December 2014 – ░░░ INSOLVENCY INTERFACE

Pre-appointment support for DOCA may be an inducement for valuable consideration

Corporate Insolvency, court decisions, External administration, External administrators, Insolvency Law, law reports, Offences Comments Off

Dec 152014

Registered liquidators are aware that they are prohibited by law from giving, or agreeing or offering to give, someone valuable consideration with a view to securing their own appointment or nomination as a liquidator or an administrator of a company, or an administrator of a deed of company arrangement (section 595 of the Corporations Act 2001).

But I wonder how many of them would be aware that giving an assurance of support for a proposed Deed of Company Arrangement may be an inducement under section 595.

The Chief Justice of the South Australian Supreme Court, Chief Justice Kourakis, took this view in his judgment in the case of Viscariello v Macks [2014] SASC 189, handed down on 9 December 2014.

Mr John Viscariello, a company director, alleged that registered liquidator Mr Peter Macks, administrator of two of Mr Viscariello’s companies, wrongfully failed to negotiate and put in place a Deed of Company Arrangement which would have allowed the companies to continue to trade under a changed ownership structure.

There were several other matters adjudicated upon in this case, and in a sense the allegation that the administrator had given an undertaking to the director that he would support a certain Deed of Company Arrangement (DOCA) became secondary.

But the comments by Chief Justice Kourakis are intriguing.

Chief Justice Kourakis

Mr Viscariello alleged that Mr Macks made certain representations to him and Mr Fred Bart (a businessman and entrepreneur who was a prospective purchaser of the company’s business) in a meeting in November 2001 to the effect that if he (Macks) were appointed as administrator, he would cause the company to enter into a deed of company arrangement reflecting the terms in a Heads of Agreement document, refered to by His Honour as “the proposed Bart DOCA”.

His Honour said:

“I find it unlikely that Mr Macks would have given an unqualified assurance that he would support the proposed Bart DOCA in breach of his duty to investigate the financial circumstances of the Companies and provide opinions to creditors.” [Para 122 of judgment]
….
“It is inherently improbable that he would have made the unqualified representations pleaded by Mr Viscariello.”[Para.125]
….
“If the pleaded representations were made and an agreement or understanding reached to that effect, Mr Macks would have breached s 595 of the Corporations Act and both Mr Bart and Mr Viscariello would have procured him to do so.” [Para.128]
….
“It would be contrary to the public interest to allow Mr Viscariello to recover damages for a misrepresentation which arises out of a failure to give effect to an unlawful arrangement.(Footnote 76) With respect to the false and misleading conduct alleged against Mr Macks in respect of the 27 November meeting with Mr Viscariello and Mr Bart, I reject Mr Viscariello’s evidence that Mr Macks gave an assurance that he would ensure that the Companies would enter into the Bart DOCA.” [para. 130](Emphasis added)

Footnote 76: Yango Pastoral Co Pty Ltd v First Chicago (Australia) Limited (1978) 139 CLR 410; Brownbill v Kenworth Trucks Sales (NSW) Pty Ltd (1982) 39 ALR 191; Alexander v Rayson [1936] 1 KB 169; McCarthy Rose (Milk Vendors) Pty Ltd v Dairy Farmers Coop Milk Co Ltd (1945) 45 SR(NSW) 266; Mason v Clarke [1955] AC 778.

Click here for pdf copy of judgment by Chief Justice Kourakis on 9 December 2014: Judgment in Viscariello v Macks [2014] SASC 18

Holiday reading for insolvency law enthusiasts

Corporate Insolvency, External administration, Insolvency Law, Law reform proposals, Regulation Comments Off

Dec 102014

In time for the Christmas holidays the American Bankruptcy Institute (ABI) has released (8 December 2014) a 400-page report titled Commission to Study the Reform of Chapter 11, 2012-2014, Final Report and Recommendations.

