ASIC – Page 6 – ░░░ INSOLVENCY INTERFACE

Director concedes defeat

ASIC, Offences, Regulation, White collar crime Comments Off

Feb 232011

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

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

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

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

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

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

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

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

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

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

Regulator challenges liquidator’s right to practice

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

Feb 162011

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

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

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

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

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

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

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

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

Does deregistration short cut conflict with Court judgment?

ASIC, Forms, Insolvency Laws, Regulation Comments Off

Nov 252010

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

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

Now it stikes me that it might actually be unlawful.

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

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

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

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

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

Let’s have a debate.

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

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

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

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

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

Obscure short cut through insolvency law on company deregistration

ASIC, Insolvency Laws, Regulation 1 Response »

Nov 242010

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

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

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

But I’m getting ahead of myself.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But what of the creditors of the company in liquidation?

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

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

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

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

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

Most reports of director misconduct are shelved

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

Nov 042010

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

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

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

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

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

What the ASIC chart means

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

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

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

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

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

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

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

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

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The ASIC chart

ASIC’s notes to chart

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

ASIC ‘s official summary

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

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

Corporate insolvency regulator is “overburdened” says Senate Committee.

Australian Senate 2009-2010, Official Inquiries, Regulation Comments Off

Sep 142010

In its report released today (14 September 2010) the Australian Senate Committee that was set up to inquire into liquidators and administrators has recommended that the corporate insolvency arm of ASIC be transferred to ITSA to form the Australian Insolvency Practitioners Authority (AIPA).

In discussing this recommendation (one of many in its 190 page report) the Committee said:

“.. (we have) heard a range of evidence concerning the role and competence of the Australian Securities and Investments Commission (ASIC), the Companies and Liquidators Disciplinary Board (CALDB) and the Insolvency Practitioners Association of Australia (IPAA). The criticism of ASIC’s approach to monitoring the insolvency industry as outlined in chapter 6 of this report is of particular concern for the committee”.

“ASIC has consistently claimed that it has the resources to fulfil its current responsibilities in insolvency matters. It has also admitted that there are areas in which it could improve. Taken together, these comments suggest that ASIC believes it can address these areas without more funding, provided its responsibilities in insolvency are not increased.”

“However, the committee believes that regardless of funding, ASIC is overburdened. The oversight of insolvency practitioners is just one of 13 ‘stakeholder teams’ within ASIC’s organizational structure. Its 2008–09 Annual Report lists six strategic priorities, none of which relate directly to corporate insolvency matters. Understandably, the strategic priority of managing the domestic and international implications of the Global Financial Crisis has consumed much of ASIC’s time and resources.”

“The committee believes that corporate insolvency in Australia needs more priority and prominence in the regulatory framework. This will not be achieved through more funding and responsibilities for the same overburdened agency. Rather, … the committee argues that there is a need to combine the regulation of personal bankruptcy and corporate insolvency under the one body. This would be best achieved by transferring ASIC’s corporate insolvency responsibilities to within the Insolvency and Trustee Service Australia (ITSA). The new agency would therefore be under the Attorney-General’s portfolio.”

For a copy of the full report go to: http://www.aph.gov.au/senate/committee/economics_ctte/liquidators_09/report/report.pdf

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Why are reports of misconduct shelved?

ASIC, Australian Senate 2009-2010, Offences, Official Inquiries, Regulation, White collar crime Comments Off

Sep 132010

Statistics produced by Australia’s corporate regulator reveal that it treats only 11% of the unfavourable statutory reports it receives from insolvency practitioners as serious enough to warrant any action.

Insolvency practitioners must lodge a report with the Australian Securities and Investments Commission (ASIC) when they suspect an offence under any Australian law relating to the company to which they are appointed.

In one of ASIC’s submissions to the Senate Committee’s inquiry into liquidators and administrators (see page 76 of the March 2010 submission), there is a chart showing the number of such reports – described as “reports of alleged misconduct or suspicious activity” – received in the financial years 2007, 2008 and 2009, and in the 6 months to December 2009.

See the copy of ASIC’s chart at the end of this article.

[All public submissions to the Committee may be found at http://www.aph.gov.au/senate/committee/economics_ctte/liquidators_09/submissions.htm ]

The chart in ASIC’s first submission reveals that during the period 1/7/2006 to 31/12/2009 ASIC received 20,225 “inital” statutory reports alleging misconduct or suspicious activity. Of those only 2,918 (14.4%) were flagged or escalated for further consideration.

In the 06/07 and 07/08 financial years the number of reports escalated equalled 17%. But in the 08/09 financial year and the half year to December 2009, that figure dropped to 11%.

Why are 89% of reports by liquidators and administrators not acted upon? There would be several reasons. Isn’t the public entitled to know what those reasons are and how many cases there are in each category?

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