Offences – ░░░ INSOLVENCY INTERFACE

Combatting illegal phoenixing – consultation paper – 28 September 2017

Corporate Insolvency, Insolvent Trading, Offences, Phoenix company activity, Regulation, White collar crime Comments Off

Sep 282017

Consultation

The Treasury has today (28 September 2017) released a consultation paper on reforms to address illegal phoenix activity. The closing date for submissions by interested parties is 27 October 2017.

The paper is available for download from the Treasury website.

Below is the foreword to the paper, by the Hon Kelly O’Dwyer MP, Minister for Revenue and Financial Services:

Phoenixing involves the stripping and transfer of assets from one company to another to avoid paying liabilities. It hurts all Australians, including employees, creditors, competing businesses and taxpayers, and has been a problem for successive governments over many decades.

Phoenixing has a significant financial impact – in 2012, the Fair Work Ombudsman and PwC estimated the cost of phoenixing to the Australian economy to be as high as $3.2 billion annually. It also undermines business’ and the public’s confidence in the corporate and insolvency sectors and the broader economy.

Companies fail for many different reasons, and it can be difficult to distinguish between those who are engaging in illegal phoenix activity and those who are simply involved in a failed company. We are committed to helping honest and diligent entrepreneurs who drive Australia’s productivity, but we won’t tolerate those who misuse the corporate form, to defeat creditors and rip off all Australians. Continue reading »

Penalties for White Collar Crime: Senate Report of March 2017

ASIC, Offences, Regulation, White collar crime Comments Off

May 292017

crime-cloud

Inquiries by Parliamentary committees can be a waste of everyone’s time. The Senate’s Inquiry into criminal, civil and administrative penalties for white collar crimes is a good example.

It began in November 2015 and ended in March 2017 (after pausing for 5 months because of the election). It received 139 submissions, 2 lots of “additional information”, and had a public hearing at which 23 witnesses appeared. It’s report, which carries the grandiose title “Lifting the fear and suppressing the greed” (23 March 2017), runs to 108 pages. The committee said:

“A clear message to the committee from inquiry participants was that white-
collar crime and misconduct can cause serious harms, both at the individual level and
in the community as a whole.”

But despite this statement and the enormous amount of work that went into making submissions, conducting the inquiry and writing the report, media coverage has been almost non-existent. Perhaps news editors thought the subject matter was fairly dry, and/or that the report’s recommendations were not particularly noteworthy or inspiring or controversial. Such a conclusion would be understandable. To which I would add, that the report is unlikely to have much of an impact on how we deal with white collar crime.

THE COMMITTEE’S RECOMMENDATIONS
Recommendation 1	That the government consider reforms to provide greater clarity regarding the evidentiary standards and rules of procedure that apply in civil penalty proceedings involving white-collar offences.	paragraph 3.52
Recommendation 2	That the Australian Securities and Investments Commission (ASIC) consider ways in which the accessibility and usability of the banned and disqualified register might be enhanced, in order to create greater transparency regarding banning and disqualification orders.	paragraph 5.24
Recommendation 3	That the government consider making infringement notices available to the ASIC to respond to breaches of the financial services and managed investments provisions of the Corporations Act.	paragraph 5.34
Recommendation 4	That the government amend the Corporations Act 2001 to increase the current level of civil penalties, both for individuals and bodies corporate, and that in doing so it should have regard to non-criminal penalty settings for similar offences in other jurisdictions.	paragraph 6.55
Recommendation 5	That the government provide for civil penalties in respect of white-collar offences to be set as a multiple of the benefit gained or loss avoided.	paragraph 6.56
Recommendation 6	That the government introduce disgorgement powers for the ASIC in relation to non-criminal matters.	paragraph 6.57

The committee’s full report is available for viewing and download at the committee’s Parliament of Australia website.

Incidentally, insolvency practitioners will be disappointed that there are so few references in the report to insolvency and liquidation, although potentially recommendation 4 could have an impact in corporate insolvency.

The next part of this blog post contains extracts which reveal “The Committee’s Views” and the “Table of Contents of Report”.

Parliamentary Committee recommends ASIC be permitted to access data

ASIC, Offences, White collar crime Comments Off

Mar 042015

Recommendation 20 of the advisory report by the Australian Parliamentary Joint Committee on Intelligence and Security (tabled 27 February 2015) is that the Australian Securities and Investments Commission (ASIC) be listed as a criminal law-enforcement agencies under proposed section 110A of the Telecommunications (Interception and Access) Act 1979, thereby permitting it to continue to access telecommunications data.

ASIC had fought strongly for this change during the Committee’s inquiry – see, for example, my post “Not happy, Malcolm! ASIC argues for access to telecommunications data.”

