ARITA – Page 2 – ░░░ INSOLVENCY INTERFACE

Tax Office loses to liquidators in test case regarding tax obligations

Capital Gains Tax, CGT, Corporate Insolvency, court decisions, Insolvency Law, Tax debts, Tax liabilities, Taxation Issues Comments Off

Oct 102014

The Federal Court of Appeal has dismissed an appeal by the Australian Taxation Office against a court ruling that where a tax assessment has not been issued liquidators have no obligation under s 254(1)(d) of the Income Tax Assessment Act to retain from the proceeds of sale an amount sufficient to pay an apparent Capital Gains Tax liability . (Judgment dated 8/10/2014, Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133.)

The liquidators of Australian Building Systems Pty Ltd entered into a contract of sale of real property in Creastmead, Qld. The ATO argued that a tax liability for the capital gain arising from the sale arose when the sale occurred, and, accordingly, on receipt of the proceeds of sale, the liquidators were obliged under s 254(1)(d) to retain from the proceeds of sale an amount sufficient to pay that tax liability regardless of whether a tax assessment had been issued.

A couple of years ago the Australian Restructuring Insolvency & Turnaround Association (ARITA) (then the IPAA) and the ATO decided to run a test case on the obligations of liquidators upon the occurrence of a CGT event.

Justice-Blind-Scales

The decision in the first instance by Justice Logan of the Federal Court (in March 2013) has been confirmed by Justices Edmonds, Collier and Davies. Davies J summed up the decision as follows (paragraphs 34 and 35):

“Section 254(1) of the Income Tax Assessment Act 1936 (Cth) (“ITAA36”) applies to liquidators because liquidators are deemed to be “trustees” for the purposes of the taxation laws: see definition of “trustee” in s 6(1) of the ITAA36. As the consequence, a liquidator is “answerable as taxpayer” in respect of income, profits or capital gains derived by the liquidator in his or her representative capacity (s 254(1)(a)), and is required to lodge returns of such income, profits or capital gains and liable to “be assessed thereon”, but in his or her representative capacity only (s 254(1)(b)). Section 254(1)(d) then requires the liquidator to retain “out of any money” which comes to the liquidator in his or her representative capacity, sufficient money to pay tax that “is or will become due” in respect of such “income, profits or gains”, and s 254(1)(e) makes the liquidator personally liable for the tax payable to the extent of the amount retained, or which “should have been retained”. On its proper construction, it seems to me that the section contemplates that in the circumstances where the section is engaged, a post appointment tax liability, if any, will be assessed to the liquidator in his or her representative capacity, rather than to the company. That said, the analysis serves in my view to confirm that any personal liability falling upon the liquidator arises only if, and where, an assessment has issued, and there is an amount of tax that “is or will become due” in the sense of “assessed as owing”. For the reasons expressed by Edmonds J, the Commissioner’s construction of the phrase “is or will become due” as it is used in s 254(1)(d) is to be rejected. In my view the primary judge was correct to hold that the reasoning in Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54; (2007) 232 CLR 598 in respect of the proper construction of s 255 of the ITAA36 applies equally to the proper construction of s 254, and that s 254(1)(d) is to be read as referring to an amount of tax that has been assessed. “

Interestingly, the appeal judges did not comment on Justice Logan’s cautionary advice to liquidators at the first hearing, which was:

“… Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….” __________________________________________________________________________________

For my other posts on this topic see: “Post-appointment income tax debts of liquidator” 10 October 2010 “Decision only partly resolves tax puzzle for liquidators” 7 March 2014 “ATO appeals against decision in Australian Building Sysytems case” 19 March 2014

Financial System Inquiry: insolvency practitioners have their say

Corporate Insolvency, Financial System Inquiry, Insolvency practices, Practitioners Association (ARITA) Comments Off

Sep 032014

The Australian Restructuring Insolvency and Turnaround Association (ARITA) has released its second-round submission (26/8/2014) to the government’s Financial System Inquiry (FSI). ARITA has more than 2,200 members practising in, or interested in, the insolvency and restructuring industry. It’s full 32 page submission can be seen HERE. The Executive Summary from the submission appears below:

ARITA submission Part 1

ARITA-exec-summary-part2

ARITA-exec-summary-part3

Financial Systems Inquiry poses questions about insolvency regime

Corporate Insolvency, Insolvency Law, Insolvency practices, Official Inquiries, Personal Bankruptcy, Practitioners Association (ARITA), Regulation Comments Off

Jul 172014

Is there evidence that Australia’s external administration regime causes otherwise viable businesses to fail and, if so, what could be done to address this?

This is the question being asked about external administrations in the Interim Report of the Financial System Inquiry (FSI) (July 2014). The FSI says it would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:

No change to current arrangements.
Implement the 2012 proposals to reduce the complexity and cost of external administration for SMEs. [See below for details of these proposals.]

The brief section of the FSI’s report dealing with external administration may be viewed HERE. (The full report in pdf format is available HERE.)

David Murray, FSI chairman. Artwork from bluenotes.anz.com

US Chapter 11 regime?

Adoption by Australia of a US Chapter 11 style form of external administration could still be an option, although the FSI has already given it the thumbs down, as this extract from its interim report shows:

“The Inquiry considers adopting such a regime would be costly and could leave control in the hands of those who are often the cause of a company’s financial distress. Capital would be maintained in a business that is likely to fail, which would restrict or defer the capital from being channelled to more viable and productive enterprises. Adopting such a regime would also create more uncertainty for creditors by limiting their rights. The Inquiry notes that Chapter 11 has rarely enabled businesses to continue as going concerns in the long term. There is little empirical evidence that Australia’s voluntary administration process is causing otherwise viable businesses to fail. The Inquiry would like stakeholders to provide any empirical evidence that supports that view.”

Second round of submissions to FSI

Submissions in response to the Interim Report are due by 26 August 2014. Submissions can be lodged online using the Financial System Inquiry special facility, or may be lodged by email or post: fsi@fsi.gov.au or Financial System Inquiry, GPO Box 89, Sydney NSW 2001.

Insolvency reform proposals of 2012

The 2012 insolvency reform proposals to which the FSI specifically refers in its request for second round submissions concern:

Registration and discipline of insolvency practitioners (See note 1 at end of post for more information).
Specific rules relating to external administrations (note 2).
Regulator powers and miscellaneous amendments (note 3).

The Explanatory Material issued with the Insolvency Law Reform Bill on 19 December 2012 can be viewed HERE.

“Thought leadership”

The Australian Restructuring Insolvency & Turnaround Association (ARITA) (previously known as the Insolvency Practitioners Association) says it has embarked on “a major project to drive thought leadership around our insolvency regime”. It is asking insolvency practitioners who want to make a submission to FSI to work with the professional association:

“ARITA has embarked on a major project to drive thought leadership around our insolvency regime. Along with some of ARITA’s excellent previous work, significant new work has already been completed and ARITA members will soon be asked for comment on key aspects of our policy positions. This work is, obviously, well timed to support the FSI request for submissions. ARITA will actively work to represent the views of its membership and the profession to the FSI. We would urge all members and their firms to work with ARITA on providing strong and consistent representation to the FSI. If you or your firm is looking at making its own submission, please let ARITA know so that we can collaborate with you.” ARITA Press Release 15/7/2014

NOTES re Proposals in December 2012 Insolvency Reform Bill:

Note 1: Registration and discipline of insolvency practitioners

Common rules regarding: the physical registers of insolvency practitioners; registration and disciplinary Committees.

Note 2: Specific rules relating to external administrations

Common rules regarding: •

Remuneration and other benefits received by the insolvency practitioner;
The handling of administration or estate funds;
The provision of information by insolvency practitioners during an external administration or bankruptcy;
The meetings of creditors during an external administration or bankruptcy;
Committee of inspection formed as part of an external administration or bankruptcy; and
The external review of the administration of an estate or insolvency.

