Regulation – Page 11 – ░░░ INSOLVENCY INTERFACE

Was it worth the effort?

Criminal convictions, Insolvency Laws, Personal Bankruptcy, White collar crime Comments Off

Apr 122011

“When ITSA (the Insolvency and Trustee Service Australia) identifies criminal behaviour such as this, it will investigate the matter and pursue the offender to the full extent of the law”. So said Mr Jeff Hanley, Assistant National Manager of ITSA’s Enforcement unit in a media release commenting on the case of Mr Peter David Wilson of Sea Lake, Victoria.

While ITSA may well pursue offenders to the full extent of the law, the sentence in the Wilson case again raises the question of whether, generally speaking, the judiciary in Australia regards bankruptcy offences as relatively trivial.

Mr Wilson’s crime was that he signed a Statement of Income declaring his annual income to be significantly less than he earned. In support of this false Statement of Income he provided an Australian Taxation Office Notice of Assessment which, enquiries revealed, he had altered to show a taxable income that was less than it actually was.

As required by the Bankruptcy Act, Mr Wilson had been making fortnightly income contributions. But he fell behind in the payments. When requested by his Trustee to complete an Annual Statement of Income Mr Wilson “saw a way of not having to make the contributions by falsely lowering his annual income to his Trustee”.

“This offender deliberately fabricated documents to avoid disclosing his true income and therefore pay less by way of a return to his creditors” said Mr Hanley.

“In a Record of Interview with ITSA Investigators, Wilson made full and frank admissions about his offending – stating he intentionally altered the document so as to reduce his income for the purposes of not having to pay compulsory income contributions.”

The penalty? Mr Wilson pleaded guilty and was released on a $1000 recognisance to be of good behaviour for 12 months. A further condition imposed was that Wilson continue to make fortnightly payments in reduction of his debt to ITSA.

Of course, we do not know all the facts nor the character and circumstances of Mr Wilson at the time he appeared before the court.

But one wonders whether light sentences such as this would have any detterent effect at all on other would-be offenders with fraudulent intent.

_______________________________________________________________________________

Author: P Keenan 12/4/2011. Disclaimer: The material published on this blog is general in nature. It is made available on the understanding that the Author is not thereby engaged in rendering professional advice. Before relying on the material in any important matter, users should carefully evaluate its accuracy, currency, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.

Liquidator voluntarily resigns

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

Mar 022011

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

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

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

In its media release ASIC states:

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

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

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

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

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

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

Government funding of liquidators: latest figures released

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

Feb 232011

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

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

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

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

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

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

Director concedes defeat

ASIC, Offences, Regulation, White collar crime Comments Off

Feb 232011

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

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

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

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

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

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

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

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

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

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

Regulator challenges liquidator’s right to practice

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

Feb 162011

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

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

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

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

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

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

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

__________________________

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

Trustee for Liquidation of Bernard Madoff’s company castigates J P Morgan Chase

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

Feb 042011

Details were released today of the $US6 billion lawsuit brought in December 2010 against JPMorgan Chase (JPMC) by the Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS).

The lawsuit, brought under the US Bankruptcy Code, the Securities Investor Protection Act (SIPA) and other laws, seeks to recover fees, profits and damages. JPMorgan Chase was the primary banker of Mr. Madoff’s firm. The Trustee further alleges that the bank aided and abetted his fraud.

The Trustee, Irving H. Picard, has sued J P Morgan Chase & Co., J P Morgan Chase Bank NA, J P Morgan Securites LLC, and J P Morgan Securities Ltd.

Many of the words, phrases and concepts contained in the Causes of Action – of which there are 21 – will be familiar to Australian insolvency practitioners.

For example, claims are made for Preference Period Initial Transfers (“a preferential transfer avoidable by the Trustee”); Two Year Initial Transfers (“a fraudulent transfer avoidable by the Trustee”); and Six Year Initial Transfers (“made by BLMIS with the intention to hinder, delay, or defraud the creditors”).

Also, it is alleged that “BLMIS did not receive fair consideration for the Six Year Initial Transfers. BLMIS was insolvent at the time it made each of the Six Year Initial Transfers or, in the alternative, BLMIS became insolvent as a result of each of the Six Year Initial Transfers”.

JPMorgan Chase strenuously denied the allegations, calling the suit meritless and “based on distortions of both the relevant facts and the governing law.”

“J.P. Morgan did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff,” the bank said in a statement. “Madoff’s firm was not an important or significant customer in the context of J.P. Morgan’s commercial banking business.”

JPMorgan Chase says it will “defend itself vigorously against the unfounded claims brought by the trustee.”

In the Nature of the Action, the Trustee uses strong language and is severely critical of JPMC (see below).

