Encouraging news. According to an article published on insolvencynews.com on 9 January 2014, the United Kingdom insolvency authority has banned the directors of two unrelated companies from acting as company directors for failing to maintain adequate accounting records:
Melbourne liquidator Andrew Leonard Dunner is likely to be prohibited from being registered as a liquidator for 5 years, following a decision by the Federal Court in an action brought against him by the Australian Securities and Investments Commission (ASIC).
In a media release on 30 August 2013 ASIC said that:
“In handing down his reasons for judgment today, Justice Middleton found that Mr Dunner had failed to adequately investigate the circumstances and affairs of companies to which he was appointed and had inaccurately reported to ASIC and creditors.
“The Court also found that he had drawn remuneration in excess of $600,000 without appropriate approval or adequate supporting documentation. The Court considered it appropriate that he should repay that remuneration and have leave to apply to the Court for justification of an entitlement to recoup remuneration where appropriate. Justice Middleton found that Mr Dunner’s conduct indicated ‘…a systemic failure of administration and internal protocols, as well as (in a number of instances) extremely poor professional judgment. In this way, Mr Dunner has failed to satisfy the high standards of conduct required of his offices’.
“In finding that a banning period of 5 years was appropriate, Justice Middleton said:
‘Withdrawing a liquidator’s registration operates directly to protect the public from the work of the person. It also operates generally by deterring other liquidators from acting in a similar fashion. ASIC submitted – and I accept – that there is a compelling public interest in the maintenance of a system which recognises that registration as a liquidator is a privilege, the continuance of which is conditional upon diligent performance of its attendant duties.’
To see the ASIC media release, CLICK HERE.
To see Justice Middleton’s important 67 page report and judgment, CLICK HERE .
Australian Securities and Investments Commission v Dunner  FCA 872.
CORPORATIONS – Corporations Act 2001 (Cth), ss 423, 499, 536 – Duties of liquidator – Duties of receiver – Court inquiry into defendant’s conduct as liquidator and receiver – Failure by defendant to investigate circumstances of companies to which he was appointed – Drawing remuneration without approval or adequate supporting documentation – Inaccurate reporting to ASIC and creditors regarding external administrations – Repayment of remuneration drawn without approval – Unfitness to remain registered as liquidator – Duration of prohibition order.
Australian liquidators: For my free guide on final meetings and finalisation of a creditors’ voluntary liquidation, go to http://insolvencyresources.com.au/Checklists/checcvolliqFinaMeet_v3.pdf
Any suggestions for change or improvement are welcome.
With the necessary approval, a liquidator may legally destroy his or her records of a winding up soon after it is finalised. The same is true of books and records of the liquidated company. (See section 542 of the Corporations Act 2001 “the Act”.)
In the case of a creditors’ voluntary winding up approval must be obtained from creditors and then the Australian Securities and Investments Commission (ASIC). In a winding up by the Court approval must be obtained from the Court.
The provisions in the Act for early destruction make sense. Or at least they do in so far as they pertain to the books and records of the liquidated company that exist at the commencement of the winding up. At that stage a company may have a vast collection of books and records. Without special laws a liquidator would be required to store them for 5 years after the company ceased to exist. Multiply this cost by the many administrations that a liquidator may have and the sum becomes exorbitant, and needlessly so.
But in the case of books and records created subsequent to commencement of the winding up, the argument for early destruction is much weaker, particularly now that society seems to be demanding that liquidators be more accountable and more closely supervised. (For example, see the Australian Senate Committee Report: “The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework“, September 2010.)
(This aspect of the law in relation to retaining books is discussed in my earlier article headed: “Retaining books and records post liquidation”.)
Nonetheless, the main purpose of this article is to draw the attention of liquidators to an application form that I have prepared for use in applying for early destruction of books in a creditors’ voluntary liquidation. (There is no statutory form for an application.)
My standard form may be found at:
Before applying to ASIC a resolution approving/directing the early destruction must be passed by creditors, either through the committee of inspection – if there is one – or at a meeting of creditors. This is usually a standard item on the agenda at the first or second meeting.
ASIC’s Regulatory Guide 81 (RG 81) sets out what information the application must contain. A little less information is required if the application is made after the company is deregistered. But an application can be made before deregistration and even up to 2 months before the final meeting of members and creditors.
Essentially the application requires the liquidator to supply a copy of the committee or creditors’ resolution and to state that:
- no litigation by or against the liquidator or the company is in process, is contemplated or is expected;
- no one has asked for access to the books;
- no circumstances exist in relation to the company or an associate (as defined in section 11 of the Act) which may result in the books being required within 5 years of the company’s deregistration;
- the liquidator has lodged his or her investigation report and received a “no further action” type clearance from ASIC;
- the liquidator has satisfied all his or her lodging and reporting requirements; and
- there are insufficient funds in the liquidation to meet the costs of storing the books for 5 years.
Presumably if there are circumstances which exist in relation to the company or an associate which may result in the books being required within 5 years of the company’s deregistration, a liquidator who, nevertheless, wants permission to destroy the books would have to present a submission to ASIC for its consideration.
Is it time for a “Guideline for Record Retention and Disposal” in corporate insolvency administration?
In Australia the insolvency practitioners association (the IPAA) has a Code of Professional Practice (COPP) of over 100 pages. A lot of it refers to the importance of maintaining proper records, especially for calculating fees and documenting proceedings at meetings of creditors. But there is no discussion or recommendation about what to do with books and records after the insolvency appointment ends.
The corporations law requires that books and records be retained for 5 years from the date of a company’s deregistration. However, when a company has been wound up under a creditors’ voluntary winding up, and creditors have directed that the books and records may be destroyed within those 5 years, the law permits early destruction in accordance with that direction provided the Australian Securities and Investments Commission (ASIC) gives its consent. [Corporations Act 2001, sec. 542]
Naturally, the IPAA expects insolvency administrators to comply with the law. But the insolvency law is dangerously imprecise because it lumps together the “books of the company and of the liquidator”.
Insolvency practitiones should be asking themselves what they should regard as the meaning of the phrase “all books of the company and of the liquidator that are relevant to affairs of the company at or subsequent to the commencement of the winding up” . [sec. 542(1)] [emphasis added]
If there are practitioners who believe that once early destruction has been officially authorised by ASIC, this wording gives them carte blanche to destroy every record to do with the liquidation as soon as the shortened period has ended, a few words from the IPAA about exercising caution and prudence might be worthwhile.
In my view, if a shortened period for retention of the books and records is authorised – and that period is less than, say, 3 years – practitioners should nevertheless retain the “core” books and records of the liquidation for a longer period .
In deciding what are the “core” books and records, the liquidator should take into account particular events and problems occurring during the liquidation, and bear in mind the normal professional responsibility to possess evidence supporting transactions and justifying decisions.
Such core books and records may include:
- Liquidator’s accounting records, e.g., bank statements, EFT transaction statements, cheque books/stubs, payment and receipt vouchers, employee and pay records, journals and ledgers.
- Liquidator’s budgets and financial statements.
- Liquidator’s checklists, diaries, project management tools, working papers and timesheets.
- Liquidator’s lists of books and records received, showing where they are stored.
- Liquidator’s notes of significant telephone conversations and events at meetings.
- Important written contracts.
- Accident and worker’s compensation records.
- Minutes of meetings, attendance registers and proxies.
- Proofs of debt.
By not pointing out to insolvency practitioners the dangers present in early indiscriminate destruction, the IPAA may be doing the profession a disservice by leaving its membership vulnerable to accusations of questionable or unprofessional behaviour.
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