Options paper questions insolvency regulation and practises

ASIC, Insolvency Laws, Insolvency practices, Personal Bankruptcy, Regulation, Standards Comments Off

Jun 062011

Over 130 questions about insolvency regulation and practises have been raised for discussion by the Attorney-General’s Department and the Departments of Treasury in their “Options paper: a modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia”, released at the 2011 Gala Dinner of the Insolvency Practitioners Association of Australia on 2 June.

The questions, extracted from the 120 page paper, are shown below. The final date for submissions is 29 July 2011.

Standards for entry into the insolvency profession

Discussion questions

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?
Should the gaining of a Masters in Business Administration meet the qualification requirements for registration, if it did not otherwise meet legal and accounting study requirements?
Should a minimum level of actual experience in insolvency administration remain a mandatory requirement for registration as a practitioner?
Should the experience requirements for registered liquidators be reduced to two years of full‑time experience in five years?
Should new market entrants be required to complete some form of insolvency specific education before practicing as registered liquidators or registered trustees?
Should ASIC be empowered to impose requirements on a registered liquidator as a condition of the registration? What types of conditions should a regulator be empowered to impose upon a new registered liquidator’s registration?
Should a registered trustee face more streamlined entry requirements than those that exist for a standard applicant for registration as a registered liquidator, and vice versa?
Is further formal training necessary to ensure that practitioners that wish to transition between the two professions are able to fulfil their statutory obligations?

Registration process for insolvency practitioners

Discussion questions

Should an applicant seeking registration as a registered liquidator or registered trustee be required to be interviewed as part of the registration process?
Should an applicant seeking registration as a registered liquidator or registered trustee be required to sit an exam as part of the registration process?
Should a general ‘fit and proper’ person requirement be imposed for the registration of both personal and corporate insolvency practitioners?
If the process for the registration of liquidators is aligned with the process for the registration of registered trustees, what differences should be maintained between the two registration processes?
Is it appropriate that the current fee for registration of liquidators be increased to reflect the amendments to registration processes?
Should the official liquidator role be maintained?
What other aspects of the current Bankruptcy Act committee system might be amended?
If registration of a registered liquidator is for a defined period, what conditions should be required to be met for renewal of the registration to occur?
Should the renewal process include a fee? Should the fee be commensurate merely with the administrative cost for completing the renewal or should the revenue raised by the fee be used to fund additional oversight of the insolvency market? Should the renewal fee be determined with reference to the numbers and nature of the administrations to which the practitioner is appointed?

Remuneration framework for insolvency practitioners

Discussion questions

Should the Corporations Act be amended to include a provision that aligns with the Bankruptcy Act prohibition upon practitioners making any arrangement whereby a benefit is received, either directly or indirectly, in addition to the remuneration to which he or she is entitled? Should such a prohibition be clarified to provide that this extends to charging disbursements with a profit component that may benefit, directly or indirectly, the practitioner?
Are the current requirements for the provision of information to creditors to assist them in assessing costs appropriate? Should this information be provided in a standard form? Should these requirements be aligned between corporate and personal insolvency?
What could be done to address concerns about cross subsidisation?
What could be done to address concerns about inappropriate use of disbursements?
Should all fee approval be required to be subject to a cap set by creditors in an external administration or bankruptcy? Is it unreasonable to expect that an insolvency practitioner go back to the creditors in order to seek an increase on the initial remuneration cap?
Should a group of creditors (or a single creditor) that successfully challenge an insolvency practitioners’ remuneration, receive an increased priority in relation to the savings that may result?
Should a registered liquidator, under any circumstances, be able to exercise a casting vote on a motion regarding his or her remuneration or removal?

