Temporary restructuring relief – the ASIC forms – January 2021

 ASIC, Corporate Insolvency, Forms, Insolvency Law, Regulation, Temporary restructuring relief  Comments Off on Temporary restructuring relief – the ASIC forms – January 2021
Jan 062021
 

Prescribed Form

Temporary restructuring relief documents – ASIC Form EX07 – 1 January 2021. A cover sheet for lodging director declarations relating to temporary restructuring relief and related documents. Includes Guide. PDF format. Link to ASIC.

Prescribed Form

Director/s declaration of eligibility for temporary relief – ASIC form (no number) 1 January 2021. Related document to ASIC Form EX07 – see above. PDF format. Link to ASIC.

ASIC guidance

ASIC FAQs for company directors about temporary restructuring relief . Online pages. Headings: 1. Overview of the temporary restructuring relief. 2. Eligibility for temporary restructuring relief. 3. How does temporary restructuring relief end? 4. What a director must do if they realise the company is no longer eligible for temporary restructuring relief. Link to ASIC.

ASIC guidance

ASIC Guide for directors to publishing a notice of the declaration on the Published Notices Website. Online pages. Link to ASIC.

Extracts from ASIC guidance

Warning: These extracts DO NOT FULLY COVER the subject. For a much more complete picture read the extensive guidance given by Australian Securities and Investment Commission (ASIC) and/or the legislation (see below).

It is important directors seek advice from a trusted adviser such as a suitably qualified financial adviser, accountant, registered liquidator or lawyer if they are considering whether eligibility for temporary restructuring relief…. The temporary restructuring relief extends, to 31 March 2021, certain measures implemented by the government to assist companies continue to operate during the COVID- 19 pandemic…. Directors must act before 31 March 2021 if they wish to access the temporary restructuring relief…. A company can access temporary restructuring relief if, during the period 1 January 2021 to 31 March 2021, the company directors make the required declaration about the company’s eligibility for temporary restructuring relief; and publish notice of the making of the declaration on the Published Notices Website. To ensure the temporary restructuring relief does not cease, directors must also give ASIC a copy of their declaration no later than 5 business days after it is made…. The period of relief only begins when the directors have made a declaration about the company’s eligibility for temporary restructuring relief and published notice of making the declaration on the Published Notices Website…. The initial temporary restructuring relief period can be extended for a further one month in some circumstances….

Specific Legislation

  • Sections 458D to 458H of the Corporations Act 2001; LINK
  • Section 588GAAC of the Corporations Act 2001; and LINK
  • Regulation 5.4.01AAA of the Corporations Regulations 2001.

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Creators of ASIC’s ROCAP documents describe their process

 Creators of ASIC’s ROCAP documents describe their process  ASIC, Corporate Insolvency, External administration, Forms, Insolvency Law, Insolvency practices, Regulation  Comments Off on Creators of ASIC’s ROCAP documents describe their process
Jun 212019
 

Creators of ASIC’s ROCAP documents describe their process

Soon after the Australian Securities and Investments Commission (ASIC) issued a form titled “Report On Company Activities and Property“ (ROCAP), the creators of the form – the Communications Research Institute (CRI) – published an article describing the process they went through, their standards and the results of tests carried out.

Form Design process

CRI form design procedure (Source: CRI)

The ROCAP – which replaced the Report as to Affairs (RATA) – is used in corporate insolvencies, where company directors are required to supply liquidators and other external administrators with details of a failed company’s present position, assets, liabilities and history.

Below is a copy of the article written in October 2018 by the head of CRI, Professor David Sless.

As the reader will see, CRI reports that “in the final round of testing (of the new form/documents) participants described the documents as ‘straightforward’ (and that) they easily followed both instructions and the related form-filling task.”

If that’s how the form and accompanying documents are received and processed in practice, it will be a welcome change. Because, by contrast, CRI says it found that “not a single director who participated in the CRI testing of the original RATA could use it appropriately”.

By now (June 2019) feedback to ASIC should indicate whether the new design developed by CRI has been a success, i.e., is regarded by directors and liquidators as more user-friendly and useful. CRI says that “once introduced, the forms and instructions will be carefully monitored and further refined or changed as needed.”

A NEW FORM HELPING FAILED COMPANIES
A Communications Research Institute (CRI) Model project

WHEN A COMPANY fails and an External Administrator is appointed, the Administrator sends a director of the company a form to complete by a set date. The form, known until now as the Report As To Affairs (RATA) had remained largely unchanged since the 19th century.  The Australian Securities and Investment Commission (ASIC), which issues the RATA under the Corporations Act 2001, contracted CRI to develop a new design that would be:

  • user friendly,
  • consistent and logical,
  • visually appealing,
  • easy to read an complete.

