IPA – ░░░ INSOLVENCY INTERFACE

IPA guide: acceptable creditor resolutions for external administrators seeking future remuneration encompassing increases in hourly rates.

Checklists and guides, Corporate Insolvency, court decisions, Insolvency Law, Insolvency practices Comments Off

Dec 182013

Several years ago an external administrator (Paul Gidley) went to the Federal Court for advice on the validity of resolutions passed approving his remuneration prospectively (i.e. ahead of the work being performed). It was a treated as test case, and in it he was supported by the Insolvency Practitioners Association of Australia (IPA) and opposed by the Australian Securities and Investments Commission (ASIC).

The judgment of Justice Gyles favoured the external administrator and opened the way for liquidators and other external administrators to have their remuneration “fixed by reference to a formula based upon time, provided that the formula is objective enough to satisfy the test laid down by the High Court ….” He decided that “the resolutions in question in this case are capable of objective application. All of the necessary elements can be objectively identified. The person doing the work, that person’s category and the period spent are all the elements required. The sum can be calculated or ascertained definitely….” (Gidley re: Aliance Motor Body Pty Limited [2006] FCA 102).

Now the IPAA has drafted two examples of alternative resolutions that it believes meet the test in situations where the external administrator seeks prospective (future) remuneration that allows for the increase of hourly rates. See IPAA release 17 December 2013: Prospective remuneration approval – Increase in hourly rates

The sample resolutions are:

“That the future remuneration of the [appointee type] from [date] is determined at a sum equal to the costs of time spent by the [appointee type] and their partners and staff, calculated at the hourly rates as detailed in the report to creditors of [date] that will be increased at a rate of X% at 1 July each year, up to a capped amount of $[capped amount], exclusive of GST, and that the [appointee type] can draw the remuneration on a monthly basis or as required.”

“That the future remuneration of the [appointee type] from [date] is determined at a sum equal to the costs of time spent by the [appointee type] and their partners and staff, calculated at the hourly rates as detailed in the report to creditors of [date] that will be increased in accordance with the June quarter Consumer Price Index (all groups) at1 July each year, up to a capped amount of $[capped amount], exclusive of GST, and that the [appointee type] can draw the remuneration on a monthly basis or as required.”

In providing these examples the IPAA says:

“The Third Edition of the IPA Code of Professional Practice (effective from 1 January 2014) provides further clarification that hourly rates can only be increased where an objective formula is approved by creditors as part of the resolution …In practice this means that, should a practitioner wish to adjust their hourly rates, they must include a definitive formula in the resolution – a resolution which refers to an increase “from time to time” or similar is not acceptable. The IPA also considers that a resolution that refers to increases of “up to X%” does not meet the definitive requirements of the Gidley decision. Should practitioners wish to be able to increase rates during the period of a prospective fee approval, they should consider resolutions which refer to increases of X%pa or in accordance with CPI. “

Insolvency Practitioners Association finalises third edition of code of conduct

Checklists and guides, Ethics, Forms, Insolvency practices, Practitioners Association (IPAA), Regulation, Standards, Templates Comments Off

Oct 292013

The Australian Insolvency Practitioners Association (IPA) today released the third edition of its Code of Professional Practice, together with a new Explanatory Memorandum, a document showing all changes, and four templates for insolvency practitioners to use as guides when preparing such documents for creditors.

From IPA website, www.ipaa.com.au

Changes to code of conduct for liquidators and trustees

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

Sep 182013

In continuing to develop its Code of Professional Practice, the Insolvency Practitioners Association of Australia (IPAA) released a draft third edition on 6 September 2013.

The Code sets guidelines for the behaviour and practices of trustees appointed under the Bankruptcy Act and liquidators and other types of external administrators appointed under the Corporations Act.

The draft is open for comment until 27 September 2013, and the IPAA hopes that the new version will take effect from 1 January 2014.

Those invited by the IPAA to comment are “members, regulators, government agencies and other stakeholders” – which presumably includes financiers, creditors, insolvent debtors, company directors and shareholders. In fact, the IPAA’s announcement is headed “public consultation“.