Note 3, part (a): Regulator powers and miscellaneous amendments

Provide ASIC with further powers to assist it in its oversight of the regulation of registered liquidators. In particular, the Bill amends the ASIC Act to:

enable ASIC to require the provision of information and books as part of an ASIC proactive surveillance program;
enable ASIC to provide administration information to a person with a material interest in the information; and
improve the transparency of ASIC oversight of the corporate insolvency industry.

Note 3, part (b): Regulator powers and miscellaneous amendments

Amend the Bankruptcy Act to enable ITSA to provide information relevant to the administration of the corporate law to ASIC.

Note 3, part (c): Regulator powers and miscellaneous amendments

A range of miscellaneous amendments, including:

amending the Acts to strengthen the penalties for breach of a bankrupt’s or directors’ obligations to provide a report as to affairs (RATA), or the books of the company, to an insolvency practitioner;
amend the Corporations Act to provide a process for the automatic disqualification of directors that have failed to provide a RATA, or the books of the company, to a registered liquidator until they have complied with those obligations; and
amend the Acts to enable the assignment of an insolvency practitioner’s statutory rights of actions.

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

Insolvency Services Standard for public accountants to be strengthened

Checklists and guides, Corporate Insolvency, Ethics, Insolvency practices, Regulation, Standards Comments Off

May 282014

Australia’s Accounting Professional and Ethical Standards Board (ASESB) is revising the professional standard that governs accountants in public practice who perform insolvency services.

On 21 May 2014 ASESB issued an exposure draft of the proposed revisions. It is seeking feedback from insolvency accountants and “other stakeholders” by 4 July 2014.

Chairman of ASESB, Stuart Black, says

“The proposed new requirements to (the professional standard) APES 330 will further strengthen the professional requirements applicable to liquidators and administrators and provide a reference for creditors, regulators and other stakeholders to evaluate and monitor practitioner conduct”

The Media Release states that:

“APESB sets the code of ethics and professional standards by which members of Australia’s three major professional accounting bodies (CPA Australia, the Institute of Chartered Accountants Australia and the Institute of Public Accountants) are required to abide.”

Overview of the proposed changes

The exposure draft contains the following list of “significant revisions” to the existing APES 330:

Revision or addition of the following definitions: Administration, Appointment, Approving Body, Contingent Fee, Controller, Firm, Independence, Insolvency Services, Insolvent Debtor, Member, Member in Public Practice, Professional Activity, Professional Bodies, Professional Services, Professional Standards, Referring Entity, and Related Entity;
Removal of the defined terms: Associated Entity, Controlled Entity, and Witness Report;
Extending the scope of the standard to include members’ voluntary liquidations with the exception of having to comply with the Independence requirements of the standard;
Introduction of a requirement to disclose the source of a referral where the Appointment follows a specific referral;
Introduction of a requirement to declare in the DIRRI that no information or advice, beyond that outlined in the DIRRI, was provided;
Use of the term “believing” to clarify that it is the Member in Public Practice’s reasons for believing that the Pre-appointment Advice provided or the relationship disclosed does not result in a conflict of interest or duty;
Extension of the prohibition on providing Pre-appointment Advice to both an insolvent Entity and its directors; to include an Insolvent Debtor and any corporate Entity associated with that individual;
New guidance to encourage disclosure of relationships with Associates of the insolvent Entity that were more than two years prior to the Appointment;
Amendment of the current prohibition of consenting to an Appointment where prior business dealings were held to exclude immaterial dealings, or those business dealings that occurred more than two years prior to the Appointment;
Additional guidance on what is considered a material business relationship;
A new requirement to provide the basis of fee calculations and where relevant the scale
Mandating that where fee estimates are provided that these be provided in writing with explanations of the variables that may affect the estimated fee;
An obligation on the Member in Public Practice to provide details of Expenses that may be charged from the Administration and the basis of how the Expenses will be charged and recovered by the Firm;
Prohibition of Members in Public Practice claiming any pre-appointment disbursements as an Expense;
Requirement for consistency between fees charged and those sought for prospective fee approval;
The scale of rates used to calculate prospective fees must be that approved by the Approving Body
Where a Member in Public Practice accepts an Appointment with another Member, all Members are equally responsible for all decisions on the Appointment;
Payments received for the costs of an Administration from third parties must be disclosed to the Approving Body and approved (other than in an Appointment as a Controller);
Detailed requirements and guidance on Expert Witness obligations has been replaced by referring Members in Public Practice to APES 215 Forensic Accounting Services; and
New requirements for a Member in Public Practice to use appropriate procedures to ensure statutory timeframes are met in a timely manner.

Deadline for comments

The deadline for stakeholder comments is 4 July 2014. APESB says it welcomes comments from respondents on any matters in the exposure draft (ED 01/14).

Comments should be addressed to:
The Chairman, Accounting Professional & Ethical Standards Board Limited
Level 7, 600 Bourke Street, MELBOURNE, VIC, 3000.

A copy of each submission will be placed on public record on the APESB website. http://www.apesb.org.au/apesb-exposure-drafts-open-for-comment.

Sources and Links

APESB Media Release 21 May 2014

APESB At A Glance, APES 330 Insolvency Services ED, May 2014

Proposed Standard: apes 330 Insolvency Services

Footnote

The Australian Restructuring Insolvency & Turnaround Association (ARITA) also has an extensive Code of Professional Practice. That governs members of ARITA, but has also been accepted by some judges in hearings concerning misconduct as a guide to the professional standards expected of all insolvency practitioners. Accordingly, the changes by the accounting bodies to APES 330 may not make much real difference to practice standards. But of course the accounting bodies must have their own rules in place.

Insolvency industry reps quizzed at Senate inquiry into ASIC

ASIC, Australian Senate 2013-14, Corporate Insolvency, Insolvency Law, Insolvency practices, Practitioners Association (IPAA), Prosecution of Liquidators, Regulation, Standards, White collar crime Comments Off

Apr 152014

senate committe report book Four senior representatives of the Australian Restructuring Insolvency and Turnaround Association (ARITA) (formerly (IPAA) gave evidence on 2 April 2014 at the public hearing held by the Senate Economics References Committee which is inquiring into the performance of the Australian Securities and Investments Commission (ASIC).

Although the Senate is inquiring into ASIC, most of the questions faced by the ARITA representatives – and the sometimes lengthy discussions that followed – concerned insolvency administration, law and reconstruction, as well as the insolvency profession itself.

The following extract from the Hansard transcript provides insights into both ARITA’s current views on a range of issues to do with corporate insolvency and the kind of recommendations that the Senate committee might make.

I have split the transcript up by inserting the following subject headings:

ASIC AND ARITA WORKING TOGETHER
PROCESSING OFFENCE REPORTS (S.533 ETC) – FIRST DISCUSSION
ASIC AGENDA FOR INSOLVENCY
SPLITTING UP ASIC OR INTERNAL REFORM?
BUSINESS RESTRUCTURING: ADOPTING U.S. CHAPTER 11 METHOD
WHITE-COLLAR CRIME WITHIN THE INSOLVENCY PROFESSION (ARIFF ETC.)
STATUTORY REPORTS BY LIQUIDATORS REGARDING OFFENCES (S.533 ETC) – SECOND DISCUSSION
COMPLAINTS ABOUT INSOLVENCY PRACTITIONERS. STOP ORDERS.
PRE-PACK INSOLVENCY ADMINISTRATIONS
WHAT CHANGES IN THE LAW WOULD HELP ASIC PERFORM BETTER?
RENEWING A LIQUIDATOR’S LICENCE
LIQUIDATOR’S FEES FOR SMALL COMPANIES
DUTY OF CARE IN EXERCISING POWER OF SALE
ACCESS TO INFORMATION HELD BY ASIC
LIQUIDATORS LICENCES AND STOP ORDERS (AGAIN)

Appearing for ARITA were:

David Lombe, President
Michael McCann, Deputy President
Michael Murray, Legal Director
John Winter, Chief Executive Officer

The committee chairman is Senator Mark Bishop.