Full details of the lawsuit may be found at http://documents.nytimes.com/madoff-trustees-lawsuit-against-jpmorgan-chase?ref=business

__________________________________________________________

Irving H. Picard (“Trustee”), as trustee for the substantively consolidated liquidation of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”), and the estate of Bernard L. Madoff, by and through his undersigned counsel, as and for his Complaint against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. (collectively, “JPMC” or “Defendants”), states as follows:

NATURE OF THE ACTION

1. The story has been told time and time again how Madoff duped the best and the brightest in the investment community. The Trustee’s investigation reveals a very different story—the story of financial institutions worldwide that were keen to the likely fraud, and decidedly turned a blind eye to it. While numerous financial institutions enabled Madoff’s fraud, JPMC was at the very center of that fraud, and thoroughly complicit in it.

2. JPMC was BLMIS’s primary banker for over 20 years, and was responsible for knowing the business of its customers—in this case, a very large customer. JPMC is a sophisticated financial institution, and it was uniquely situated to see the likely fraud. Billions of dollars flowed through BLMIS’s account at JPMC, the so-called “703 Account,” but virtually none of it was used to buy or sell securities as it should have been had BLMIS been legitimate. But if those large transactions that did not jibe with any legitimate business purpose triggered any warnings, they were suppressed as the drive for fees and profits became a substitute for common sense, ethics and legal obligations. It is estimated that JPMC made at least half a billion dollars in fees and profits off the backs of BLMIS’s victims, and is responsible for at least $5.4 billion in damages for its role in allowing the Ponzi scheme to continue unabated for years, with an exact amount to be determined at trial.

3. In addition to being BLMIS’s banker, JPMC also profited from the Ponzi scheme by selling structured products related to BLMIS feeder funds to its clients. Its due diligence revealed the likelihood of fraud at BLMIS, but JPMC was not concerned with the devastating effect of fraud on investors. Rather, it was concerned only with its own bottom line, and did nothing but a cost-benefit analysis in deciding to become part of Madoff’s fraud: “Based on overall estimated size of BLM strategy, . . . it would take [a] . . . fraud in the order of $3bn or more . . . for JPMC to be affected.” JPMC also relied on the Securities Investor Protection Corporation (“SIPC”) to protect its profits: “JPMorgan’s investment in BLM . . . is treated as customer money . . . and therefore [is] covered by SIPC.” By the Fall of 2008, in the midst of a worldwide economic downturn, the cost-benefit analysis had changed. JPMC, no longer comfortable with the risk of fraud, decided to redeem its $276 million in investments in BLMIS feeder funds. JPMC also received an additional $145 million in fraudulent transfers from BLMIS in June 2006. The Trustee seeks the return of this money in this Action.

4. JPMC allowed BLMIS to funnel billions of dollars through the 703 Account by disregarding its own anti-money laundering duties. From 1986 on, all of the money that Madoff stole from his customers passed through the 703 Account, where it was commingled and ultimately washed. JPMC had everything it needed to unmask the fraud. Not only did it have a clear view of suspicious 703 Account activity, but JPMC was provided with Financial and Operational Combined Uniform Single Reports (“FOCUS Reports”) from BLMIS. The FOCUS Reports contained glaring irregularities that should have been probed by JPMC. For example, not only did BLMIS fail to report its loans from JPMC, it also failed to report any commission revenue. JPMC ignored these issues in BLMIS’s financial statements. Instead, JPMC lent legitimacy and cover to BLMIS’s operations, and allowed BLMIS to thrive as JPMC collected hundreds of millions of dollars in fees and profits and facilitated the largest financial fraud in history.

5. In addition to the information JPMC obtained as BLMIS’s long-time banker, JPMC also performed due diligence on BLMIS beginning in 2006, using information it obtained from those responsible at JPMC for the 703 Account, as well as information provided by various BLMIS feeder funds. At some point between 2006 and the Fall of 2008, if not before, JPMC unquestionably knew that:

a. BLMIS’s returns were consistently too good—even in down markets—to be true;

b. Madoff would not allow transparency into his strategy;

c. JPMC could not identify, and Madoff would not provide information on, his purported over-the-counter (“OTC”) counterparties;

d. BLMIS’s auditor was a small, unknown firm;

e. BLMIS had a conflict of interest as it was the clearing broker, sub-custodian, and sub-investment adviser;

f. feeder fund administrators could not reconcile the numbers they got from BLMIS with any third party source to confirm their accuracy; and

g. there was public speculation that Madoff operated a Ponzi scheme, or was engaged in other illegal activity, such as front-running.

6. JPMC looked the other way, ignoring the warning signs, even in the aftermath of other well-known frauds. In response to those who, prior to Madoff’s arrest, found it “[h]ard to believe that [fraud] would be going on over years with regulators [sic] blessing,” REDACTED Risk Officer of JPMC’s Investment Bank responded, “you will recall that Refco was also regulated by the same crowd you refer to below and there was noise about them for years before it was discovered to be rotten to the core.”

7. JPMC’s due diligence team was further concerned about fraud at BLMIS in the wake of another well-known fraud, the Petters fraud. Some of these concerns centered on BLMIS’s small, unknown auditor, Friehling & Horowitz (“Friehling”):

The “DD” [due diligence] done by all counterparties seems suspect. Given the scale and duration of the Petters fraud it cannot be sufficient that there’s simply trust in an individual and there’s been a long operating history . . . . Let’s go see Friehling and Horowitz the next time we’re in NY . . . to see that the address isn’t a car wash at least.

