Contempt for corporations law a growing culture in construction industry

 ASIC, Australian Senate 2013-14, Corporate Insolvency, Insolvency Statistics, Phoenix company activity, White collar crime  Comments Off on Contempt for corporations law a growing culture in construction industry
Dec 042015
 

The Senate Economics References Committee has criticised the contempt that some directors show for company laws, the “mild” consequences of non-compliance and the low likelihood that unlawful conduct will be detected.

In its report “Insolvency in the Australian construction industry: I just want to be paid” – published 3 December 2015 – the Senate Committee states:

The committee considers that the estimates of the incidence of illegal phoenix activity detailed in this report suggest that construction industry is being beset by a growing culture among some company directors of disregard for the corporations law. This view is reinforced by the anecdotal evidence received by the committee which indicates that phoenixing is considered by some in the industry as merely the way business is done in order to make a profit.

The committee is particularly concerned at evidence that a culture has developed in sections of the industry in which some company directors consider compliance with the corporations law to be optional, because the consequences of non-compliance are so mild and the likelihood that unlawful conduct will be detected is so low.

This culture is reflected in the number of external administrator reports indicating possible breaches of civil and criminal misconduct by company directors in the construction industry. Over three thousand possible cases of civil misconduct and nearly 250 possible criminal offences under the Corporations Act 2001 were reported in a single year in the construction industry. This is a matter for serious concern. It suggests an industry in which company directors’ contempt for the rule of law is becoming all too common.

[from Executive summary, Phoenixing (page xix) and paragraph 5.100 (page 87)]
Continue reading »

More talk about phoenixing of insolvent companies

 Corporate Insolvency, Employee Entitlements, External administration, External administrators, Personal Bankruptcy, Phoenix company activity, Practitioners Association (ARITA), White collar crime  Comments Off on More talk about phoenixing of insolvent companies
Nov 122015
 

Transcripts have now been published for all of the public hearings of the Senate inquiry into insolvencies in construction industry. Phoenixing of companies is the main topic discussed. Several insolvency practitioners have given evidence, and at the hearing in Sydney on 28th September the insolvency profession was criticised by the leading participant, Senator Doug Cameron. At the public hearing in Melbourne on 29th September the Walton Constructions case was discussed in detail by the insolvency practitioners initially appointed as external administrators.

A list of the public hearings and those who appeared as witnesses is provided below. Continue reading »

ASIC winds up more abandoned companies to help employees

 ASIC, Corporate Insolvency, External administration, Insolvency Statistics  Comments Off on ASIC winds up more abandoned companies to help employees
Oct 262015
 

Some directors of insolvent companies abandon their companies rather than adopt the proper course, which is to put the company through formal liquidation under the Corporations Act.

The Australian Securities and Investments Commission (ASIC) recently (21 October 2015) published a list of the latest abandoned companies that it has placed in liquidation under the special powers provided in section 489EA of the Corporations Act 2001. This brings to 60 the total of such company liquidations.

Were it not for special powers given to ASIC, abandonment of a company would cause employees who had not been paid their wages, leave and other entitlements to miss out on the compensation administered through the Australian Government’s Fair Entitlements Guarantee scheme (FEG), because such financial assistance is only available to employees of businesses that have gone into liquidation (or bankruptcy in the case of non-corporate employers). So putting an abandoned company into liquidation gives unpaid employees access to the FEG compensation. Unpaid employees of an abandoned companies can submit a request to ASIC to wind up the company.

The latest group of 10 abandoned companies owed at least 15 employees a total in excess of $429,000 in employee entitlements. They are:

LATEST LIST OF ABANDONED COMPANIES
Source: ASIC Media Release 15-305MR, 21-10-2015

Company Name

State
Adelaide Commercial Furniture Pty Ltd SA
JBKM Ventures Pty Ltd QLD
New Energy Technologies Pty Ltd NSW
Rifam Pty Ltd VIC
Let it Rain Pty Ltd NSW
Focus on Training Pty Ltd VIC
YQ Trading Pty Ltd NSW
Parklane Building Corporation Pty Ltd NSW
Sureline Training Services Pty Ltd WA
Australian Veterinary Hospitals (South Australia) Pty Ltd NSW

Apart from the names of the liquidators appointed, this is the only information supplied by ASIC. (The “corporate veil”, or something like it, seems to require that the identity of the company directors be kept confidential.)

