When should liquidators apply to court for approval and directions?

 Checklists and guides, Industry People, Insolvency practices, Legal opinion, Regulation  Comments Off on When should liquidators apply to court for approval and directions?
Sep 212011
 

 Michael J Galvin, barrister and insolvency law expert from Melbourne, has kindly contributed the following article for insolvency practitioners on applications for Court approval and directions, and the powers of administrators and liquidators.

 

 Applications for Court approval and directions

In addition to cases where liquidators and administrators are obliged to seek directions (see later in this paper), there are many circumstances where it may be thought desirable to apply for Court approval.  

This will be so where the liquidator or the administrator is uncertain as to the course he or she should adopt in relation to a matter (e.g. Re Mento Developments (2009) 73 ACSR 622).  It is particularly so where it is anticipated that a decision is likely to be controversial or where there is likely to be a complaint about a transaction which a liquidator or administrator proposes entering into, or has entered into (e.g. see Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) 79 ACSR 373; Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111).

Section 479(4) of the Corporations Act 2001 provides that a liquidator may apply to the Court for directions regarding any matter arising in the winding up.  Section 511 makes similar provision for liquidators in creditors’ voluntary windings up, including liquidations which have ensued from a voluntary administration. Whilst they are expressed in different terms, it has been held that there is no material difference between the provisions.

Section 447D gives the Court power to give directions to administrators, and deed administrators, about matters arising in connection with the performance or exercise of their functions and powers.

Sections 479(4), 511 and 447D have a common pedigree.  The history of s 479(4) and its relationship to applications by trustees (particularly of deceased estates) for judicial advice were considered in detail by McClelland J. in GB Nathan & Co Pty Ltd (in liq) (1991) 24674 (see also Macedonian Orthodox Community Church St Petka Inc (2008) 249 ALR 250; see also Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111 (Mansfield, Besanko and Flick JJ).

The primary purpose of the court’s power to give judicial advice is the protection of those appointed by the Court to administer estates from allegations that they have acted improperly (Southern Cross Airlines Holdings Ltd (1998) 1 Qd R 84 at 93).  It is also aimed at protecting the interests of trusts (Macedonian Orthodox Community Church St Petka Inc at [71] & [72]).

That is not to say that the court will grant a direction or approval whenever sought (Southern Cross Airlines Holdings Ltd at 92).  It is important that the proposed direction:

  • relates to the manner in which the liquidator should act in carrying out the liquidator’s functions; and
  • will not adversely affect the legal rights or interests of other persons (or allow the liquidator to do so with impunity) (Southern Cross Airlines Holdings Ltd at 92).

However, an application for directions may be readily converted to an adversarial proceeding where the circumstances warrant it (Re Mento Developments (2009) 73 ACSR 622).

The power to give judicial advice extends to whether or not a liquidator is justified in prosecuting or defending proceedings (particularly having regard to the associated costs of doing so) (Macedonian Orthodox Community Church St Petka Inc at [71] & [72]).

The court may exercise its power to give judicial advice even with respect to and the liquidator’s proposal to enter into a commercial arrangement (Re Timbercorp Securities Ltd (in liq) (2009) 74 ACSR 626).

Further:

A liquidator is entitled to seek directions on the administration of the winding up even though the issue about which he seeks a direction may be or become an adversarial issue in other proceedings;

The direction or advice is to be directed to advising the liquidator on whether or not he or she is justified in conduct and winding up in a certain way and not deciding disputes between competing parties;

The direction or advice should not seek to resolve an issue between competing parties, but the fact that the advice may tend to foreclose an issue in other disputed proceedings is not of special significance in the court exercising its discretion to give private advice to the liquidator; and

Where a liquidator seeks advice on an issue which may be contested between competing parties, the court should be alert to not going further than is necessary to give the advice sought (Re Mento Developments (2009) 73 ACSR 622 at [49]).

It is common, for the applicant liquidator to nominate willing parties to act as contradictors in the proceeding. These are usually persons, such as creditors or classes of creditors, who have an interest in the outcome of the application. The identification of such persons is helpful because they are usually able to promote counter arguments that assist the Court in resolving the relevant issue or issues. The costs of such persons are usually agreed in advance to be met out of the assets of the liquidation.

Opinions differ as to the appropriate wording of a direction. Some judges prefer to give a direction that a liquidator is “justified” in taking a particular action. Others prefer to direct that the liquidator would be acting “reasonable” were he or she to adopt a particular course.

