The Australian Securities and Investments Commission (ASIC) has a business plan to guide its regulation of insolvency practitioners. In 2016-17 two new projects have been added to the ongoing ones. Here is ASIC’s summary of the plan as published recently on its website …
ASIC Key Projects
Communicating with industry and individual firms to reinforce and articulate standards and expectations (ongoing project)
|⚬ Communicating with stakeholders (e.g. through media releases, journal articles, ad-hoc bulletins, regular newsletters), including in relation to surveillance outcomes, to reinforce and articulate standards and expectations
⚬ Releasing key communications, such as:
⚬ Engaging with stakeholders, including meeting with individual firms and industry bodies (such as the Australian Restructuring, Insolvency and Turnaround Association (ARITA), Chartered Accountants Australia and New Zealand, CPA Australia, and Australian Financial Security Authority, and other government agencies such as the Australian Taxation Office, Department of Employment and Fair Work Ombudsman
⚬ Participating in and contributing to the Phoenix Taskforce and the Serious Financial Crime Taskforce
|Information for registered liquidators and other stakeholders (new project)||⚬ Working closely with industry to further develop guidance and lift standards of conduct
⚬ Reviewing existing ASIC guidance to reflect law reform and improving existing creditor and other stakeholder information published by ASIC
⚬ Reviewing and improving what information registered liquidators currently report to facilitate the assessment and, where appropriate, investigation of reports of alleged misconduct
|Registered liquidators’ independence and remuneration (new project)||⚬ Independence (including referral relationships with pre-insolvency advisors) and remuneration (including adequacy of disclosure and reasonableness); anticipated to continue into 2017-18|
|Surveillance of high-risk registered liquidators (ongoing project)||⚬ Misconduct resulting from conflicts of interest, incompetence and improper gain|
|Ensuring compliance with statutory lodgements obligations and publication of notices requirements (ongoing project)||⚬ Reviewing registered liquidator outstanding statutory lodgements and publication of notices (including insolvency and external administration related notices) on the ASIC published notices website to identify systemic non-compliance|
|Lodgement of annual statements (ongoing project)||⚬ Reviewing all annual statements from registered liquidators to detect non-compliance with the requirements to maintain registration, including identification of potential competence concerns|
|Transactional reviews (ongoing project)||⚬ Undertaking reviews identified through referrals, and responding to identified concerns including:
– inappropriate relationships between registered liquidators and pre-insolvency advisers
– inadequate declarations of relevant relationships and indemnities
– inadequate remuneration disclosure
|Investigate and where appropriate take administrative or court action (ongoing project)||⚬ Investigating and taking action against registered liquidator misconduct, as identified through surveillances and referrals|
Support development and implementation of key Government law reforms and other initiatives (ongoing project)
|⚬ Advising Government on proposed insolvency reforms (including proposed reforms in the Government’s National Innovation and Science Agenda) and implementing the Insolvency Law Reform Act 2016, including engaging with Treasury, industry and professional bodies, introducing new guidance and implementing IT and business process changes
⚬ Delivering an enhanced ASIC Form 507 Report as to Affairs (RATA), including stakeholder consultation, to provide better information to facilitate the conduct of external administrations and improve reporting to creditors
⚬ Liaising with Treasury and industry/professional bodies regarding the Government’s proposals/reforms to facilitate corporate restructure (a ‘safe harbour’ and voiding of ipso facto clauses) from the Productivity Commission (in recommendations from its inquiry report into business set-up, transfer and closure) and the Government’s National Innovation and Science Agenda
….(UPDATE to post – 1 April 2017: In an email on 24 March 2017, Adrian Brown, leader of ASIC’s Insolvency Practitioners Team, informed practitioners that following a consultation process ASIC has worked with Treasury “to develop an alternative option for the Minister’s consideration”. The alternative option includes halving the fixed annual levy to $2,500.)….
….(SECOND UPDATE to post – 10 May 2017: The proposed fixed annual levy is now $2500 – SEE MY NEW POST.
A refined proposal for a government levy on registered liquidators – intended to recover costs incurred by the ASIC in regulating them – has been released as part of a Treasury consultation paper titled Proposed Industry Funding Model for the Australian Securities and Investments Commission – November 2016.
The proposal in brief
Each registered liquidator would pay a minimum, fixed annual levy of $5,000. On top of that the liquidator would be required to pay an activity-based levy – estimated to be $550 per appointment – for each external administration appointment in the financial year.
External administration appointments includes appointment as a controller, provisional liquidator, liquidator, voluntary administrator or administrator of a deed of company arrangement.
Special rules and adjustments are to apply where registered liquidators are appointed jointly and where an external administration appointment transitions from one type of external administration to another.
The paper states that there are 710 registered liquidators and the levies are aimed at recovering ASIC regulatory costs of $8.5 million.(Supporting attachment to the Government’s Proposals Paper, Table 8)
(More details of the proposal are supplied below, under the heading Extracts from the Consultation paper.)