As to the costs per company, ASIC said in January 2013:

“The cost of taking winding-up action is generally estimated to be about $15,000. This figure comprises ASIC’s costs and the liquidator’s remuneration.” (Reg Guide 242)

One can only hope that the liquidators are recovering company assets to pay the liquidation costs, or that the directors are penalised in some way for making taxpayers foot the bill.

The 60 abandoned companies wound up by ASIC since 2013 owed a total of 213 employees more than $2.9 million in entitlements.

END OF POST

Government contemplates imposing a regulation levy on external administrators

 ASIC, Corporate Insolvency, External administration, External administrators, Regulation  Comments Off on Government contemplates imposing a regulation levy on external administrators
Aug 312015
 

UPDATE TO THIS POST: In November 2016 the Treasury issued a revised proposal for consultation. See my blog titled “Levy on registered liquidators and other industries to help fund ASIC”.

A Government levy on registered liquidators is included in a draft proposal to adopt an “industry funding” model, or user-pays system, for the Australian Investments and Securities Commission (the ASIC). The levy is intended to recover costs incurred by the ASIC in regulating registered liquidators.

The Consultation Paper, issued on 28 August 2015, estimates that a flat levy on registered liquidators:

“… would equate to around $12,700 per year and some liquidators would potentially pay a high proportional fee relative to their costs of regulation.”

The paper discusses, as another option, the merits of the levy being based on “assets realised”. It states that one point in favour would be that:

“Levying liquidators on the basis of ‘assets realised’ would promote greater harmonisation between bankruptcy and corporate insolvency laws. It would be similar to the asset realisations charge administered by the Australian Financial Security Authority.”

In bankruptcies the liability to pay the asset realisations charge is that of the practitioner, but the amount of charge paid is borne by the estate or administration. This aspect is not discussed in the Consultation Paper. But presumably if the ASIC levy follows the bankruptcy scheme, the levy will be paid from funds held or realised by the company under external administration. Continue reading »

Senate Committee told about phoenix activity in construction industry

 Corporate Insolvency, Insolvency Law, Official Inquiries, Regulation, White collar crime  Comments Off on Senate Committee told about phoenix activity in construction industry
May 292015
 

Parliament website
The Senate Committee established to inquire into “Insolvency in the Australian construction industry” – which is code for illegal phoenix activity in the construction industry – has received written submissions from industry bodies, unions, contractors associations, superannuation funds, insolvency practitioners, the ATO and the ASIC. A total of 18 submissions were received and are available for download from the Parliament of Australia website. Below is a screenshot of the list of submissions.

Submissions to committee

Parliamentary Committee recommends ASIC be permitted to access data

 ASIC, Offences, White collar crime  Comments Off on Parliamentary Committee recommends ASIC be permitted to access data
Mar 042015
 

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

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

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

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

In its comments the Committee said:

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

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

 ASIC, Offences, White collar crime  Comments Off on Not happy, Malcolm! ASIC argues for access to telecommunications data
Feb 022015
 

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

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

Background

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

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

After explaining how crucial this was, he said:

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

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

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

ASIC fights back

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

ASIC Submission paragraphs 7 to 22.

(Images added)

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

Law enforcement

ASIC as a major criminal law enforcement agency

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

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

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

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

(i) insider trading (s 1043A);

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

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

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

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

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

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

  •  ASIC, in collaboration with the Commonwealth Director of Public Prosecutions (CDPP), secured criminal convictions against 129 persons for indictable offences, including “prescribed offences” and “serious offences” as defined in ss 5(1) and 5D of the TIA Act, and achieved sentences of imprisonment against 68 persons; [5] and
  • ASIC, through the conduct of its own prosecutions, secured criminal convictions against 2,404 other persons for less serious summary offences, an average of 481 persons convicted a year.

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

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

Recommendation 5

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

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

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

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

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

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

data-access

ASIC’s existing powers under the TIA Act

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

  • authorised ASIC officers are able to receive telecommunications data if it is reasonably necessary for enforcement of the criminal law or a law imposing a pecuniary penalty; and
  •  ASIC has the ability to seek a warrant from an independent judicial officer authorising ASIC to access stored communications for the purpose of investigating a “serious contravention”, as defined in s 5E of the TIA Act.