The full text of the IPAA’s Explanatory Memorandum – which provides “an explanation of the major changes that have been made to the Code in the development of the third edition” – is reproduced below.

From: Kim Arnold (IPAA)
Date: 6 September 2013
Subject: Explanatory Memorandum Draft Third edition of the Code

Introduction

This document summarises the more significant changes to the Code and discusses the reasons for the changes. It also addresses some of the concerns arising out of the first round of consultation with the IPA’s Insolvency Specialist Working Group (ISWG), National Board and State Committees.

Disclosure of referrers (6.6)

A requirement has been added to the Code requiring a Practitioner to disclose the source of a referral in the DIRRI where the appointment follows a specific referral.

During the first round of consultation, concerns were raised about this new requirement, specifically around commercial sensitivity of this information and the impact this may have on the reputation of the referral source.

It is our view that the disclosure of the referral source of an appointment is important for the following reasons:

• Creditors have a right to know how the appointment came about and part of that process is who referred the appointment maker (directors, debtor) to the practitioner;

• It may be relevant to creditors if the referral source is subsequently engaged to provide services in the administration and subsequently paid by the administration;

• We have received numerous complaints about the practices of a number of referral agencies, however as their personnel are not members of the IPA (nor registered liquidators or registered trustees) we are unable to take any action in respect of these complaints. The disclosure of the referral source may assist the IPA in managing this industry issue.

Disclosure of remuneration pre-appointment (6.13)

A section has been added to the Code requiring Practitioners to provide certain information about remuneration to directors/debtor prior to a director/debtor appointment (not court or controller appointments). This is not a requirement to provide a quote or estimate, but if a quote or estimate is provided, it will need to be in writing.

We have received a number of complaints from directors stating that they were told one thing by a Practitioner prior to the appointment and the actual fees sought/drawn in the administration were completely different. As there is usually no documentary evidence regarding what was told to the director prior to the appointment, it is difficult for the Practitioner to be able to verify what information was provided. By providing information about remuneration in writing to the directors/debtor, the Practitioner will receive protection from misinterpretation and will be able to provide evidence of the information provided in the event of a subsequent complaint.

We have also received colloquial evidence from a practitioner that some practitioners are providing directors/debtors will very low fixed fee estimates in order to obtain appointments and subsequently charging remuneration at hourly rates and having that approved by creditors.

Practitioners will also be required to disclose any estimates or quotes provided to directors/debtors prior to appointment in the initial remuneration advice sent to creditors.

We have developed a template for use by Practitioners at 23.2.3

Disclosure of basis of and actual disbursements (15.3.2)

Although creditors do not have the right to approve disbursements, they do have the right to understand on what basis disbursements are recovered and the quantum of disbursements paid to the Practitioner’s firm.

To provide greater clarity to creditors on the basis on which internal disbursements (eg internal non-professional fee expenses) are recovered , Practitioners will be required to disclose the basis in the initial advice to creditors regarding remuneration. This requirement has been built into the template at 23.2.1.

To assist creditors with understanding what disbursements have actually been paid to the Practitioner, the following information must now be included in the remuneration approval report:

• general information on the different classes of disbursements;

• a declaration that the disbursements were necessary and proper;

• in relation to disbursements paid to the Firm, whether directly or in reimbursement of a payment to a third party:

– who the disbursement was paid to;

– what the disbursement was for;

– the quantity and rate (only for internal disbursements); and

– the amount paid; and

• details of the basis of any internal disbursements that will be charged to the Administration in the future (e.g. Page rate for photocopying done internally).

Note that payments direct to third parties by the Administration only need to be clearly included in the receipts and payments.

These requirements have been built into the report template at 23.2.2.

Payment of remuneration by secured creditors in non-controller appointments (15.5.5)

The Code now makes clear that any payments by secured creditors for the realisation of secured assets, in any appointments other than controller appointments, must be disclosed to the approving body and approved in the same way as other remuneration.

In our view, this is a codification of the law.

Section 449E in respect of VA is clear that an administrator is only entitled to remuneration as is determined by agreement with the COI, resolution of creditors or the Court.