What the liquidators’ professional association thinks
The Australian Restructuring Insolvency & Turnaround Association (ARITA) opposes the proposed quantum of the levy. In a statement on its website on 9 November ARITA describes the ASIC user-pays funding model for registered liquidators as “highly controversial”. It says:
“ARITA remains strongly of the view that the quantum per practitioner is excessive in every respect and will cause significant harm to the structure of the profession, regardless of the methodology used” , adding that “the quantum is completely disproportionate to other similar profession’s fees”.
ARITA’s detailed analysis and critique of the proposal will be made in a submission to Treasury, due by December 16.
Passing on cost of the per-appointment part of the levy to clients
Transcripts have now been published for all of the public hearings of the Senate inquiry into insolvencies in construction industry. Phoenixing of companies is the main topic discussed. Several insolvency practitioners have given evidence, and at the hearing in Sydney on 28th September the insolvency profession was criticised by the leading participant, Senator Doug Cameron. At the public hearing in Melbourne on 29th September the Walton Constructions case was discussed in detail by the insolvency practitioners initially appointed as external administrators.
A list of the public hearings and those who appeared as witnesses is provided below.
UPDATE TO THIS POST: In November 2016 the Treasury issued a revised proposal for consultation. See my blog titled “Levy on registered liquidators and other industries to help fund ASIC”.
A Government levy on registered liquidators is included in a draft proposal to adopt an “industry funding” model, or user-pays system, for the Australian Investments and Securities Commission (the ASIC). The levy is intended to recover costs incurred by the ASIC in regulating registered liquidators.
The Consultation Paper, issued on 28 August 2015, estimates that a flat levy on registered liquidators:
“… would equate to around $12,700 per year and some liquidators would potentially pay a high proportional fee relative to their costs of regulation.”
The paper discusses, as another option, the merits of the levy being based on “assets realised”. It states that one point in favour would be that:
“Levying liquidators on the basis of ‘assets realised’ would promote greater harmonisation between bankruptcy and corporate insolvency laws. It would be similar to the asset realisations charge administered by the Australian Financial Security Authority.”
In bankruptcies the liability to pay the asset realisations charge is that of the practitioner, but the amount of charge paid is borne by the estate or administration. This aspect is not discussed in the Consultation Paper. But presumably if the ASIC levy follows the bankruptcy scheme, the levy will be paid from funds held or realised by the company under external administration.
During the June 2015 hearing in Canberra of the Senate Economics References Committee’s inquiry into “Insolvency in the Australian construction industry”, Mr Dave Noonan, a national secretary in the Construction, Forestry, Mining and Energy Union (CFMEU), listed what he thought were the main causes of business failure in the construction industry. In doing so he was drawing largely on figures published by the Australian Securities and Investments Commission (ASIC), which gathers that information from liquidators and other external administrators.
It’s the latest example of these ASIC statistics being quoted as if they were accurate and credible. In the CFMEU’s case, Mr Noonan took delight in agreeing with a Dorothy Dixer from a friend in the Senate (Senator Doug Cameron) that “the CFMEU was not named as one of the major reasons for corporate failure in the construction industry”. The inference was, of course, that the statistics proved that the CFMEU was not a problem for the industry.
What some of those who quote these ASIC statistics may not know is that the categories of causes from which external administrators must choose are predetermined. In other words, in nominating causes of failure external administrators must select from a list of categories created by the ASIC. Also, one of those categories – one which gets a large number of ticks – is labelled merely “Other”.
Furthermore, and curiously, the information given to the ASIC by external administrators appears, on the face of it, to be at odds with the widespread belief amongst the insolvency community, unions and regulators that many business failures, especially in the construction industry, are the result of fraudulent phoenix activity. Which raises the question of whether the number of permitted categories of causes need to be increased, and/or whether the categories need to be modernised, broadened and clarified.
Permitted categories of causes
The ASIC compiles its statistics on the causes of failure from information supplied by external administrators when they fill out their statutory reports online (Form EX01, Schedule B of ASIC Regulatory Guide 16). In filling out these reports – i.e., in nominating the causes of a particular corporate insolvency – external administrators must select from 13 categories of causes, which are shown below in the order established by the ASIC and using its exact words. This list of categories has existed for at least thirteen years. The only change since 2002 has been to alter the name of cause number 13, from “None of the above” to “Other, please specify”.
Select from these causes of failure
1. Under capitalisation
2. Poor financial control, including lack of records
3. Poor management of accounts receivable
4. Poor strategic management of business
5. Inadequate cash flow or high cash use
6. Poor economic conditions
7. Natural disaster
9. DOCA (Deed of Company Arrangement) failed
10. Dispute among directors
11. Trading losses
12. Industry restructuring
13. Other, please specify
For those with business savvy, a rough definition of most of these ASIC categories can be deduced from their titles. (Which is just as well, because there is no official explanation.) But some categories – particularly “Fraud” (ASIC cause 8) – are vague and broad, and would benefit from the ASIC stating exactly what they mean.