As to the equivalent law governing trustees in bankruptcy, see Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111.

 When is Court/creditor approval required

A. Liquidators

As to liquidators’ powers generally, see s 477 Corporations Act 2001.

Liquidators are prohibited from doing any of the following unless they have the approval of the Court (Federal or Supreme), the approval of the committee of inspection (if there is one) or a resolution of creditors:

  • compromise a debt due to the company which is greater than $100,000 (s 477(2A));
  • enter into an agreement on the company’s behalf (such as a lease or a charge) which may remain on foot or involve the performance of obligations beyond three months from the date of the agreement (s 477(2B)).

Quaere whether settlement of a claim against a director for insolvent trading, which according to the terms of s 459M is a debt due to the company, requires Court or creditor approval.

A liquidator in a creditors’ voluntary winding up is prohibited from doing any of the following without the leave of the Court, unless and until the initial meeting of creditors under s 497 has been held:

  • pay any class of creditors in full (subjection to s 556) (ss 477(4) and 477(l)(b);
  • compromise or make any arrangement with creditors, or persons claiming to be creditors, of the company, or whereby the company may be rendered liable (s 477(4) and s 477(l)(c)); and
  • do anything necessary for the winding up of the company and distributing its property (ss 477(4) and 477(2)(m)).

The exercise by a liquidator of the powers conferred by s 477 is always subject to the control of the Court. Any creditor or contributory, or ASIC, may apply to the Court with respect to any exercise, or proposed exercise, of any of those powers (s 477(6); note also the power of the Court to review the actions, decisions and omissions of liquidators under s 1321).

A liquidator must have regard to any directions given by resolution of the creditors or by the committee of inspection. A direction by the former will override a direction by the latter (s 479(1)). The liquidator may convene meetings of creditors to ascertain their wishes, and is obliged to convene a meeting if required to do so by creditors having one tenth of the company’s debt (s 479(4)).

B. Administrators

While a company is under administration, the administrator:

  • has control of the company’s business, property and affairs;
  • may carryon the company’s business and manage its property and affairs;
  • may terminate or dispose of all or part of the business, and may dispose of any of the property; and
  • may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration (s 437A(l)).

The administrator has additional powers:

  • to remove a director from office;
  • to appoint a director;
  • to execute a document, bring or defend proceedings, or do anything else, in the company’s name and on its behalf; and
  • whatever else is necessary to the purposes of part 5.3A (s 442A).

A transfer of shares in a company during administration is void, unless:

  • the administrator has given written and unconditional consent to the transfer;
  • the administrator gives written consent and any conditions have been satisfied; or
  • the Court authorises the transfer (s 437F(1)).

An administrator’s consent to a transfer of shares is subject to review by the Court (s 437F(5) and (6). The Court will only authorise the transfer under s 437F(l)(c) if it is satisfied the transfer is in the best interests of the company’s creditors as a whole.

An administrator is prohibited from disposing of property subject to a charge, or property used by the company but owned by someone else (e.g. property leased by the company), unless:

  • the disposal is in the ordinary course of business;
  • the charge or owner consents; or
  • the administrator obtains the leave of the Court (s 442C).

The Court will only grant leave if it is satisfied that the chargee’s or owner’s rights are adequately protected (s 442C(3».

As in the case of liquidators, the actions, decisions and omissions of administrators, and deed administrators, are subjection to review by the Court (s 1321).

Author: Michael J Galvin 5 September 2011

Michael’s Profile

 From the date of his admission in 1989 until commencing the Readers’ Course earlier in 1999, Michael worked with Gadens Lawyers, formerly J M Smith & Emmerton.  He became an associate in 1991 and then a partner in 1994.  He conducted an extensive insolvency practice as a solicitor for ten years advising liquidators, receivers, voluntary administrators, company directors, debtors, creditors, trustees and the Insolvency and Trustee Service Australia.  He appeared in a variety of proceedings as a solicitor advocate including commercial hearings and trials in the Magistrates’, County, Supreme and Federal Courts and public examinations under the Corporations Law and Bankruptcy Act. Michael is co-author of the recently published Butterworth’s loose-leaf service “Bankruptcy Law and Practice”.

Telephone: (03) 9225 8235 Secretary: (03) 9225 6059 Chambers: Lonsdale Chambers, Level 5, 530 Lonsdale Street, Melbourne Vic 3000.  Clerk: Michael Green (03) 9225 7222.