CRI drew on its extensive research and practice in forms design spanning over three decades.  CRI collaborated and consulted throughout the project with ASIC and a diverse group of professionals, academics, industry bodies, and former company directors, all of whom contributed to the design of the new form. 

External administrators, in particular, who were the main RATA users told us that it failed to provide them with adequate information on the companies they administered.  CRI, in consultation with ASIC determined that the needs of administrators had to be taken into account in the redesign.

Receiving the RATA is an unhappy and often traumatic experience for company directors.  It marks the end of the company’s life, handing over its remains and final fate to an External Administrator who disposes of it and its assets in the best interests of its creditors.  The feedback showed that in that handing over, filling out the RATA was itself traumatic.

Tellingly, not a single director who participated in the CRI testing of the original RATA could use it appropriately.

The redesign involved all aspects of the form’s structure, language, layout, colour and content, and a change of name from RATA to are more easily understood name: ROCAP – Report on Company Activities and Property.  CRI undertook three rounds of designing, testing, and consultation with ASIC and stakeholders, followed by redesign.

The result is a totally new set of three documents to replace the RATA: Part A contains most of the RATA questions but in a totally new format, Part B contains new questions about the company records, history and management, and the third document contains detailed instructions for completing Parts A and B….

The instructions … are designed to exactly complement the questions, using the same numbering system throughout.

Observations from previous research shows that form users avoid reading instructions on a form because they see the task is primarily a form-filling task rather than are reading-and-form-filling task.  In CRI’s designs, the instructions are always in a separate document, physically removed from the form filling tasks.

Careful design refinement of the navigation between the two documents as a result of testing enabled easy navigation between the two.  In the final round of testing, participants describe the document as “straightforward”. They easily followed both instructions and the related form-filling task.  The new design meets all CRI standards for good information design.

Once introduced, the forms and instructions will be carefully monitored and further refined or changed as needed.

Professor David Sless

Communication Research institute – October 2018

My previous posts on this subject are titled “Framework of new Report as to Affairs (RATA) drafted by ASIC” and “ASIC notifies liquidators that ROCAP is to replace RATA”. 

I plan to post more articles about the new form and documents.

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Framework of new Report as to Affairs (RATA) drafted by ASIC

 ASIC, Checklists and guides, Corporate Insolvency, External administration, Forms, Insolvency Law, Insolvency practices, Regulation  Comments Off on Framework of new Report as to Affairs (RATA) drafted by ASIC
Oct 122018
 

On 1 October 2018 the Australian Securities and Investments Commission (ASIC) released a draft of a new Report as to Affairs (commonly known as a RATA). A copy of this form, which includes detailed instructions, may be downloaded from my website or from this ASIC journal.

The new name of the report is to be Report On Company Activities and Property (ROCAP). ASIC intends releasing it in November 2018.

Analysis

Form apges

The following comments outline my preliminary analysis of the draft. Continue reading »


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Confusing causes of corporate insolvency

 ASIC, Corporate Insolvency, External administration, External administrators, Forms, Regulation, White collar crime  Comments Off on Confusing causes of corporate insolvency
Jul 312015
 
During the June 2015 hearing in Canberra of the Senate Economics References Committee’s inquiry into “Insolvency in the Australian construction industry”, Mr Dave Noonan, a national secretary in the Construction, Forestry, Mining and Energy Union (CFMEU), listed what he thought were the main causes of business failure in the construction industry. In doing so he was drawing largely on figures published by the Australian Securities and Investments Commission (ASIC), which gathers that information from liquidators and other external administrators.

It’s the latest example of these ASIC statistics being quoted as if they were accurate and credible. In the CFMEU’s case, Mr Noonan took delight in agreeing with a Dorothy Dixer from a friend in the Senate (Senator Doug Cameron) that “the CFMEU was not named as one of the major reasons for corporate failure in the construction industry”. The inference was, of course, that the statistics proved that the CFMEU was not a problem for the industry.

What some of those who quote these ASIC statistics may not know is that the categories of causes from which external administrators must choose are predetermined. In other words, in nominating causes of failure external administrators must select from a list of categories created by the ASIC. Also, one of those categories – one which gets a large number of ticks – is labelled merely “Other”.

Furthermore, and curiously, the information given to the ASIC by external administrators appears, on the face of it, to be at odds with the widespread belief amongst the insolvency community, unions and regulators that many business failures, especially in the construction industry, are the result of fraudulent phoenix activity. Which raises the question of whether the number of permitted categories of causes need to be increased, and/or whether the categories need to be modernised, broadened and clarified.

circle-of-confusion

Permitted categories of causes

The ASIC compiles its statistics on the causes of failure from information supplied by external administrators when they fill out their statutory reports online (Form EX01, Schedule B of ASIC Regulatory Guide 16). In filling out these reports – i.e., in nominating the causes of a particular corporate insolvency – external administrators must select from 13 categories of causes, which are shown below in the order established by the ASIC and using its exact words. This list of categories has existed for at least thirteen years. The only change since 2002 has been to alter the name of cause number 13, from  “None of the above” to “Other, please specify”.

