ASIC penalises two liquidators over conflicts of interest

 ASIC, Insolvency Laws, Insolvency practices, Prosecution of Liquidators, Regulation, Standards  Comments Off on ASIC penalises two liquidators over conflicts of interest
Aug 262011
 

Official liquidators, John Frederick Lord,  a former partner of accounting firm PKF Chartered Accountants and Business Advisers (PKF), and Atle Crowe-Maxwell, a current partner of PKF, have been penalised for not disclosing to the Supreme Court of New South Wales that they had a commercial relationship with the petitioning creditor in hundreds of liquidations.

 The Australian Securities and Investments Commission (ASIC) has cancelled Mr Lord’s registration as an official liquidator.  Mr Crowe-Maxwell has been required to enter into an undertaking with ASIC.

 The following is the media release from ASIC dated 26 August 2011:

 “ASIC has cancelled the registration of one NSW-based liquidator and required a second to enter into an undertaking, under section 1291 of the Corporations Act 2001 (the Act), after the liquidators consistently failed to disclose conflicts of interest in more than 100 administrations to which they were appointed.

 John Frederick Lord, 59, a former partner of accounting firm PKF Chartered Accountants and Business Advisers (PKF), had his official liquidator registration cancelled because, from 8 April 2004 to 6 March 2009, he did not disclose to the Supreme Court of New South Wales that he had a commercial relationship with the petitioning creditor of 225 companies in respect of which he consented to act as official liquidator.

 Atle Crowe-Maxwell, a current partner of PKF, also failed to disclose the same information to the Court for 105 administrations in which he consented to act as official liquidator, over the period from 19 July 2007 to 6 March 2009. As a result, ASIC has required Mr Crowe-Maxwell to enter into an undertaking with ASIC.

 Following its investigations, ASIC formed the view that Mr Lord and Mr Crowe-Maxwell’s acceptance and maintenance of the role of official liquidator in these circumstances while at the same time both being indirect shareholders – and in the case of Mr Lord, being a director as well – of debt collector, Premium Collections Pty Limited (Premium Collections), was a breach of their duties as fiduciaries to reveal potential conflicts of interest.

 Mr Lord’s de-registration as an official liquidator comes into effect immediately.

ASIC Commissioner Michael Dwyer said ASIC considered it in the public interest to take action against Mr Lord and Mr Crowe-Maxwell.

‘ASIC’s decisions highlight the need for practitioners to be aware of their overriding obligation to both be and be seen to be independent,’ Mr Dwyer said.

 ‘The independence of liquidators underpins, and is the foundation of, an effective and efficient system of corporate insolvency.’

 Mr Lord and Mr Crowe-Maxwell have the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.

 BACKGROUND

Mr Lord was a director and indirect shareholder of Premium Collections, a company that went into voluntary administration on 22 April 2009. A liquidator was appointed to Premium Collections on 27 May 2009. Mr Crowe-Maxwell was an indirect shareholder of the same company.

Premium Collections provided debt collections services for workers compensation insurers who were nominees of WorkCover. Two of those insurers were the largest clients of Premium Collections.

Premium Collections issued demands on behalf of the insurers to company policyholders whose workers compensation insurance premiums were unpaid. If the premiums continued to remain unpaid, Premium Collections recommended that their client, the relevant workers compensation insurer, make an application to wind up the debtor company.

From February 2008, Premium Advisory Pty Limited and PC Legal Pty Limited provided legal services to the insurers in respect of the winding up proceedings. Mr Lord was an indirect shareholder of both Premium Advisory and PC Legal. Mr Crowe-Maxwell was an indirect shareholder of Premium Advisory.

For the purpose of the winding up applications, Mr Lord and Mr Crowe-Maxwell consented to act as official liquidators to the debtor company. Each consent to act provided to the Court did not refer to the existing commercial relationship with the insurer that was the petitioning creditor.

 The liquidator of Premium Collections lodged a supplementary report with ASIC on 19 April 2010 under section 533(2) of the Act. ASIC undertook its own investigations which resulted in the decisions to cancel Mr Lord’s registration and require an undertaking from Mr Crowe-Maxwell.”