Communication and monitoring

Discussion questions

What amendments should be made to provide creditors with more information or power to monitor the progress of a winding up, administration or bankruptcy?
Should creditors have largely the same rights to information and tools to monitor a liquidation, administration, bankruptcy or controlling trusteeship?
Are there any impediments to insolvency practitioners communicating with creditors electronically?
If the statutory frameworks are aligned, are there any modifications necessary to account for the practical differences between the bankruptcy and corporate insolvency frameworks?
Would support from at least 25 per cent of creditors be an appropriate threshold in corporate insolvency for requiring a creditors meeting to be held? Given the larger numbers and quantum of claims, would a lower threshold (for example, 10 per cent) be more appropriate? What rules should apply in relation to who bears the costs of holding a meeting of creditors?
If liquidators are required to provide all information reasonably requested by a creditor regarding a liquidation or administration and creditors have improved powers to require the calling of meetings, is there any need for default annual meetings, written updates or creditors’ meetings at the completion of a winding‑up? Could these requirements be amended to a requirement for the practitioner to raise the option of having such updates and meetings with creditors (for consideration and voting) as a default reporting arrangement?
Should the role of the COI be given greater prominence in the corporate and personal insolvency systems? If so, how might this occur?
Should the rules governing COIs be aligned between corporate and personal insolvency? Are there any specific aspects of COI law that should be otherwise reformed?
Should creditors be able to make a binding resolution on a liquidator? If yes, should there be any role for the Court to overrule that resolution (for example, where the Court believes that the resolution is not in the best interests of the creditors as a whole)? Should there be any limit on the type of areas that creditors are able to pass a binding resolution?

Funds handling and record keeping

Discussion questions

Should the rules governing record keeping, accounting, audits and funds handling in corporate and personal insolvency be aligned? If so, how should this occur?
If aligned rules on accounts reporting are introduced, what should be the content, form and frequency of the accounts required?
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?
If amendments are made to the personal and corporate law to align the powers of the regulators (in certain circumstances) to freeze the accounts of insolvency practitioners, in what circumstances should the regulators be able to issue an account freezing notice to a bank?
Should the issuing of an account freezing notice require an application to the Courts? For how long should a freezing notice have effect?
At what level should the penalties that apply to breaches of the funds handling, record keeping, retention of books, and audit provisions in the Corporations Act and the Bankruptcy Act be set to provide a greater deterrent to potential offenders?
Will increasing the penalties make practitioners more likely to pay greater attention to these requirements?
Are there additional civil obligations and criminal offences that should be provided for in respect of these areas?
If civil or criminal penalties are applied for the lodgement of inaccurate annual reports, under what circumstances should those penalties apply?
Should late lodgement, non‑lodgement or false lodgement of accounts be a statutory basis for removal? If so, by what process might removal take place?

Insurance requirements for insolvency practitioners

Discussion questions

Is there a benefit for insolvency practitioners, creditors or other stakeholders in aligning the insurance requirements for liquidators and registered trustees?
If the criminal penalty for not complying with insurance requirements is increased, at what level should the penalty be set to provide a sufficient deterrence against breach?
Should a fidelity fund be established? If so, how should such a fund be operated and funded?
What other reforms might be put in place regarding insurance requirements?

Discipline and deregistration of insolvency practitioners

Discussion questions

Are there any reforms that should be made to either the Committee’s or the CALDB’s systems of disciplining practitioners to improve their operation?
Do you think that aligning the disciplinary frameworks will provide for more consistent and improved outcomes for practitioners and other stakeholders between personal and corporate insolvency?
If a Committee structure is adopted for registered liquidators:
- Should there be any amendments to the framework that underpins the current personal insolvency committee system?
- Should the statutory framework for the committee system currently in the Bankruptcy Act be replicated in the Corporations legislation?
- Should ASIC be statutorily required to provide a show‑cause notice to the practitioner before establishing a committee?
- Should the committee consist of a member of ASIC, a member of the IPA, and an appointee of the Minister?
- Should there be a time limit for decisions by the committee? Should it be aligned with the current time limit for bankruptcy?
If a Committee structure is not adopted for registered liquidators, what specific reform options should be adopted under either the CALDB or Committee regimes? In particular:
Should a statutory timeframe be introduced for decisions by the CALDB?
Are there any powers that the CALDB currently has that should equally be conferred upon a Committee under the Bankruptcy Act or vice versa?
What, if any, other reforms should be made in respect of the transparency of Board and Committee hearings and decisions?
Should a committee constituted under the Bankruptcy Act be empowered to summon a third party to appear at a hearing to give evidence and be cross examined?
Should mechanisms be put in place to impose sanctions on practitioners or witnesses who fail to attend or provide books to a Committee or Board?
Should the Bankruptcy Act be amended to provide ITSA with the express power to seek to deregister a registered trustee where the trustee is no longer ‘fit and proper’?
If the regulatory frameworks are amended to expand the powers of ASIC and ITSA to discipline insolvency practitioners directly, what minor breaches should those powers extend to?
Would the suggested amendments to enhance the powers of the court breach considerations of natural justice?
Should the nature of the role of registered liquidators and registered trustees as officers of the court, as well as their inherent fiduciary duties, mean that it is reasonable to empower the Court to direct them to stand aside where there are serious allegations that have yet to be resolved?