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“Australian Insolvency Decisions” August 2011 edition

 Industry People, Insolvency practices, Personal Bankruptcy  Comments Off on “Australian Insolvency Decisions” August 2011 edition
Sep 012011
 
Compiled by Michael Ennis.   Michael developed an interest in insolvency case law, while a Deputy Registrar in Bankruptcy at the Federal Court of Australia and while undertaking various roles at the  Insolvency Trustee Service Australia (ITSA).  He has maintained this interest since retiring.  If you would like to receive the Insolvency Decisions schedule direct, advise Michael of additional decisions, or share your observations, you may contact Michael direct on rmci53mje@spin.net.au.

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Bankruptcy Act  – Prior to Date of Bankruptcy

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Goodman v Zhao [2011] FMCA 578 (26 July 2011) BANKRUPTCY – Creditors petition – debtor disputing the judgment debt – issues in relation to the judgment debt already litigated as far as the High Court – previous judgment of this Court dismissing a challenge to the bankruptcy notice subject to appeal in the Federal Court – no reason to defer a sequestration order http://www.austlii.edu.au/au/cases/cth/FMCA/2011/578.html

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Kwok v Bank of Western Australia Limited [2011] FMCA 559 (22 July 2011) BANKRUPTCY – Application to set aside a Bankruptcy Notice brought pursuant to s.41(7) – requirements of section not make out – application dismissed http://www.austlii.edu.au/au/cases/cth/FMCA/2011/559.html

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 “A question resolved – I had thought that there was a decision on point the other way” – M Ennis –  Autron Pty Ltd v Benk [2011] FCAFC 93 (28 July 2011) BANKRUPTCY AND INSOLVENCY – bankruptcy notice – validity – whether post-judgment interest included in a bankruptcy notice can be a component of the prescribed statutory minimum for which a bankruptcy notice can be issued – consideration of the meaning of “final judgment” and “final order” http://www.austlii.edu.au/au/cases/cth/FCAFC/2011/93.html

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Bankruptcy Act – following Date of Bankruptcy

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Mango Boulevard Pty Ltd v Whitton; In the matter of Spencer (Bankrupt) (No 2) [2011] FCA 845 (28 July 2011) COSTS – bankruptcy – application for directions by trustee – whether trustee ought to have his costs paid out of funds held by him for the calling of a meeting of creditors – where trustee’s application to the court was reasonable – where need for directions arose from instruction of principal proceeding – order for costs reserved to the discretion of the trial judge COSTS – costs of interlocutory proceeding – application that costs be paid forthwith – circumstances in which order for costs to be paid forthwith may be made – where applicant had costs awarded against it in respect of transfer application – where bankruptcy jurisdiction is exercised in national court – order would cause injustice – order not made http://www.austlii.edu.au/au/cases/cth/FCA/2011/845.html

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 “Note service of Bankruptcy Notice by email” – M Ennis  – Topalides v Edey [2011] FMCA 556 (22 July 2011) BANKRUPTCY – Application for Review – suggestions of procedural faults and of misleading conduct – allegations of improper service or no service at all – consideration of statutory requirements – determination of no fault or error arising from service or otherwise http://www.austlii.edu.au/au/cases/cth/FMCA/2011/556.html

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 “How rare is this, a S. 50; so it follows the subsequent decision is going to be of interest” – M Ennis – Tang & Anor v Bassili & Ors [2011] FMCA 544 (20 July 2011) BANKRUPTCY – ATO delivery of s.260-5 ITAA notices upon third party – questions of whether money “due” by third party to taxpayer debtor – third party purchaser due to pay money to taxpayer pursuant to contract for sale of land – land subject to registered mortgages securing debt due – money not due to taxpayer – money due to mortgagee – arrangements between parties to secure disputed fund pending trial – such arrangement did not disturb legal rights of parties – arrangement not render disputed fund due by party subject to s.260-5 notice http://www.austlii.edu.au/au/cases/cth/FMCA/2011/544.html

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CostaExchange Limited & Ors v Shephard (No.2) [2011] FMCA 545 (12 July 2011) BANKRUPTCY – Creditor’s petition – application to set aside sequestration order – operation of sequestration order stayed for 21 days on condition of payment by debtor to trustee – mistake affecting ability of debtor to comply – no grounds for setting aside sequestration order – no evidence of ‘fraud’ – sequestration order did reflect intentions of court – delay in applying for remedy – application refused http://www.austlii.edu.au/au/cases/cth/FMCA/2011/545.html