 

Although ASIC has cancelled Mr Lord’s registration as an “official liquidator” it appears his registration as a “registered liquidator” will remain intact for a little while longer.  ASIC has two registers for liquidators – one for “official liquidators” and the other for “registered liquidators” .  A search on 28 August 2011 reveals that Mr Lord is not on the former but is still on the latter. 

 

However, this distinction is probably of no practical consequence in this case, because Mr Lord decided some time ago to resign from all his appointments.  On 15 August 2011 he  told the NSW Supreme Court that he is to resign as a partner of the accounting firm PKF on 31 October 2011 and intends to cease practising as an insolvency practitioner”.  Also, he stated that ” He ceased accepting appointments as an external administrator on 30 April 2011 (and) intends to resign as liquidator of all companies in which he holds appointments.”  See the judgment in the matter of the Resignation of John Frederick Lord and the companies listed in the Schedules of the Originating Process [2011] NSWSC 917.

 

[A “registered liquidator” can accept appointments in voluntary liquidations (such as creditors’ voluntary liquidations under Section  497 of the Corporations Act 2001), and appointments as a voluntary company administrator or a deed of company arrangement administrator.  But only an “official liquidator” can act in compulsory liquidations/court liquidations.]

 

Review of laws governing Bankruptcy Act debt agreements

 Insolvency practices, Official Inquiries, Personal Bankruptcy  Comments Off on Review of laws governing Bankruptcy Act debt agreements
Aug 232011
 

The Australian Government has called for submissions by 26 August 2011 on issues related to the functioning of the debt agreement system for personal insolvency.   It says that three key issues  need to be resolved:

  1. The registration of deed agreement administrators
  2. The remuneration of deed agreement administrators
  3. Access to debt agreements

The following headings, sub-headings and questions appear in the paper.  Several options are given and consultation questions raised.

1. The regulation of administrators

  •  ITSA’s powers to deal with potential maladministration

  • Duties of administrators 

  • The registration of administrators

  • The qualifications of registered administrators 

  • Unregistered administrators 

  • ITSA’s powers to investigate potential misuse of client monies by unregistered administrators

  • Advertising by administrators

  • The provision of advice by unregulated entities

  • Insurance requirements for administrators

 2. Remuneration of administrators

  • The structure of the administrator market

  • Remuneration of administrators

  • What fees do administrators charge in practice?

  •  What effect does the level of fees have on acceptance rates?

  • Should administrator fees be regulated?

  • Increasing the information available to debtors

  •  Expenses recovered by administrators

 3. Access to debt agreements

  • How high should the thresholds be?

  •  How long should former bankrupts be barred from proposing a debt agreement?

4. International models: additional options for debtors

For a copy of the Government consultation paper in PDF format, click HERE.  To get the MS Word format click HERE.

Note from Attorney General re Submissions

Interested parties are invited to comment on the paper. While submissions may be lodged electronically or by post, electronic lodgement is preferred. For accessibility reasons, please submit responses sent via email in a Word or RTF format. An additional PDF version may also be submitted. All information (including name and address details) contained in submissions will be made available to the public on the Attorney-General’s website unless you indicate that you would like all or part of your submission to remain in confidence. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like part of their submission to remain in confidence should provide this information marked as such in a separate attachment. Legal requirements, such as those imposed by the Freedom of Information Act 1982, may affect the confidentiality of your submission. Please send written comments by close of business 26 August 2011 to:
Assistant Secretary

Business Law Branch

Civil Law Division

Attorney-General’s Department

Robert Garran Offices

3-5 National Cct

BARTON ACT 2600

or by email to bankruptcy@ag.gov.au.

Published submissions on regulation of insolvency practitioners

 ASIC, Insolvency practices, Official Inquiries, Regulation, Treasury Options paper 2011  Comments Off on Published submissions on regulation of insolvency practitioners
Aug 182011
 

Public responses to the Australian Treasury’s options paper titled “A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia” have been published on the Treasury website.  Click HERE to see them. There were 22 public submissions.