_________________________________________________________________

Extract from Hansard transcript of Senate Economics References Committee 2 April 2014

1. ASIC AND ARITA WORKING TOGETHER

CHAIR: I have some general questions. I think we might be going to explore four or five different issues and then my colleagues will jump in as appropriate. Firstly, do you consider that ASIC works effectively with your organisation?

Mr Lombe: In my view, the liaison side of the relationship has improved. I think, in the last two or three years, ASIC have been more active in consulting with ARITA. We have regular liaison meetings with them as a body. They have also, I think, ramped up their activity with senior practitioners, and there are regular meetings with them. In general terms, I think the liaison process is much better and that they are very much listening to some of the issues that are raised by ARITA and members.

2. PROCESSING OFFENCE REPORTS (S.533 ETC) – FIRST DISCUSSION

CHAIR: Do you draw any shortcomings to our attention?

Mr Lombe: One of the biggest issues that I would draw to your attention is that, in every administration, there is a form of offences report. In other words, if a liquidator, in reviewing the books and records or reviewing the conduct of the directors, forms a view that they have committed an offence under the act, they are required to make a report. In many cases, it is compulsory that they do that. The issue for us—and I believe it is a resources issue—is the fact that they are not being acted upon. That those reports are not being acted upon is a bit like the broken window in New York. I think there is a general perception within the business community that, if you do certain things at a certain level, there will be no effective review. We prepare thousands of reports each year and they are not being acted upon.

CHAIR: How do you know they are not being acted upon? Why do you assert that?

Mr Lombe: We simply get a letter saying, ‘There will be no action taken in relation to this matter.’ So it is very definite.

CHAIR: It is a standard form response?

Mr Lombe: Yes, it is.

CHAIR: There are always degrees of significance. Something can be a routine breach, an inadvertent breach or a breach that has no consequences, while something else can be quite deliberate, fraudulent and planned. What do you do with the second group when they say no action will be taken?

Mr Lombe: 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….

3. ASIC AGENDA FOR INSOLVENCY

CHAIR: What needs to be higher on ASIC’s agenda?

Mr Lombe: A reform package. There is the reform bill that is in parliament at the moment, but that is really in many ways at a lighter level. It is not a significant reform. It is harmonisation. It is giving more powers to creditors. But, importantly, it does not deal with, for example, a chapter 11 regime which might be considered. It does not deal with ipso facto clauses which may cause in an insolvency matter the liquidator or the voluntary administrator to lose the power to have a lease in respect of a store or a property, which then means that you cannot sell the business or restructure it. Prepacks are another item. There are a number of items that we have on our agenda for reform. I think it could be higher on ASIC’s list of things that they are looking at.

4. SPLITTING UP ASIC OR INTERNAL REFORM?

CHAIR: We had the discussion this morning—and I think you might have been in the back while we were having it—that over time ASIC has been given more and more responsibilities as the financial services industry has grown. Is there a case for splitting ASIC up or for internal reform of the organisation itself? Or is it just a resourcing issue?

Mr Lombe: From our perspective, it is not a splitting-up matter but a consolidation with AFSA, the regulator that controls bankruptcy. That was considered by the government previously and the ultimate result was that they decided not to move them together. With the economies of scale, I think I could see a better way of dealing with liquidators and trustees. At the moment they are two separate groups of people. But if you have a trustee he is more than likely a liquidator and vice versa. So I think there would be ways of making sure that, if you have an issue with, for example, a trustee’s conduct, that would be known to the regulator. Whereas at the moment there is a situation where potentially there could be an issue and it is not seen. Just in terms of dealing with liquidators and registered trustees, I can see some benefits to having one body.

5. BUSINESS RESTRUCTURING: ADOPTING U.S. CHAPTER 11 METHOD

CHAIR: Let’s turn to current insolvency laws in the context of the US chapter 11 processes. Is the current insolvency framework appropriate for restructuring a business in this country or is value destruction inevitable once an insolvency practitioner has been appointed?

Mr Lombe: That is a very big question.

CHAIR: It is.

Mr Lombe: What I would say to you is that our regimes work well. I am not sure whether you are aware of this but there was a paper called Safe harbour which talked about trying to allow businesses to be restructured without the value destruction. I think that particular issue got some discussion but it was very brief. I think we need to go back to that. In terms of chapter 11, again I do not want to mislead you. It is not necessarily a popular thing amongst insolvency practitioners. We very much have a wide church of insolvency practitioners that deal with smaller matters, medium-sized matters and larger matters.

CHAIR: Why is it not necessarily popular?

Mr Lombe: I think people have a view that it is a very expensive process. It is an American process. You are leaving the people who caused the problem in charge of the company still. What I would say to that is that we do not need to adopt holus-bolus the situation in the US. It could work effectively in Australia. I would refer you to a matter that I was involved in. The organisation was called United Medical Protection, which was a medical insurer who insured about 60 per cent of Australian doctors. Basically, medical services ceased at that particular point. In relation to that matter, it was a chapter 11 in Australia, being run by me as a provisional liquidator using the provisional liquidation regime and being carried out by a Supreme Court judge, Justice Austin. That was very much a situation where, effectively, for all intents and purposes you had a chapter 11 running in Australia. Chapter 11 is not for mum-and-dad grocery stores that go into liquidation.

CHAIR: No, it is not; it is for major enterprises.

Mr Lombe: It is for major enterprises. If you put a major enterprise into a VA the costs with the VA are probably going to approximate the costs if you had to go off to a court and talk to a judge. Often, it is advanced that a judge is not capable, or that our judges would not be able to do this. I do not agree with that assessment. I have found first hand, in dealing with Justice Austin, that our judges are very capable of dealing with it. In the US they have a separate bankruptcy court, but I do not believe that that is a major issue. I am a firm believer in chapter 11, but I might pass to one of my colleagues, Michael Murray, to give a little bit of background to that.

Mr Murray: As Mr Lombe said, chapter 11 is an arrangement whereby the restructuring of the company is left in the hands of the directors, or existing management, but under the control of a court. In Australia, we take a different approach where what we call the voluntary administration regime involves the appointment of an administrator or company liquidator to be in charge of the company—so in Australia the existing management does not have any further role in the restructuring of the company. There are pros and cons to each arrangement. In Australia it is commonly said that we do not have the same culture that they might have in America, in terms of attitudes to corporate failure, and that we would probably find it difficult, as Mr Lombe mentioned, to leave the management of the enterprise with the directors during the restructuring exercise.

CHAIR: But that is an indigenous concern. They leave the directors in control in the United States, and hundreds of companies have gone into liquidation over the years under chapter 11 and then traded out to be viable, ongoing concerns—all the auto companies, the airline companies. Just because there are some concerns in this country that, perhaps, the directors were not as competent as they could have been—the evidence from overseas is that that is not an issue. Why would it be different here?

Mr Lombe: I have a view—this is a personal view; it is not an ARITA view—that we are too obsessed with insolvent trading and with charging directors rather than saving jobs and saving businesses. You have given a number of quotations—

CHAIR: That is what this discussion is about: value creation and value destruction.

Mr Lombe: Exactly. There is no doubt that if you appoint a voluntary administrator, you appoint a receiver, you appoint a liquidator, there is value destruction. There is no doubt about that. Chapter 11 has a different connotation, which is why I am, personally, in favour of it. But, as I say to you, it is not necessarily a popular view.

CHAIR: No. I hear that loud and clear, but what I am pressing down on is: so what if it is not a popular view? If hundreds of companies have been saved to be now effective, viable concerns returning dividends to shareholders and employing tens of thousands of people, who cares if people in this country are upset?

Mr Lombe: These things need to be debated more. They need to be discussed. I was extremely disappointed that that safe harbour document just disappeared without being properly publicly debated.