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CostaExchange Limited & Ors v Shephard [2010] FMCA 804 (12 October 2010) BANKRUPTCY – Creditor’s petition – costs in protracted litigation with debtor – debtor’s evidence did not show ability to pay debt – sequestration order made http://www.austlii.edu.au/au/cases/cth/FMCA/2010/804.html

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Bankruptcy Act – Other Schemes under the Act

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“As the year goes on the most complex of matters seem to be occurring – looking forward to decisions in these bankruptcies” – M Ennis –  Robertson & Anor v Moran & Ors [2011] FMCA 496 (20 July 2011) BANKRUPTCY – Personal insolvency agreement – application to set aside – agreement not calculated to benefit creditors generally – large unsecured indebtedness – token contribution under agreement – dominant related creditors benefiting from continuing business activities of debtor – controlling trustee recommended against acceptance of agreement – further investigation of debtor’s business affairs warranted – application set aside – sequestration order made http://www.austlii.edu.au/au/cases/cth/FMCA/2011/496.html

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Corporations – pre-appointment

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Time Of My Life Pty Limited -v- Windsor Turf Supplies Pty Limited (In Liquidation) [2011] NSWSC 916 (16 August 2011) CORPORATIONS – Corporations Act 2001 (Cth) s 459G(1), 459H(1) – application to set aside a statutory demand – genuine dispute as to existence of debt – statutory demand set aside http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/916.html

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Forensic Document Examiners Pty Ltd v Cristavao [2011] FCA 843 (28 July 2011) http://www.austlii.edu.au/au/cases/cth/FCA/2011/843.html

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Refund Property Fees Pty Ltd v Prime Project Development (Cairns) Pty Ltd [2011] FCA 851 (21 July 2011) PRACTICE AND PROCEDURE – interim receiver – whether to appoint an interim receiver of a secured loan under s 57 of the Federal Court of Australia Act 1976 (Cth) – where first respondent had purportedly assigned the loan to the applicant – where substantive proceeding claimed relief under the Trade Practices Act 1974 (Cth) and the Property Law Act 1974 (Qld) – where receiver would have powers to release security – where receiver would receive monies under loan and pay unsecured creditors instead of secured creditors – where security was effectively held separately – misunderstanding as to the nature of a receiver – necessary party not joined – receiver not appointed – applicant to file and serve statement of claim http://www.austlii.edu.au/au/cases/cth/FCA/2011/851.html

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Corporations  – post appointment

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S E Vineyard Finance Pty Ltd (recs & mgrs apptd) v Casey [2011] VSC 403 (26 August 2011) APPEAL – Magistrates’ Court – Whether numerous challenges to Magistrate’s findings raised a question of law. TRADE PRACTICES – Whether there were misleading and deceptive representations in prospectus for establishment of vineyard – Omission to mention round robin transaction involving monies borrowed from appellant to pay management fees for vineyard – Whether credit provider knowingly concerned – Whether linked credit provider liable for misrepresentation – Meaning of consumer – Whether claims outside limitation period – Unconscionable conduct – Trade Practices Act 1974 (Cth), ss 48, 51AC, 52, 73, 82. EQUITY – Whether fiduciary relationship existed – Whether there was a breach of fiduciary duty – Equitable damages – Constructive trust http://www.austlii.edu.au/au/cases/vic/VSC/2011/403.html

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Re Keldane Pty Ltd (in liq) [2011] VSC 385 (23 August 2011) CORPORATIONS – Termination of winding up – Sufficiency of material for the Court to order termination – Doubt about whether the creditors’ resolution would have been passed on the material before them – Validation of appointment of administrators – Whether approval by creditors is to be given before or at the time of administrator’s appointment – ss 436B(2) and 482(1) Corporations Act 2001 (Cth). http://www.austlii.edu.au/au/cases/vic/VSC/2011/385.html

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Re Timbercorp Limited (in liq) [2011] VSC 189 (23 August 2011) Corporations – Approval of compromise – Insurance claim – Allocation of proceeds – Confidentiality of terms of settlement and legal advice – Applications under ss 477(2A) and 511 of the Corporations Act 2001 (Cth) http://www.austlii.edu.au/au/cases/vic/VSC/2011/189.html

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CAREY -v- KORDA & WINTERBOTTOM [No 2] [2011] WASC 220 (26 August 2011) Catchwords:
Evidence – Privilege – Legal professional privilege – Receivers and managers – Whether solicitors engaged by receiver and manager are engaged to act for company – Whether sufficient basis to maintain claim for legal professional privilege over bills of costs and recharge schedules – Whether legal professional privilege waived – Whether privilege abrogated by statute http://www.austlii.edu.au/au/cases/wa/WASC/2011/220.html