During a Committee hearing Mr Greg Tanzer, the Commissioner of ASIC, highlighted the need for reliable access to telecommunications data to combat the increasing global threat of insider trading:

It is not like terrorism, and I do not make a case that it is exactly the same as terrorism. That would be churlish and, frankly, stupid. But insider trading is an especially pernicious activity. If insider trading is permitted to continue, retail investors and institutional investors will lose confidence in the Australian market. Australia is a net importer of capital—a very major net importer of capital—and if foreign investors in particular, let alone Australian investors, lose confidence in our market, we lose this whole engine and multiplier effect that we have through our capital markets for efficient capital raising. … I am not equating this to a terrorist act, but I am equating this somewhat to other crimes which cause physical harm to people. It is very difficult for a person who has lost their life savings to recover, particularly if your are at that part of your life… where you do not have a lot of time to recover a deadweight loss. (Page 35 of Report.)

In its comments the Committee said:

6.42 The Committee recognises the importance of carefully circumscribing the agencies which are designated as ‘criminal law enforcement agencies’ to ensure that only agencies involved in investigating serious contraventions of the law and subject to appropriate safeguards may seek warrants to access stored communications.
6.43 On the evidence provided, the Committee considers that ASIC is an appropriate agency to be a ‘criminal law enforcement agency’. In particular, the Committee notes that ASIC’s functions include investigating serious offences; that access to stored communications is, and will continue to be, of assistance in its investigations of serious offences; and that ASIC is subject to appropriate accountability requirements and safeguards including the Australian Privacy Principles.

Not happy, Malcolm! ASIC argues for access to telecommunications data

ASIC, Offences, White collar crime Comments Off

Feb 022015

In a move that seems to be based on the curious notion that corporate, white-collar crime is not real crime, the federal government has proposed to reduce the right of the Australian Securities and Investments Commission (ASIC) to access telecommunications metadata.

But ASIC is fighting back, with straight talking, in detailed submissions to the Senate inquiry into the Bill. [Full name of inquiry: Senate Legal and Constitutional Affairs Committee – An inquiry into the comprehensive revision of the Telecommunications (Interception and Access) Act 1979.]

Background

In introducing the Telecommunications (Interception and Access) Amendment (Data Retention) Bill 2014 (TIA Bill) to parliament in October 2014 the Minister for Communications, Mr Malcolm Turnbull, said:

“The bill contains a package of reforms to prevent the further degradation of the investigative capabilities of Australia’s law enforcement and national security agencies.”

After explaining how crucial this was, he said:

“This bill does not provide agencies with new powers to access communications data; the bill simply ensures that data will continue to be available to agencies as a part of legitimate investigations, subject to the same, strict limits that currently apply. In fact, the bill will strictly limit, and indeed reduce, the range of enforcement agencies permitted to access telecommunications metadata without a warrant. The bill will allow what we might call ‘traditional’ law enforcement agencies, such as the police, Customs, crime commissions and anticorruption bodies, to access this information. The bill will also grant the Attorney-General the power to declare, via legislative instrument subject to parliamentary oversight, additional agencies….” (Underlining mine.)

[Source: Second reading speech- Hansard- 20 October 2014 – page 12561-3]

The Australian Securities and Investments Commission (ASIC) is one of the agencies whose right to metadata has been reduced.

ASIC fights back

The following is an extract from the submission in January 2015 by the ASIC to the Senate Inquiry.

ASIC Submission paragraphs 7 to 22.

(Images added)

[Source: The full ASIC submission, which is available here.]

Law enforcement

ASIC as a major criminal law enforcement agency

ASIC is, among other things, a major criminal law enforcement agency. The types of white collar crime investigated and prosecuted by ASIC are both notoriously difficult to prove and capable of causing immense harm to Australia’s financial system. This harm includes damage to the integrity of Australia’s financial markets, and devastation to individual victims who risk losing their houses and life savings.

This significant risk is expected to increase into the future given the ever-growing pool of superannuation investments and large number of Australians expecting to retire from active work in the next 20 years.

ASIC’s express criminal law enforcement functions and obligations extend to the investigation and prosecution of “prescribed offences” and “serious offences”, as defined in sections 5(1) and 5D of the TIA Act. For example:

ASIC is responsible for the investigation and prosecution of criminal offences in a range of Commonwealth statutes, [1] including the following “serious offences” in Part 7.10 of Corporations Act 2001 (Cth) (Corporations Act) that are punishable by imprisonment for up to 10 years:

(i) insider trading (s 1043A);

(ii) market manipulation (ss 1041A to 1041D); and

(iii) financial services fraud (ss 1041E to 1041G), such as fraudulent investment schemes (including Ponzi schemes), cold calling ‘boiler room’ investment frauds and superannuation fraud; and

ASIC is also empowered to, and regularly does, investigate and prosecute other criminal offences (Commonwealth, State or Territory) where the conduct involves corporations, managed investment schemes or certain types of financial fraud, [2] including the following “serious offences”:

(i) general fraud offences under State legislation punishable by a maximum term of imprisonment of 7 years or more. [3]