Numbers for categories of ASIC causes
The ASIC’s latest report on this subject [1.] shows that in 2013-14 the “nominated causes of failure” – for all industry types, not just the construction industry – from highest to lowest, were:
|CAUSES OF FAILURE||
|Inadequate cash flow or high cash use||
|Poor strategic management of business||
|Poor financial control including lack of records||
|Poor economic conditions||
|Dispute among directors||
|Poor management of accounts receivable||
|Dispute among directors||
|Deed of Company Arrangement failed||
Top nominated causes
An external administrator may nominate as many of the prescribed causes as he or she likes. According to the ASIC, external administrators nominated an average of between two and three causes of failure per report in 2013–14. So in its summary the ASIC highlights the top three nominated causes of failure for companies and provides figures on the percentage of reports by external administrator in which these nominated causes appear:
|CAUSES OF FAILURE||
|Inadequate cash flow or high cash use (ASIC cause 5)||
in 42.6% of reports
|Poor strategic management of business (ASIC cause 4)||
in 42.0% of reports
|Trading losses (ASIC cause 11)||
in 32.5% of reports
These top three nominated causes have been the same for the past four years. It appears that “Other” (ASIC cause 13) may be a close fourth.
What is fraudulent phoenix activity?
The following explanation of phoenix activity comes from “Defining and Profiling Phoenix Activity”, a paper published in December 2014 as part of a research project (still going) by Associate Professor Helen Anderson, Professor Ann O’Connell, Professor Ian Ramsay, Associate Professor Michelle Welsh and Hannah Withers of the University of Melbourne Law School and the Monash Business School: [2.]
“The concept of phoenix activity broadly centres on the idea of a second company, often newly incorporated, arising from the ashes of its failed predecessor where the second company’s controllers and business are essentially the same. It is important to note that phoenix activity can be legal as well as illegal. Legal phoenix activity covers situations where the previous controllers start another similar business when their earlier entity fails in order to rescue its business. Illegal phoenix activity involves similar activities, but the intention is to exploit the corporate form to the detriment of unsecured creditors, including employees and tax authorities.
In a typical phoenix activity scenario, a company in financial difficulties, ‘Oldco’, is placed into liquidation or voluntary administration, or is simply left dormant (and may then be deregistered). Prior to this occurring, Oldco’s assets may be transferred either to a newly incorporated entity, ‘Newco’, or to an existing entity, such as a related company in a corporate group. “
Estimates of losses incurred by the Taxation Office, employees, the Fair Entitlements Guarantee (FEG) scheme, sub-contractors, trade creditors , etc. as a result of phoenix activity vary, but are in the hundred of millions. On its website the ASIC quotes from figures in a report published by Fair Work Australia in 2012 which put the cost to the Australian economy at potentially more than $3 billion annually. The FWA report, “Phoenix activity: sizing the problem and matching solutions”, estimates that the annual cost of illegal phoenix activity is:
- up to $655 million for employees, in the form of unpaid wages and other entitlement
- up to $1.93 billion for businesses, as a result of phoenix companies not paying debts, and for goods and services that have been paid for but not provided, and
- up to $610 million for government revenue, mainly as a result of unpaid tax – but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme (GEERS) now the Fair Entitlement Guarantee (FEG). [3.]
Phoenix perpetrators and phoenix victims
A phoenix transaction carried out by a company normally brings about the end of the company. If the company’s former suppliers or subcontractors cannot survive without the payments they were receiving from the company, they too may have to close down. Hence, where phoenix activity is involved a failed company might be a phoenix perpetrator or a phoenix victim (or perhaps a phoenix perpetrator as a result of being a phoenix victim!).
For simplicity’s sake, this article will focus upon companies/directors that are phoenix perpetrators.
To which category of ASIC causes of failure do phoenixing events belong?
When looking at a failed company an external administrator might conclude that the company is a phoenix perpetrator (or, to describe the event more accurately, that the directors caused the company to carry out a phoenix arrangement). However, the predetermined list of causes which the ASIC has created doesn’t provide a category that is clearly made for such cases, or a category into which such cases might logically fit.
“Fraud” (ASIC cause 8) might be an appropriate category. But if the phoenix activity was “legal” [4.] it may not.
Even if “Fraud” is the cause category into which external administrators should, and do, put fraudulent or illegal phoenix cases, then it appears that the commonly accepted extent of such activity is not being reflected in their reports to the ASIC. As chart 1. shows, “Fraud” accounts for only 146 out of 22,606 causes.
Furthermore, anecdotal evidence suggests that “Fraud” is regarded by external administrators as referring to dishonesty by employees or outsiders – like the misappropriation of funds, or the abuse of position by employees, or wrongful or criminal deception by outsiders.
In a “legal phoenix” case the external administrator might select the cause category of “Other” (ASIC cause 13). The fact that this cause stands at an appreciable 2,726 out of 22,606 on the latest count (see chart 1.) adds weight to that possibility. But because the “please specify” descriptions that are requested and given in this category are not publicly disclosed by the ASIC (and probably not even analysed), we don’t know what is being included in this undefined, catch-all category.
In a “legal phoenix” case, and even in an “illegal phoenix” case, the external administrator might – for the purpose of reporting causes of failure – disregard the phoenix transaction, preferring the view that the company failed before implementation of the phoenix scheme as a result of other causes, such as “inadequate cash flow or high cash use”, “poor strategic management of business” and/or “poor financial control including lack of records”.
What we don’t know
There is so much we don’t know. For example:
- We don’t know whether phoenixing is generally regarded by external administrators as a cause of failure of companies.