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

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

  • the insider trading offence in s 1043A(1) ordinarily requires proof that inside information was communicated to the accused;
  • the insider trading offence in s 1043A(2) specifically criminalises the “communication” of inside information;
  • the market manipulation offences in ss 1041A to 1041C ordinarily require proof of communications, such as placing orders for the offending trades by telephone or over the internet, and the identity of the persons who made them;
  • the market manipulation offence in s 1041D specifically criminalises the “circulation or dissemination” of offending “statements or information”;
  • the offence in s 1041E (false or misleading statements) specifically criminalises the “making” or “dissemination” of offending statements or information;
  • the offence in s 1041F (inducing persons to deal) criminalises the “making” or “publishing” of offending statements or information; and
  • the offence in s 1041G criminalises engaging in “dishonest conduct” in the course of carrying on a financial service business, which commonly involves communications of false or misleading information.

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

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

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

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

footnote symbol cropped

Footnotes:

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

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

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

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

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

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

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

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

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

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

 

 

More demanded of liquidators in reporting insolvent trading

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

UPDATED 16/1/2015

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

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

Background

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

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

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

ex01-embossed

Possible Misconduct – EX01

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

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

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

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

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

Possible Misconduct – Criminal Offences – Insolvent Trading – EX01

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

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

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

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

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

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

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

Effects of changes to insolvent trading sections of EX01

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

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

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

Extra questions about insolvent trading – new EX01

Period insolvency commenced

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

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

Method/s of determining date of insolvency

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

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

Records used to determine date of insolvency

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

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

Grounds for director to suspect insolvency

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

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

Approximate debt after insolvency

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

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

Aged list of creditors

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

◻ Date of insolvency ◻ Date of appointment

Dishonesty by director

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

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

Reasons for not reporting insolvent trading

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

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

Whether creditor/s are seeking compensation for insolvent trading

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

◻ Yes ◻ No

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

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

Insolvency industry bodies may request disciplinary action by ASIC against registered liquidators

 ASIC, Corporate Insolvency, External administrators, Insolvency Law, Law reform proposals, Practitioners Association (ARITA), Regulation  Comments Off on Insolvency industry bodies may request disciplinary action by ASIC against registered liquidators
Dec 092014
 

Under the Insolvency Law Reform Bill 2014 the insolvency practitioners association and the accountants associations are to be granted the right to formally refer registered liquidators who they suspect are guilty of misconduct to the Australian Securities and Investments Commission to consider using its disciplinary powers.

Disciplinary-action The following table sets out the proposed legislation by using extracts from the Bill and related official material.

SUBJECT: DISCIPLINE OF REGISTERED LIQUIDATORS:
POWER OF INDUSTRY BODY TO GIVE INDUSTRY NOTICE

SELECTED EXTRACTS FROM THE DRAFT BILL, PROPOSED RULES, ETC.
SOURCE OF TEXT
Subdivision G of Division 40 provides that an industry body will be able to provide information about potential breaches of the law by a liquidator, and also be able to expect a response from ASIC on the outcome of that information provision.
The following industry bodies are proposed to be prescribed bodies:
• Australian Restructuring Insolvency & Turnaround Association;
• CPA Australia;
• Institute of Chartered Accountants in Australia; and
• Institute of Public Accountants.		 Insolvency Practice Rules Proposal Paper,
page 19, para 110
An industry body (prescribed in the Insolvency Practice Rules) may lodge a notice (an industry notice) stating that the body reasonably suspects that there are grounds for ASIC to take disciplinary action against a registered liquidator. The industry body must identify the registered liquidator and include the information and copies of any documents upon which the suspicion is grounded.

ASIC must consider the information and documents included in the industry notice and take action as follows:

• if ASIC decides to take no action ASIC, must give the industry body a notice within 45 business days after the industry notice is lodged;
• however, such a notice does not preclude ASIC from taking action based wholly or partly on the basis of information in the industry notice of the following kind:
– suspending or cancelling the registration of the registered liquidator;
– giving the registered liquidator a show cause notice; or
– imposing a condition on the registered liquidator;
• if ASIC does take action based wholly or partly on the information included in an industry notice, ASIC must give the industry body notice of that fact.

An industry notice is not a legislative instrument.

An industry body is not liable civilly, criminally or under any administrative process for giving an industry notice if the body acted in good faith and the suspicion that the body holds in relation to the subject of the notice is a reasonable suspicion.

A person who makes a decision in good faith as a result of which an industry body gives an industry notice is not civilly, criminally or under any administrative process for making the decision.