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GREAT SOUTHERN MANAGERS AUSTRALIA LTD (IN LIQ) IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE MANAGED INVESTMENT SCHEMES LISTED IN SCHEDULE 1 -v- THACKRAY [No 3] [2011] WASC 195 (12 August 2011) Catchwords: Corporations – Managed Investment Scheme – Rights Proceeding – Withdrawal of defences and counterclaims in Rights Proceeding – Allocation of net proceeds of fund – Rights of respective claimants – Turns on own facts http://www.austlii.edu.au/au/cases/wa/WASC/2011/195.html

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MICHAEL OSCAR BASEDOW AS ADMINISTRATOR OF FIRST GROWTH FUNDS LTD (ADMINISTRATOR APPOINTED) [2011] SASC 132 (16 August 2011) Application for directions by Administrator – consideration of assets of company – whether approval should be given to dispose of certain assets prior to the second creditors meeting – difficulty of attributing value to assets – some assets consisted irrecoverable debts – agreements entered into by Administrator subject to the Court’s direction http://www.austlii.edu.au/au/cases/sa/SASC/2011/132.html

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Constantinidis & Anor v Landcorp (NSW) Pty Ltd (in liq) & Ors [2011] NSWSC 872 (16 August 2011) Costs – costs ordered against plaintiffs where application to extend caveat could not have succeeded http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/872.html

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In the matter of Tumut River Orchard Management Limited (in liq) ABN 003 501 611 [2011] NSWSC 915 (15 August 2011) CORPORATIONS – application for appointment of liquidator – s 502 of the Corporations Act 2001 (Cth) – where company in liquidation without liquidator — r 7.2 of the Supreme Court (Corporations) Rules 1999 (NSW) – whether plaintiff can bring the application where it is neither a creditor nor a contributory of the company – held r 7.2(2)(a) does not create a closed class – held s 502 of the Corporations Act 2001 (Cth) does not restrict who may properly make the application – s 14 of the Civil Procedure Act 2005 (NSW) – if it were otherwise the present case is an appropriate one in which to dispense with rule – r 1.8 of the Supreme Court (Corporations) Rules 1999 (NSW) – liquidator appointed http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/915.html

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 Chand v Azurra Pty Ltd (in liquidation) [2011] NSWCA 227 (5 August 2011) ADMINISTRATIVE LAW – judicial review – procedural fairness – whether Consumer, Trader and Tenancy Tribunal denied applicants procedural fairness in giving no weight to expert report on basis of non-compliance with Makita v Sprowles principles – whether Tribunal denied applicants procedural fairness in excluding one applicant from hearing room while her husband was being cross-examined – whether excluded applicant was denied a reasonable opportunity to be present and participate in the proceedings on second hearing day  ADMINISTRATIVE LAW – judicial review – relief sought in the nature of certiorari – whether Consumer, Trader and Tenancy Tribunal made factual findings in the absence of any evidence to support those findings  EVIDENCE – principle in Jones v Dunkel – whether failure to call available party eyewitness relevant to assessment of evidence of another party eyewitness who was called http://www.austlii.edu.au/au/cases/nsw/NSWCA/2011/227.html

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CHICAGO BOOT CO P/L v DAVIES & MCINTOSH AS JOINT & SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD [2011] SASCFC 92 (23 August 2011) CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PREFERENCES http://www.austlii.edu.au/au/cases/sa/SASCFC/2011/92.html

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Bridgeport Pty Ltd v Yelyruss Pty Ltd (in liq) and Anor [2011] QSC 237 (2 August 2011) Procedure – Supreme Court procedure – Queensland – Procedure under Uniform Civil Procedure Rules and predecessors – Other matters – application for leave to add contributor to notice of claim – factors considered – significant delay – prejudice – contribution would not be significant – leave not granted http://www.austlii.edu.au/au/cases/qld/QSC/2011/237.html