- We don’t know how many phoenix cases – legal and illegal – external administrators encounter.
- We don’t know whether illegally phoenixing is generally regarded by external administrators as either an offence or “misconduct” to be reported to the ASIC.
The above discussion of causes has drawn on information supplied by external administrators in a particular section of the statutory report form EX01. However, the main reason for this form’s existence is to report, as required by the Corporations Act, possible offences that the external administrator has noticed.
In Schedule B external administrators are asked to advise whether they are reporting “possible misconduct”. It is possible, therefore, that reports of illegal phoenixing are contained in this main section of their reports.
But if this is so, the ASIC’s analysis of the statutory reports received – published in “Insolvency statistics: External administrators’ reports” – does not mention it. In fact, the word “phoenix” appears only once in the latest of those published reports, and then only in a passing manner. Perhaps this is to be expected, given that the word “phoenix” does not even appear in Schedules B and D nor in any other part of ASIC Regulatory Guide 16.
It’s possible that the word’s absence from the offences/misconduct section of the Regulatory Guide may be due to the fact that “there is no express ‘phoenix offence’”. [4.]
However, as “Defining and Profiling Phoenix Activity” explains, acts carried out during conduct of an “illegal phoenix scheme” are likely to be offences under one or more of several sections in the Corporations Act. Also, the acts are likely to breach provisions of the Tax Assessment Act, the Criminal Code Act and/or the Fair Work Act. [4.] .
At this point we arrive at the same questions presented by the earlier analysis of the causes of failure. Is the phoenix activity observed by “the front-line investigators of insolvent corporations” [5.] being officially reported to the ASIC? If it is, how does the ASIC know it is, and how is the ASIC putting that information on the public record and before inquiries and researchers looking into phoenix activity?
Given the high level of interest in, and regulatory action to curb, the illegal phoenixing phenomenon, it is a pity that the store of the valuable knowledge derived from first-hand observations by external administrators is not being properly mined. The ASIC should give serious consideration to amending/expanding the Form EX01, Schedule B of Regulatory Guide 16 with simple changes to:
- include a category for corporate failures caused by phoenix schemes; and
- include a question in the misconduct section asking whether the company was involved in a phoenix scheme.
- Insolvency statistics: External administrators’ reports 1 July 2013-30 June 2014: Report 412, 29 September 2014
- “Defining and Profiling Phoenix Activity”, December 2014, Associate Professor Helen Anderson and others.
- The ASIC often refers to external administrators as “the front-line investigators of insolvent corporations”. See for example, “Regulatory Guide 16: External administrations: Reporting and lodging”, para. R16.4
Previous posts on this blog regarding this inquiry:
- Compelling first day at inquiry into construction industry insolvencies (19 June 2015)
- Senate Committee told about phoenix activity in construction industry (29 May 2015)
A set of “policy positions” on insolvency law and practice has just been issued by Australia’s insolvency practitioners association – the Australian Restructuring Insolvency and Turnaround Association (ARITA).
The policies are titled:
- Policy 15-01: ARITA Law Reform Objectives (Corporate)
- Policy 15-02: Aims of insolvency law
- Policy 15-03: Current Australian corporate restructuring, insolvency and turnaround regime and the need for change
- Policy 15-04: Creation of a Restructuring Moratorium (Safe Harbour)
- Policy 15-05: Stronger regulation of directors and creation of a director identification number
- Policy 15-06: Advocate for Informal Restructuring
- Policy 15-07: Reworked Schemes/Voluntary Administration regimes to aid in the rehabilitation of large enterprises in financial distress
- Policy 15-08: Extension of moratorium to ipso facto clauses
- Policy 15-09: Streamlined Liquidation for Micro Companies
- Policy 15-10: Micro Restructuring
- Policy 15-11: Pre-positioned sales
ARITA’s 17-page paper – named Policy Positions of the Australian Restructuring Insolvency and Turnaround Association – is the final version of its discussion paper, A Platform for Recovery 2014. It is attached to its submission on 2 March 2015 to the Productivity Commission’s public inquiry into ” barriers to setting up, transferring and closing a business”.
It seems ARITA’s policy positions paper is not yet (mid-day 5/3/15) published as a separate document on ARITA’s website. However, I have created a copy, which is available on my website now.
ARITA’S full 59-page submission to the Productivity Commission is available on its site, as is its useful summary of the key points made in the submission. ARITA says that the policies in the Policy Positions paper form the key basis of ARITA’s submission to the Productivity Commission.
Other link: To the website of the Productivity Commission’s Business Set-up, Transfer and Closure inquiry.
What information should a liquidator supply to the court to have his or her remuneration approved? On the other side, those opposed to the amount of remuneration must “settle on particular aspects of the liquidators’ conduct which can be queried”. This judgment from Western Australia on 11 February 2015 considers some issues.