Select from these causes of failure

1.  Under capitalisation
2.  Poor financial control, including lack of records
3.  Poor management of accounts receivable
4.  Poor strategic management of business
5.  Inadequate cash flow or high cash use
6.  Poor economic conditions
7.  Natural disaster
8.  Fraud
9.  DOCA (Deed of Company Arrangement) failed
10. Dispute among directors
11. Trading losses
12. Industry restructuring
13. Other, please specify

For those with business savvy, a rough definition of most of these ASIC categories can be deduced from their titles. (Which is just as well, because there is no official explanation.) But some categories – particularly “Fraud” (ASIC cause 8) – are vague and broad, and would benefit from the ASIC stating exactly what they mean.

Numbers for categories of ASIC causes

The ASIC’s latest report on this subject [1.] shows that in 2013-14 the “nominated causes of failure” – for all industry types, not just the construction industry – from highest to lowest, were:

Chart 1
CAUSES OF FAILURE
NUMBER
Inadequate cash flow or high cash use
4,031
Poor strategic management of business
3,975
Trading losses
3,078
Poor financial control including lack of records
2,908
Other
2,726
Poor economic conditions
2,312
Dispute among directors
1,743
Poor management of accounts receivable
1,017
Dispute among directors
271
Industry restructuring
222
Fraud
146
Natural disaster
122
Deed of Company Arrangement failed
55
TOTAL
22,606

Top nominated causes

An external administrator may nominate as many of the prescribed causes as he or she likes. According to the ASIC, external administrators nominated an average of between two and three causes of failure per report in 2013–14. So in its summary the ASIC highlights the top three nominated causes of failure for companies and provides figures on the percentage of reports by external administrator in which these nominated causes appear:

Chart 2
CAUSES OF FAILURE
2013-14
Inadequate cash flow or high cash use (ASIC cause 5)
in 42.6% of reports
Poor strategic management of business (ASIC cause 4)
in 42.0% of reports
Trading losses (ASIC cause 11)
in 32.5% of reports

These top three nominated causes have been the same for the past four years. It appears that “Other” (ASIC cause 13) may be a close fourth.

What is fraudulent phoenix activity?

The following explanation of phoenix activity comes from “Defining and Profiling Phoenix Activity”, a paper published in December 2014 as part of a research project (still going) by Associate Professor Helen Anderson, Professor Ann O’Connell, Professor Ian Ramsay, Associate Professor Michelle Welsh and Hannah Withers of the University of Melbourne Law School and the Monash Business School:  [2.]

“The concept of phoenix activity broadly centres on the idea of a second company, often newly incorporated, arising from the ashes of its failed predecessor where the second company’s controllers and business are essentially the same. It is important to note that phoenix activity can be legal as well as illegal. Legal phoenix activity covers situations where the previous controllers start another similar business when their earlier entity fails in order to rescue its business. Illegal phoenix activity involves similar activities, but the intention is to exploit the corporate form to the detriment of unsecured creditors, including employees and tax authorities.
In a typical phoenix activity scenario, a company in financial difficulties, ‘Oldco’, is placed into liquidation or voluntary administration, or is simply left dormant (and may then be deregistered). Prior to this occurring, Oldco’s assets may be transferred either to a newly incorporated entity, ‘Newco’, or to an existing entity, such as a related company in a corporate group. “

Losses incurred

Estimates of losses incurred by the Taxation Office, employees, the Fair Entitlements Guarantee (FEG) scheme, sub-contractors, trade creditors , etc. as a result of phoenix activity vary, but are in the hundred of millions. On its website the ASIC quotes from figures in a report published by Fair Work Australia in 2012 which put the cost to the Australian economy at potentially more than $3 billion annually. The FWA report, “Phoenix activity: sizing the problem and matching solutions”, estimates that the annual cost of illegal phoenix activity is:

  • up to $655 million for employees, in the form of unpaid wages and other entitlement
  • up to $1.93 billion for businesses, as a result of phoenix companies not paying debts, and for goods and services that have been paid for but not provided, and
  • up to $610 million for government revenue, mainly as a result of unpaid tax – but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme (GEERS) now the Fair Entitlement Guarantee (FEG).  [3.]

 

Phoenix perpetrators and phoenix victims

A phoenix transaction carried out by a company normally brings about the end of the company. If the company’s former suppliers or subcontractors cannot survive without the payments they were receiving from the company, they too may have to close down. Hence, where phoenix activity is involved a failed company might be a phoenix perpetrator or a phoenix victim (or perhaps a phoenix perpetrator as a result of being a phoenix victim!).

For simplicity’s sake, this article will focus upon companies/directors that are phoenix perpetrators.

To which category of ASIC causes of failure do phoenixing events belong?