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In the matter of Lawrence Waterhouse Pty Ltd (in liq) – Shaw v Minsden Pty Ltd [2011] NSWSC 964 (24 August 2011) CORPORATIONS – whether transfer of land and/or creation of charge over land is/are insolvent transaction(s) pursuant to s 588FC of the Corporations Act 2001 (Cth) or unreasonable director-related transaction(s) pursuant to s 588FDA (and, in either case, voidable pursuant to s 588FE) – in the alternative, whether transfer and/or creation of charge is/are alienation(s) of land with intent to defraud a creditor pursuant to s 37A of the Conveyancing Act 1919 (NSW) – CONTRACTS – whether rights and equitable interest arising under transfer have been abandoned – TRUSTS – whether transferee (Minsden) holds land and/or charge on constructive trust for transferor (Lawrence Waterhouse) – whether Lawrence Waterhouse held land as trustee for its director (Wayne Lawrence) and, if so, whether Lawrence Waterhouse is entitled to indemnification – whether, if transfer void or set aside, land is held on constructive trust for Wayne Lawrence and subject to an equitable charge in his favour – HELD – abandonment not established – Lawrence Waterhouse held land as trustee for Wayne Lawrence at time of transfer – Lawrence Waterhouse entitled to indemnification and to trace land into hands of Minsden for that purpose – charge set aside as unreasonable director-related transaction and alienation of property with intent to defraud creditor – CORPORATIONS – whether Lawrence Waterhouse has kept proper books and records for purposes of s 286 of the Corporations Act – if not, whether presumption of insolvency has been rebutted – whether Wayne Lawrence has breached any civil penalty provisions and exculpatory relief should be granted – HELD – failure to keep proper books and records – presumption of insolvency rebutted up to date of withdrawal of support by Wayne Lawrence – breach of statutory duty established – exculpatory relief not granted so as to absolve director from obligation to account for any loss sustained through breach of that duty http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/964.html

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 “Receivers & Managers” – M Ennis – Olde & Ors v Primary Compass Limited ACN 129 159 812 [2011] NSWSC 845 (8 August 2011) PROCEDURE – civil – interlocutory issues – injunction to restrain call on bank guarantee – whether implied term of guarantee that would only be used to meet certain liabilities – no serious question to be tried – interrelationship between “serious question to be tried” and “balance of convenience” http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/845.html

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Horley v Sector 7G Architecture Pty Ltd (in liquidation) [2011] NSWSC 827 (4 August 2011) APPEAL – appeal under s 39 of the Local Court Act 2007 – leave sought to carry on proceedings pursuant to s 500(2) of the Corporations Act 2001 (Cth) – leave under s 40 of the Local Court Act 2007 – adequate reasons for decision not given – architectural services provided for the reconstruction of a guest house – whether claim decided in contract or quantum meruit – credit findings – terms of agreement reached – whether agreement reached as to fixed fee on implied term that reasonable sum would be paid – appeal upheld – decision below set aside http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/827.html

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Roufeil v Gliderol International Pty Limited [2011] FCA 847 (29 July 2011) CORPORATIONS – voidable transactions – whether certain payments were voidable transactions within the meaning of s 588FE(2) of the Corporations Act 2001 (Cth) – whether payments were “unfair preferences” given by company to creditor – whether payments were made while company was insolvent – whether company presumed to be insolvent by virtue of s 588E of the Corporations Act 2001 (Cth) http://www.austlii.edu.au/au/cases/cth/FCA/2011/847.html

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 “Significant debts in this matter” – M Ennis – Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89 (25 July 2011) CORPORATIONS – powers of liquidator in winding up – whether company’s entry into agreement to fund litigation intended to be commenced by a creditor was expedient for the winding up of the company’s affairs and the distribution of its property – whether possible commercial return from sharing in proceeds of litigation adequate to attract s 477(2)(m) of the Corporations Act 2001 (Cth) PRACTICE AND PROCEDURE – application for leave to appeal by non-party – where prospective appellant held charge over the assets of the party to be funded in the litigation, which security would potentially be diminished according to the terms of the litigation funding agreement if that agreement were approved  http://www.austlii.edu.au/au/cases/cth/FCAFC/2011/89.html

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Miscellaneous

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COMMONWEALTH BANK OF AUSTRALIA -v- SHADDICK [2011] WASC 205 (22 August 2011) Catchwords: Property law – Service of default notice – Whether notice has to come to attention of mortgagor – Proper mode of service http://www.austlii.edu.au/au/cases/wa/WASC/2011/205.html