Removal and replacement of insolvency practitioners

Discussion questions

Should an initial creditors’ meeting in a compulsory winding up at which creditors would have the right to replace or appoint a new liquidator be mandated?
If an initial creditors’ meeting were mandated for court‑ordered windings up:
Should there be an exception for assetless administrations?
Should approval of the appointed registered liquidator be able to be obtained through a mail out? If confirmation/replacement of registered liquidations occurred by postal vote in court ordered liquidations, should this mechanism also replace the opportunity to replace a practitioner provided via initial meetings in other kinds of corporate insolvency?
Should creditors in corporate insolvencies be generally empowered to remove a registered liquidator by resolution in the same way as under personal insolvency law?
What effect, if any, would the potential for removal be expected to have on remuneration arrangements?
Does the current scheme for the removal of a registered trustee provided sufficient and clear protections against abuses of process?
If creditors are empowered to remove a liquidator in a creditors’ voluntary winding up (subsequent to the first meeting), should members have any corresponding right in a members’ voluntary winding up?
Is there a need to facilitate the transfer of the books of the administration from an outgoing insolvency practitioner to his or her replacement? What barriers, if any, are there to the implementation of such a reform?
Are any other amendments necessary to assist creditors to use any new power to remove a registered liquidator? What other administrative arrangements would be required to ensure a smooth transition from one registered liquidator to another?

Regulator powers

Discussion questions

Are there unjustified divergences between the powers and roles of the insolvency regulators?
Should a creditor in a corporate insolvency have any right to request that ASIC undertake a review of specified kinds of decision by a liquidator?
If ASIC was to be empowered, what types of decisions should ASIC be able to review?
The expansion of ASIC’s current functions to include such a review power would have some cost. Given the Government’s cost recovery policy how should any expansion of powers be funded?
Should ASIC and ITSA be given more flexibility to communicate to a complainant (or creditors generally) information obtained by it in relation to the conduct of an external administration?
Should regulators be able to require a practitioner to sit an examination to test ongoing compliance with the knowledge or skills requirements for registration? Should such a power be extended to enabling regulators to require persons acting under delegation from practitioners to sit an examination?
What powers might be appropriate to provide to regulators to facilitate (if necessary) the rights of creditors to call meetings and to ensure such meetings are held in a transparent manner — in particular in relation to the assessment of votes for and against the retention of the current insolvency practitioner?
Does section 536 of the Corporations Act, as currently applied by the Court, provide for the appropriate supervision of registered liquidators by ASIC?
Should ASIC be able to share information with the IPA for disciplinary purposes?
Should ITSA and ASIC be empowered to impose conditions across the market? If so, what types of conditions should the regulator be empowered to impose?
If a new Ombudsman or external dispute resolution scheme were established:
Should the new body be a statutory body (for example, the Superannuation Complaints Tribunal) or a private body (for example, the Financial Ombudsman Service)?
Should any new body have the ability to hear disputes in both corporate and personal insolvency? Should the new entity be independent of the two regulators?
If the body is a statutory entity, what functions of ITSA or ASIC should be given to the new body? Should the body have power to obtain information or to inspect the records of an organisation relevant to the complaint? If the new body is privately run, what protections would need to be put in place to achieve this?
How should the new body be funded? Should there be any charge to the complainant to investigate a complaint or should it be funded through an industry levy?
Should the body have an explicit educative role?
Should the body have the right to deal with systemic issues or commence its own investigation? If the body is a private entity, what powers should it be given to achieve those objectives?
What types of disputes should the body be able to hear and deal with? Should the body be able to review remuneration? Should this be done through independent cost assessors?