Judgment – Remuneration of Provisional Liquidator – WA
RE PNP PACIFIC PTY LTD; EX PARTE STRICKLAND & HURT as Liquidators of PNP PACIFIC PTY LTD  WASC 49 (11 February 2015)
CORAM : MASTER SANDERSON > HEARD : 6 NOVEMBER 2014 > DELIVERED : 6 NOVEMBER 2014 > PUBLISHED : 11 FEBRUARY 2015 > FILE NO/S : COR 147 of 2014
MATTER : Application for approval of liquidators’ remuneration pursuant to s 504 of the Corporations Act 2001 (Cth) > EX PARTE > KIMBERLEY ANDREW STRICKLAND as Liquidator of PNP PACIFIC PTY LTD First-named Plaintiff > DAVID ASHLEY NORMAN HURT as Liquidator of PNP PACIFIC PTY LTD > Second-named Plaintiff.
Catchwords: Liquidation – Application for approval of remuneration – Turns on own facts. Legislation: Corporations Act 2001 (Cth), s 449E (7)
1 MASTER SANDERSON: This was the plaintiffs’ application for approval of remuneration. The application was issued on 6 August 2014. It was supported by an affidavit of the second-named plaintiff, David Ashley Norman Hurt, sworn 29 May 2014, and a further affidavit of Mr Hurt, sworn 6 August 2014. Mr Sean Damian O’Reilly, a secured creditor of the company, appeared and opposed the making of the order for remuneration. I granted Mr O’Reilly leave to file any affidavit in opposition to the liquidator’s remuneration claim by 16 September 2014.
2 The matter came back before the court on 6 November 2014. The plaintiffs were represented, but Mr O’Reilly did not appear. I indicated to counsel for the plaintiffs no affidavit from Mr O’Reilly had been received and I would make orders approving the remuneration in terms of the originating process. I indicated I would give written reasons for my decision. On 16 December 2014 I read short oral reasons into the transcript and published these reasons both to the plaintiffs’ solicitors and to Mr O’Reilly. Regrettably, due to an administrative oversight, I did not take into account an affidavit of Mr O’Reilly which had been filed on 7 October 2014. I have now had the opportunity to consider that affidavit and have concluded that even with the benefit of Mr O’Reilly’s affidavit, the plaintiffs’ application should be approved. These reasons deal shortly with why, in these rather unusual circumstances, I would approve the plaintiffs’ remuneration.
3 The way in which the remuneration of liquidators, provisional liquidators and other company administrators is to be determined was set out by the Full Court of this court in Venetian Pty Ltd v Conlan (1998) 20 WAR 96. It is worth setting out again the regime mandated by the court. It is as follows (103 104):
Ordinarily, to commence the proceedings, the provisional liquidator will provide the court with a statement of account reflecting in appropriate itemised form, details of the work done, the identity of the persons who did the work, the time taken for doing the work, and the remuneration claimed accordingly. The statement of account should also reflect in appropriately itemised form the expenses incurred by the provisional liquidator, accompanied where necessary by voucher proof. Sufficient detail should be provided to enable the court to determine whether the disbursements were reasonably incurred and that the amounts claimed are reasonable.
The statement of account should be verified by affidavit. When the remuneration claimed involves work carried out by the provisional liquidator and his staff, the verifying affidavit need state merely that the work described in the statement of account was done by the provisional liquidator or under his personal supervision, and that from personal knowledge or from the records kept by the provisional liquidator or his firm, or from some other appropriate source, he believes that the information contained in the statement of account is correct. When disbursements are claimed, the affidavit should verify that they were incurred and, if necessary, why they needed to be incurred.
In Re Solfire Pty Ltd (In liq) (No 2), Shepherdson J said (at 1,164):
‘In my view, when a provisional liquidator seeks to have his remuneration determined by the court he should provide a document not dissimilar in form to the bill of costs in taxable form provided by a solicitor to his client … He should identify the person or persons and the grade or grades of the person or persons engaged in the particular task concerning the provisional liquidation, he should identify that task and dates on which time was spent on it, the amount of time spent on it and he should identify the relevant rate, according to the grade of the person or persons performing the work. I also consider that he should require the person performing the work to keep reasonably detailed diary notes and time sheets which documents should be open to inspection by persons entitled to see them.’
In our opinion, however, it is, with respect, unnecessary to lay down an absolute rule, in such detailed terms, concerning the statement of account to be provided by a provisional liquidator. It may well be that in a particular case information particularised as suggested by Shepherdson J would be appropriate. In other cases less detailed information may be required. Every case depends on its own circumstances. But the overriding principle remains: sufficient information must be provided to the court to enable it to perform its function under s 473(2).
If the Master were to be satisfied that the statement of account was sufficiently detailed to enable the remuneration to be determined, but there were objections to the account, special directions should be given in regard to the mode in which the account is to be taken or vouched. The procedure set out in O 45 should as far as possible be adopted. If, for example, the objector challenges whether a particular item of work was in fact done, or whether the person alleged to have done the work spent the time alleged in doing it, it may be necessary for the provisional liquidator to call direct evidence establishing the correctness of the allegations made: see generally Gava v Grljusich (unreported, Supreme Court, WA, Full Court, Library No 970492, 19 September 1997).
Notice should be given of the points on which the provisional liquidator will be crossexamined (if crossexamination is allowed). The notice of objection should be supported by affidavit. Crossexamination of the provisional liquidator and the objecting party may then occur. But care should be taken to follow the admonition of Sir Robert Megarry VC in Computer Machinery Co Ltd v Drescher (at 1386), namely: ‘It would not be right to allow anything resembling a trial of the action to take place in the guise of an argument on costs’.