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YZERMAN -v- SCHOFIELD [2011] WASC 200 (15 August 2011) Catchwords: Conflict of laws – Leave to issue writ and serve out of jurisdiction – Application to revoke or set aside order granting leave to issue writ and serve out of jurisdiction – Related proceedings instituted in England – Dispute over beneficial ownership of land – Forum non conveniens – Relationship between remedies – Inappropriateness of local forum – Registered joint tenancy of land in Western Australia – Parties resident in England – Action for sale of land in Western Australia under s 126 of Property Law Act – Discretionary considerations http://www.austlii.edu.au/au/cases/wa/WASC/2011/200.html

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Break Fast Investments Pty Ltd v C & O Voukidis Pty Ltd [2011] NSWSC 871 (15 August 2011) Caveat – form of caveat – whether description of interest adequate – leave to lodge further caveat http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/871.html

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 

Gigi Entertainment Pty Limited v Basil John Macree (No. 2) [2011] NSWSC 869 (12 August 2011) SOLICITOR – COSTS – lien – delivery of former client’s papers to new solicitor – solicitor’s rules – whether solicitors undertaking satisfactorily secures payment of former solicitor’s costs and disbursements – Legal Profession Act 2004, s 728 – appropriate conditions http://www.austlii.edu.au/au/cases/nsw/NSWSC/2011/869.html

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 

 

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ASIC penalises two liquidators over conflicts of interest

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

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

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

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

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

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

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

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

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

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

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

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

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

 BACKGROUND

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

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

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

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

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

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

 

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

 

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

 

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

 

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Review of laws governing Bankruptcy Act debt agreements

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

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

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

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

1. The regulation of administrators

  •  ITSA’s powers to deal with potential maladministration

  • Duties of administrators 

  • The registration of administrators

  • The qualifications of registered administrators 

  • Unregistered administrators 

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

  • Advertising by administrators

  • The provision of advice by unregulated entities

  • Insurance requirements for administrators

 2. Remuneration of administrators

  • The structure of the administrator market

  • Remuneration of administrators

  • What fees do administrators charge in practice?

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

  • Should administrator fees be regulated?

  • Increasing the information available to debtors

  •  Expenses recovered by administrators

 3. Access to debt agreements

  • How high should the thresholds be?

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

4. International models: additional options for debtors

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

Note from Attorney General re Submissions

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

Business Law Branch

Civil Law Division

Attorney-General’s Department

Robert Garran Offices

3-5 National Cct

BARTON ACT 2600

or by email to bankruptcy@ag.gov.au.
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Published submissions on regulation of insolvency practitioners

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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ATO authorised to settle large unfair preference claims

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

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

 The ATO says:

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

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

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

 The ATO describes unfair preferences as follows:

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

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

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

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

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

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

 

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Proposed levy to pay for liquidation of assetless companies

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

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

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

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

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

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

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

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

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

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

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

 Such initial funding to wind up these companies would also:

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

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

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

 _____________________________________________________________________

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

 

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Insolvency options paper: free template for submissions

 Checklists and guides, Insolvency Laws, Insolvency practices, Personal Bankruptcy, Regulation  Comments Off on Insolvency options paper: free template for submissions
Jul 292011
 

NOTE: SUBMISSIONS CLOSED.  ALL PUBLIC SUBMISSIONS ARE NOW PUBLISHED ON THE TREASURY WEBSITE.  CLICK HERE TO VIEW OR COPY.  PJK 23/8/2011.

Want to make a submission regarding the Government’s important options paper on insolvency reform, titled “A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia”?  Use my free template, available for download HERE.

This  simple table template, written with MS Office Word, lists the 135 discussion questions being raised in the options paper and provides space beside each question for your comments/opinions.  Just save the document to your computer,  fill it in and email it to the Treasury Department at insolvency@treasury.gov.au.  Closing date for submissions is 29 July 2011, but submissions soon after that date are likely to be accepted.

NOTE: submissions will be made public unless marked Confidential or Not for Publication.

The options paper in available at the Treasury website.

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Unauthorised amendment of receiver’s BAS gets through ATO

 BAS, GST, Insolvency practices, Returns, Taxation Issues  Comments Off on Unauthorised amendment of receiver’s BAS gets through ATO
Jul 222011
 

The Australian Taxation Office has been asked to explain how it is possible for a BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended  by another entity without authorisation. In the actual case that gave rise to the question, a GST refund of approximately $650,000 was paid out to the receivers as a result of the unauthorised amendment. The case concerned sale of  real property by the receivers.

The Tax Institute brought this matter to the ATO’s attention in March 2011  at a meeting of one of the ATO’s community consultation forums, the GST Sub-committee of the National Tax Liaison Group.