When looking at a failed company an external administrator might conclude that the company is a phoenix perpetrator (or, to describe the event more accurately, that the directors caused the company to carry out a phoenix arrangement). However, the predetermined list of causes which the ASIC has created doesn’t provide a category that is clearly made for such cases, or a category into which such cases might logically fit.

“Fraud” (ASIC cause 8) might be an appropriate category. But if the phoenix activity was “legal” [4.] it may not.

Even if “Fraud” is the cause category into which external administrators should, and do, put fraudulent or illegal phoenix cases, then it appears that the commonly accepted extent of such activity is not being reflected in their reports to the ASIC.  As chart 1. shows, “Fraud” accounts for only 146 out of 22,606 causes.

Furthermore, anecdotal evidence suggests that “Fraud” is regarded by external administrators as referring to dishonesty by employees or outsiders – like the misappropriation of funds, or the abuse of position by employees, or wrongful or criminal deception by outsiders.

In a “legal phoenix” case the external administrator might select the cause category of “Other” (ASIC cause 13). The fact that this cause stands at an appreciable 2,726 out of 22,606 on the latest count (see chart 1.) adds weight to that possibility. But because the “please specify” descriptions that are requested and given in this category are not publicly disclosed by the ASIC (and probably not even analysed), we don’t know what is being included in this undefined, catch-all category.

In a “legal phoenix” case, and even in an “illegal phoenix” case, the external administrator might – for the purpose of reporting causes of failure – disregard the phoenix transaction, preferring the view that the company failed before implementation of the phoenix scheme as a result of other causes, such as “inadequate cash flow or high cash use”, “poor strategic management of business” and/or “poor financial control including lack of records”.

What we don’t know

There is so much we don’t know. For example:

  • We don’t know whether phoenixing is generally regarded by external administrators as a cause of failure of companies.
  • We don’t know how many phoenix cases – legal and illegal – external administrators encounter.
  • We don’t know whether illegally phoenixing is generally regarded by external administrators as either an offence or “misconduct” to be reported to the ASIC.

 

Possible misconduct

The above discussion of causes has drawn on information supplied by external administrators in a particular section of the statutory report form EX01. However, the main reason for this form’s existence is to report, as required by the Corporations Act, possible offences that the external administrator has noticed.

In Schedule B external administrators are asked to advise whether they are reporting “possible misconduct”.  It is possible, therefore, that reports of illegal phoenixing are contained in this main section of their reports.

But if this is so, the ASIC’s analysis of the statutory reports received – published in “Insolvency statistics: External administrators’ reports” – does not mention it. In fact, the word “phoenix” appears only once in the latest of those published reports, and then only in a passing manner. Perhaps this is to be expected, given that the word “phoenix” does not even appear in Schedules B and D nor in any other part of ASIC Regulatory Guide 16.

It’s possible that the word’s absence from the offences/misconduct section of the Regulatory Guide may be due to the fact that “there is no express ‘phoenix offence’”. [4.] 

However, as “Defining and Profiling Phoenix Activity” explains, acts carried out during conduct of an “illegal phoenix scheme” are likely to be offences under one or more of several sections in the Corporations Act.  Also, the acts are likely to breach provisions of the Tax Assessment Act, the Criminal Code Act and/or the Fair Work Act.  [4.] .

Winding up

At this point we arrive at the same questions presented by the earlier analysis of the causes of failure. Is the phoenix activity observed by “the front-line investigators of insolvent corporations”  [5.]  being officially reported to the ASIC? If it is, how does the ASIC know it is, and how is the ASIC putting that information on the public record and before inquiries and researchers looking into phoenix activity?

Given the high level of interest in, and regulatory action to curb, the illegal phoenixing phenomenon, it is a pity that the store of the valuable knowledge derived from first-hand observations by external administrators is not being properly mined. The ASIC should give serious consideration to amending/expanding the Form EX01, Schedule B of Regulatory Guide 16 with simple changes to:

  •  include a category for corporate failures caused by phoenix schemes; and
  • include a question in the misconduct section asking whether the company was involved in a phoenix scheme.

FOOTNOTES:

  1. Insolvency statistics: External administrators’ reports 1 July 2013-30 June 2014: Report 412, 29 September 2014
  2. http://law.unimelb.edu.au/cclsr/centre-activities/research/major-research-projects/regulating-fraudulent-phoenix-activity
  3. http://asic.gov.au/for-business/your-business/small-business/compliance-for-small-business/small-business-illegal-phoenix-activity/
  4. “Defining and Profiling Phoenix Activity”, December 2014, Associate Professor Helen Anderson and others.
  5. The ASIC often refers to external administrators as “the front-line investigators of insolvent corporations”. See for example, “Regulatory Guide 16: External administrations: Reporting and lodging”, para. R16.4

Previous posts on this blog regarding this inquiry:

 


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More demanded of liquidators in reporting insolvent trading

 ASIC, Assetless companies, Checklists and guides, Corporate Insolvency, External administrators, Forms, Insolvency Laws, Insolvency practices, Regulation, White collar crime  Comments Off on More demanded of liquidators in reporting insolvent trading
Jan 142015
 

UPDATED 16/1/2015

Despite directors receiving official admonishments, detailed instructions and threats about the practice of allowing a company to trade whilst insolvent (see, for example, ASIC Regulatory Guide 217), the curse of insolvent trading seems to be growing.