The ABI [**] is a bit like the Australian Reconstructing Insolvency & Turnaround Association (ARITA), only much larger. On its website it’s described as follows:

“The American Bankruptcy Institute is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI Canal Center Plaza membership includes more than 13,000 attorneys, auctioneers, bankers, judges, lenders, professors, turnaround specialists, accountants and other bankruptcy professionals providing a forum for the exchange of ideas and information. In fulfillment of its mission to provide information to its members, journalists, Congress and the public, ABI is engaged in numerous educational and research activities, as well as the production of a number of publications both for the insolvency practitioner and the public.”

This is an extract from the Introduction to the ABI’s report:

“A robust, effective, and efficient bankruptcy system rebuilds companies, preserves jobs, and facilitates economic growth with dynamic financial markets and lower costs of capital. For more than 35 years, the U.S. Bankruptcy Code has served these purposes, and its innovative debtor in possession chapter 11 process, which allows a company to manage and direct its reorganization efforts, is emulated around the globe. As with any law or regulation, however, periodic review of U.S. bankruptcy laws is necessary to ensure their continued efficacy and relevance …. Markets and financial products, as well as industry itself, often evolve far more quickly than the regulations intended to govern them. It may be that significant economic crises tend to occur cyclically and encourage reevaluation of the federal bankruptcy laws. Regardless, the general consensus among restructuring professionals is that the time has come once again to evaluate U.S. business reorganization laws.”

Despite the ABI’s report being mainly about Chapter 11 – i.e., the US law which permits a corporation or other entity to propose a plan of reorganization (debtor in possession) to keep its business alive and pay creditors over time – it seems to me that Australian insolvency law enthusiasts will find its discussion and analysis invaluable. Seriously.

A pdf copy of may be downloaded from the ABI site.

[**] As we all know, in America the term “bankruptcy” refers to corporate insolvency as well as personal insolvency.

Insolvency industry bodies may request disciplinary action by ASIC against registered liquidators

ASIC, Corporate Insolvency, External administrators, Insolvency Law, Law reform proposals, Practitioners Association (ARITA), Regulation Comments Off

Dec 092014

Under the Insolvency Law Reform Bill 2014 the insolvency practitioners association and the accountants associations are to be granted the right to formally refer registered liquidators who they suspect are guilty of misconduct to the Australian Securities and Investments Commission to consider using its disciplinary powers.

Disciplinary-action The following table sets out the proposed legislation by using extracts from the Bill and related official material.