My own submission focused on the following 3 issues raised by the government:

QUESTION re STANDARDS FOR ENTRY INTO THE INSOLVENCY PROFESSION.  Are there any concerns with changing the academic requirements to remove the greater emphasis placed upon accounting skills over legal skills, while retaining a minimum level of study in each?

MY SUBMISSION > Yes.   1.  The current emphasis in the academic requirements of liquidators is not on “accounting skills” (as the Options Paper states) but on accounting studies.  Such studies teach important aspects of business activity, including budgeting, economics, business management, break-even analysis, financial ratios, business finance, costing methods, stock control, valuations, auditing, and taxes.  2.  A liquidator or other external administrator is likely to require a solid understanding in these aspects of business, particularly in trade-on situations.  3.  The present system, under which lawyers provide legal advice to liquidators as required, works well.  It brings fresh, independent, expert minds to bear when needed, which enhances the integrity of external administration regimes.  Would a liquidator whose professional qualification is that of a lawyer seek advice from another lawyer and give it the same status?

REMUNERATION FRAMEWORK FOR INSOLVENCY PRACTITIONERS.  INTEGRITY OF THE FEE SETTING PROCESS.

MY SUBMISSION > When the Options Paper refers to “clients” (of the insolvency practitioner) (para 162) it says that this term is used to refer to “creditors and/or members, depending upon the nature of the relevant insolvency administration”.  This seems to me to be a huge oversimplification which hides some important elements present in many insolvency administrations. 

In a voluntary corporate insolvency appointment the liquidator or administrator appointed at the first instance is engaged by the directors.  So, especially in the case of small enterprises, the liquidator or administrator will tend to think of the directors or, perhaps the directors’ accountant or lawyer, as his/her client.  The insolvency practitioner is approached by the directors (directly or indirectly) to assist with a problem that they have.

In such a case the liquidator’s fee is likely to be set by the directors or their advisers.  For example, the company’s lawyer or public accountant will contact two or more insolvency practitioners and ask them for advice on what to do and a “quote” on a fee – essentially a “fixed” fee – to carry out the work. 

The competition that keeps down insolvency administration fees occurs at this point.  It is, in fact, a tender process.  The winner, once appointed, then has the task of convincing those who have the power to approve or cut the fee (the creditors) that the fee is reasonable.  In this scenario, that tends to be the nature of the insolvency practitioners relationship with creditors.

 Often overlooked in discussions about the fee setting process in insolvency administration is the downside of competition.  Although a tender process keeps fees down, what is the cost to the integrity of our insolvency laws?  An analogy of sorts exists in the building industry, where fierce competition has encouraged quotes that are only achievable by the use of fake contracting agreements (to reduce employment costs), the fraudulent retention of tax monies, and the use of phoenix companies.  In the insolvency industry the push for cheap fees is likely to encourage tasks being cut, and the easiest tasks to cut are those to do with the investigation and reporting of offences and misconduct. 

 Inquiries and discussions about fees (including the discussion in the Options Paper) usually overlook the fact that our laws and our regulators charge and entrust liquidators with being part of the white-collar police force.  The amount of work liquidators are expected to carry out in this area – in investigations, collecting evidence, reporting and prosecution support – is considerable.  If liquidators do not meet this obligation, the insolvency laws are not enforced.  Through regulatory guides and the like the ASIC has almost “privatized” the enforcement of insolvency laws.  And, where the liquidator does this work, creditors often pay for it.  “Justice” has become another important client for the liquidator to consider.  Lower liquidation fees could be achieved, and justice might be better served, if a much greater part of this function was handed back to the ASIC or given to another government-funded police force.

QUESTION re FUNDS HANDLING AND RECORD KEEPING.  Are there other record keeping, accounting, audits and funds handling rules that should be mandated for personal and corporate insolvency, in addition to those that currently exist?