A person who gives information or a document in good faith which is included, or a copy of which is included, in an industry notice is not liable civilly, criminally or under any administrative process for giving the information or document.

 Explanatory Material, pages 140-141,
paras 6.67 to 6.70
An industry body (which will be prescribed in the Insolvency Practice Rules) may give ASIC an ‘industry notice’ stating that the industry body reasonably suspects that there are grounds for ASIC to take disciplinary action in relation to a registered liquidator.

ASIC is required to notify the industry body whether or not it has decided to take action in relation to the matters in the industry notice.

An industry body is not liable civilly, criminally or under any administrative process if the body acted in good faith and its suspicion in relation to the subject of the notice is a reasonable suspicion.

A person who makes a decision in good faith as a result of which an industry body gives a notice is not liable civilly, criminally or under any administrative process. Similarly, a person who in good faith provides information or gives a document which is included in an industry notice, or a copy of which is included, is not liable civilly, criminally or under any administrative process.

 Explanatory Material, Comparison of key features
of new law and current law, page 125
Notice by industry bodies of possible grounds for disciplinary action

Industry body may lodge notice
(1) An industry body may lodge with ASIC a notice in the approved form (an industry notice):
(a) stating that the body reasonably suspects that there are grounds for ASIC:
(i) to suspend the registration of a registered liquidator under section 40-25; or
(ii) to cancel the registration of a registered liquidator under section 40-30; or
(iii) to give a registered liquidator a notice under section 40-40 (a show-cause notice); or
(iv) to impose a condition on a registered liquidator under another provision of this Schedule; and
(b) identifying the registered liquidator; and
(c) including the information and copies of any documents upon which the suspicion is founded.

ASIC must consider information and documents
(2) ASIC must consider the information and the copies of any documents included with the industry notice.

ASIC must give notice if no action to be taken
(3) If, after such consideration, ASIC decides to take no action in relation to the matters raised by the industry notice, ASIC must give the industry body written notice of that fact.

45 business days to consider and decide
(4) The consideration of the information and the copies of any documents included with the industry notice must be completed and, if ASIC decides to take no action, a notice under subsection (3) given, within 45 business days after the industry notice is lodged.

ASIC not precluded from taking action
(5) ASIC is not precluded from:
(a) suspending the registration of a registered liquidator under section 40-25; or
(b) cancelling the registration of a registered liquidator under section 40-30; or
(c) giving a registered liquidator a notice under section 40-40 (a show-cause notice); or
(d) imposing a condition on a registered liquidator under another provision of this Schedule; and
wholly or partly on the basis of information or a copy of a document included with the industry notice, merely because ASIC has given a notice under subsection (3) in relation to the matters raised by the industry notice.

Notice to industry body if ASIC takes action
(6) If ASIC does take action of the kind mentioned in subsection (5) wholly or partly on the basis of information or a copy of a document included with the industry notice, ASIC must give the industry body notice of that fact.

Notices are not legislative instruments
(7) A notice under subsection (3) or (6) is not a legislative instrument.

No liability for notice given in good faith etc.

(1) An industry body is not liable civilly, criminally or under any administrative process for giving a notice under subsection 40-100(1) if:
(a) the body acted in good faith in giving the notice; and
(b) the suspicion that is the subject of the notice is a reasonable suspicion.

(2) A person who, in good faith, makes a decision as a result of which the industry body gives a notice under subsection 40-100(1) is not liable civilly, criminally or under any administrative process for making the decision.

(3) A person who, in good faith, gives information or a document to an industry body that is included, or a copy of which is included, in a notice under subsection 40-100(1) is not liable civilly, criminally or under any administrative process for giving the information or document.

 Insolvency Law Reform Bill 2014 Exposure Draft,
Insolvency Practice Schedule (Corporations),
sections 40-100 and 40-105,
pages 186 & 187

ASIC publishes an overview of statistics and offences reported by liquidators

 ASIC, Corporate Insolvency, Insolvency Statistics, Offences, Regulation  Comments Off on ASIC publishes an overview of statistics and offences reported by liquidators
Sep 302014
 

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

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

ASIC Media Release

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

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

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

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

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

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

Profile of insolvent companies

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

Table 1 summarises key data from the report.

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

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

Allegations of misconduct

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

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

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

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

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

Future improvements: Reporting of alleged insolvent trading and other offences

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

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

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

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

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

 Older Entries  Newer Entries