4 What is anticipated by this regime is a twostage process. The practice is grown up of liquidators swearing an affidavit and attaching to that affidavit copies of the timesheets used to calculate remuneration. In addition, the liquidator will provide a brief description of the role of each person for whom a charge has been made, and the rate at which the time has been charged. I then consider the timesheets and all related material and form a prima facie view as to whether the charge is reasonable.
5 In this case the approach taken by the liquidators was slightly different. They produced a remuneration report pursuant to s 449E(7) of the Act. A copy of that report is annexure DH11 to the first affidavit of Mr Hurt. The remuneration was approved at a meeting of creditors held on 23 April 2012. The liquidators then undertook further work and prepared a further remuneration request report which appears as annexure DH13 to Mr Hurt’s affidavit. It is this report seeking an amount of $25,419 which formed the basis of this application. The report was not approved by a meeting of directors.
6 The first report itself begins by setting out a ‘Schedule of Hourly Rates and General Guide to Staff Experience’. For instance, under the classification ‘Director’ there appears a heading ‘Description’. It reads as follows:
Chartered accountant (or equivalent) and degree qualified with 9+ years (approximately) of experience. Able to autonomously lead complex insolvency appointments.
7 The hourly rate specified is $510. There then follow a number of categories down to the final category of ‘Clerical’. Such persons are charged at $110 an hour. There is then a heading ‘Liquidators’ Disbursements’ which sets out the way in which disbursements are charged. For instance, ‘Printing’ is charged at 30 cents per page. There then follows a heading ‘Remuneration Methods’ and it is said that the liquidators have charged on a time cost basis. There is a further subheading ‘Other Creditor Information on Remuneration’. Reference is made to a number of publications providing some guide as to the way in which liquidators charge generally.
8 The main part of the report appears under the heading ‘Schedule of Liquidator’s Anticipated Tasks and Estimated Remuneration for the Period 5 April 2012 to Finalisation of the Liquidation’. The total shown is $40,230, and it was this amount that was approved.
9 The second report was in a slightly different form. Once again, the hourly rates of staff were set out and it is said charging was based on a time cost method. There then appears a heading ‘Tasks Undertaken by the Liquidators and Time Costs for the Period 5 April 2012 to 30 June 2013’. By way of example as to how these matters are set out, appearing below is the first of a number of discrete boxes setting out what was done in relation to particular matters.
$311 per hour
Stock, Plant and Equipment
Funds in CS Legal trust account
10 There is a final heading ‘Summary of the Liquidators’ Time Costs for the Period 5 April 2012 to 30 June 2013 by Personnel Level and Task’. By way of example, Mr Hurt is described as ‘Associate Director’. His hourly rate is $467. He is said to have spent 6.7 hours working on the liquidation at a total cost of $3,129. That dollar figure is then broken down further. For instance, under ‘Assets’, as set out above, Mr Hurt is said to have incurred an amount of $94 by way of costs.
11 As with every single case I have looked at over the past almost 17 years since Venetian was decided, I was satisfied, prima facie, the charges claimed were justified. It is difficult to see how in any circumstance a different conclusion can ever be reached. All a liquidator can ever do is set out in broad detail what was done in the course of the liquidation and the hourly rate charged. There is no way I could, by looking at the broad description of the work done by Mr Hurt and his hourly rate, assess whether or not the charge is reasonable. Really, the first stage of this two stage process is a waste of time. Of course, if it were the case the material before the court was manifestly inadequate because there were no timesheets, the hourly rate was not specified, or the individuals who did the work were not identified, then the claim would fail. But that is a wholly different thing from requiring a preliminary assessment of the entitlement to remuneration.
12 In any event, having undertaken in this case a preliminary assessment of the material, I was satisfied, prima facie, the plaintiffs were entitled to compensation. It was then a matter of considering the affidavit of Mr O’Reilly. It is somewhat difficult to distil from the affidavit the nature of Mr O’Reilly’s complaint. It would appear to amount to Mr O’Reilly being dissatisfied with the time invested by the plaintiffs in the liquidation. At par 51 of his affidavit he says:
My professional opinion is that the amount of hours that could be substantiated in this matter is less than 50 hours.
13 In a following paragraph he goes on to offer a breakdown of how long various tasks would take. For instance, ‘Creditors’ is suggested to take four hours. Mr O’Reilly also complains about the charges of liquidators generally without reference to this particular liquidation. Mr O’Reilly was also not satisfied there was a need for investigation of the company’s affairs. If an investigation was actually undertaken, he says it was not comprehensive.
14 The difficulty with Mr O’Reilly’s affidavit is its generality. It does not settle on particular aspects of the liquidators’ conduct which can be queried. To refer again to the Venetian decision, Mr O’Reilly does not challenge whether a particular item of work was done or whether a particular person specified actually did the work. Based upon the general affidavit filed by Mr O’Reilly, there was no way I could have directed the liquidator to file further affidavit material. That would have required each and every one of the persons who were associated with the liquidation to swear an affidavit saying what they did, when they did it and why they did it. It is that sort of exercise which, on any approach to a review of remuneration, is to be avoided.