Specific issues for small business

Discussion questions

Are any statutory reforms required to assist regulators to provide improved regulation in relation to interconnected personal and corporate insolvencies? Are improvements needed in relation to their capacity to share information and cooperate?
If the scope of the AA Fund is broadened to allow for the funding of registered trustees to investigate and report on corporate law breaches, which Corporations Act breaches in particular should be provided for?
Should the scope of the AA Fund be broadened to allow for loans to registered liquidators to properly carry out their fiduciary and statutory duties?
Should section 305 of the Bankruptcy Act also be expanded to provide for the funding of investigations into corporate law breaches?
What steps might be taken to improve efficiency in relation to related personal and corporate insolvencies while appropriately addressing conflicts of interest?
What other amendments can be made to assist creditors and directors of small corporates to better engage with the corporate insolvency system?
Is there a case for automatic disqualification of directors after a company failure? If so, how many repeated failures should trigger disqualification? Should there be a threshold for failures to trigger disqualification (for example, where less than 50 cents in a dollar are returned to creditors)? Over what period must the failures occur?
Should a registered liquidator be able to assign actions which vest personally in the liquidator? If so, should a registered trustee be likewise able to assign rights of action?
Should ASIC be able to automatically disqualify a director of an insolvent company who has not taken reasonable steps to ensure that the company has maintained its financial records?

_________________________________________________________

Liquidator voluntarily resigns

ASIC, Industry People, Insolvency Laws, Prosecution of Liquidators, Regulation Comments Off

Mar 022011

Paul Pattison – the Australian liquidator whose own private company became insolvent – has voluntarily resigned from his company appointments and agreed not to take on any more until he demonstrates that he has the financial capacity to adequately and properly perform his duties as a liquidator.

The announcement was made on 1 March 2011 by the Australian Securities and Investments Commission (ASIC), which applied on 7 February to the Supreme Court of Victoria for suspension of his license to practice.

ASIC’s investigation into the conduct and affairs of Mr Pattison and two of his private companies is continuing.

In its media release ASIC states:

Following Mr Pattison’s voluntary resignation, ASIC yesterday obtained orders by consent in the Supreme Court of Victoria appointing new liquidators or deed administrators to 80 companies which were formerly administered by him.

Mr Pattison resigned as liquidator or deed administrator of those companies and gave an undertaking that he would cease to carry out, consent to, or otherwise accept appointment as a liquidator, provisional liquidator, voluntary administrator, administrator of a deed of company arrangement or controller, until he produces evidence in a form acceptable to ASIC or to the Court which demonstrates he has the practice and financial capacity to adequately and properly carry out his duties as a liquidator.

Yesterday’s consent orders follow the commencement of ASIC’s action against Mr Pattison and Pattison Business Recovery & Insolvency Specialists Pty Ltd (PBRIS) in the Supreme Court of Victoria. On 7 February 2011, ASIC asked the Supreme Court to begin an inquiry into Mr Pattison’s conduct and his capacity to adequately and properly perform his duties as a liquidator.

Upon making the orders by consent, the Court ordered that these proceedings be otherwise dismissed.

No findings of impropriety as to the conduct of Mr Pattison as a liquidator were made.

ASIC’s investigation into the conduct and affairs of Mr Pattison, PBRIS and his former company, Pattison Consulting Pty Ltd, is continuing. ASIC will make no further comment on the investigation at this time.

Government funding of liquidators: latest figures released

ASIC, Assetless Administrations Fund, Insolvency Laws, Insolvency Statistics, Offences, Regulation, White collar crime Comments Off

Feb 232011

Figures just released by the Australian Securities and Investments Commission (ASIC) show that 644 grants totalling over $8.6 million have been paid to liquidators out of the Federal Government’s Assetless Administration Fund (AA Fund) between 19/12/2007 (the first payment) and 21/2/2011.

Creation of the AAFund was announced in October 2005 and officially launched on 22 February 2006.

Liquidators of companies with few or no assets may apply to ASIC for grants to finance preliminary investigations by them into the failure. Where ASIC is satisfied that enforcement action may result from a liquidator’s investigation and report, it may approve a grant.

Liquidators can seek funding to carry out an investigation and report in circumstances where they believe director bannings may be appropriate; or for other matters; such as where the liquidator believes there is or may be evidence of possible offences or other misconduct in relation to the Corporations Act 2001.

The largest single payment to date is $442,000 in 2009, to a liquidator who received $739,000 in total in that year . Most payments have been $8,250.

Click here to see the latest list of grant recipients. (… to 9 May 2011)

Director concedes defeat

ASIC, Offences, Regulation, White collar crime Comments Off

Feb 232011

It took almost 3 years, but insolvency fraud charges brought by the Commonwealth Director of Public Prosecutions (CDPP) against company director, Paul Michael Belousoff, concluded on 21 February 2011 with a guilty plea and the court ordering he serve a prison sentence.