CHAIR: Mr Murray, I interrupted you

Mr Murray: I was going to follow up on the point that Mr Lombe raised about the insolvent-trading laws in Australia, which are regarded internationally as quite severe. They are seen as an impediment to flexibility of restructuring, and the issue of value destruction comes up in that context. There is seen to be too much of a readiness to go into a formal insolvency arrangement where a more informal or more flexible arrangement might serve a better purpose.

CHAIR: So is there a bit of value in having a significant public debate around this issue?

Mr Lombe: I believe there is, and certainly for ARITA at the moment it is very much on the top of our agenda to come out with a piece of thought leadership which might encourage people to look at reform, because I think 1993 was the last serious reform we had, when the voluntary administration regime was brought in. We have been tinkering at the edges. There are some worthwhile things in the reform bill—I am not saying that there is not—but I think we should have that debate about substantial reform.

CHAIR: So your organisation is doing a fair bit of internal policy thought on the efficacy of an alternative situation, as opposed to a straight application of the insolvency laws and the immediate harm that flows from that.

Mr Lombe: Yes. Wherever I go as president of ARITA, I am making those sorts of statements—that we need to be looking at this. We need to be looking at reform. We need to have a dialogue about these sorts of matters.

CHAIR: Mr Medcraft, I think, said to us that the United States chapter 11 bankruptcy system is a very good structure. He believes it significantly mitigates the loss of value that results from essentially going in and just selling up whole entities and that it is far less harmful in terms of job losses and general destruction of value.

Mr Lombe: I would certainly agree with that part of his statement. I do not know about the rest of it, but I certainly agree with that.

CHAIR: There is some substance there on the table?

Mr Lombe: There is, yes. We would obviously like to encourage ASIC along those lines.

6. WHITE-COLLAR CRIME WITHIN THE INSOLVENCY PROFESSION (ARIFF ETC.)

CHAIR: ASIC has called for a review of penalties for white-collar crime. Do you have experience in white- collar crime within your professional organisations?

Senator WILLIAMS:   I can give you some names: McVeigh, Macdonald, Patterson, Ariff. You need any more?

Mr Lombe: Are you alluding to Mr Ariff?

CHAIR:   I am, by way of introduction. But more generally the question is: are current penalties and their application sufficient in the area of white-collar crime or do they need to be reviewed? That is really the issue.

Mr Lombe: Looking at the Ariff matter, to start off, that is a real blight on our profession. It is extremely regrettable and it is still a matter that gets a lot of discussion at the ARITA table. We are extremely embarrassed by it. The other thing that I would say is my view was the matter potentially was not handled as quickly as our profession would have liked. I think there were other ways. There is a thing called the Crimes Act which could have been looked at. Also, in terms of being an officer of the court, this matter could have been brought to the court. It could potentially have stopped him practising by having a receiver or some practitioner appointed to his practice to stop it, because I think it is the position that, whilst the investigation was going on and whilst the matter was proceeding in court, he was stealing funds. It is extremely regrettable and, as I say, it is a blight on our profession and we are extremely embarrassed by it.

But I would say this fellow was a criminal. He misappropriated moneys. We can sit down with a blank piece of paper and I can have a lawyer with me—the best lawyer in Australia—writing about how you stop people doing what Mr Ariff did, and the answer is you cannot because he is simply a criminal.

There may well be a case for better processes that make it easier to deal with these sorts of matters. I would say at the moment there are things in place which could have been accessed, but maybe there needs to be some reform to deal with this, to make it easier to deal with those sorts of things. I am not talking about someone who makes a mistake in their declaration of relationships, independence or indemnities. I am talking about someone who is taking money illegally, misappropriating money out of a matter. In that case, that has to be treated differently.

There are powers for ASIC to investigate those matters and get the material to understand that that is not a legitimate payment but a payment for a trip for his family, or things of that nature. From that perspective, I think there is some basis there. I might just ask Mike McCann, who is our vice president, to comment on that.

Mr McCann:  The other day someone like Ariff was a criminal, and in a lot of cases of white-collar fraud or crime it is the directors of companies who are perpetrating similar crimes or other fraudulent activity, and they are true criminals.

In the case of Australia a lot of the penalties that we have seen handed out have been relatively modest compared to some of the high-water marks in the US et cetera, where they seem to have a much more rapid and much more draconian penalty regime. They seem to prosecute very quickly and the penalties are very severe. As a deterrent, I suspect that our penalty regime here is not quite sufficient, because there is a culture of crime and fraud being conducted around the country. While that is still the case in many countries, I think there could be more of a deterrent.

In our practice, obviously, we come across a lot of companies who have failed, for various reasons. To be honest, the majority are probably due to incompetence and misfortune, but there is certainly a hard-core element of fraudulent or criminal activity by people who have the status of directors of companies.

CHAIR: You said there is ‘core’ illegal activity.

Mr McCann:   You do see on a recurring basis—not the same people necessarily—activity which is tantamount to fraud or criminal activity. You see that a lot in some these investment schemes that we are well aware of. That activity has been perpetrated very blatantly with the intention of taking funds from investors and similar parties. That is a criminal activity.

CHAIR: So you are saying to us that the penalty regime that applies is not an effective deterrent?

Mr McCann: Seemingly so, because we seem to have recurring activity of that sort of behaviour. People do go through that process. It takes them some time to be prosecuted and, if they are prosecuted, they serve a period. I am not sure if I am correct, but usually three to six years is a fairly serious sentence. I think in the US a lot of these crimes receive in excess of 10 years penal sentences.

Mr Lombe: Mr Chairman, could I make a small correction to what was said by the previous witness. It is on this topic. What it relates to is a comment that he made that ASIC had not pursued a criminal insolvent trading case for more than 10 years. I can tell the committee today that in fact they are pursing the Kleenmaid matter. It is a matter that is in Queensland. I think we are all familiar with the Kleenmaid product—washing machines, fridges and associated things. ASIC have taken criminal action against those directors and in fact a committal hearing finished this week and those directors have been committed to face trial.

7. STATUTORY REPORTS BY LIQUIDATORS REGARDING OFFENCES (S.533 ETC) – SECOND DISCUSSION

CHAIR: Thank you for that. Can we talk about statutory liquidator reports for a while? There is a huge volume filed every year—almost 7,000—from auditors and liquidators. We have had a submission from a number of firms that essentially says that auditors are frustrated with the statutory reporting process and that an enormous amount of time and expense is put into the preparation of such reports. They are filed with ASIC. There may well be some significant recommendations in their reports for follow-up action—drawing to attention shortcomings or deficiencies in various areas—and, by and large, they are received, noted, filed and moved on. In that light, does your organisation have concerns about the process and follow-up action deriving from the filing of the reports?

Mr Lombe: Yes. That was the issue I was talking about a little bit earlier—the extension reports. For example, in a liquidation by the court, you are required to lodge a section 533 report, which deals with offences committed by directors. What that means as a liquidator is you need 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 to understand what has gone on. We are required to file that report, and it does take time. So it is time and money, and often in these official liquidations there are no assets at all. If there are, creditors are effectively paying for that.

You are quite right: thousands of them are lodged and most of them come back ‘no further action’. I think it is frustrating to liquidators because they feel, ‘Why am I bothering to do it?’

The answer is, ‘You are required to do it under the law, so you need to do it.’ So we do not support anyone not lodging section 533 reports. But you can understand someone’s frustration, where they have reported offences and nothing happens.

CHAIR: The question then becomes: does ASIC use these thousands of reports it receives to effectively analyse and detect patterns of dubious behaviour?

Mr Lombe: I think you could probably say they have used them in the past to come up with a phoenix activity, so they have then had a focus on phoenix activity, and still do. I believe they are reading them for trends, but the frustration is that you are reporting an offence that you believe should be prosecuted in that particular company. So the fact that they are monitoring trends or things that are coming up is certainly useful, because it may mean that they see a trend and therefore they can take some action against it. But the fact that it is not being prosecuted is a frustration. I think sometimes that happens in larger matters as well.