8. In or about September 2008, as JPMC was re-evaluating its hedge fund investments in the midst of the worldwide financial crisis, REDACTED [JPMC Employee 3], of JPMC’s London office, had a telephone call with individuals at Aurelia Finance, S.A. (“Aurelia Finance”), a Swiss company that purchased and distributed JPMC’s structured products. During the course of that call, the individuals at Aurelia Finance made references to “Colombian friends” and insisted that JPMC maintain its BLMIS-related hedge. That conversation triggered a concern that Colombian drug money was somehow involved in the BLMIS-Aurelia Finance relationship, which led to an internal investigation at JPMC of BLMIS and Aurelia Finance for money laundering. Significantly, it was only when its own money was at stake that JPMC decided to report BLMIS to a government authority.

9. As reported in the French press, by the end of October 2008, JPMC admitted in a filing of suspicious activity made to the United Kingdom’s Serious Organised Crime Agency (“SOCA”) that it knew that Madoff was “too good to be true,” and a likely fraud:

(1) . . . [T]he investment performance achieved by [BLMIS’s] funds . . . is so consistently and significantly ahead of its peers year-on-year, even in the prevailing market conditions, as to appear too good to be true—meaning that it probably is; and

(2) the lack of transparency around Madoff Securities trading techniques, the implementation of its investment strategy, and the identity of its OTC option counterparties; and

(3) its unwillingness to provide helpful information.

None of this information was new to JPMC—it had known it for years. It was only in an effort to protect its own investments that JPMC finally decided to inform a government authority about BLMIS. JPMC further sought permission from SOCA to redeem its Aurelia Finance-related investments and admitted that “as a result [of these issues with BLMIS] JPMC[] has sent out redemption notices in respect of one fund, and is preparing similar notices for two more funds.”

10. Incredibly, even when it admitted knowing that BLMIS was a likely fraud in October 2008, JPMC still did nothing to stop the fraud. It did not even put a restriction on the 703 Account. It was Madoff himself who ultimately proclaimed his fraud to the world in December 2008, and the thread of the relationships allowing the fraud to exist and fester began to be revealed as well. JPMC’s complicity in Madoff’s fraud, however, remained disguised, cloaked in the myth that Madoff acted alone and fooled JPMC. But that is the fable. What follows is the true story.

Decline in UK in number of dodgy directors being penalised

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

Jan 192011

The UK government’s corporate insolvency regulator (the Insolvency Service) investigates too few cases of alleged misconduct by company directors.

This is the view of the UK’s Association of Business Recovery Professionals (known as “R3”), which represents 97% of the UK’s Insolvency Practitioners.

In a media release – “Public at risk from ‘dodgy directors’” – on 10 January 2011, R3 (which stands for rescue, recovery, renewal) says its research shows that:

“The number of directors disqualified by the government for misconduct, such as fraud, has failed to keep pace with an increased number of reports of potential misconduct.”

“The percentage of reports taken forward by the Insolvency Service (i.e. disqualifications) has halved from 40% in 2003/4 to 20% in 2009/10. Fraudulent activity is known to increase during tough economic times. In 2009/10, insolvency practitioners submitted 7,030 reports on directors’ behaviour which they believed warranted further investigation. However, in that year, only 1,387 cases were concluded by the Insolvency Service.”

R3’s President Steven Law commented:

“This mechanism is in place to protect the general public and other businesses from dishonest directors. Not punishing directors who are blameworthy sends out a dangerous message to others.”

To read a copy R3’s media release, go to https://www.r3.org.uk/pressandpublic/default.asp?page=1&i=523&id=548#PressStory

R3 has published a paper headed “Directors’ Disqualification: Room for improvement”. It provides some interesting statistics, summarizes actual case studies – of “cases when directors have not been disqualified despite the insolvency practitioner reporting obvious misconduct” – and makes 5 recommendations. A copy is available HERE.

Does deregistration short cut conflict with Court judgment?

ASIC, Forms, Insolvency Laws, Regulation Comments Off

Nov 252010

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

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

Now it stikes me that it might actually be unlawful.

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

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

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

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

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

Let’s have a debate.

——————————————————————————————-

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

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

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

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

———————————————————————————————

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

Obscure short cut through insolvency law on company deregistration

ASIC, Insolvency Laws, Regulation 1 Response »

Nov 242010

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

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

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

But I’m getting ahead of myself.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But what of the creditors of the company in liquidation?

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

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

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

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

——————————————————————————–

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

Most reports of director misconduct are shelved

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

Nov 042010

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

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

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

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

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

What the ASIC chart means

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

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

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

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

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

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

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

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

_________________________________________________________________

The ASIC chart

ASIC’s notes to chart

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

ASIC ‘s official summary

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

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

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

Older Entries Newer Entries