ASIC is the only agency with specific statutory responsibility for investigating and prosecuting criminal offences in the Corporations Act. ASIC is also the only agency with a standing statutory entitlement to commence prosecutions for offences in the Corporations Act. [4]

ASIC regularly exercises these criminal law enforcement functions and obligations. For example, between 1 July 2009 to 30 June 2014:

ASIC, in collaboration with the Commonwealth Director of Public Prosecutions (CDPP), secured criminal convictions against 129 persons for indictable offences, including “prescribed offences” and “serious offences” as defined in ss 5(1) and 5D of the TIA Act, and achieved sentences of imprisonment against 68 persons; [5] and

ASIC, through the conduct of its own prosecutions, secured criminal convictions against 2,404 other persons for less serious summary offences, an average of 481 persons convicted a year.

On 24 June 2013 the Parliamentary Joint Committee on Intelligence and Security (PJCIS) handed down its report entitled Report of the Inquiry into Potential Reforms of Australia’s National Security Legislation. In its report the PJCIS did not recommend removing or reducing ASIC’s existing powers under the TIA Act to access telecommunications data or stored communications. Rather, the PJC wrote the following (at pp.25-26):

2.54 The Committee is satisfied that access to telecommunications data for serious crime and threats to security is justified. Access for agencies not enforcing the criminal law or investigating security threats should be subject to further review.

Recommendation 5

The Committee recommends that the Attorney-General’s Department review the threshold for access to telecommunications data. This review should focus on reducing the number of agencies able to access telecommunications data by using gravity of conduct which may be investigated utilising telecommunications data as the threshold on which access is allowed.

This conclusion and recommendation does not justify the proposed removal of ASIC’s existing powers to access telecommunications data given that ASIC is responsible for enforcing the criminal law, including investigating and prosecuting “serious offences” as defined in the TIA Act.

Neither the Explanatory Memorandum nor the second reading speech relating to the TIA Bill elaborates on the criteria that were adopted in determining which agencies should be included within the definition of “criminal law-enforcement agency”, but in the second reading speech the Minister for Communications stated:

[T]he bill will strictly limit, and indeed reduce, the range of enforcement agencies permitted to access telecommunications metadata without a warrant.

The bill will allow what we might call ‘traditional’ law enforcement agencies, such as the police, Customs, crime commissions and anticorruption bodies, to access this information.

In light of ASIC’s explicit, extensive and longstanding [6] criminal law enforcement functions, there does not appear to be logical reason for its exclusion from the primary definition in the Bill of a “criminal law -enforcement agency”. In particular, ASIC is not aware of any specific submission or suggestion to the effect that it has either misused its existing powers under the TIA or should have them removed.

ASIC’s existing powers under the TIA Act

ASIC is currently an “enforcement agency”, as defined in s 5(1) of the TIA Act. [7] Consequently:

authorised ASIC officers are able to receive telecommunications data if it is reasonably necessary for enforcement of the criminal law or a law imposing a pecuniary penalty; and

ASIC has the ability to seek a warrant from an independent judicial officer authorising ASIC to access stored communications for the purpose of investigating a “serious contravention”, as defined in s 5E of the TIA Act.

Any subsequent use of telecommunications data or stored communications obtained by ASIC is strictly restricted by a number of legislative and procedural safeguards, in addition to oversight regimes. These are outlined later in the submission.

An important consideration in any assessment of the necessity of ASIC having the ability to access telecommunications data and stored communications is the fact that many of the offences it investigates and prosecutes, including all of the offences in Part 7.10 of the Corporations Act, are actually constituted by communications or otherwise generally require proof of communications for a successful conviction. For example:

the insider trading offence in s 1043A(1) ordinarily requires proof that inside information was communicated to the accused;

the insider trading offence in s 1043A(2) specifically criminalises the “communication” of inside information;

the market manipulation offences in ss 1041A to 1041C ordinarily require proof of communications, such as placing orders for the offending trades by telephone or over the internet, and the identity of the persons who made them;

the market manipulation offence in s 1041D specifically criminalises the “circulation or dissemination” of offending “statements or information”;

the offence in s 1041E (false or misleading statements) specifically criminalises the “making” or “dissemination” of offending statements or information;

the offence in s 1041F (inducing persons to deal) criminalises the “making” or “publishing” of offending statements or information; and

the offence in s 1041G criminalises engaging in “dishonest conduct” in the course of carrying on a financial service business, which commonly involves communications of false or misleading information.

The central importance of telecommunications evidence and the need for ASIC to obtain such evidence in relation to investigations of these market-related offences was specifically recognised by the then Minister for Financial Services, Superannuation and Corporate Law when introducing reforms to the TIA Act in 2010. [8]

One particular type of serious criminal activity investigated by ASIC that involves communications is “cold calling” investment frauds, which can be prosecuted as a serious fraud offence against State Acts or as a financial services fraud offence against the Corporations Act. These frauds involve individuals being unexpectedly called and subjected to intense pressure into buying investments on the premise of high returns (sometimes as high as 300 per cent in just 15 days), but the returns are often completely fictitious and the investments a sham or worthless.