MY SUBMISSION > Yes.  I believe that the current law which allows liquidators in a creditors voluntary liquidation to destroy their own records of a liquidation soon after the winding up is finalized ought to be repealed.  Sec 542(1) contains the phrase “all books of the company and of the liquidator”.  The reference to the books of the liquidator should be removed.  For more comments see http://insolvencyresources.com.au/blog/2010/05/24/retaining-books-and-records-post-liquidation/ 

 

Free Excel template: corporate insolvency Report as to Affairs (Form 507)

 ASIC, Forms, Insolvency practices, Regulation, Templates  Comments Off on Free Excel template: corporate insolvency Report as to Affairs (Form 507)
Aug 162011
 

I have created –  in Microsoft Excel format – the current  Australian statutory companies Report as to Affairs form.  It is  free to download and/or view from my website.  Click  HERE for the forms page and look for Form 507, MS Excel version.

ATO authorised to settle large unfair preference claims

 Directors indemnities, Insolvency practices, Payments to ATO, Taxation Issues, Voidable transactions  Comments Off on ATO authorised to settle large unfair preference claims
Aug 122011
 

In certain circumstances, and without taking legal action, liquidators may now get back unfair preference payments of up to $500,000 made to the ATO.

 The ATO says:

 “We have now obtained approval to settle claims with a monetary value of up to $500,000, provided we can establish the proposed settlement is in accordance with legal principle and practice as advised by our legal services branch.”

 Details of the terms and conditions are on the ATO’s website page – written for liquidators –  headed “Preference payments for companies” (last modified on 8 August 2011).

 The current web page is an amended version of a page issued in July 2010.  That page was about payments not greater than $25,000, whereas the current page focuses on the settlement of claims over $25,000.  The settlement of claims over $25,000 needs the approval of the ATO’s legal services branch, whereas claims under $25,000 can, apparently, be agreed without that level of approval.

 The ATO describes unfair preferences as follows:

“Unfair preferences usually involve transactions that discriminate in favour of one creditor at the expense of other creditors. The aim of the law outlined below is to ensure creditors are treated equally by preventing any unsecured creditors from receiving an advantage over others.  The proceeds of any property you, as a liquidator, recover and realise will form part of the funds available for distribution amongst all unsecured creditors after the winding-up expenses have been paid.”

The liquidator, in a letter to the ATO with relevant evidence attached, needs to establish that he or she has a valid claim for voidable transaction under section 588FE of the Corporations Act 2001.  The ATO web page describes in detail the evidence and information that liquidators must provide.  

The ATO will need to be satisfied that there is no statutory defence available to it.  But the liquidator “(does not) have to demonstrate that a statutory defence is not available”. 

Crucially, for claims either under or over $25,000, the claim will not be settled without court proceedings if the ATO decides it should seek an indemnity against the directors of the company (section 588FGA).  This is because where directors are to be involved in this way, the courts have found that they have a right to be heard on the primary dispute between the liquidator and the ATO.

 In assembling information for a claim, the liquidator can obtain from the ATO itself copies of relevant documents concerning the company’s tax affairs.  There is no charge for this service, and no need for an application under the Freedom of Information legislation.

The ATO says it cannot settle unfair preference claims made later than is allowed under section 588FF.  [NOTE: An application under section 588FF(1) may only be made (a) during the period beginning on the relation-back day and ending (i) 3 years after the relation-back day; or (ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company; whichever is the later; or (b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during period (a). ]

 

Proposed levy to pay for liquidation of assetless companies

 Assetless companies, Insolvency practices, Official Inquiries, Treasury Options paper 2011  Comments Off on Proposed levy to pay for liquidation of assetless companies
Aug 102011
 

The Insolvency Practitioners Association of Australia (IPA) has suggested that solvent companies pay a fee to fund the liquidation of small assetless companies.  The proposal is that this new pool of funds be used to pay a set fee to liquidators who are willing to do the work.

The IPA’s proposal is made in its July 2011 submission to the Treasury, in response to an Options Paper on regulation of insolvency practitioners. 

This fund would be in addition to the existing Assetless Administrations Fund (AAF).  The problem with the AAF is that it is not open to liquidators of assetless companies unless and until they have conducted preliminary investigations and made preliminary reports to the Australian Securities and Investments commission (ASIC), and then only for the purpose of paying for additional investigations and reports by liquidators where it appears that directors ought to be banned or prosecuted.