So, in an attempt to reel it in – or perhaps (for the cynical) to reduce the number of reported cases – the Australian Securities and Investments Commission (ASIC) is putting the onus on liquidators to provide “better” information in their statutory reports.

Background

Where liquidators of insolvent companies become aware that a past or present director or other officer of a company may have committed an offence, they are required to make a formal report to ASIC. Several years ago ASIC came up with a form and guidelines spelling out the information it wanted from liquidators before it would take their allegations of offences any further. This change came with the introduction of an electronic means of lodging reports, but also occurred after ASIC had become fed-up with receiving offence reports considered by its investigators to be almost worthless.

The latest version of this offence report form was released on 18 December 2014. The changes that have been drawn to the attention of liquidators by ASIC concern allegations of insolvent trading. The previous version of the form (July 2008) asked little of liquidators regarding this subject: about all it wanted was a “Yes” or “No” on the availability of documentary evidence. But the new version requires far more.

In the insolvency profession the ASIC form is known as EX01. More technically it is Schedule B of Regulatory Guide 16: Report to ASIC under s422, s438D or s533 of the Corporations Act 2001 or for statistical purposes. (Note: This reporting requirement applies not only to liquidators but also to receivers or managing controllers and voluntary administrators. However for simplicity all these classes of external administrators are referred to collectively in this article as liquidators.)

ex01-embossed

Possible Misconduct – EX01

In EX01 reporting of “insolvent trading” is carried out in the section headed Possible Misconduct.

Here, ASIC asks the liquidator “Are you reporting possible misconduct?”

If the answer is “Yes”, the liquidator is invited to examine Schedule D of ASIC Regulatory Guide 16 to learn “what is likely to constitute a breach of the relevant section, and the evidence needed to prove such a breach”. Schedule D contains over 6,500 words.

There is also a warning “that ASIC may ask you to provide a supplementary report addressing in detail the possible misconduct reported and we may later require further evidence or statements from you for Court purposes”. A description of what is required in the ASIC supplementary report is set out in Schedule C: Supplementary report by receiver or managing controller under s422(2), by voluntary administrator under s438D(2), or by liquidator under s533(2). Schedule C contains about 3,000 words. Liquidators of “assetless companies” are eligible under Regulatory Guide 109 to apply for funding from ASIC for reasonable remuneration and costs in preparing a supplementary report (ASIC form EX03).

If, after considering what is involved in answering “Yes”, the liquidator still thinks the misconduct is worth reporting, or filing a complaint, he or she is directed to the section headed “Criminal Offences”.

Possible Misconduct – Criminal Offences – Insolvent Trading – EX01

Preliminary details of an allegation of insolvent trading – an offence under section 588G(3) of the Corporations Act 2001 – are sought by ASIC in the usual tick-the-box manner.

First the liquidator reports the alleged offence by ticking “Yes” to the following statement:

“In your opinion, one or more directors failed to prevent the company incurring a debt or debts at a time when the director suspected that the company was insolvent or would become insolvent as a result, and the failure to prevent the company incurring the debt(s) was dishonest.”

Having ticked that box, the liquidator is asked “Do you have documentary evidence or other to support your opinion?” and “Are you aware of documentary evidence in the possession of another person that supports this allegation?”

Up to this section the revised form is practically the same as the previous version.

But in the new version, if the liquidator reports a case of insolvent trading and has, or knows of, documentary evidence supporting this conclusion, the liquidator must provide more information by answering several extra questions.

These extra questions concern the period of insolvency, the methods and records used to determine the date of insolvency, the amount of debts incurred, and the reasonable grounds for the director had to suspect insolvency. (The actual questions are set out verbatim below, but the heading are mine.) They are the type of questions that a liquidator, especially one with sufficient funds, ought to consider as a matter of course before reaching an opinion regarding the existence (or non-existence) of insolvent trading.

Effects of changes to insolvent trading sections of EX01

Prior to the recent changes, if ASIC saw a completed EX01 form in which the liquidator had alleged a breach of the insolvent trading laws, and had also answered “yes” to questions about the possession or existence of documentary evidence “or other” to support that opinion, ASIC would have then needed to consider whether to investigate. Its task would likely have entailed obtaining, or trying to obtain, from the liquidator the extra information that is now set out in the latest version of EX01. So, as far as the extra demands in the form are concerned, ASIC would probably argue that liquidators are no greater imposed upon now than they were before.