An example of cold calling frauds involved ASIC’s investigation between September 2009 and April 2013 of 17 cases of investment fraud causing over $8 million in losses to Australian investors. In these investigations, ASIC used telecommunications data as a crucial form of intelligence. The Australian Crime Commission estimated that between January 2007 and April 2012 more than 2,600 Australians lost over $113 million to investment frauds, but it is believed there is a high level of underreporting and the extent is far greater. [9]

Investigations and prosecutions for Corporations Act offences are notoriously difficult, resource-intensive and time-consuming. Effective performance of ASIC’s law enforcement functions can only be achieved if we have adequate powers to obtain information and evidence about suspected contraventions of the laws we administer. Given the increasing role of telecommunications in the delivery of financial services in Australia, including carrying out trades on Australia’s markets, ASIC anticipates that its need to obtain telecommunications data and stored communications will correspondingly increase over time.

Footnotes:

[1] See, eg, ss 1(2)(g), 13 & 49(2) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act); s 1315 of the Corporations Act; and ss 247 and 274 of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act). While all criminal prosecutions arising out of ASIC investigations are commenced by ASIC and are based on briefs of evidence prepared by ASIC, prosecutions for indictable offences are generally continued by the Commonwealth Director of Public Prosecutions (CDPP).

[2] See, eg, s 13(1)(b) of the ASIC Act. Prosecutions for State or Territory offences are commenced by ASIC or its officers in accordance with the law in each jurisdiction governing the commencement of prosecutions.

[3] ASIC is also responsible for the investigation and civil prosecution of contraventions of a range of federal laws imposing substantial pecuniary penalties. Examples of civil penalty cases successfully brought by ASIC include: ASIC v GE Capital Finance Australia [2014] FCA 701 (penalties totalling $1.5 million); ASIC v Newcrest Mining Ltd [2014] FCA 698 (penalties totalling $1.2 million); Idylic Solutions Pty Ltd, Re; ASIC v Hobbs (2013) 93 ACSR 421 (penalties totalling $670,000); ASIC v Macdonald (No 12) (2009) 259 ALR 116 (James Hardie case) (penalties totalling $670,000); ASIC v Vines (2006) 58 ACSR 298 (penalties totalling $640,000); ASIC v Vizard (2005) 54 ACSR 394 (penalties totalling $390,000); ASIC v Loiterton (2004) 50 ACSR 693 (penalties totalling $805,000); ASIC v Adler [2002] NSWSC 483 (HIH case) (penalties totalling $900,000).

[4] Pursuant to s 1315 of the Corporations Act and s 49(2) of the ASIC Act.

[5] Some examples of recent criminal cases successfully pursued by ASIC include: R v Johnson [2014] VSC 175 (imprisonment for 6 years and 6 months, with a non-parole period of 3 years and 6 months); R v Veitch, NSW District Ct, 26 June 2014 (imprisonment for 6 years and 2 months, with a non-parole period of 4 years); R v Maile, QLD District Ct, 20 June 2014 (imprisonment for 4 years and 3 months, with a non-parole period of 16 months); R v Williams, QLD District Ct, 20 June 2014 (HIH investigation) (imprisonment for 4 years and 3 months, with a non-parole period of 16 months); R v Kur, WA District Ct, 21 February 2013 (imprisonment for 4 years, with a non-parole period of 2 years); R v Evans, NSW District Ct, 7 May 2013 (imprisonment for 5 years, with a non-parole period of 3 years and 9 months); R v Weerappah, VIC County Ct, 6 August 2013 (imprisonment for 4 years, with a non-parole period of 2 years); Banovec v R [2012] NSWCCA 137 (imprisonment for 7 years, with a non-parole period of 4 years and 9 months); R v Hoy [2011] VSC 95 (imprisonment for 13 years and 9 months, with a non-parole period of 9 years); Koch v R [2011] VSCA 435 (imprisonment for 13 years and 2 months, with a non-parole period of 10 years, reduced on appeal to imprisonment for 9 years and 10 months, with a non-parole period of 7 years and 6 months); R v Finnigan, NSW District Ct, 18 December 2011 (imprisonment for 10 years, with a non-parole period of 6 years); R v Dale, QLD District Ct, 25 November 2011 (imprisonment for 7 years and 6 months, with a non-parole period of 3 years and 2 months. The sentence was upheld on appeal: R v Dale [2012] QCA 303); R v Jovicic, QLD District Ct, 1 September 2011 (imprisonment for 7 years, with a non-parole period of 2 years and 4 months); R v Kennedy, QLD District Ct, 8 November 2011 (imprisonment for 6 years, with a non-parole period of 2 years); R v De Silva [2011] NSWSC 243 (imprisonment for 2 years and 6 months, with a non-parole period of 18 months); R v Bangaru, NSW District Ct, 17 December 2010 (imprisonment for 8 years and 6 months, with a non-parole period of 6 years and 4 months); R v Hartman [2010] NSWSC 1422 (imprisonment for 4 years and 6 months, with a non-parole period of 3 years).