CHAIR: So it is the lack of prosecutorial action that you complain of?

Mr Murray (?): I was just going to say at times, so do you use those reports where they have directors in a number of companies and they use that to identify a recurring activity for a particular individual or individuals, and then can you use that as a basis to seek a banning order, banning that party from being a director?

CHAIR: Let us get down to brass tacks. Does your organisation have a complaint about ASIC’s response to the reports once filed?

Mr Lombe: We have certainly raised this issue with ASIC, and the answer that comes back, in my recall, is that they simply do not have the resources to deal with it.

CHAIR: What is it that they do not have the resources to do?

Mr Lombe: To investigate the matters and prosecute the directors.

CHAIR: In its 2007 report, the ANAO looked at this issue and they found that, given the large number of reports received by ASIC each year that alleged offences against the Corporations Act, it was appropriate that ASIC had systems in place to prioritise its regulatory actions through risk scoring. It noted further:

… 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.

Are those findings from six or seven years ago relevant today?

Mr Lombe: I think they are very relevant.

CHAIR: In your view, could liquidators in their reports assist ASIC in distinguishing between the very serious breaches from the less-so? There are limited resources; there have to be priorities. Everything is not absolutely important. Is there a mechanism that could be developed whereby the industry advise ASIC that this set of issues or this set of complaints or this set of directors or this set of companies really are most egregious and need to be attended to?

Mr Lombe: I think that might be useful reform if that were the case. If there were some way of collating or rating, if you like, particular matters, I think that could be useful. At the moment the liquidator simply prepares his report and describes—

CHAIR: Perhaps you could develop a framework whereby, on a score of zero to 100, all of those above 80 points, for example—whatever the criteria are—are particularly egregious and warrant follow-up action, and the rest are therefore for analysis and noting purposes.

Mr Lombe: Yes.

CHAIR: Is it worthwhile giving consideration to the development of such a recommendation?

Mr Lombe: I think that would be worthwhile.

CHAIR: We are talking about developing criteria for risk scoring that liquidators and trustees would apply in the development of their report and provide to ASIC.

Mr Lombe: That is correct. If, for example, a bankrupt does something or does not cooperate, does not file his statement of affairs or whatever, his bankruptcy can be extended, so there is an actual penalty in those sorts of things. Whereas, in a liquidation, if there is a particular offence or whatever that does not get investigated then there is no penalty.

CHAIR: If that were the practice, after it were developed and became common practice, that would be a very, very up-to-date mechanism for noticing trends and behaviours and taking the appropriate either regulatory or prosecutorial action for the more severe cases.

Mr Lombe: That is right. Maybe in a situation where there are automatic offences, if you have done such and such, you cannot be a director for four years.

CHAIR: We will give consideration to such recommendations. Questions on this issue? Do you want to go onto the complaints about insolvency practitioners or do you want to go somewhere else?

8. COMPLAINTS ABOUT INSOLVENCY PRACTITIONERS. STOP ORDERS.

Senator WILLIAMS: Just about ASIC doing their job, Chair. We come to Mr Ariff and the frustration there with it being four years almost until ASIC acted. In this inquiry when I asked why it took three years to scrub out one particular financial planner when they had been given a file from the Commonwealth Bank. It is the speed at which ASIC acts that I have been finding frustrating when we know Ariff’s record and what he did.

In your submission you say that:

We mention that we support the IPA being given access to ASIC complaints details etc under the ILRB. The present laws do not allow ASIC to share information with IPA, nor IPA with ASIC.

That is the situation you were saying.

Mr Lombe: That is the situation except I would correct that we normally provide that information to ASIC.

Senator WILLIAMS: So you are saying you need more transparency between your organisation and ASIC to work on issues.

Mr Lombe: Definitely. For example, we might be looking at a particular complaint about a particular member. We might look at it and really struggle to see a lot wrong with it once we have gone through submissions and those sorts of things. But this same practitioner, for example, could be subject to a very serious ASIC investigation. We don’t know about that, so we are making a decision about a practitioner in isolation. That is the key point we are trying to make.

Senator WILLIAMS: While I have been running through this inquiry, Mr Lombe, I would like a stop order power be given to ASIC. In the case of financial planners, clear evidence is given to ASIC that they have given the wrong advice, have not done their job properly, ripped people off, done whatever—forgery, fraud, you name it. ASIC can just ring up that financial planner and say, ‘From this minute, you’re banned from operating as a financial planner. You can go to the AAT, if you wish to appeal it.’ How would you feel if that was also put on liquidators? If the liquidators were licensed instead of registered, so the licence was renewed every three years, and then ASIC could have gone to Ariff and in one phone call scrubbed him out. How would you feel about representing your organisation if that was to be put in place?

Mr Lombe: I think you need to have some form of investigation in relation to these matters because the nature of insolvency is there are confrontations and that can be—

Senator WILLIAMS: We had the 2010 Senate inquiry into liquidators and the previous government did draw up a white paper. I know the current government is working more to complete that. CarLovers are costing $1.8 million in legal fees to have Ariff removed. Who in administration has got a lazy $1.8 million to pay legal fees? That is outrageous.

Mr Lombe: Yes. I understand the point you are making. I think there needs to be a more streamlined position where there are serious issues of conduct. It needs to be easier or there needs to be a more streamlined process that works better to do that.

Senator WILLIAMS: Mr D’Aloisio told us at Senate estimates to deregister a liquidator is very difficult. If we have them licensed and ASIC have the power, it may never be used, but it puts your industry on notice that if you do do the wrong thing, one phone call and the next day you are down at Centrelink.

Mr Lombe: I would like to see a bit more than one phone call, frankly. I would like to see a proper process—

Senator WILLIAMS: The point I am making is I believe they should have the powers to say, ‘Right-o. We’ve got clear evidence here of wrongdoing,’ as they could have done with Singleton Earthmoving or Independent Powdercoating or whatever the companies were that were done over. But they haven’t got that power; instead, the company had to spend almost $2 million to have him removed out of one company. I think that is outrageous.

Mr Lombe: That is certainly wrong. I think there needs to be a more streamlined process; I agree with you—

Senator WILLIAMS: So do I.

Mr Lombe: where there is serious misconduct.

Senator WILLIAMS: There will be changes coming, I can assure you. I think you will be happy with them. I want ASIC feared. I want them to be a corporate watchdog where people are too scared to do the wrong thing. There is a lot of money out there, especially in superannuation, and there are people who do the wrong thing, clearly. I want to have a corporate watchdog that is feared out there in your industry or the financial planners or whoever to say: we do the wrong thing, ASIC will slam us straightaway.

Mr Lombe: We certainly do not support misconduct. As I mentioned before, we are very embarrassed by the Ariff matter and we certainly support a better process to deal with someone who has a serious allegation of misconduct against them.

Senator WILLIAMS:   You saw the recommendations. The committee was chaired by former South Australian Labor senator Annette Hurley, and I thought it was a good inquiry. Mr Murray, was it you who said at first that we did not need the inquiry, or was it Ms North?

Mr Murray: It was not me; it was our previous president.

Senator WILLIAMS:   So you think there should be closer work with ASIC in terms of transparency and sharing information with the organisation?

Mr Lombe: Yes, I would be very much in favour of that.

Senator WILLIAMS:  That would be something you would like to see this committee recommend?

Mr Lombe: Yes, I would.

9. PRE-PACK INSOLVENCY ADMINISTRATIONS

Senator WILLIAMS: Is there anything else you would like to see? I agree with your pre-packs, by the way. I think that is something to really look at closely. I have done a lot of work with some liquidators about pre-packs to save the cost and return more money to their creditors; that is what it is all about.

Mr Lombe: It usually stops that destruction of value. Often you have got businesses with complex arrangements—leases, agreements, licensing and all that sort of stuff. As soon as you have an event of insolvency, they are void; they can be terminated. That is the difficulty in restructuring a business.