But regardless of the information ASIC has or could readily obtain, it often decides not to investigate complaints of alleged offences. For many years this inaction has deeply frustrated a lot of liquidators. Many feel that completing an EX01 form is a waste of their time and also, where there are still funds in the insolvent company, a waste of creditors’ money. Unless the revised EX01 results in greater tangible action by ASIC (increased investigations and prosecutions and not just more detailed statistics), making the form more demanding will aggravate these feelings.

It might even see an increase in the non-reporting of insolvent trading offences (see the new question “Reasons for not reporting insolvent trading”), or in “no” being the liquidator’s response when it really should be “yes”.

Extra questions about insolvent trading – new EX01

Period insolvency commenced

Indicate the period, which, in your opinion, the company became unable to pay all its debts as and when they became due and payable:

◻ At appointment ◻ 1 – 3 months prior to appointment ◻ 4 – 9 months prior to appointment ◻ 10 – 15 months prior to appointment ◻ 16 – 24 months prior to appointment ◻ Over 2 years prior to appointment

Method/s of determining date of insolvency

How did you determine the date on which, in your opinion, the company became unable to pay all its debts as and when they became due and payable? (tick one or more):

◻ Cash flow analysis ◻ Trading history analysis ◻ Balance sheet analysis ◻ Informed by director(s) ◻Other, please specify __________________

Records used to determine date of insolvency

Which of the following records, in your possession, did you use to determine the date on which, in your opinion, the company became unable to pay all its debts? (tick one or more):

◻ Cash flow (actual / forecasts / budgets) ◻ Banking records ◻ Aged debtors’ list ◻ Aged creditors’ list ◻ Profit & loss statements ◻ Balance sheets ◻ Other, please specify _______________

Grounds for director to suspect insolvency

If you believe the director had reasonable grounds to suspect the company was insolvent or would become insolvent by incurring the debt (or a reasonable person in a like position would have reason to suspect), please identify on which of the following indicators of insolvency you have based your belief (tick one or more):

◻ Financial statements that disclose a history of serious shortage of working capital, unprofitable trading ◻ Poor or deteriorating cash flow or evidence of dishonoured payments ◻ Difficulties paying debts when they fell due (e.g. evidenced by letters of demand, recovery proceedings, increasing age of accounts payable) ◻ Non-payment of statutory debts (e.g. PAYGW, SGC, GST) ◻ Poor or deteriorating working capital ◻ Increasing difficulties collecting debts ◻ Overdraft and/or other finance facilities at their limit ◻ Evidence of creditors attempting to obtain payment of outstanding debts ◻ Other, please specify ________________

Approximate debt after insolvency

Estimate the approximate amount of debts incurred after the date (in your opinion) of insolvency:

◻ $0 – $250,000 ◻ $250,001 – less than $1 million ◻ $1 million to $5 million ◻ Over $5 million ◻ Unable to determine

Aged list of creditors

Do you have an aged creditors’ list as at (tick one or more):

◻ Date of insolvency ◻ Date of appointment

Dishonesty by director

If the director/directors was dishonest in failing to prevent the company from incurring the debt, indicate what evidence you have available to support this (tick one or more):

◻ Evidence showing that the director/directors had an opportunity to prevent the company from incurring the debt and did not. Such evidence could include: • documents evidencing discussions with the directors, employees and creditors concerning the circumstances surrounding the incurring of particular debts; • correspondence or other documents relating to the circumstances surrounding the incurring of the debt. ◻ Evidence showing that the failure was dishonest (i.e., the director/directors incurred the debt with the knowledge that it would produce adverse consequences, the failure was intentional, wilful or deliberate, and it included an element of deceit or fraud). Such evidence could include: • documents evidencing discussions with the directors, employees and creditors concerning the circumstances surrounding the incurring of particular debts; • correspondence or other documents relating to the circumstances surrounding the incurring of the debt.

Reasons for not reporting insolvent trading

If you did not report insolvent trading (s588(1)-(2) or s588(3)), was it because, in your opinion:

◻ The books and records are insufficient to establish insolvent trading ◻ The company did not incur debts at a time when it was unable to pay its debts (e.g., it ceased to trade) ◻ The directors had reasons to expect the company could pay its debts as they fell due and payable (eg. they obtained independent advice) ◻ Other, please specify ________________

Whether creditor/s are seeking compensation for insolvent trading

Has a creditor commenced, or indicated that they intend to commence, action to recover compensation for loss resulting from insolvent trading?