[6] ASIC (and its immediate predecessor, the Australian Securities Commission) has been exercising important criminal law enforcement functions since 1991 and before this there was a very long tradition, spanning 150 years, of comparable specialist authorities undertaking criminal investigations and prosecutions in relation to corporate crime in Australia: see, eg, sections LVII to LX of the Companies Statute 1864 (Vic).

[7] ASIC falls within paragraph (n)(i) of the definition of “enforcement agency” in s 5(1) of the TIA Act because ASIC’s functions include, among other things, “administering a law imposing a pecuniary penalty”

[8 ]Minister for Financial Services, Superannuation and Corporate Law, Speech, 2 March 2010, available at:

http://ministers.treasury.gov.au/listdocs.aspx?doctype=1&PageID=005&min=ceba. Also see Minister for Financial Services, Superannuation and Corporate Law, Media Release, 28 January 2010, available at: http://ministers.treasury.gov.au/listdocs.aspx?doctype=0&PageID=003&min=ceba.

[9] Australian Crime Commission, Serious and organised investment frauds¸ https://www.crimecommission.gov.au/publications/intelligence-products/crime-profile-fact-sheets/serious-andorganised-investment-frauds.

Pre-appointment support for DOCA may be an inducement for valuable consideration

Corporate Insolvency, court decisions, External administration, External administrators, Insolvency Law, law reports, Offences Comments Off

Dec 152014

Registered liquidators are aware that they are prohibited by law from giving, or agreeing or offering to give, someone valuable consideration with a view to securing their own appointment or nomination as a liquidator or an administrator of a company, or an administrator of a deed of company arrangement (section 595 of the Corporations Act 2001).

But I wonder how many of them would be aware that giving an assurance of support for a proposed Deed of Company Arrangement may be an inducement under section 595.

The Chief Justice of the South Australian Supreme Court, Chief Justice Kourakis, took this view in his judgment in the case of Viscariello v Macks [2014] SASC 189, handed down on 9 December 2014.

Mr John Viscariello, a company director, alleged that registered liquidator Mr Peter Macks, administrator of two of Mr Viscariello’s companies, wrongfully failed to negotiate and put in place a Deed of Company Arrangement which would have allowed the companies to continue to trade under a changed ownership structure.

There were several other matters adjudicated upon in this case, and in a sense the allegation that the administrator had given an undertaking to the director that he would support a certain Deed of Company Arrangement (DOCA) became secondary.

But the comments by Chief Justice Kourakis are intriguing.

Chief Justice Kourakis

Mr Viscariello alleged that Mr Macks made certain representations to him and Mr Fred Bart (a businessman and entrepreneur who was a prospective purchaser of the company’s business) in a meeting in November 2001 to the effect that if he (Macks) were appointed as administrator, he would cause the company to enter into a deed of company arrangement reflecting the terms in a Heads of Agreement document, refered to by His Honour as “the proposed Bart DOCA”.

His Honour said:

“I find it unlikely that Mr Macks would have given an unqualified assurance that he would support the proposed Bart DOCA in breach of his duty to investigate the financial circumstances of the Companies and provide opinions to creditors.” [Para 122 of judgment]
….
“It is inherently improbable that he would have made the unqualified representations pleaded by Mr Viscariello.”[Para.125]
….
“If the pleaded representations were made and an agreement or understanding reached to that effect, Mr Macks would have breached s 595 of the Corporations Act and both Mr Bart and Mr Viscariello would have procured him to do so.” [Para.128]
….
“It would be contrary to the public interest to allow Mr Viscariello to recover damages for a misrepresentation which arises out of a failure to give effect to an unlawful arrangement.(Footnote 76) With respect to the false and misleading conduct alleged against Mr Macks in respect of the 27 November meeting with Mr Viscariello and Mr Bart, I reject Mr Viscariello’s evidence that Mr Macks gave an assurance that he would ensure that the Companies would enter into the Bart DOCA.” [para. 130](Emphasis added)

Footnote 76: Yango Pastoral Co Pty Ltd v First Chicago (Australia) Limited (1978) 139 CLR 410; Brownbill v Kenworth Trucks Sales (NSW) Pty Ltd (1982) 39 ALR 191; Alexander v Rayson [1936] 1 KB 169; McCarthy Rose (Milk Vendors) Pty Ltd v Dairy Farmers Coop Milk Co Ltd (1945) 45 SR(NSW) 266; Mason v Clarke [1955] AC 778.

Click here for pdf copy of judgment by Chief Justice Kourakis on 9 December 2014: Judgment in Viscariello v Macks [2014] SASC 18

ASIC publishes an overview of statistics and offences reported by liquidators

ASIC, Corporate Insolvency, Insolvency Statistics, Offences, Regulation Comments Off

Sep 302014

In the 2013–14 financial year, 7,218 reports alleging misconduct were lodged with ASIC by external administrators.