15 Accordingly, I was not satisfied the affidavit of Mr O’Reilly gave rise to any matter about which the liquidators had to provide further information. I am satisfied the approval of that remuneration was proper and appropriate. I made orders accordingly.
Despite directors receiving official admonishments, detailed instructions and threats about the practice of allowing a company to trade whilst insolvent (see, for example, ASIC Regulatory Guide 217), the curse of insolvent trading seems to be growing.
So, in an attempt to reel it in – or perhaps (for the cynical) to reduce the number of reported cases – the Australian Securities and Investments Commission (ASIC) is putting the onus on liquidators to provide “better” information in their statutory reports.
Where liquidators of insolvent companies become aware that a past or present director or other officer of a company may have committed an offence, they are required to make a formal report to ASIC. Several years ago ASIC came up with a form and guidelines spelling out the information it wanted from liquidators before it would take their allegations of offences any further. This change came with the introduction of an electronic means of lodging reports, but also occurred after ASIC had become fed-up with receiving offence reports considered by its investigators to be almost worthless.
The latest version of this offence report form was released on 18 December 2014. The changes that have been drawn to the attention of liquidators by ASIC concern allegations of insolvent trading. The previous version of the form (July 2008) asked little of liquidators regarding this subject: about all it wanted was a “Yes” or “No” on the availability of documentary evidence. But the new version requires far more.
In the insolvency profession the ASIC form is known as EX01. More technically it is Schedule B of Regulatory Guide 16: Report to ASIC under s422, s438D or s533 of the Corporations Act 2001 or for statistical purposes. (Note: This reporting requirement applies not only to liquidators but also to receivers or managing controllers and voluntary administrators. However for simplicity all these classes of external administrators are referred to collectively in this article as liquidators.)
Possible Misconduct – EX01
In EX01 reporting of “insolvent trading” is carried out in the section headed Possible Misconduct.
Here, ASIC asks the liquidator “Are you reporting possible misconduct?”
If the answer is “Yes”, the liquidator is invited to examine Schedule D of ASIC Regulatory Guide 16 to learn “what is likely to constitute a breach of the relevant section, and the evidence needed to prove such a breach”. Schedule D contains over 6,500 words.
There is also a warning “that ASIC may ask you to provide a supplementary report addressing in detail the possible misconduct reported and we may later require further evidence or statements from you for Court purposes”. A description of what is required in the ASIC supplementary report is set out in Schedule C: Supplementary report by receiver or managing controller under s422(2), by voluntary administrator under s438D(2), or by liquidator under s533(2). Schedule C contains about 3,000 words. Liquidators of “assetless companies” are eligible under Regulatory Guide 109 to apply for funding from ASIC for reasonable remuneration and costs in preparing a supplementary report (ASIC form EX03).
If, after considering what is involved in answering “Yes”, the liquidator still thinks the misconduct is worth reporting, or filing a complaint, he or she is directed to the section headed “Criminal Offences”.
Possible Misconduct – Criminal Offences – Insolvent Trading – EX01
Preliminary details of an allegation of insolvent trading – an offence under section 588G(3) of the Corporations Act 2001 – are sought by ASIC in the usual tick-the-box manner.
First the liquidator reports the alleged offence by ticking “Yes” to the following statement:
“In your opinion, one or more directors failed to prevent the company incurring a debt or debts at a time when the director suspected that the company was insolvent or would become insolvent as a result, and the failure to prevent the company incurring the debt(s) was dishonest.”
Having ticked that box, the liquidator is asked “Do you have documentary evidence or other to support your opinion?” and “Are you aware of documentary evidence in the possession of another person that supports this allegation?”
Up to this section the revised form is practically the same as the previous version.
But in the new version, if the liquidator reports a case of insolvent trading and has, or knows of, documentary evidence supporting this conclusion, the liquidator must provide more information by answering several extra questions.
These extra questions concern the period of insolvency, the methods and records used to determine the date of insolvency, the amount of debts incurred, and the reasonable grounds for the director had to suspect insolvency. (The actual questions are set out verbatim below, but the heading are mine.) They are the type of questions that a liquidator, especially one with sufficient funds, ought to consider as a matter of course before reaching an opinion regarding the existence (or non-existence) of insolvent trading.
Effects of changes to insolvent trading sections of EX01
Prior to the recent changes, if ASIC saw a completed EX01 form in which the liquidator had alleged a breach of the insolvent trading laws, and had also answered “yes” to questions about the possession or existence of documentary evidence “or other” to support that opinion, ASIC would have then needed to consider whether to investigate. Its task would likely have entailed obtaining, or trying to obtain, from the liquidator the extra information that is now set out in the latest version of EX01. So, as far as the extra demands in the form are concerned, ASIC would probably argue that liquidators are no greater imposed upon now than they were before.
But regardless of the information ASIC has or could readily obtain, it often decides not to investigate complaints of alleged offences. For many years this inaction has deeply frustrated a lot of liquidators. Many feel that completing an EX01 form is a waste of their time and also, where there are still funds in the insolvent company, a waste of creditors’ money. Unless the revised EX01 results in greater tangible action by ASIC (increased investigations and prosecutions and not just more detailed statistics), making the form more demanding will aggravate these feelings.