SUBJECT: DISCIPLINE OF REGISTERED LIQUIDATORS:
POWER OF INDUSTRY BODY TO GIVE INDUSTRY NOTICE

SELECTED EXTRACTS FROM THE DRAFT BILL, PROPOSED RULES, ETC.	SOURCE OF TEXT
Subdivision G of Division 40 provides that an industry body will be able to provide information about potential breaches of the law by a liquidator, and also be able to expect a response from ASIC on the outcome of that information provision. The following industry bodies are proposed to be prescribed bodies: • Australian Restructuring Insolvency & Turnaround Association; • CPA Australia; • Institute of Chartered Accountants in Australia; and • Institute of Public Accountants.	Insolvency Practice Rules Proposal Paper, page 19, para 110
An industry body (prescribed in the Insolvency Practice Rules) may lodge a notice (*an industry notice*) stating that the body reasonably suspects that there are grounds for ASIC to take disciplinary action against a registered liquidator. The industry body must identify the registered liquidator and include the information and copies of any documents upon which the suspicion is grounded. ASIC must consider the information and documents included in the industry notice and take action as follows: • if ASIC decides to take no action ASIC, must give the industry body a notice within 45 business days after the industry notice is lodged; • however, such a notice does not preclude ASIC from taking action based wholly or partly on the basis of information in the industry notice of the following kind: – suspending or cancelling the registration of the registered liquidator; – giving the registered liquidator a show cause notice; or – imposing a condition on the registered liquidator; • if ASIC does take action based wholly or partly on the information included in an industry notice, ASIC must give the industry body notice of that fact. An industry notice is not a legislative instrument. An industry body is not liable civilly, criminally or under any administrative process for giving an industry notice if the body acted in good faith and the suspicion that the body holds in relation to the subject of the notice is a reasonable suspicion. A person who makes a decision in good faith as a result of which an industry body gives an industry notice is not civilly, criminally or under any administrative process for making the decision. A person who gives information or a document in good faith which is included, or a copy of which is included, in an industry notice is not liable civilly, criminally or under any administrative process for giving the information or document.	Explanatory Material, pages 140-141, paras 6.67 to 6.70
An industry body (which will be prescribed in the Insolvency Practice Rules) may give ASIC an ‘industry notice’ stating that the industry body reasonably suspects that there are grounds for ASIC to take disciplinary action in relation to a registered liquidator. ASIC is required to notify the industry body whether or not it has decided to take action in relation to the matters in the industry notice. An industry body is not liable civilly, criminally or under any administrative process if the body acted in good faith and its suspicion in relation to the subject of the notice is a reasonable suspicion. A person who makes a decision in good faith as a result of which an industry body gives a notice is not liable civilly, criminally or under any administrative process. Similarly, a person who in good faith provides information or gives a document which is included in an industry notice, or a copy of which is included, is not liable civilly, criminally or under any administrative process.	Explanatory Material, Comparison of key features of new law and current law, page 125
Notice by industry bodies of possible grounds for disciplinary action Industry body may lodge notice (1) An industry body may lodge with ASIC a notice in the approved form (an industry notice): (a) stating that the body reasonably suspects that there are grounds for ASIC: (i) to suspend the registration of a registered liquidator under section 40-25; or (ii) to cancel the registration of a registered liquidator under section 40-30; or (iii) to give a registered liquidator a notice under section 40-40 (*a show-cause notice); or (iv) to impose a condition on a registered liquidator under another provision of this Schedule; and (b) identifying the registered liquidator; and (c) including the information and copies of any documents upon which the suspicion is founded. ASIC must consider information and documents* (2) ASIC must consider the information and the copies of any documents included with the industry notice. ASIC must give notice if no action to be taken (3) If, after such consideration, ASIC decides to take no action in relation to the matters raised by the industry notice, ASIC must give the industry body written notice of that fact. 45 business days to consider and decide (4) The consideration of the information and the copies of any documents included with the industry notice must be completed and, if ASIC decides to take no action, a notice under subsection (3) given, within 45 business days after the industry notice is lodged. ASIC not precluded from taking action (5) ASIC is not precluded from: (a) suspending the registration of a registered liquidator under section 40-25; or (b) cancelling the registration of a registered liquidator under section 40-30; or (c) giving a registered liquidator a notice under section 40-40 (a show-cause notice); or (d) imposing a condition on a registered liquidator under another provision of this Schedule; and wholly or partly on the basis of information or a copy of a document included with the industry notice, merely because ASIC has given a notice under subsection (3) in relation to the matters raised by the industry notice. Notice to industry body if ASIC takes action (6) If ASIC does take action of the kind mentioned in subsection (5) wholly or partly on the basis of information or a copy of a document included with the industry notice, ASIC must give the industry body notice of that fact. Notices are not legislative instruments (7) A notice under subsection (3) or (6) is not a legislative instrument. No liability for notice given in good faith etc. (1) An industry body is not liable civilly, criminally or under any administrative process for giving a notice under subsection 40-100(1) if: (a) the body acted in good faith in giving the notice; and (b) the suspicion that is the subject of the notice is a reasonable suspicion. (2) A person who, in good faith, makes a decision as a result of which the industry body gives a notice under subsection 40-100(1) is not liable civilly, criminally or under any administrative process for making the decision. (3) A person who, in good faith, gives information or a document to an industry body that is included, or a copy of which is included, in a notice under subsection 40-100(1) is not liable civilly, criminally or under any administrative process for giving the information or document.	Insolvency Law Reform Bill 2014 Exposure Draft, Insolvency Practice Schedule (Corporations), sections 40-100 and 40-105, pages 186 & 187