Back in August 2005 two of Mr Belousoff’s companies – namely, Index Options (Australia) Pty Ltd and Bel Investments Pty Ltd – were placed into liquidation by order of the Court.

In 2006 Mr Belousoff was convicted in the Magistrates Court of offences brought by the Australian Securities and Investments Commission (ASIC) under section 475 and 530A of the Corporations Act (failure to submit a report as to affairsto the liquidator and failure to supply the liquidator with the books) in respect of both of his companies. He was fined a total of $2,900.

In July 2006 the liquidator was granted an order by the Victorian Supreme Court that the liquidator be appointed as receiver of the Index Options Trust for the purpose of preserving its assets. In his judgment Justice Whelan said:

“It suffices to say that in my view the liquidator’s material establishes that Mr Belousoff was responsible for a serious failure to keep proper books and records and that there are grounds for serious concern that he was also responsible for the payment over of substantial funds of Index Options or the Index Options Trust in a most improvident manner.”

Later, in April 2008, Mr Belousoff was charged with eight counts of engaging in conduct that resulted in the fraudulent concealment or removal of company property and one count of fraudulently making a material omission in a report as to affairs.

These frauds came to the attention of ASIC through a liquidator’s report, which was prepared with funds provided to the liquidator from ASIC’s Assetless Administration Fund (AA Fund).

The liquidator, ASIC and the Commonwealth DPP claimed that after the liquidator was appointed,- Mr Belousoff fraudulently removed or concealed in excess of $1 million worth of property belonging to the two companies.

In September 2008 ASIC disqualified Mr Belousoff from managing corporations for five years because of his involvement with two failed companies.

On 31 January 2011 Mr Paul Belousoff pleaded guilty to all of the charges brought in April 2008. On 21 February 2011 the Court sentenced Mr Belousoff to a term of 11 months imprisonment, but that he be released after serving three months on the condition that he be of good behaviour for three years.

Regulator challenges liquidator’s right to practice

ASIC, Practitioners Association (IPAA), Prosecution of Liquidators, Regulation Comments Off

Feb 162011

The financial collapse of a private company belonging to a liquidator has led the Australian Securities and Investments Commission (ASIC) to apply to the Supreme Court of Victoria for suspension of his license to practice. This was recently revealed by business journalist Leonie Wood of The Age.

The liquidator, Paul Pattison, of Melbourne, is a former director of Pattison Consulting Pty Ltd.

Pattison Consulting Pty Ltd – which ran his insolvency firm – made a declaration of solvency and went into a members voluntary (solvent) liquidation in April 2010. In the Declaration of Solvency filed with ASIC at the time Mr Pattison said Pattison Consulting Pty Ltd had a net worth of $250,000, comprised of assets worth $4.62 million (including “work in progress” of $4.1 million), less liabilities of $4.37million. (Ordinarily in this context, “work in progress” would mean fees accrued but not yet billed for work done in connection with insolvency appointments.)

In November 2010 the liquidator of Pattison Consulting Pty Ltd resigned, and both a voluntary administrator and a receiver were appointed. In December 2010 creditors resolved to wind up the company as a creditors voluntary (insolvent) winding up. The company changed its name to ACN 079 638 501 Pty Ltd.

Throughout these events Mr Pattison continued to practice as a registered liquidator, court appointed liquidator and trustee in bankruptcy, and does so to this day, because , in the words of the Insolvency Practitioners Association (IPA), insolvency appointments are “personal to a practitioner, rather than to a company or firm”.

Commencement of ASIC’s proceedings has led the IPA to suspend his membership of the Association and commence disciplinary proceedings against him. (IPA Media Release)

Neither ASIC nor the IPA has suggested that there is anything wrong with the way in which Mr Pattison has ran any of his numerous insolvency administrations.

__________________________

UPDATE 2/3/2011: Now see my article “Liquidator voluntarily resigns”.

Does deregistration short cut conflict with Court judgment?

ASIC, Forms, Insolvency Laws, Regulation Comments Off

Nov 252010

A controversial ASIC-approved short cut to deregistration in a creditors’ voluntary liquidation seems to be at odds with sentiments expressed in a decision of the Federal Court of Australia.