That’s one statistic contained in “Insolvency statistics: External administrators’ reports (July 2013 to June 2014)”, a report by the Australian Securities and Investments Commission (ASIC). The report (Report 412) is the latest data from ASIC on liquidations and other forms of external administrations.

ASIC Media Release

The following is from ASIC’s media release of 29 September 2014:

Report 412 Insolvency statistics: External administrators’ reports (July 2013 to June 2014) (REP 412) is ASIC’s sixth report and provides information on the nature of corporate insolvencies, supplementing the monthly and quarterly statistics that ASIC publishes on its website.

The report summarises information from 10,073 reports received during the 2013–14 financial year and includes ASIC’s response to reports of alleged misconduct from external administrators.

Commissioner John Price acknowledged the work of external administrators in carrying out their investigations and reporting to ASIC.

‘External administrators’ reports are a critical source of intelligence for ASIC. In addition to providing more detailed qualitative data, the information obtained from reports helps ASIC focus its regulatory efforts. It also helps us assess whether enforcement action is warranted, or if a director banning action should be pursued.

‘We encourage external administrators to provide these reports and any allegations of misconduct in a timely manner to assist in our supervision of insolvency and corporate governance issues,’ Mr Price said.

Profile of insolvent companies

REP 412 includes information about the profile of companies placed into external administration, including:
•industry types
•employee numbers
•causes of company failure
•estimated number and value of a company’s unsecured creditor debts, and
•estimated dividends to unsecured creditors.

Table 1 summarises key data from the report.

REP 412 shows small to medium size corporate insolvencies again dominated external administrators’ reports. Of note, 86% had assets of $100,000 or less, 81% had less than 20 employees and 43% had liabilities of $250,000 (or less).

97% of creditors in this group received between 0–11 cents in the dollar, reflecting the asset/liability profile of small to medium size corporate insolvencies.

Allegations of misconduct

REP 412 details how often external administrators report alleged misconduct by company officers and the types of alleged misconduct most frequently reported.

In the 2013–14 financial year, 7,218 reports alleging misconduct were lodged with ASIC by external administrators.

ASIC asked external administrators to prepare 802 supplementary reports where external administrators alleged company officer misconduct. This accounted for 11.1% of all reports, which alleged misconduct, lodged in the financial year.

Supplementary reports are typically detailed, free-format reports, which set out the results of the external administrator’s inquiries and the evidence they have to support alleged offences. Generally, ASIC can determine whether to commence a formal investigation on the basis of a supplementary report. While only a portion of the offences reported may result in a formal investigation or surveillance, ASIC uses the information for broader intelligence and targeting purposes.
In both the 2012–13 and 2013–14 financial years, after assessment, ASIC referred 25% and 19% of these cases respectively for investigation or surveillance.

ASIC considers a range of factors when deciding to investigate and take enforcement action and this is detailed in Information Sheet 151 ASIC’s approach to enforcement (INFO 151).

Future improvements: Reporting of alleged insolvent trading and other offences

To assist external administrators in their reporting obligations, ASIC anticipates releasing an amended report template for external administrators (Form EX01) in early-2015.

The amendments aim to capture more accurate information on alleged insolvent trading offences which might provide greater insight into the extent of insolvent trading and enable ASIC to focus our resources on matters that warrant further investigation.

The revised form is a further ASIC initiative to collect better information on corporate insolvencies in Australia. It complements recent enhancements to other forms to capture data in electronic format such as:
•industry statistics for external administration appointments from Form 505 (notice of appointment)
•key information from deeds of company arrangement from an enhanced Form 5047, and
•key financial data from Form 524 (presentation of accounts and statement).

ASIC expects to continue our work with industry to improve reporting including on other offences, such as alleged breaches of director duties.

The full Report 412 is available for download in PDF format from ASIC.

Report on Senate inquiry into ASIC recommends self-rating of director offences in liquidators reports

ASIC, Australian Senate 2013-14, Corporate Insolvency, Insolvency practices, Offences, Official Inquiries, Practitioners Association (ARITA), Practitioners Association (IPAA), Regulation Comments Off

Jun 272014

Recommendation 17 of the Senate Economics References Committee final report (26/6/2014) on the performance of the Australian Securities and Investments Commission (ASIC) is:

“… that ASIC, in collaboration with the Australian Restructuring Insolvency and Turnaround Association and accounting bodies, develop a self-rating system, or similar mechanism, for statutory reports lodged by insolvency practitioners and auditors under the Corporations Act 2001 to assist ASIC identify reports that require the most urgent attention and investigation.” (Page 244, para. 15.66)

Source: Final report of Senate Economics References Committee on Performance of the Australian Securities and Investments Commission, 26/6/2014

Committee’s comments preceding this recommendation

Before making recommendation 17 the Senate Committee’s Report looks at “Reports from industry professionals” including external administrators. It states as follows (note: I’ve removed its footnotes):

External administrators

15.55 The Corporations Act also places an obligation on liquidators, receivers and voluntary administrators (external administrators) to report suspected breaches of the Corporations Act to ASIC….