◻ Yes ◻ No

Possible Misconduct – Breaches of civil obligations – Insolvent Trading – EX01

Insolvent trading may also be a breach of civil penalty sections 588G(1)-(2) of the Act. The revised form EX01 also seeks details of allegations of this nature, by asking about the period of insolvency, the methods and records used to determine the date of insolvency, the amount of debts incurred, and the reasonable grounds for the director had to suspect insolvency. The questions are practically the same as those asked when a criminal offence is alleged (see above). In the previous version of EX01 only three brief questions were posed, which concerned the availability of evidence and the perceived legitimacy of a director’s defence.


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“Nudges” may be used by ASIC to persuade company directors to comply

 ASIC, Corporate Insolvency, Forms, Offences, Practitioners Association (IPAA), Regulation  Comments Off on “Nudges” may be used by ASIC to persuade company directors to comply
Jun 132014
 
A story by Michael Murray of the Australian Restructuring Insolvency & Turnaround Association (ARITA) brings news that the Australian Securities and Investments Commission (ASIC) has commissioned the Queensland University Business School to investigate “approaches that can be used to improve director co-operation with liquidators and director compliance with their statutory and other obligations”.

ASIC appears to be looking for styles of approach that are more scientific and more savvy.

The news story suggests that an approach to be considered is that of the “pure nudge”, the “assisted nudge” and the “shove”.

A “nudge” is defined in a government paper entitled “Influencing Consumer Behaviour: Improving Regulatory Design” (see below) as a change to choice architecture which influences the decision of an individual without restricting, or raising the price of, the set of choices available”.  The paper says that “under certain conditions, some evidence suggests that nudge interventions can be cost-effective relative to more direct or traditional forms of government intervention; used alongside existing regulatory approaches; targeted in influence; and easy to implement.”

ASIC seems to be keen to try the “nudges” experiment. In its April 2014 submission to the Financial Systems Inquiry ASIC recommends that it should have a more flexible regulatory toolkit such as would enable it to intervene in the financial product and service supply chain by way of ‘shoves’ and ‘nudges’ to achieve regulatory outcomes that more effectively meet the needs of investors and consumers. It suggests that simple “nudges” are likely to achieve cost-effective results in many cases.

Nudge

ARITA’s news story of 6 June 2014 is headed “How Directors of Insolvent Companies [Should] Behave” and says:

“Liquidators will be aware that director compliance can be variable and that non-compliance can ultimately call for prosecution of the directors, adversely distracting liquidators from their duties and imposing costs on creditors. The behavioural economics approach seeks to influence and direct director behaviour in order to promote positive reinforcement and indirect suggestions in order to achieve compliance.

At a simple level, it could be applied to refine the form and content of letters sent by liquidators to directors stating their obligations. Improvement of the report as to the company’s financial position (the RATA) is another coalface example, ARITA research showing that it can be a daunting, unduly complex and difficult document for directors to complete: Peter Keenan, Terry Taylor Scholarship Report 2011. In some circumstances, small changes can give effect to significant behavioural changes.

ARITA sees this research as very worthwhile and it mirrors similar approaches being taken by the Australian government in other areas – see Influencing Consumer Behaviour: Improving Regulatory Design, Office of Best Practice Regulation, Department of Finance and Deregulation. Among many issues, that paper discusses the concepts of a “pure” nudge, an “assisted” nudge and ultimately a “shove”, in seeking regulatory compliance. Such approaches are used by revenue authorities in Australia and internationally. For example, in the UK, a change in the wording of letters sent to those owing income tax was claimed to have resulted in an extra £200 million in tax being collected on time.

ARITA also sees potential for research into the behaviour of directors at the pre-liquidation stage, that is, in managing a failing company that is heading towards collapse – what may usefully be used to prompt directors to take action or seek advice? to have a more real perception of the company’s financial position? to more positively react to possible insolvent trading liability and to the company’s creditors? and many other such issues.

We also see potential for this research to be applied in personal insolvency.

ARITA is monitoring the progress of this research and its outcomes. Any comments or questions? to Michael Murray, Legal Director, ARITA.

Link: News story by Michael Murray of ARITA: “HOW DIRECTORS OF INSOLVENT COMPANIES [SHOULD] BEHAVE”
Link: Paper from Office of Best Practice Regulation in 2012 “INFLUENCING CONSUMER BEHAVIOUR: IMPROVING REGULATORY DESIGN”
Link: ASIC’s April 2014 submission to the Financial Systems Inquiry


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ASIC report seeks more ideas on reducing red tape

 ASIC, Corporate Insolvency, Forms, Insolvency practices, Regulation  Comments Off on ASIC report seeks more ideas on reducing red tape
May 232014
 
Australia’s corporate regulator, the Australian Securities and Investments Commission, estimates that 10 per cent of its 362 statutory forms could be removed, consolidated or streamlined in the name of reducing “red tape”.

This is revealed in Report 391 – ASIC’S deregulatory initiatives, published on 7 May 2014.