In my post headed “Obscure short cut through insolvency law on company deregistration” (24/11/2010) I questioned whether this officially sanctioned short cut or escape mechanism – which allows liquidators to bypass sections 509(1) to (5) of the Corporations Act 2001 (the Act) in loosely defined and very common circumstances – was warranted.

Now it stikes me that it might actually be unlawful.

His Honour, Jacobsen J, examined section 509 of the Act in considering the case of Emergen X Pty Ltd (In Liquidation) ACN 114 579 510 [2010] FCA 487.

His Honour’s written judgment (May 2010) illustrates the importance attached to the requirements to convene a final meeting and to let 3 months elapse after that date.

A shareholder of the company applied to the Court for an order under section 509(6) to bring forward the date of deregistration by shortening the 3 month period that is otherwise required to elapse. (The shareholder wanted deregistration to occur on the earlier date so that it (the shareholder) could obtain a tax benefit, under CGT rules, by being able to claim a loss on the shares in the current tax year.)

His Honour took the view from examining legal authorities that the 3 month period is a “period of grace”, designed to allow “for claims by creditors or other aggrieved parties so as to ensure that they can make a claim against a company without having to go through the process of seeking an order reinstating it.”

I find it difficult to see how the sentiments expressed by His Honour sit in harmony with the short cut – as ASIC has approved with companies Form 578 – which allows liquidators to bypass giving notice of a final meeting of creditors and also removes the 3 month period of grace.

Let’s have a debate.

——————————————————————————————-

Note: The following quote is from His Honour’s judgment in Emergen X Pty Ltd (In Liquidation) ACN 114 579 510 [2010] FCA 487:

“The reason why there is a period of grace of three months allowed after the filing of the return seems to be explained in a Victorian authority from the nineteenth century. The decision, which is relevant, is John Birch & Co. Limited v The Patent Cork Asphalt Co. Limited (1894) 20 VLR 471 (“John Birch”). In that case Madden CJ said at 472 that the suspension of a dissolution for three months in the then relevant section of the legislation means that a purpose is to be served. His Honour said the only easily understandable purpose is to enable persons who are affected to come in and make a claim. Thus the period of grace is allowed for claims by creditors or other aggrieved parties so as to ensure that they can make a claim against a company without having to go through the process of seeking an order reinstating it.

Although the decision of Madden CJ in John Birch was reversed on appeal, the discussion of the Full Court does not affect the primary judge’s explanation for the rationale of the three month period, see John Birch & Co. Limited v The Patent Cork Asphalt Co. Limited (1985) 21 VLR 268.”

Note: For the full text of this judgment, issued in May 2010, click HERE.

———————————————————————————————

The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.

Obscure short cut through insolvency law on company deregistration

ASIC, Insolvency Laws, Regulation 1 Response »

Nov 242010

Here’s a tip for the student of insolvency law and practice. Don’t look to legislation or legal judgments for all the answers. Some of the official rules are contained in “regulatory guides” which can easily escape your attention.

But even more problematic is the occasional, obscure, almost unwritten, rule which is the result of a pragmatic arrangement between regulators and insolvency practitioners.

A good, current example , is deregistration of a company following a creditors’ voluntary liquidation. Here, the pragmatic twist to the law dwells in the text on a non-prescribed form, and in the text of an even more obscure document, a statement issued by the Insolvency Practitioners Association of Australia (IPAA or IPA) to its members.

But I’m getting ahead of myself.

Look up Part 5.5 of the Corporations Act 2001 (the Act), under the heading “Final meeting and deregistration”, and you will find law (section 509) which states that “ASIC must deregister the company at the end of the 3 month period after the (final) return was lodged.” This requirement is sometimes referred to as “automatic deregistration”.

To get to this point in a creditors’ voluntary liquidation where the liquidator lodges a final return, the Act states that the liquidator “must convene a general meeting of the company, or, in the case of a creditors’ voluntary liquidation, a meeting of the creditors and members of the company, for the purpose of laying before it the account and giving any explanation of the account” .

On the face of it, these provisions would appear to be the law. Put simply, a company which has entered into a creditors’ voluntary liquidation is deregistered automatically 3 months after the liquidator’s return of the final meeting is lodged.

If you, the student, wanted this confirmed, you might consult a book on corporate insolvency law in Australia, where you would almost definitely find such confirmation.

But what you and the author of the book (and, of course, creditors and the general public) don’t know is that ASIC has modified the law.