Senator WILLIAMS: The assets sold way below their value.

Mr Lombe: That can be the outcome. Often the reason that occurs is that you have had a destruction of value by the existing directors; they have traded the business down. By the time the liquidator, the voluntary administrator or the receiver gets appointed, the business has been seriously impacted by the trading.

10. WHAT CHANGES IN THE LAW WOULD HELP ASIC PERFORM BETTER?

Senator WILLIAMS: If you were in charge of Australia for one day, what changes would you make to our Corporations Law so that ASIC can perform their job better?

Mr Lombe: I would be trying to give ASIC some more resources, or have resources shifted, so that ASIC can focus on some of those key investigated aspects that I have been talking about today.

11. RENEWING A LIQUIDATOR’S LICENCE

Senator WILLIAMS: Do you support user pays?

Mr Lombe: One thing that has always amazed me in Australia is that I can go out today and set up a company and incur $1 million worth of a credit and I do not have to put any money down at all. I do not have to put a deposit down for creditors or whatever if the company gets liquidated. So I think there is some angle to that.

Senator WILLIAMS: I am referring more to when we license your industry. You pay a licence fee every three years. Perhaps when you apply for a licence you should have a face-to-face interview instead of something on paper. People can write anything about their character and good standing, and I think that needs to be addressed as well. But they are issues that we will address later.

Mr Lombe: One of the issues that was addressed in the reforms is that, if you want to become a liquidator, it is a paper driven exercise. If I want to become a liquidator, I have got some experience and some references and I give those to the regulator. I have never understood why there is not a face-to-face interview. The law is going to change if that bill comes in. When I became a trustee, I had to sit an exam and I had to sit through two hours of questions. So I think a face-to-face interview is the right thing in terms of when you initially get licensed. At the end of the day, it is probably something to consider in relation to ongoing licensing.

Senator WILLIAMS: I said to my eldest son, who is a chartered accountant, ‘Why didn’t you become a liquidator?’ and he said, ‘You’ve got to be joking!’ He really baulked at the idea.

Mr Lombe: A lot of people like the insolvency space because it is not merely liquidating companies but assisting companies to restructure. We do a lot of work to save companies from getting into liquidation and voluntary administration.

Senator WILLIAMS: If we can save the companies—whether it be pre-pack or chapter 11—we are saving the jobs. As the chair has said, a lot of creditors would not like the freezing of assets and payments et cetera. Case International is a big agricultural machinery manufacture right around the world. They were in serious trouble 15 years ago; now they are a prime player in agricultural machinery and those jobs have been saved.

Mr Lombe: I certainly support what you are saying and that is what our profession is developing into. The business acumen that our practitioners have is so important.

Mr Winter: In terms of the pathways into practice, from ARITA’s perspective we have an extensive education requirement which is effectively two units of Masters level study, which is delivered by Queensland University of technology. That is part of our requirement to become a member of ARITA. So, at a professional level, we are expecting a high standard, and of course you need to be a member of Chartered Accountants, CPA, or your relevant Law Society in order to gain membership of ARITA as well.

12. LIQUIDATOR’S FEES FOR SMALL COMPANIES

Senator WILLIAMS: It has been suggested to me that the liquidators’ fees should be capped when liquidating smaller companies. How do you feel about that?

Mr Lombe: I think that is something that should be investigated.

Senator WILLIAMS: Because 96 per cent of liquidations return less than 10c in the dollar to the creditors.

Mr Lombe: I think a capped fee situation is something that should be investigated. One of the things I would also say is that you might get a particular matter and there might be a capped fee on it, and then you look at it and you say, ‘There’s insolvent trading that I want to pursue and there are preference payments that I want to pursue,’ so in those situations you would have to go back to the creditors and say, ‘There are these things that need to be pursued,’ and the creditors would authorise you by increasing that cap. At the end of the day, creditors control liquidators and voluntary administrators being paid.

Senator WILLIAMS: They do to a certain extent. For example, KordaMentha, when they liquidated Ansett, were exempted, seven out of the 10 years, from reporting to ASIC. No-one should be exempted in the first year, so that ASIC can get a listing of the assets. It is ironic that during that period KordaMentha grew their offices right around Australia. We do not know how much they charged.

Mr Lombe: I do not think that is a political matter. I think it was an anomaly that existed then.

Senator WILLIAMS: I think there should have been three liquidators sent into Ansett—one for the aircraft, one for the real estate and one for the spare parts and machinery or whatever. It probably would have been over in two or three years instead of 10.

13. DUTY OF CARE IN EXERCISING POWER OF SALE

CHAIR: Can we now turn to section 420A of the act, ‘Controller’s duty of care in exercising power of sale’. It imposes a duty on the controller of a company, including liquidators, to take all reasonable care, when selling the property of a company, to obtain the best price that is reasonably obtainable, having regard to the circumstances when the property is sold. We have received a number of written complaints, and I think all of us have been lobbied extensively by persons who have been or are still aggrieved at a liquidation process. I have been made aware of allegations concerning hotels in Fremantle worth $2 million or $3 million sold off for $80,000 or

$100,000, without notice. A whole range of people have been to see me on those sorts of matters. The other example, of course, is the South Johnstone sugar mill case. The allegation is that it was sold at a much

undervalued asset price. That is the context in which I want to have a discussion about section 420A. How is this

section of the act enforced and what authority, if any, does ASIC have to deal with such allegations of assets being sold way under value?

Mr Lombe: Let me just start, and I might ask Michael Murray to help me a little bit on this question. Section

420A is a section which relates to the duties of receivers, so we are talking about receivers disposing of assets. Section 420A is very much a procedural-type issue. In other words, I get appointed to a hotel—

Senator WILLIAMS: Does that include liquidators as well?

Mr Lombe: No, it does not.

Senator WILLIAMS: Section 420A does not cover liquidators?

Mr Lombe: No. It covers receivers.

CHAIR: What is the difference between a receiver and a liquidator?

Mr Lombe: A receiver is appointed usually—unless it is a court-appointed receiver—pursuant to a fixed and floating charge. A liquidator is appointed by the court or via the voluntary administration process if no deed of company arrangement is put in place.

CHAIR: Are there similar or the same obligations in different sections on liquidators as there are on receivers?

Mr Lombe: They are different. Correct me if I am wrong, Michael, but my understanding of the liquidator’s duties is that he is not to act recklessly in the realisation of an asset. He does not have a section 420A but—

CHAIR: So you have got a lesser test.

Mr Lombe: A lesser test, yes.

CHAIR: Not to behave recklessly.

Mr Lombe: Yes. I think they are the right words, Michael?

Mr Murray: A liquidator has to act in the interests of creditors and, in acting in the interest of creditors, he properly should get market value or good value for the assets. But it is expressed more precisely in respect of receivers. To some extent, they are parallel, I think, or fairly equal.

CHAIR: But, whether it be receiver or liquidator, the allegation that is, repeatedly, assets are flogged off at way below their real value or market price if there was a contested market to acquire the particular asset. Does ASIC have any ability to get involved where such allegations are made. If not, why not?

Mr Lombe:   Can I just make an initial statement in relation to 420A. I started talking about a procedural
section. What that means is that a receiver should look at the asset, he should go and obtain an evaluation in relation to the asset, he should make whatever inquiries he needs to make in respect of that asset to understand the nature of that asset, he should seek expert advice in relation to that asset if he needs to. He should do whatever he needs to do to understand that asset. He should then embark upon a selling process. Now, that selling process

would be one where he would instruct an appropriate agent. So, if you are selling a major hotel, then you are looking for a person who sells hotels, not someone who sells pubs. You would get someone of that nature, you would get expert advice as to how it should be realised and then you would kick off an appropriate advertising campaign. That might be eight weeks for expressions of interest, and there ought to be a staggered process of providing information to people et cetera. Then you would go through the process of obtaining the best offer. That would be one way of doing it. You could put it to auction, which would be another way of doing it.

