Jul 262013

An Enforcement Outcomes report has been issued by the Australian Securities and Investments Commission (ASIC) for the six months from January to June 2013 (Report 360).

It is the fourth of its type since ASIC abandoned its Prosecution Reports. But unlike those reports – upon which I based my paper, “Convictions for summary insolvency offences committed by company directors” , a detailed comparison of prosecution outcomes over the years 2006 to 2010, including the sections of the Corporations Act under which enforcement action was taken and the fines imposed – the new Enforcement Outcomes reports provide far less information.

In the part of the  latest Enforcement Outcomes report that mentions summary insolvency offences, the reader is simply told that:

“As part of our liquidator assistance program, 249 directors were successfully prosecuted for summary offences concerning a failure to assist an external administrator.” (paragraph 86)

Similar brief references are made in the three previous reports.

So what, if anything, do these limited figures say?

About all we can do is compare the latest figure with those from the previous 18 month period.

In the six months  from July to December 2012 the comparative number of directors successfully prosecuted under the liquidator assistance program was 275. (Report 336, paragraph 91.)

Further comparisons with the two earlier Enforcement Outcomes reports might not be all that meaningful, because those reports give figures on summary “proceedings against” directors rather than the current classification of “successful prosecutions” against directors.  That said, the reports for the six months to June 2012 and for the first six months (to December 2011), put the figures at 196 and 208 respectively  (see Report 299, paragraph 48 and Report 281, paragraph 39 )

But according to ASIC, readers need to be cautious when making comparisons of such data. The Enforcement Outcomes report 360 states (at paragraph 18):

“Comparisons between individual enforcement reports have some limitations. This is because no two enforcement actions are the same. For example, there may be differences in the complexity or seriousness of the allegations. However, over a two-year period, it is possible to identify the types of conduct or sectors that are the focus of ASIC’s enforcement activity in the longer term.”

This statement – minus the final sentence – was also used in the Media Release that accompanied the report.

Too many liquidators failing to provide adequate disclosure to creditors on relationships

 ASIC, Corporate Insolvency, Insolvency Laws, Insolvency practices, Offences, Regulation, Standards  Comments Off on Too many liquidators failing to provide adequate disclosure to creditors on relationships
Jul 242013

When the Australian Securities and Investments Commission (ASIC) released its report on supervision of registered liquidators it bemoaned the fact that its compliance checks had found a 10% increase in inadequate declarations, up from 46.9% in 2011 to 56.3% in 2012.

In the accompanying Media Release ASIC Commissioner John Price was fairly blunt:

“The increase in inadequate declarations concerns ASIC. Liquidators must make full disclosure to creditors when it comes to their independence. Given our guidance, and education programs through the Insolvency Practitioners Association of Australia (IPA), there is no good reason for such a failure rate.”

Under the Corporations Act 2001 liquidators and administrators (other than those appointed by the Court) are required to make written declarations to creditors concerning indemnities they have received and relationships they have, or have had, with certain defined “persons” within the preceding 24 months. Both declarations are to be made and sent to creditors before the first meeting of creditors is held. The Declaration of Relevant Relationships and Declaration of Indemnities are referred to collectively in the insolvency profession as a DIRRI.

Fawlty Dirri


An “inadequate” DIRRI is described in ASIC’s report (para 56) as one which:

(a) fails to disclose a relevant relationship in pre-appointment dealings and/or, where such a relevant relationship has been identified, adequately explain why it does not create a conflict of interest;

(b) fails to disclose all companies involved in appointments to a group of companies, and whether or not circumstances existed between the group entities that may give rise to a conflict and, if so, how the appointees would manage those issues; and/or

(c) is not signed by all appointees.

More detailed guidance on how to make sure a DIRRI is adequate was given to registered liquidators in an email sent to them on 28 June 2013 by Adrian Brown, leader of ASIC’s Insolvency Practitioners Team.

The email extract below is Mr Brown’s description of “seven key areas for improving the likelihood that your DIRRIs do comply with the law, relevant professional standards and the IPA’s Code of Professional Practice.”

“1. Disclose pre appointment dealings/advice

Provide meaningful information about the nature and extent of pre-appointment meetings (regardless of the nature of the meeting or dealing, be it face to face meetings, telephone discussions or email/ other electronic communications) with the company’s directors and any of their advisors.

2. Disclose relationships

Disclose all relevant relationships in accordance with the Act, professional standards and the IPA Code to ensure full disclosure and transparency. We suggest you consider:

· how the relevant relationship might impact your ability to act in the best interests of creditors; and

· whether there is a reasonable chance that creditors might consider that independence is, or appears to be, compromised by that relationship if it were to subsequently come to light.

3. Provide a reason why a relationship does not result in a conflict

Give a reason why you believe each relevant relationship does not result in a conflict of interest or duty. The reasons provided must be specific to the appointment and should not simply be a restatement of example reasons provided in the IPA Code.

Merely stating that a relationship will not affect your independence, or that you received no payment for pre-appointment advice or meetings, is NOT a “reason”.

4. Disclose when appointed to a group of companies

Where the appointment is to a number of companies in a group, the DIRRI should specifically refer to each company and cite a reason why you believe that multiple appointments will not result in a conflict of interest or duty.

You should also consider what steps you must take should you become aware of an actual or potential conflict after the appointment.

5. Disclose external administrations with common directors

Documented conflict checks undertaken pre-appointment should show if you or your firm acted, or continue to act, as external administrator of another company with the same or a common director where the appointment occurred within two years before the new appointment.

Where this occurs, the relationship should be disclosed together with the reason why you believe the new appointment will not result in a conflict of interest or duty.

6. Disclose indemnities and other up-front payments

Disclose full details of the nature and extent of all non-statutory indemnities and up-front payments. This should include stating whether there are any conditions governing the indemnity, including what the indemnity can be used for.

7. Review and sign the DIRRI

It is vital that you carefully review every DIRRI before signing it. All appointees must sign the DIRRI.”

ASIC’s message is taking a long time to get across to some liquidators …

Three years ago (May 2010) Mr Stefan Dopking, then ASIC’s leader of the Insolvency Practitioners & Liquidators Stakeholder Team, wrote to registered liquidators to reveal the findings of its compliance review of DIRRIs in 2009. What ASIC found then was strikingly similar to its findings in 2012, as this extract from Mr Dopking’s letter shows:

“The review identified a number of areas where we believe the adequacy of disclosure needs improvement.  In particular, our general observations are that:

  • a large number of Declarations did  not adequately disclose the nature of the relationships or provide adequate reasons to explain why the disclosed relationships did not result in a conflict of interest or duty;
  • Declarations  did  not  clearly  articulate  whether  the registered  liquidator’s  firm  (i.e. partners or related bodies corporate) was included in the Declaration;
  • the majority of Declarations did not disclose the nature and extent of pre appointment meetings and advice;
  • prior or contemporaneous appointments as external administrators of other companies with common directors were not adequately disclosed in over 20 instances;
  • many Declarations did not provide sufficient information to adequately identify the party providing an indemnity or sufficiently disclose the nature and extent of the indemnity provided;
  • many Declarations were not signed by both joint and several appointees (ASIC is of the  view that each appointee must consider whether any relevant relationships exist that require disclosure and the Corporations Act 2001 (‘the Act’) requires each appointee to sign the relevant Declarations); and
  • it was not evident from the minutes of the meeting of creditors in many cases that Declarations were tabled at the meeting of creditors as required by the Act3. Minutes  of  the  meeting  of  creditors  should  evidence  compliance  with  this statutory requirement.”

The law requiring liquidators to prepare DIRRIs for creditors came into effect in January 2008.

(End of post)