How? Well not – as far as I can see – through the official process of issuing a regulatory document, such as a Regulatory Guide or Information Sheet (of which there are a great many).

Instead, the modified rule finds its expression in companies Form 578 (which is not a prescribed form). The form is headed “Deregistration request (liquidator not acting or affairs fully wound up)”. One of the two tick boxes on the form, which constitute the basis for requesting deregistration, states:

“There are no funds left in the creditors’ voluntary liquidation to hold a final meeting and also the affairs of the company are fully wound up.”

So, dear student, the “law” relating to deregistration of a company following a creditors’ voluntary liquidation has been modified by inserting an escape clause. If there are no funds left in the liquidation and the affairs of the company are “fully wound up”, the requirement to hold a final meeting is nullified or overlooked, and deregistration can be achieved by simply ticking a box and lodging a form.

This change is a result of ASIC “exercising its discretion”, says the IPAA in a submission to Treasury in 2009:

“This issue concerns the application of s 601AB of the Corporations Act in finalising a creditors’ voluntary liquidation as an alternative to holding a final meeting of the company’s members and creditors under s 509. After consultation with ASIC, the IPA issued a Practice Update in the June 2008 issue of its journal. The Update informs members that ASIC has advised the IPA that in situations where the liquidator is without funds to cover the cost of holding the final meeting, ASIC will exercise its discretion and accept lodgement of a Deregistration Request (Form 578) under s 601AB(2). It may be that the words of that subsection need clarifying to accord with what appears to be this intent of the section. “

But, dear student, you should also know that there is apparently a proviso attached to the phrases “no funds left to hold a final meeting” (ASIC) and “without funds to cover the costs of holding the final meeting” (IPAA). Whether the staff in ASIC who process Form 578 applications are aware of this proviso is not clear. Nevertheless, in a statement to members in 2008 (which was published again in July 2010 due to a number of queries from members) the IPAA states that:

“Only liquidators that are without funds are eligible to use section 601AB(2). “Without funds” does not include situations where the liquidator distributes all available funds via a dividend to creditors. Therefore, liquidators should ensure that sufficient funds are retained to cover the cost of a final meeting when a dividend is paid.”

Personally, and like most people, I am strongly opposed to obscure or unwritten rules in any area of law, and especially so when they come into being with little debate and are at odds with the principle or intention of the law as it is expressed in applicable legislation.

No doubt there are practical reasons for the procedure authorized by Form 578:

1. Liquidators receive a benefit, particularly when they are winding up a company that does not have enough funds to pay the costs of calling a final meeting of members and creditors. Without this short cut to deregistration these liquidators would be out of pocket. However, the saving in each case may not be great, given that there is (apparently) no requirement to give notice of the final meeting other than by means of one advertisement in the Government Gazette.

2. The government regulator (ASIC) receives a benefit by getting more dead companies off its Register with less “fuss”, thus reducing its workload in this area and thereby saving taxpayers some government expenditure.

But what of the creditors of the company in liquidation?

Financially, the Form 578 short cut to deregistration appears to make no difference to the creditors, for if the company is able to pay them a dividend the procedure cannot be utilized; and if the company is unable to pay them a dividend, it remains unable to pay them a dividend.

From the intangible views of justice and equity, it can be seen that, in the case of creditors of a company which is unable to pay a dividend, the Form 578 short cut deprives creditors of the right to receive a final account of the winding up and the opportunity to discuss the winding up with the liquidator and others at a final meeting.

Apart from the fact that these rights and opportunities seem to be enshrined in sections 509(1), the short cut method overlooks one of the main themes of recent attempts to reform insolvency laws, namely the need to improve information to creditors.

Is this short cut justified by the financial savings and improved efficiency? Let’s have a debate.

——————————————————————————–

The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.

Most reports of director misconduct are shelved

ASIC, Insolvency Laws, Offences, Regulation, White collar crime Comments Off

Nov 042010

89% of the initial offence referral reports sent to Australia’s corporate regulator by liquidators and other external administrators end up consigned to oblivion. Of the remaining 11%, approximately 66% receive a similar fate.

This data is revealed in the latest annual report by the Australian Securities and Investments Commission (ASIC), tabled in Parliament on 28 October 2010.

Unfortunately ASIC’s annual report does not offer any explanation for the result, which is that the vast majority of offence allegations are dropped or rejected.