New law to give creditors power to review fees of liquidators

Corporate Insolvency, External administration, Insolvency Law, Insolvency Laws, Law reform proposals, Regulation Comments Off

Dec 062014

When the Insolvency Law Reform Bill 2014 is passed, creditors in an external administration of a company (except under receivership or provisional liquidation) will be granted the power to have the external administrator’s fees reviewed by another external administrator. In the draft legislation, the person appointed by creditors is called a reviewer, a reviewing liquidator and, occasionally, a cost assessor.

The following table sets out the proposed legislation by using extracts from the Bill and related official material.

SUBJECT: CREDITORS’ REVIEW OF REMUNERATION OF EXTERNAL ADMINISTRATORS

SELECTED EXTRACTS FROM THE DRAFT BILL, PROPOSED RULES, ETC.	SOURCE OF TEXT
5-20 Meaning of external administrator of a company A person is an external administrator of a company if the person is: (a) the administrator of the company; or (b) the administrator under a deed of company arrangement that has been entered into in relation to the company; or (c) the liquidator of the company; or (d) the provisional liquidator of the company.Note: A person is not an external administrator of a company for the purposes of this Schedule merely because the person has been appointed as a receiver, receiver and manager, or controller in relation to property of the company.	Insolvency Law Reform Bill 2014 Exposure Draft, Insolvency Practice Schedule (Corporations), section 5-20, page 157
90-22 Application of this Subdivision This Subdivision applies in relation to a company that is under external administration, other than a company in relation to which a provisional liquidator has been appointed.	Insolvency Law Reform Bill 2014 Exposure Draft, Insolvency Practice Schedule (Corporations), Subdivision C section 90-22, page 263
Appointment to carry out review (1) A registered liquidator may be appointed to carry out a review into either or both of the following matters: (a) remuneration of the external administrator of the company; (b) a cost or expense incurred by the external administrator of the company. Appointment by resolution (2) The appointment may be made by resolution of: (a) the creditors; or (b) if the company is being wound up under a members’ voluntary winding up—the company; (3) If the appointment is made by resolution, the resolution must specify: (a) the remuneration, costs or expenses which the liquidator is appointed to review; and (b) the way in which the cost of carrying out the review is to be determined. Appointment by one or more creditors or members (4) The appointment may be made by: (a) one or more of the creditors; or (b) if the company is being wound up under a members’ voluntary winding up—one or more of the members. (5) However, an appointment may only be made under subsection (4) if the external administrator of the company agrees to the appointment. (6) The agreement must: (a) be in accordance with the Insolvency Practice Rules; and (b) specify: (i) the remuneration, costs or expenses which the liquidator is appointed to review; and (ii) the way in which the cost of carrying out the review is to be determined. Appointments by creditors etc.—limit (7) Despite subsection (1), a registered liquidator appointed under this section has no power to review the remuneration to which the external administrator of a company is entitled under subsection 60-5(2) (remuneration if no remuneration determinations made).	Insolvency Law Reform Bill 2014 Exposure Draft, Insolvency Practice Schedule (Corporations), Subdivision C, section 90-24, pages 264 and 265
…. Creditors, ASIC and the Court will also have the power to appoint a cost assessor to assess and report on the reasonableness of the remuneration and costs incurred during a portion or all of an administration.	Explanatory Material, page 163, para 7.22
Review of the external administration of a company The creditors may resolve by majority of creditors in both value and number, or the external administrator may agree, to appoint a reviewer to review and report on the reasonableness of the remuneration and costs incurred in an external administration …. The purpose of the report is to provide information for interested parties to exercise their rights in relation to the administration, such as to remove the liquidator or challenge the liquidator’s remuneration. The review is not determinative of the issues considered. The costs of the review will form part of the expenses of the administration, unless so agreed with the liquidator. The Court may make any orders it deems fit in relation to the review. The reviewer must be a registered liquidator. The Insolvency Practice Rules may prescribe, amongst other things, the duties of a reviewer.	Explanatory Material, Comparison of key features of new law and current law, page 168
