary report. “

 ASIC ‘s official summary

“Liquidators, administrators and receivers (external administrators) are required to report to ASIC if they suspect that company officers have been guilty of an offence or, in the case of liquidators, if the return to unsecured creditors may be less than 50 cents in the dollar. As part of our response to the GFC (Global Financial Crisis), ASIC committed to increasing action on reports alleging misconduct from insolvency practitioners, following a 25% increase in insolvency appointments in 2008-09.  This year, a significantly increased proportion of supplementary reports (33% compared with 24% in 2008-09) were referred for compliance, investigation or surveillance.  Fewer reports failed to identify any offence.”

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The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.

Liquidator John David Adams passes away

 Industry People  Comments Off on Liquidator John David Adams passes away
Nov 032010
 

John Adams, a well-known Melbourne liquidator, passed away on 31 October 2010 at the age of 66.

In the years that I knew him well (1979 to 1984) John was a knowledgable and respected  liquidator with a professional approach combined with loads of business  nous and common sense.  Just as importantly he was also warm, generous and a lot of fun to be around. I will be forever grateful to him for having faith in me and giving me a start in public accounting and the insolvency profession when he was a partner at Parkhill Lithgow and Gibson, Chartered Accountants. 

Rest in peace JDA.