So the idea of section 420A is to put in place a regime to ensure that you get the best price or a market price in relation to that asset. That is what it is trying to ensure. My understanding is that it is not in that section that ASIC can take action. Although you are obviously breaching the law, my understanding, again, is that it would need to be someone like a creditor or a director who says, ‘You’ve breached section 420A,’ and who would need to prosecute that through the courts. That is my understanding.

CHAIR: Or indeed the owner of the asset.

Mr Lombe: Yes, the owner of the asset. I do not think ASIC normally gets involved—

Mr Murray: Typically, it is the owner of the business that challenges the receiver on the sale of the asset, saying that it was sold at under its value. Correct me if I am wrong, Mr Lombe, but often owners of businesses have an unrealistic expectation of the value of their business, and it is not an uncommon complaint that what was a wonderful business was sold too cheaply, but that is not the reality.

Mr Lombe: I can give you an example of a major hotel—you would know the name; it is a hotel in Sydney. It was previously bought at $45 million. It was sold for around $20 million. This particular hotel was the subject of various programs on TV about the destruction in value that had occurred. In fact, the hotel, rather than having 200 guests in it—or 200 rooms multiplied by the number of guests—had three or four people in it. So you can destroy the value of particular assets. The reason I gave that example of a hotel is that the income a hotel can generate is about occupancy. If you have no income from that hotel, your price will be affected. In an insolvency situation, when you get appointed, that asset can be seriously distressed, and that is why the asset just will not be sold or will sell at a very low level.

CHAIR:   Okay. I understand the point you are making about section 420A and the process that should be followed to realise maximum value when the assets are realised, and I also accept the point that Mr Murray made that often the owner of a business will have an inflated view of its value. Is there any recourse available to the owner of the asset or creditors both before and after the sale if they believe the asset has been significantly undervalued and flogged off at way below market price?

Mr Lombe: I think their recourse is to take legal action against the receiver for sale at below value.

CHAIR: And, essentially, alleged negligence, I suppose.

Mr Lombe: Well, it is alleged that they breached section 420A.

CHAIR: Is that the only avenue you are aware of?

Mr Murray: Yes, they can take court action. I would have to say, from my experience in reading the law reports, they do not often succeed—I say that as a generalisation. You asked whether ASIC has a power. ASIC has a power generally over receivers, which is under section 423 of the Corporations Act, in respect of misconduct or inattention to their duties, and there is a similar power in respect of liquidators. That is an overarching power that ASIC has in respect of the conduct of receivers.

CHAIR: Okay. Based on your experience, gentlemen, does this section 420A, as it applies to liquidators and receivers in the context of allegations of the sale of assets at way under market price, need to be strengthened in any respect or is it adequate?

Mr McCann: I think it is very adequate. As a practising receiver I know it is one of the things we are most mindful of whenever we take possession, say, for a bank of an asset and take it to market. We are very mindful of obtaining value and going through that process to ensure we are attaining the maximum possible price for the asset. That means we are very rigid around following a due process for the sale—in fact, to the point that, on day one of an appointment, you often get presented with people saying, ‘I want to buy that asset,’ and they put an offer on the table and you have to say, ‘That’s great. That looks like a very good offer but I cannot accept it because I have to go through a process to make sure that is the right value.’

CHAIR:   Does due process in realising the value of the assets necessarily involve a public process and competition and tenders? If not, should it?

Mr Lombe: It does and it should.

CHAIR: I received complaints that business that have been wound up and the assets flogged off for way, way below market price was done by some fix where there was no tender process, and all of a sudden the new owner had it.

Mr Lombe: That is wrong.

Mr McCann: In the case of receivership that is clearly wrong.

CHAIR: Is it also illegal?

Mr Lombe: It is in breach of the law.

Mr McCann: However, in a case of liquidation there are circumstances where a liquidator with no funds has an asset and has no ability to trade or continue the business to allow an opportunity to achieve a higher value, if that is possible, and may need to act to close down the business and sell the assets, because there is no way that they can pay employees the next week or the next day because there are no funds available. In that case you will see a more rapid fire-sale type of situation.

Mr Lombe: It again goes to that issue of a liquidation versus a receivership.

14. ACCESS TO INFORMATION HELD BY ASIC

CHAIR: Yes, I get that point. You noted that ASIC receives and stores prescribed information under legislation and some of this information can be made public. But you argue that anonymous and aggregate statistics can be made public if ASIC so chooses. Can you put some more meat on those bones about why and how information should be made public?

Mr Murray: I think we are making the point there that Mr Harris made earlier about access to statistics. We feel frustrated—along with Mr Harris and other academics—about the lack of statistics, particularly in the insolvency area. We compare that very much, for example, to AFSA—the Australian Financial Security Authority, which is the bankruptcy regulator. They produce good statistics which inform the law reform process in bankruptcy. We do not have that sort of information in corporate insolvency. We were able to attend the previous session with Mr Harris, where you made a suggestion to him that he formulate some areas where ASIC might better produce information.

CHAIR: Could you take the question that I gave to Mr Harris and provide us, with some degree of urgency, a written note advising the type of information that ASIC has that should be made publicly available and that would be of use?

Mr Murray: Yes.

Mr Lombe: I would make you aware of a situation. ARITA gives a research prize so that someone can do research. One of our prize-winners was looking at deeds of company arrangement. When you go into voluntary administration, there is a decision about whether you go into liquidation or a deed of company arrangement. He was trying to work out how many companies go into deeds of company arrangement and how successful those deeds of company arrangements are. He wanted to get access to information from ASIC to be able to do that very important research. It would have cost thousands of dollars and ASIC just said, ‘We can’t give that information to you.’

CHAIR: Can’t or won’t?

Mr Lombe: Won’t.

CHAIR: Did they offer a reason?

Mr Murray: I think they said that they cannot—and I think this was referred to earlier—because they are legislatively prevented from waiving fees or giving out information.

CHAIR: Can you take that request on notice and provide us a written response?

Mr Lombe: Within the month?

CHAIR: Yes.

Mr Murray: Yes.

CHAIR: And also advise us if there are legislative prohibitions in the act that we need to have a look at as well in formulating our recommendations. If ASIC are prohibited under the law to provide the information, unless the act is changed, they cannot. So we need to be aware of that as well.

15. LIQUIDATORS LICENCES AND STOP ORDERS (AGAIN)

Mr Murray: I would like to make a final comment, please. Senator Williams, you mentioned earlier the issues about practitioner regulation and the cost of, for example, removing Mr Ariff from CarLovers and the cost to creditors, and also the idea of regulating a practitioner by way of ASIC immediately terminating their licence. I just wanted to point out—and I am sure you are aware—

Senator WILLIAMS: A stop order; not terminate their licence—put their licence on hold.

Mr Murray: I just wanted to point out that, following on from this report that we were involved in before, we have the bill and there is quite a regime in the bill giving powers to ASIC and also its counterpart AFSA in relation to those sorts of circumstances that you described. Also, in respect of removal of a practitioner, you do not have to go to court under the bill; the creditors can make that decision by—

Senator WILLIAMS: Has that bill has been introduced to the House?

Mr Murray: It is not in the House; it is what is called—

Senator WILLIAMS: It is being planned.

Mr Murray: It is an exposure draft and we have been working closely with Treasury with respect to refinements of its draft.

Senator WILLIAMS: I have looked over it piece by piece, the proposals, and have kept a close eye on it. Are you pretty happy with the proposals?

Mr Murray: We are—yes. We would like to think we have had a fair degree of input into it and we would encourage its further progress into parliament.

Senator WILLIAMS: Good. I have been briefed and I am very happy with what has been proposed.

Mr Murray: Thank you.

CHAIR: Thank you very much for your assistance today and for your involvement.

Mr Murray: Thank you.