It might even see an increase in the non-reporting of insolvent trading offences (see the new question “Reasons for not reporting insolvent trading”), or in “no” being the liquidator’s response when it really should be “yes”.
Extra questions about insolvent trading – new EX01
Period insolvency commenced
Indicate the period, which, in your opinion, the company became unable to pay all its debts as and when they became due and payable:
◻ At appointment ◻ 1 – 3 months prior to appointment ◻ 4 – 9 months prior to appointment ◻ 10 – 15 months prior to appointment ◻ 16 – 24 months prior to appointment ◻ Over 2 years prior to appointment
Method/s of determining date of insolvency
How did you determine the date on which, in your opinion, the company became unable to pay all its debts as and when they became due and payable? (tick one or more):
◻ Cash flow analysis ◻ Trading history analysis ◻ Balance sheet analysis ◻ Informed by director(s) ◻Other, please specify __________________
Records used to determine date of insolvency
Which of the following records, in your possession, did you use to determine the date on which, in your opinion, the company became unable to pay all its debts? (tick one or more):
◻ Cash flow (actual / forecasts / budgets) ◻ Banking records ◻ Aged debtors’ list ◻ Aged creditors’ list ◻ Profit & loss statements ◻ Balance sheets ◻ Other, please specify _______________
Grounds for director to suspect insolvency
If you believe the director had reasonable grounds to suspect the company was insolvent or would become insolvent by incurring the debt (or a reasonable person in a like position would have reason to suspect), please identify on which of the following indicators of insolvency you have based your belief (tick one or more):
◻ Financial statements that disclose a history of serious shortage of working capital, unprofitable trading ◻ Poor or deteriorating cash flow or evidence of dishonoured payments ◻ Difficulties paying debts when they fell due (e.g. evidenced by letters of demand, recovery proceedings, increasing age of accounts payable) ◻ Non-payment of statutory debts (e.g. PAYGW, SGC, GST) ◻ Poor or deteriorating working capital ◻ Increasing difficulties collecting debts ◻ Overdraft and/or other finance facilities at their limit ◻ Evidence of creditors attempting to obtain payment of outstanding debts ◻ Other, please specify ________________
Approximate debt after insolvency
Estimate the approximate amount of debts incurred after the date (in your opinion) of insolvency:
◻ $0 – $250,000 ◻ $250,001 – less than $1 million ◻ $1 million to $5 million ◻ Over $5 million ◻ Unable to determine
Aged list of creditors
Do you have an aged creditors’ list as at (tick one or more):
◻ Date of insolvency ◻ Date of appointment
Dishonesty by director
If the director/directors was dishonest in failing to prevent the company from incurring the debt, indicate what evidence you have available to support this (tick one or more):
◻ Evidence showing that the director/directors had an opportunity to prevent the company from incurring the debt and did not. Such evidence could include: • documents evidencing discussions with the directors, employees and creditors concerning the circumstances surrounding the incurring of particular debts; • correspondence or other documents relating to the circumstances surrounding the incurring of the debt. ◻ Evidence showing that the failure was dishonest (i.e., the director/directors incurred the debt with the knowledge that it would produce adverse consequences, the failure was intentional, wilful or deliberate, and it included an element of deceit or fraud). Such evidence could include: • documents evidencing discussions with the directors, employees and creditors concerning the circumstances surrounding the incurring of particular debts; • correspondence or other documents relating to the circumstances surrounding the incurring of the debt.
Reasons for not reporting insolvent trading
If you did not report insolvent trading (s588(1)-(2) or s588(3)), was it because, in your opinion:
◻ The books and records are insufficient to establish insolvent trading ◻ The company did not incur debts at a time when it was unable to pay its debts (e.g., it ceased to trade) ◻ The directors had reasons to expect the company could pay its debts as they fell due and payable (eg. they obtained independent advice) ◻ Other, please specify ________________
Whether creditor/s are seeking compensation for insolvent trading
Has a creditor commenced, or indicated that they intend to commence, action to recover compensation for loss resulting from insolvent trading?
◻ Yes ◻ No
Possible Misconduct – Breaches of civil obligations – Insolvent Trading – EX01
Insolvent trading may also be a breach of civil penalty sections 588G(1)-(2) of the Act. The revised form EX01 also seeks details of allegations of this nature, by asking about the period of insolvency, the methods and records used to determine the date of insolvency, the amount of debts incurred, and the reasonable grounds for the director had to suspect insolvency. The questions are practically the same as those asked when a criminal offence is alleged (see above). In the previous version of EX01 only three brief questions were posed, which concerned the availability of evidence and the perceived legitimacy of a director’s defence.
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  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.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  1 KB 169; McCarthy Rose (Milk Vendors) Pty Ltd v Dairy Farmers Coop Milk Co Ltd (1945) 45 SR(NSW) 266; Mason v Clarke  AC 778.
Click here for pdf copy of judgment by Chief Justice Kourakis on 9 December 2014: Judgment in Viscariello v Macks  SASC 18