Removal

Those forms identified for possible removal include ones which ASIC says are “not required or used regularly by ASIC or the public”.  ASIC says that:

A number of the forms identified for removal are currently required to be provided to ASIC under the law, but provide information that might not be necessary for ASIC to hold. Subject to stakeholder comments, we may suggest that these forms be removed through legislative amendment.

Other forms are marked for removal on the basis that:

      •  the “information is available from the company”;
      • they are “obsolete“; and
      • they are “Administrative only”.

Forms that may no longer be required in corporate insolvency administration

Below I’ve listed the insolvency forms identified by ASIC for removal because the “information is not used by ASIC” *. (Per Table 1 of Appendix 1 of Report 391.)

  •  Form 540 – Statement in writing of posting of notices of appointment to settle list of contributories – Reg. 5.6.59(2)
  • Form 545 – Statement in writing of giving notice to persons placed on the list of contributories – Reg.5.6.62(5)
  • Form 555 – Notice of controller extending time to submit report as to affairs – S.429(4)
  • Form 558 – Court order extending time to provide report as to affairs – S.429(5)
  • Form 562 – Notice of liquidator extending time to submit report as to affairs – S.475(7)(b)
  • Form 911 – Verification or certification of a document – Reg. 1.0.16

* NOTE: The phrase “Information not used by ASIC” used in the Appendix appears to be an abbreviation of the phrase “information not required or used regularly by ASIC or the public”.

Forms that, if removed, could impair corporate insolvency administration

ASIC has marked other forms for possible removal because “the information is available from the company“. But liquidators of small companies – especially “phoenix” companies – frequently find it difficult or impossible to obtain information from the company. So removal of the following forms (or, more precisely, the requirement to lodge them with ASIC) may impair the efficient investigation of insolvent companies:

  • Form 909 – Notification of office at which registers are kept – Sections 100(1)(d), 172, 271, 1302(4) and 601CZC
  • Form  991 – Notification of location of books on computer – Sections 1301 and 1301(4) – inspection of books
  • Form 992 – Notification of change of location of books kept on computer – Sections 1301 and 1301(4) – inspection of books
  • Form 313 – Notification of address in Australia of information relating to financial records kept outside Australia – Section 289(2) – place where records are kept outside the jurisdiction. (See next heading.)

 Cloud computing

In recent years the uptake of cloud computing services by Australian businesses has increased dramatically. One common characteristics of cloud computing is that business books and records are held outside the Australian jurisdiction. Under section 289 of the Corporations Act 2001 “if financial records about particular matters are kept outside the (Australian) jurisdiction, sufficient written information about those matters must be kept in this jurisdiction to enable true and fair financial statements to be prepared (and) the company must give ASIC written notice in the prescribed form of the place where the information is kept”.

The proposed removal of Form 313 shows that this requirement is to be abolished.

Simplification and consolidation

Two form used in corporate insolvency administration are marked for simplification:

  • Form 529 Notice of meeting: Creditors to consider voluntary winding up
    Form 905A Notification of ceasing to act as or change of details of a liquidator.

Ideas and Comments

cut red tape

ASIC is seeking ideas and/or comments to be submitted to it by 18 June 2014.  These are to be sent to:

Ashly Hope, Strategic Policy Advisor
Australian Securities and Investments Commission
GPO Box 9827 Melbourne VIC 3001
Email: deregulation@asic.gov.au

 Sources and links:

ASIC Media Report 14-099MR “ASIC reports on red tape reduction and invites feedback”, 7 May 2014

Report 391 ASIC’s deregulatory initiatives published 7 May 2014.  ASIC says: “This report provides an overview of ASIC’s commitment to reduce compliance costs for our regulated population, including ongoing work and new initiatives.  It should be read by all businesses and individuals who are required to comply with laws and regulations administered by ASIC and those who have an interest in engaging with ASIC on our approach to deregulation.”


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Insolvency Practitioners Association finalises third edition of code of conduct

 Checklists and guides, Ethics, Forms, Insolvency practices, Practitioners Association (IPAA), Regulation, Standards, Templates  Comments Off on Insolvency Practitioners Association finalises third edition of code of conduct
Oct 292013
 
The Australian Insolvency Practitioners Association (IPA) today released the third edition of its Code of Professional Practice, together with a new Explanatory Memorandum, a document showing all changes, and four templates for insolvency practitioners to use as guides when preparing such documents for creditors.

IPA announcement

From IPA website, www.ipaa.com.au


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Liquidator likely to be banned for 5 years after Court inquiry

 ASIC, Case Reports, Corporate Insolvency, court decisions, Ethics, Forms, Insolvency Law, Insolvency Laws, Insolvency practices, law reports, Records Management, Regulation, Standards  Comments Off on Liquidator likely to be banned for 5 years after Court inquiry
Sep 032013
 
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 .

Case citation:

Australian Securities and Investments Commission v Dunner [2013] FCA 872.

Case catchwords:

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.

 


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