It would be instructive to know, for example, whether a lot of statutory reports of “misconduct and suspicious activity” are badly prepared, inadequate or unjustified; and/or whether ASIC regards a lot of the alleged misconduct and offences as minor or trivial.

The official ASIC analysis chart – “Statutory reports 2009-10” – is shown below, after my own description of what the chart means. (This is my second post on this subject.)

What the ASIC chart means

In the 2009/10 financial year ASIC received 9,074 reports from liquidators, administrators and receivers (external administrators). Of these 6,509 (71.7%) contained allegations of “misconduct or suspicious activity”.

Normally ASIC does not act upon an external administrator’s allegations of misconduct or suspicious activity unless the allegations are supported by a detailed report by the external administrator.

ASIC refers to this detailed report as a supplementary report, since typically it supplements or expands upon an initial report by the external administrator.

Usually a supplementary report is put together at the request of ASIC.

In 2009/10 ASIC received 5,748 initial reports alleging misconduct or suspicious activity. Presumably all of these were “analysed and assessed”. Out of these 5,748 reports ASIC selected 11% (632) as worthy of further attention by way of a supplementary report.

The end result for the other 89% of initial reports (5,116) was to be “recorded”. This probably means that nothing worth mentioning was done about them.

The same fate befell 66% of the 761 supplementary reports alleging misconduct or suspicious activity. Of the other 34%, ASIC referred 23% (175) “for compliance, investigation or surveillance” and referred 10% (76) “to assist existing investigation or surveillance”. ASIC concluded that 1% of the reports (8) did not actually identify offences.

There is no data in the chart on how many reports by external administrators led to prosecutions for offences.

_________________________________________________________________

The ASIC chart

ASIC’s notes to chart

“Initial reports are electronic reports lodged under Schedule B of Regulatory Guide 16. Generally, ASIC will determine whether to request a supplementary report on the basis of the initial report. Supplementary reports are typically detailed free-format reports, which detail the results of the external administrator’s inquiries and the evidence to support the alleged offences. Generally, ASIC can determine whether to commence a formal investigation on the basis of a supplementary report. “

ASIC ‘s official summary

“Liquidators, administrators and receivers (external administrators) are required to report to ASIC if they suspect that company officers have been guilty of an offence or, in the case of liquidators, if the return to unsecured creditors may be less than 50 cents in the dollar. As part of our response to the GFC (Global Financial Crisis), ASIC committed to increasing action on reports alleging misconduct from insolvency practitioners, following a 25% increase in insolvency appointments in 2008-09. This year, a significantly increased proportion of supplementary reports (33% compared with 24% in 2008-09) were referred for compliance, investigation or surveillance. Fewer reports failed to identify any offence.”

——————————————————————————————————————

The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.

Why are reports of misconduct shelved?

ASIC, Australian Senate 2009-2010, Offences, Official Inquiries, Regulation, White collar crime Comments Off

Sep 132010

Statistics produced by Australia’s corporate regulator reveal that it treats only 11% of the unfavourable statutory reports it receives from insolvency practitioners as serious enough to warrant any action.

Insolvency practitioners must lodge a report with the Australian Securities and Investments Commission (ASIC) when they suspect an offence under any Australian law relating to the company to which they are appointed.

In one of ASIC’s submissions to the Senate Committee’s inquiry into liquidators and administrators (see page 76 of the March 2010 submission), there is a chart showing the number of such reports – described as “reports of alleged misconduct or suspicious activity” – received in the financial years 2007, 2008 and 2009, and in the 6 months to December 2009.

See the copy of ASIC’s chart at the end of this article.

[All public submissions to the Committee may be found at http://www.aph.gov.au/senate/committee/economics_ctte/liquidators_09/submissions.htm ]

The chart in ASIC’s first submission reveals that during the period 1/7/2006 to 31/12/2009 ASIC received 20,225 “inital” statutory reports alleging misconduct or suspicious activity. Of those only 2,918 (14.4%) were flagged or escalated for further consideration.

In the 06/07 and 07/08 financial years the number of reports escalated equalled 17%. But in the 08/09 financial year and the half year to December 2009, that figure dropped to 11%.

Why are 89% of reports by liquidators and administrators not acted upon? There would be several reasons. Isn’t the public entitled to know what those reasons are and how many cases there are in each category?

Newer Entries