15.56 Reports made pursuant to these sections are referred to as statutory reports and are an important source of information about possible breaches of the law….

15.57 Liquidators also have the discretion to lodge further reports if, in their opinion, it is desirable to draw the matter to ASIC’s attention.

15.58 In 2012–13, external administrators lodged 9,788 reports with ASIC. Of this number, initial external administrators accounted for 95 per cent or 9,254 reports. ASIC recorded that 81 per cent of the initial reports involved companies with fewer than 20 employees. The construction industry was subject to the highest number of reports accounting for just over 24 per cent. Of the initial external administrators’ reports, receivers lodged one per cent under section 422; administrators lodged 3.8 per cent under section 438D; and 95 per cent of the reports were submitted by liquidators under section 533.

15.59 Importantly, external administrators alleged misconduct in more than two-thirds of reports (6,761) involving an overall possible 16,562 breaches. Although this number accounts for an average of between two and three breaches per report, almost 30 per cent of reports or 2,493 recorded no misconduct. ASIC asked the external administrator to prepare a supplementary section 422, section 438D or section 533 report for 677 of the 6,761 reports that identified possible misconduct. In its analysis of the statistics, ASIC explained that its request for an additional report is a function of its assessment of risk based on a number of factors, including, but not limited to:
*   the nature of the possible misconduct reported;
*   the amount of liabilities;
*   the deficiency suffered;
*   the availability of evidence;
*   prior misconduct; and
*   the advice of the external administrator that the reported possible misconduct warranted further investigation.

15.60 In a 2007 report, the Australian National Audit Office (ANAO) observed that given the large number of statutory reports received by ASIC each year that allege offences against the Corporations Act, it was appropriate that ASIC had systems in place to prioritise its regulatory action, through risk scoring. It found that ASIC’s recording of statutory report information was accurate to a high degree. The ANAO recognised that ASIC could use a wide variety of possible remedies to deal with offences identified in statutory reports or other deficiencies that warranted some sort of regulatory action. They ranged from warning letters to directors for the less serious offences to prosecution and potentially imprisonment for more serious offences. It noted that where ASIC identified that a statutory report raised issues of regulatory significance, it sought further information about the matter from the external administrator.

15.61 According to the ANAO report, ASIC did not always obtain that additional information. Based on its sample, it found that in 40 per cent of instances, ASIC did not obtain additional information that it had requested. The ANAO concluded:

… the small number of statutory reports subject to regulatory action by ASIC each year indicates that there is opportunity for greater regulatory action on these reports.

15.62 Mr David Lombe, President of the Australian Restructuring Insolvency and Turnaround Association (ARITA) was of the view that ANAO’s 2007 findings were still relevant and applicable. He noted the thousands of reports lodged with ASIC each year but not acted upon. In Mr Lombe’s view, there was a ‘general perception within the business community that, if you do certain things at a certain level, there will be no effective review’. He explained further:

“The difficulty that we have as official liquidators is that you get a matter off the court list and often that matter has no funds in it, so there are no available assets. Often that is a process by which directors have deliberately done that—it has been a deliberate course of action. If you report the matter to ASIC and there is no assistance from that space, there is not much you can do. If you felt really aggrieved by it or you felt that it was a matter that was of sufficient importance, you may be able to persuade a firm of solicitors to act on a pro bono basis, but that is very difficult. I found myself in that sort of situation with Babcock & Brown, where I had inadequate funds to be able to pursue a proper investigation. The only thing that was available to me was to ask creditors to fund me, which they did, which then allowed me to do a public examination, which brought out the conduct of directors and other stakeholders in that company. If you do not have funds in a matter, the courses are very limited.”

15.63 By way of example, Mr Lombe expanded on his concerns citing the requirement to lodge a section 533 report, which deals with offences committed by directors. He explained that for the liquidator to understand what has happened, he or she needs to

‘review the books and records, determine the transactions, try to find out what assets are there, look at insolvent trading and look at preference payments and all those sorts of things’.

The liquidator is required to file that report, which takes time. So, according to Mr Lombe, the reports involve both time and money, and often with official liquidations there are no assets at all and, if there are, creditors are effectively paying for the report. He noted that thousands of such reports are lodged with ASIC but most of them come back ‘no further action’. In his view, it is frustrating for liquidators because they feel, ‘Why am I bothering to do it?’ Mr Lombe concluded that ‘you can understand someone’s frustration, where they have reported offences and nothing happens’.