90-29 Rules about reviews (1) The Insolvency Practice Rules may provide for and in relation to reviews under this Subdivision. (2) Without limiting subsection (1), the Insolvency Practice Rules may provide for and in relation to any or all of the following matters: (a) the giving of notice to the external administrator of a company before appointing, or making an application for the appointment of, a reviewing liquidator under this Subdivision; (b) the meaning, for the purposes of section 90-26, of properly incurred in relation to costs or expenses incurred by an external administrator of a company; (c) the appointment of reviewing liquidators, including requirements as to who may be appointed and the provision of declarations of relevant relationships; (d) the powers and duties of reviewing liquidators in carrying out a review; (e) the form and content of reports by reviewing liquidators; (f) the preparation and provision of reports by reviewing liquidators.	Insolvency Law Reform Bill 2014 Exposure Draft, Insolvency Practice Schedule (Corporations), section 90-29, page 268
Subdivision D of Division 90 provides ….for the creditors to resolve to appoint, or otherwise agree with the liquidator, to appoint a reviewer to report on external administrator remuneration or costs only. Section 90-27 provides for the Insolvency Practice Rules to contain rules about such reviews.	Insolvency Practice Rules Proposal Paper, page 25, para 143
Only a registered external administrator would be able to be appointed as a reviewer.	Insolvency Practice Rules Proposal Paper, page 26, para 147
In conducting a review of remuneration and/or costs, the reviewer will be empowered to do any of following: • conduct the review; • direct the external administrator to provide an itemised invoice in a form, and within the time, specified in the direction for work undertaken by the liquidator; • direct a third party to give an itemised bill of costs in a form, and within the time, specified in the direction in relation to work undertaken by the third party; • interview any party to the review and allow that party to be questioned by any other party to the review; • direct a person to give a written statement, in a specified form and signed by the person, about a matter relevant to the review; • direct the external administrator to produce all or part of the liquidator’s files or documents in relation to the administration of the estate.	Insolvency Practice Rules Proposal Paper, page 26, para 150
It is proposed that the new rules would also stipulate that: • if the reviewer gives a person a direction, and the person does not comply with the direction, the reviewer may conduct the assessment on the basis of the information available to the reviewer; and • the reviewer will have a duty to act independently, in the interests of creditors and to avoid actual and apparent conflicts of interest.	Insolvency Practice Rules Proposal Paper, page 26, para 151
The report to be prepared by the reviewing practitioner would be required to be provided in the form, and with the content, as agreed between the reviewer and the appointing body.	Insolvency Practice Rules Proposal Paper, page 27, para 152
Once the report is completed, it would be required to be provided to the external administrator responsible for the administration, the committee of inspection (if applicable) and ASIC.	Insolvency Practice Rules Proposal Paper, page 27, para 153
ASIC may give a registered liquidator notice in writing asking the liquidator to give ASIC a written explanation why the liquidator should continue to be registered, if ASIC believes that …. (g) the liquidator has been appointed to act as a reviewing liquidator … and has failed to properly exercise the powers or perform the duties of a reviewing liquidator	Insolvency Law Reform Bill 2014 Exposure Draft, Insolvency Practice Schedule (Corporations), section 40-40, page 180

SUBJECT: CREDITORS’ REVIEW OF REMUNERATION OF EXTERNAL ADMINISTRATORS

SELECTED EXTRACTS FROM THE DRAFT BILL, PROPOSED RULES, ETC.

SOURCE OF TEXT