Questions concerning new power for winding up by ASIC

 ASIC, Corporate Insolvency, Insolvency Laws, Insolvency practices, Regulation  Comments Off on Questions concerning new power for winding up by ASIC
Feb 272012
 

New laws have been drafted to give the Australian Securities and Investments Commission (ASIC) power to wind up companies.  But what mode of winding up will these liquidations be? Creditors’ voluntary liquidation, or failed members’ voluntary liquidation?  And will there be any requirement  that directors prepare a statement of assets and liabilities?

 The focus in this post is on a proposed new section of the Corporations Act 2001, namely section 489EB —  “Deemed resolution that company be wound up voluntarily”.

The section seems, at the beginning, to be proposing that the winding up proceed  as a creditors’ voluntary winding up.  Subsections 489EB(a) and (b) state:

“(a) the company is taken to have passed a special resolution under section 491 that the company be wound up voluntarily; and

(b) the company is taken to have passed the special resolution:

(i) at the time when ASIC made the order under section 489EA; and

(ii) without a declaration having been made and lodged under section 494; ”

In other words, it is deemed to be a creditors’ voluntary liquidation because the deemed resolution to wind up the company is deemed to have not been accompanied by a declaration of solvency under section 494. 

But then in subsection 489EB(c) reference is made to section 496: a section that only applies where a declaration of solvency has been made under section 494.

Section 496 – Duty of liquidator where company turns out to be insolvent – applies in a members’ voluntary liquidation.  But how could section 496 have any application?

To me the reference to section 496 seems to be in direct conflict with (proposed) subsections 489EB(a) and (b).

If section 496 does somehow have some application as (proposed) section 489EB(c) seems to suggest, then it would appear that the winding up by the ASIC is to be a members’ voluntary winding up where a company turns out to be insolvent.

If section 496 (for members’ voluntary liquidations) does apply, then section 496(2) – notice to creditors, section 496(4) – liquidator to lay before meeting a statement of assets and liabilities, and section 496(5) – replacement of liquidator, and the other subsections in 496, would be brought into play, wouldn’t they?  Is this intentional or are these oversights or unintended consequences?

If section 496 is to have some application in a winding up by the ASIC, does that mean that the liquidator may choose a path other than the winding up of the company? I ask this because section 496(1) gives the liquidator the option to apply under section 459P for the company to be wound up in insolvency, or appoint an administrator of the company under section 436B, or convene a meeting of the company’s creditors?  Is this intentional or are these oversights or unintended consequences?

If the winding up is a creditors’ voluntary winding up, then it appears that — unlike in an ordinary creditor’ voluntary winding up — there will be no requirement of directors to submit a Report as to Affairs (RATA).  This is so because the section that does require a RATA  from the directors — section 497(5) — seems, along with all other parts of section 497,  to have been made inapplicable by the following words of  (proposed) subsection 489EB(d), “section 497 is taken to have been complied with in relation to the winding up”. 

The same would be true of section 497(2)(b)(i), which requires the liquidator to send creditors a summary of affairs (Form 509).  It too would be “taken to have been complied with in relation to the winding up”. 

Which suggests that when a company is wound up by the ASIC there will be no requirement on the part of directors to prepare and submit a statement about the company’s business, property, affairs and financial circumstances.

This seems strange given that in the other two types of insolvent winding up – court-ordered winding up and creditors’ voluntary winding up– such a statement is required. Is this an oversight or an  unintended consequence?

Also, the removal of a duty to do a RATA would be extraordinary when liquidators say – as made clear in my recent IPA sponsored survey of official liquidators  – that a RATA from directors is a very valuable tool for the efficient conduct of a winding up.

This is all that the official Explanatory Memorandum says about proposed section 489EB:

“If ASIC exercises its powers to wind up a company under the new law, the company is deemed to have passed a special resolution under existing section 491 of the Corporations Act that the company be wound up voluntarily.  The resolution is deemed to have been made on the day that ASIC uses its administrative power to order the winding up and does not require a declaration of solvency to have been made under existing section 494 of the Corporations Act.  A meeting of creditors under existing subsection 497(1) of the Corporations Act is not required where the winding up has been ordered by ASIC.  “

The peculiar phrase “The resolution … does not require a declaration of solvency to have been made under existing section 494” suggest to me a lack of understanding of the law. 

And the reference to subsection 497(1) is odd given that the proposed law refers to section 497 as a whole, not just subsection 497(1).  Has there been a mistake in drafting subsection 489EB(d)? Should it refer more narrowly to subsection 497(1) rather than to the whole section?

New Bill proposes changes to liquidation and deregistration of companies

 ASIC, Corporate Insolvency, Insolvency Law, Regulation  Comments Off on New Bill proposes changes to liquidation and deregistration of companies
Feb 202012
 

A Bill just released by the Australian Government’s Treasury department (17/2) contains amendments to the winding up of companies, a new duty for external administrators of companies that are “paid parental leave employers”, changes to requirements regarding the publication of notices, and changes to laws governing deregistration of companies.

The Bill is titled the Corporations Amendment (Phoenixing and Other Measures) Bill 2012 and is described, officially, as follows:

“The Bill amends the Corporations Act 2001 (Corporations Act) to: introduce an administrative process for compulsory external administration to facilitate payment of employee entitlements and address phoenix company activity; include a regulation making power to prescribe methods of publication of notices relating to events before, during and after the external administration of a company; and to make other miscellaneous, minor and technical amendments.”

There is plenty in the Bill that Australian insolvency practitioners will need to be aware of. 

The first part of the Bill is titled “Winding up by the ASIC”.  It includes the following new and amended sections:

  • Section 489EA – ASIC may order the winding up of a company
  • Section 489EB – Deemed resolution that company be wound up voluntarily
  • Section 489EC – Appointment of liquidator
  • Section 601AA (6) & (7)
  • Section 601AB (6) & (7)
  • Section 1317C (ca).