15.64 When asked whether liquidators, in their statutory reports, could assist ASIC to distinguish the very serious breaches from the less so, ARITA indicated that it ‘might be a useful reform’. After considering the matter further, ARITA informed the committee that if it were consulted, it could assist ASIC to determine a risk scoring profile. It explained further, however:

“But we consider that the decision on how the information required by s533 is ‘risk-scored’ for action is ultimately one for the regulator and its decision and methods should not be publicly disclosed. For one thing, this would appear to give the ‘green light’ to the commission of certain offences that are deemed not serious enough to warrant action by ASIC.”

15.65 ARITA also stated that ‘a more co-operative approach between ASIC and liquidators should also be pursued’. The committee believes that ASIC and ARITA should work closely together to develop a more effective and efficient reporting mechanism that would assist ASIC to identify the alleged serious breaches from the less so.”

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

ASIC, Corporate Insolvency, Forms, Offences, Practitioners Association (IPAA), Regulation Comments Off

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

ASIC compares penalties for corporate crime

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

Mar 212014

The Australian Securities and Investments Commission (ASIC) has completed a review of penalties in Australia for corporate wrongdoing to assess whether they are proportionate and consistent. The review compared ASIC’s penalties with those in other countries; those of other Australian regulators; and across ASIC’s regime. white-collar-cartoon-01

Results of this review were released yesterday (20 March 2014) in Report 387 – “Penalties for corporate wrongdoing”.

Key findings

ASIC says the key findings show that:

on the international comparison —
- while our maximum criminal penalties—jail and fines—are broadly consistent with those available in other countries, there are significantly higher prison terms in the US, and higher fines in some overseas countries for certain offences;
- there is a broader range of civil and administrative penalties in other countries, they are higher, and they include the ability to remove financial benefit from wrongdoing (i.e. disgorgement);
on the comparison with other Australian regulators—
- the maximum civil penalties available to ASIC are lower than those available to other regulators and are fixed amounts, not multiples of the financial benefits obtained from wrongdoing; and
on the comparison across ASIC’s regime—
- there are differences between the types and size of penalties for similar wrongdoing. For example, providing credit without a licence can attract a civil penalty up to ten times greater than the criminal fine for those who provide financial services without a licence.

ASIC media release

In releasing the report ASIC Chairman Greg Medcraft said:

“Effective enforcement is critical for ASIC in pursuing our strategic priorities of promoting fair and efficient financial markets and ensuring confident and informed investors and financial consumers. It depends on outcomes that genuinely deter corporate wrongdoing. The public expects ASIC to take strong action against serious corporate wrongdoers. Those who break the law and cause severe damage should face tough penalties. This will make them and others think twice about breaking the law. Tough penalties have a powerful deterrent effect.”

jailfree

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NOTE by author: Report 387 does not appear to review penalties for summary insolvency offences. To read my paper on this subject, “Convictions for summary insolvency offences committed by company directors”, regarding the Australian scene, CLICK HERE.

What do ASIC’s Enforcement Outcomes reports mean?

ASIC, Corporate Insolvency, Insolvency Statistics, Offences, Regulation, White collar crime Comments Off

Jul 262013

An Enforcement Outcomes report has been issued by the Australian Securities and Investments Commission (ASIC) for the six months from January to June 2013 (Report 360).

It is the fourth of its type since ASIC abandoned its Prosecution Reports. But unlike those reports – upon which I based my paper, “Convictions for summary insolvency offences committed by company directors” , a detailed comparison of prosecution outcomes over the years 2006 to 2010, including the sections of the Corporations Act under which enforcement action was taken and the fines imposed – the new Enforcement Outcomes reports provide far less information.

In the part of the latest Enforcement Outcomes report that mentions summary insolvency offences, the reader is simply told that:

“As part of our liquidator assistance program, 249 directors were successfully prosecuted for summary offences concerning a failure to assist an external administrator.” (paragraph 86)

Similar brief references are made in the three previous reports.

So what, if anything, do these limited figures say?

About all we can do is compare the latest figure with those from the previous 18 month period.

In the six months from July to December 2012 the comparative number of directors successfully prosecuted under the liquidator assistance program was 275. (Report 336, paragraph 91.)

Further comparisons with the two earlier Enforcement Outcomes reports might not be all that meaningful, because those reports give figures on summary “proceedings against” directors rather than the current classification of “successful prosecutions” against directors. That said, the reports for the six months to June 2012 and for the first six months (to December 2011), put the figures at 196 and 208 respectively (see Report 299, paragraph 48 and Report 281, paragraph 39 )

But according to ASIC, readers need to be cautious when making comparisons of such data. The Enforcement Outcomes report 360 states (at paragraph 18):

“Comparisons between individual enforcement reports have some limitations. This is because no two enforcement actions are the same. For example, there may be differences in the complexity or seriousness of the allegations. However, over a two-year period, it is possible to identify the types of conduct or sectors that are the focus of ASIC’s enforcement activity in the longer term.”

This statement – minus the final sentence – was also used in the Media Release that accompanied the report.

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