 The IPA is the professional body covering over 85% of registered insolvency practitioners in Australia.  In its submission, forwarded this week to members, it says:

 “Currently there is no process for an assetless insolvent corporation to be wound up in the absence of a director or creditor able and prepared to indemnify the practitioner’s remuneration. In the case of a court liquidation, practitioners are required to conduct the administration with no prospect of remuneration.

 We recommend the establishment of a fund to have practitioners wind up small assetless corporations, on the basis of a set fee available either to all providers, or to a panel of willing providers **, and with the ability for the practitioner to apply to the current assetless administration fund if their work identifies the likelihood of offences. (** As an example, under the regime operating in Hong Kong, practitioners bid for work of this kind quoting a fixed fee for the administrations they would undertake.)

 This scheme could be funded via a levy imposed at the time of initial company registration, or by a small annual fee charged on every corporation. The large number of corporations at any  time means that the annual fee could be very low and still provide adequate funds for the operation of the scheme.

 There are very low barriers to the formation of a corporation inAustralia, and every corporation in the economy benefits from the health and reliability of the insolvency regime. While the frequency of insolvent administration is very low, any corporation has the potential to enter the insolvency regime at some future point. It is therefore reasonable that the costs of administering assetless insolvent corporations be born equally by corporations across the economy.   

 An alternative approach would be for ASIC to administratively deregister such companies without a formal insolvency process. (But) In our opinion, this option would encourage poor corporate behaviour.  By ensuring that a company is left with no assets in the event of insolvency, a director might seek to avoid any investigation into the failure of the company and any possible breach of duties.

 The recommended approach ensures that a minimum level of investigation is done which can lead to further applications for funding in the event that offences or recoverable transactions are identified. 

 Such initial funding to wind up these companies would also:

 •   Ensure protection of employees’ rights by allowing employees to access the GEERS scheme (or any such replacement arrangement); (GEERS is the General Employee Entitlements and Redundancy Scheme, administered by the Department of Education, Employment and Workplace Relations)

 •   Provide a deterrent to poor corporate behaviour by directors, though this needs to be supported by a proactive corporate regulator; and

 •   Assist ASIC to identify directors who should be banned from continuing in such a role. “

 _____________________________________________________________________

The IPA submission – which is 36 pages long and seems to respond to all the issues and questions raised in the Options Paper – will be published, along with all other public submissions, in a few weeks. 

 

Registered Trustee voluntarily resigns from bankruptcy appointments

 Industry People, Personal Bankruptcy  Comments Off on Registered Trustee voluntarily resigns from bankruptcy appointments
Aug 032011
 

The following media release from Insolvency Trustee Service Australia  (ITSA) on 11 July 2011 concerning Mr Paul Pattison escaped my attention:

 REGULATOR WELCOMES COURT ORDERS PROVIDING FOR VOLUNTARY RESIGNATION OF MELBOURNE-BASED BANKRUPTCY TRUSTEE PAUL PATTISON

Melbourne-based Registered Trustee, Paul Pattison, has voluntarily resigned from his bankruptcy appointments following concerns by the regulator, Insolvency and Trustee Service Australia (ITSA), about his capacity to adequately and properly carry out his duties.

On Friday 08 July 2011, the Federal Court of Australia accepted Mr Pattison’s voluntary resignation and orders were obtained appointing the Official Trustee (ITSA) to administer the 272 bankruptcy matters which were formerly administered by him. Arrangements are being made to ensure the smooth transfer and ongoing administration of these bankrupt estates.

Mr Pattison resigned as trustee of these matters and gave an undertaking that he would cease to carry out, consent to, or otherwise accept appointment as a trustee, until he produces evidence in a form acceptable to ITSA or to the Court demonstrating he has the practice and financial capacity to adequately and properly carry out his duties as a trustee.

Friday’s orders follow ongoing scrutiny into Mr Pattison’s financial capacity to undertake his duties. ITSA also liaised with the Australian Securities and Investments Commission in the lead up to the commencement of a formal process investigating this and related issues.  No findings of impropriety as to the conduct of Mr Pattison as a trustee were made.

Adam Toma

National Manager Regulation and Enforcement

Insolvency and Trustee Service Australia

Ph: 1300 364 785