Part two is titled “Publication requirements” and has the following new and amended sections:

  • 412(1)(b)
  • 412(4)
  • 436E(3)(b)
  • 439A(3)(b)
  • 446A(5)(b)
  • 449C(5)(b)
  • 450A(1)(b)
  • 465A(c)
  • 491(2)(b)
  • 497(2)(d)
  • 498(3)
  • 509(2)
  • 568A(2)
  • 589(3)(a)
  • 601AA(4)
  • 601AB(1)
  • 601AB(3)
  • 601AB(4)
  • 601AB(5)
  • 1351(4)(a)(i)
  • 1367A

Part 3 is titled “Miscellaneous amendments” and contains the following new and amended sections:

  • Section 9 – (New) Definition of “paid parental leave employer”;
  • Section 600AA – (New) Duty of receiver, administrator or liquidator—parental leave pay;
  • Section 601AH(3)

There are also extensive transitional provisions.

 To see the Bill and the Explanatory Memorandum click this link to the Australian Government Com Law website.

 

GST liability on asset sales by mortgagees: Treasury review completed

 GST, Insolvency practices, Tax debts, Tax liabilities, Taxation Issues  Comments Off on GST liability on asset sales by mortgagees: Treasury review completed
Feb 172012
 

A draft of  legislation to clarify how the GST Act operates where a mortgagee in possession sells the property of a corporation has been issued for comment .

This exposure draft, issued on 14 February 2012,  follows a consultation paper issued on 7 June 2011.  The Treasury says that: “The exposure draft material has been developed taking into account comments made by stakeholders.”  

What those comments and views were will be available for public viewing on the Treasury website soon. It is Treasury practice to publish submissions on the consultation paper after the legislation has been introduced into the Parliament.

 The Treasury says that “The exposure draft legislation seeks to clarify the GST law for entities in the mortgage lending sector so that representatives of incapacitated entities will no longer need to differentiate between different provisions of the GST law and will be able to report and account under a single registration.”

The Treasury has invited interested parties to comment on the latest exposure draft.  Closing date for submissions: Tuesday, 13 March 2012. Address written submissions to:
The General Manager
Indirect Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600
Email: gstpolicyconsultations@treasury.gov.au

Copies of the Exposure Draft, the Explanatory Memorandum and the original June 2011 Consultation Paper are available HERE.

My own submission to the June 2011 consultation paper was as follows:

“I make this brief submission in response to your Consultation Paper of 7 June 2011, in which it is proposed that section 195‑1 of A New Tax System (Goods and Services Tax) Act 2000 (the GST Act)  be amended to expressly provide that Division 105 operate to the exclusion of Division 58 where a mortgagee in possession or control sells the property of a corporation.  You have also asked a much broader question, which is “Is there an alternative way to better achieve the Government’s policy objective of a representative of an incapacitated entity being liable for GST for supplies of property in their possession or control belonging to a corporation?”
 
In my opinion:
  • Division 105 of the GST Act should not be amended as is proposed.
  • Where a mortgagee takes possession of most of the assets of a corporation, the GST outcome should be the same regardless of the mechanism the mortgagee employs to exercise its rights of repossession and sale.
ATO was just resolving a conflict
 
 The proposal in the Consultation Paper seems to be guided and influenced by ATO Interpretive Decision 2010/224.  However, that decision by the ATO does not seem to give much consideration to the tax and equity issues involved.  Rather, it just seems to resolve the conflict by applying “the accepted principle of statutory interpretation (which) is that a general provision would give way to the more specific provision where there is conflict between the provisions”. 
 
Not just a tax issue
 
There is a good reason why the term ‘controller’ in the Corporations Act 2001 includes a mortgagee who takes possession or control of a corporation’s property in the event of a default by the mortgagor.  Its arises out of abuses of corporate insolvency accountability principles that used to occur prior to 1993.  Back then, to deprive the ATO of its right to priority payment of outstanding group tax, and to avoid the reporting and compliance duties imposed under company law, banks and other mortgagees decided to use the “agent for the mortgagee in possession” option.  Amendments arising out of the ALRC’s 1988 General Insolvency Inquiry took the attractive advantages out of this option.
 
Even though the “agent for mortgagee in possession” and “mortgagee in possession” mechanisms are now caught by the Corporations Act, I believe we ought to carefully consider what influence the proposed change to Division 105 of the GST Act may have on the choices that mortgagees make when taking possession of a company’s assets.  (I refer here to those who have charges over most of a company’s assets.)  No doubt, if there are tax advantages or cost advantages in them, these alternative mechanisms will become popular again.  In which case we ought to consider whether this development might be to the detriment of accountability to employees, other creditors and the public. 
 
Division 58
 
It appears to me that Division 58 was drafted as it was because there would have seemed to be no logical or perceptible reason why the GST outcome of a mortgagee taking possession of a company’s assets should be determined by whether they appointed someone called a “receiver” or someone called an “agent for the mortgage”.  Personally, although I have read lots of relevant material I still cannot see why the GST outcomes should be different.  However, I can see a case for applying a provision such as Division 105 where a financier takes possession of an asset or two under right given in chattel mortgages or the like.
 
 Division 105
 
If Section 105.5 of the GST Act was intended to apply in a situation where a mortgagee takes possession of most of the assets of a company, I find this hard to see in its narrow wording.  It seems to apply to a very specific situation.  In my view Treasury should focus in this review on uncovering the meaning of Division 105 of the GST Act and defining what situation – other than those addressed by Division 58 of the GST Act – that Division 105 is trying to address, or should address.”