Minutes of the Meeting, recently published on the ATO website, are reproduced in full below.  It appears that changes to ATO procedures may have already been made.

________________________________________________________

GST Minutes, March 2011

Agenda item 19 – Amendments of BAS lodged by representatives of an incapacitated entity.  Issue 13.40 raised by the Tax Institute.

The Taxation Institute requests an explanation as to how it is possible for BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended by another entity. Are there any checks in the BAS lodgment system for these unauthorised amendments to be stopped?

The facts relevant to this issue are that two individuals (partners in an accounting firm) were appointed as receivers and managers to sell certain new residential premises owned by a property developer that had defaulted on its repayments to a bank. The receivers had been appointed by the bank.

At the time of lodging the BAS as representatives of the incapacitated entity, the receivers were not satisfied on the basis of the information made available that they could pay GST under the margin scheme and instead paid GST under the basic rules, in respect of all sales of property. The sales proceeds were all paid to the bank.

After their appointment as receivers concluded, the property developer amended the BAS lodged by the receivers (through the business or tax agent portal). A refund of approximately $650,000 was processed without the ATO apparently doing any verification or other analysis (including as to section105-65 of Schedule 1 to the TAA). That refund was paid into the bank account of the receivers and managers (as this was still current with the ATO). This was the first time the receivers became aware that their BAS had been amended.

The matter now involves an ATO investigation of various issues, including the margin scheme valuation. The only issue for the purpose of this request is whether the ATO has any checks in its systems for such unauthorised amendments.

ATO response

Representatives of insolvent or incapacitated entities must be registered, as identified in section 58-20 of the GST Act. The ATO’s practice is to register representatives under a separate Client Account Centre (CAC), but under the same ABN as the incapacitated entity. This enables transactions attributable to the period of receivership/ administration to be recorded separately to those undertaken by the entity prior to and post the period of receivership/ administration.

Authorised contact persons, as nominated by the representatives, are listed against the separate role for the representative. Although the CAC appears on the account of the incapacitated entity, the representative is effectively treated as a separate entity. As a result, only the authorised person is allowed to lodge GST returns and amendments and make changes affecting the representative’s CAC.

Accordingly, a GST return lodged by a representative of an incapacitated entity should not be amended by a person associated with the incapacitated entity itself where that person is not authorised by the representative.

However, it is possible for someone, even where not authorised, to lodge a GST return or amendment. This could be done, for example, in paper form or through the business portal. Where someone has access to the portal in respect of the relevant ABN, that access is not restricted to specific CACs. It should be noted that the portal is a safe environment; it is password protected and encrypted, however this does not prevent unauthorised action being taken by those with access to the portal. If, for example, a person authorised by the company seeks to lodge an amendment in respect of a period the company was in receivership, the fact that the amendment request is not authorised may by identified by our systems and if so the amendment would not be processed. However, this will not occur in every case. Note that all transactions in the portal are logged; identifying the specific user taking the actions, and thus even if the amendment is processed, the fact the amendment request is unauthorised could later be identified.

The ATO take a risk based approach to reviewing lodgments, including amendments. This includes pre and post issue checks to identify fraudulent behaviour.

In light of the question that has been raised, we are considering whether further steps can be taken to reduce the risk of unauthorised amendments in these circumstances.

Meeting discussion

The ATO acknowledged that the situation as highlighted in the submission can occur on the portal. This issue has initiated action by the ATO to put in place steps to stop unauthorised amendments to BAS especially in these circumstances. The ATO considers this as a risk that requires further investigation and management to mitigate.

It was suggested by members that during the period that an entity was in insolvency, the ATO should incorporate steps to close off the incapacitated entity’s registration. The ATO is exploring ways for locking down those periods when administrators have been appointed or to trigger a review for amendments made to the BAS in those periods. The ATO is investigating the matter and how processes can be changed so that there is no reoccurrence.

The ATO also noted that access to the portal is logged, so unauthorised access in these cases can be identified. The ATO confirmed that if the representative entity has not made the relevant amendment (it has been made without authorisation by the formerly incapacitated entity), the representative entity would not be liable for a penalty if the amendment is a false or misleading statement.

Action item 2011.03.15
Amendments of BAS lodged by representatives of incapacitated entity
Description The ATO will provide an update out of session or at the next meeting on the progress made to have further controls in place so that BAS cannot be amended for periods in the past when an entity was incapacitated.
Responsibility ATO
Due date 15 June 2011
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