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END OF POST

ATO appeals against decision in Australian Building Systems case

Capital Gains Tax, CGT, Corporate Insolvency, court decisions, Insolvency Law, Practitioners Association (IPAA), Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues Comments Off

Mar 192014

The Australian Restructuring Insolvency & Turnaround Association (ARITA) reported yesterday that the Australian Taxation Office is appealing against the decision in the test case on the obligations of liquidators upon the occurrence of a Capital Gains Tax (CGT) event.

Hand objection

ARITA’s report is as follows:

CGT UNCERTAINTY by Kim Arnold, 18/3/2014

Further to our recent article on the decision in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116, the ATO have lodged an appeal. The grounds of the appeal are that:

the judge erred in concluding that the liquidators were not required under s254(1)(d) of the Income Tax Assessment Act 1936 to retain proceeds from sale sufficient to pay any net capital gain arising from the sale; and

the judge erred in concluding that the obligation to retain monies sufficient to pay any tax in respect of the sale only arises when and if an assessment is issued.

The ATO’s view is that there is an obligation for the liquidators to retain proceeds from sale sufficient to meet any tax obligation and that an assessment is not required for that obligation to arise.

The issue of CGT priority and external administrator obligations on the sale of assets in insolvency administrations has been outstanding for many years and it seems that there will be no certainty for some time to come.

For my earlier post on this subject CLICK HERE.

Decision only partly resolves tax puzzle for liquidators

Capital Gains Tax, Case Reports, CGT, Corporate Insolvency, court decisions, Insolvency Law, Insolvency practices, law reports, Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues Comments Off

Mar 072014

[UPDATE 19/3/2014: THE ATO HAS APPEALED AGAINST THE DECISION DISCUSSED IN THIS POST] [UPDATE 10/10/2014: THE ATO FAILED IN ITS APPEAL; THE DECISION OF LOGAN J WAS CONFIRMED.]

When the Insolvency Practitioners Association of Australia (since renamed the Australian Restructuring Insolvency & Turnaround Association, or ARITA) and the Australian Taxation Office (ATO) decided to run a test case on the obligations of liquidators upon the occurrence of a Capital Gains Tax (CGT) event, they probably knew they risked broadening the contentious issues. But they had to try settling a far-reaching and long-standing argument which ARITA and the ATO had been having since 2009. (1)

Unfortunately for ARITA and the ATO, the Court decided not to adjudicate in one important area, deeming it “unnecessary to answer in light of the conclusion reached …”

In running Australian Building Systems Pty Ltd v Commissioner of Taxation ([2014] FCA 116), decisions were sought on the following questions:

– whether the liquidators (this was a joint appointment) are obliged by s 254 of the Income Tax Assessment Act 1936 , prior to the issuing of a notice of assessment to Australian Building Systems Pty Ltd (ABS), to retain monies so as to meet what may be a taxation liability in respect of the income year when the CGT event occurred; and

– whether the liquidators are obliged to pay to the Commissioner the whole of any tax due by ABS in priority to other creditors of that company notwithstanding ss 501, 555 and 556 of the Corporations Act.

Tax law gavel

On the first question the Court – Logan J presiding – concluded:

“ … that s 254 of the ITAA36 had no application to the liquidators. They were not, in the absence of any assessment, subject to any retention and payment obligation derived from that section…..” (para 25 of the judgment) and “s 254 does not require retention upon the mere happening of a CGT event …” (para 31).

As the ATO had argued that it was not necessary for there to be a notice of assessment before the retention obligation of S. 254 could arise, this decision was a victory for the liquidators.

But Logan J added the following cautionary advice:

“… Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….” (para 31).

Caution-taxes

ATO back to the drawing board

The ATO will need to withdraw its exhaustive Draft Taxation Determinations TD 2012/D7 and TD 2012/D6 of September 2012 and try again to state the correct legal position. In those determinations the ATO took the view that

“a receiver who is an agent of the debtor is required by paragraph 254(1)(d) of the ITAA 1936 to retain from the sale proceeds that come to them in the capacity of agent sufficient money to pay tax which is or will become due as a result of disposing of a CGT asset”; and
“The phrase ‘tax which is or will become due’ in paragraph 254(1)(d) of the ITAA 1936 is not restricted to tax that has been assessed, and includes tax that will become due when an assessment is made. Consequently, the obligation to retain an amount under paragraph 254(1)(d) can arise in respect of tax that has not yet been assessed”.

An advisory note from ARITA?

One can imagine that the decision and the words of caution by Logan J will eventually find their way into an advisory note or practice guide from ARITA to liquidators and other insolvency practitioners. But in getting there the Judge’s caution is bound to cause ARITA’s technical advisers and members considerable trouble.

ARITA’s initial interpretation

ARITA posted a summary of the judgment on its website on 23 February (“Liquidator succeeds in CGT dispute with ATO” by Michael Murray), and ended with a note that it will closely examine the decision and the Judge’s comments and will raise the matter at its next liaison meeting with the ATO.

ARITA’s interpretation included the following comment:

“ In the case in hand, no assessment had issued when the sale took place. This means that there is no personal liability for a liquidator if, once the assessment issues, there are insufficient funds to meet the liability. “

Kicking off the discussion

I would make a couple of preliminary observations regarding this comment.

First, the fact that no assessment had issued when the sale took place is unremarkable. Normally, a tax assessment is not made until after an event occurs. Ordinarily, the ATO would not even be aware that an event had occurred until it was disclosed in a return lodged by the taxpayer. (2)

Secondly, I agree that, based on this decision, there would be no personal liability under s. 254(1)(d) or (e) of the ITAA 1936 for the tax payable as the result of a profit, etc., if the money the liquidator had was expended and/or disbursed before a tax assessment was issued.

But there are other important issues to consider. If a tax return covering
a post-appointment period was lodged and/or a tax assessment was issued showing tax payable in respect of that period, this would give rise to a debt payable by the company; and that debt would, it seems to me, be entitled to priority payment under the Corporation Act, as are other costs
of the winding up.

Such a tax debt would probably be entitled to classification as an expense “properly incurred by a relevant authority” (e.g., a liquidator) (S. 556(1)(dd) of the Corporations Act). If so, it would have a higher priority than, for example, liquidator’s remuneration (S. 556(1)(de)) and employee entitlements (S. 556(1)(e) and (g)).

So … if, when the assessment issues “there are insufficient funds to meet the liability”, the liquidator may be deemed to have breached his or her duty to distribute the proceeds in accordance with the priorities established by law.

It seems to me that this very issue was the one being broached by Logan J in his caution at para 31 of the judgment when he said:

“ … in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….”.

_______________________________________________

NOTES:

(1) In October 2012 the ATO issued draft rulings on the subject; and in February 2013 the hearing of the test case began.

(2) In the case being examined here, the ATO was informed of the CGT event when the company sought a private ruling from the Commissioner on whether s.254(1)(d) applied.

_______________________________________________

For more on this topic see my article “Post-appointment income tax debts of liquidator” published on this site on 10 October 2010.

Liquidators’ professional association has new name and new head

Corporate Insolvency, Industry People, Insolvency practices, Personal Bankruptcy, Practitioners Association (IPAA) Comments Off

Jan 092014

It’s been announced today that from January 2014 the Insolvency Practitioners Association of Australia (IPAA) will be known as the Australian Restructuring, Insolvency & Turnaround Association (ARITA), and that from February 2014 the CEO of the association will be John Winter, former head of a professional association of accountants and a person with “an extensive background in media”.

In a notice to members, Denise North, current CEO of IPAA/ARITA, said she was “delighted to report that our new name and brand are now in place” and invited members to visit the association at arita.com.au

ARITA is being described as “the peak professional body in Australia for company liquidators, bankruptcy trustees, lawyers, financiers and academics involved in restructuring, insolvency and turnaround activity. It provides advice and assistance to its members on insolvency law and practice, gives advice to government on law reform, and generally represents the interests of those in the insolvency profession.”

John Winter’s career and specialities are detailed on his LinkedIn page.

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