Similarly, section 473 for liquidators states that the liquidator is entitled to receive such remuneration as is determined by agreement between the liquidator and COI, resolution of creditors or the Court.

In a bankruptcy, remuneration is fixed under section 162 by resolution of creditors or by the COI. A trustee may also make an application to the Inspector General. Under s 165, a trustee is not able to make an arrangement for receiving from any person any remuneration beyond the remuneration fixed in accordance with the Act.

In our view, it is clear that there is a statutory requirement for proper approval to be obtained to draw any remuneration in any such appointments.

There was resistance to this change to the Code in the first round of consultation. It has been suggested that the Practitioner would be acting as the agent of the secured creditor and thus acting outside the VA/liquidation/bankruptcy. In our view, acting as agent of the secured creditor would be a conflict that would prevent the continuation of the underlying insolvency appointment. ASIC has similar concerns regarding conflict issues.

Furthermore, we envisage that the administrator/liquidator/trustee would be using the ABN, GST registration and insurance coverage of the underlying administration.

The proper view, in our opinion, is that the VA/liquidator/trustee is selling those assets in their role as VA/liquidator/trustee and remitting the proceeds to the secured creditor (subject to any prior ranking creditor, for example section 561 in a liquidation). The VA/liquidator/trustee may withhold sufficient funds to meet the cost of selling those assets, but that money cannot actually be drawn as remuneration until approval is obtained from the approving body.

Identity of directors (20.2)

There is a new requirement in the Code for Practitioners to take appropriate steps to satisfy themselves of the identity of directors or a debtor prior to accepting an appointment where the appointment is being made by the directors or a debtor.

The requirement is to take appropriate steps, which means that the Practitioner should use professional judgement to determine what is appropriate in the circumstances.

This requirement is consistent with AFSA’s (previously ITSA) requirement to verify identity when lodging a debtor’s petition.

Joint appointments (20.3)

General guidance has been added to the Code stating that joint and several appointments:

• should be taken with the knowledge that all Appointees are equally responsible for all decisions made on joint and several appointments, and

• the firm should have in place policies and procedures to ensure that all appointees are knowledgeable about the conduct of the administration, even if one appointee is leading the conduct of the administration.

This is general guidance following a spate of disciplinary action against co-appointees that were not the lead appointee on the administration.

For the purpose of facilitating comment the IPAA has made this Explanatory Memorandum and the following documents publicly available free of charge from its website:

Draft third edition with all edits marked up
A comprehensive Edits List of all changes “made to the Code between the second and third editions”.
Draft “clean” third edition assuming all edits are accepted

To see the notice issued by the IPAA click HERE.

Too many liquidators failing to provide adequate disclosure to creditors on relationships

ASIC, Corporate Insolvency, Insolvency Laws, Insolvency practices, Offences, Regulation, Standards Comments Off

Jul 242013

When the Australian Securities and Investments Commission (ASIC) released its report on supervision of registered liquidators it bemoaned the fact that its compliance checks had found a 10% increase in inadequate declarations, up from 46.9% in 2011 to 56.3% in 2012.

In the accompanying Media Release ASIC Commissioner John Price was fairly blunt:

“The increase in inadequate declarations concerns ASIC. Liquidators must make full disclosure to creditors when it comes to their independence. Given our guidance, and education programs through the Insolvency Practitioners Association of Australia (IPA), there is no good reason for such a failure rate.”

Under the Corporations Act 2001 liquidators and administrators (other than those appointed by the Court) are required to make written declarations to creditors concerning indemnities they have received and relationships they have, or have had, with certain defined “persons” within the preceding 24 months. Both declarations are to be made and sent to creditors before the first meeting of creditors is held. The Declaration of Relevant Relationships and Declaration of Indemnities are referred to collectively in the insolvency profession as a DIRRI.

An “inadequate” DIRRI is described in ASIC’s report (para 56) as one which:

(a) fails to disclose a relevant relationship in pre-appointment dealings and/or, where such a relevant relationship has been identified, adequately explain why it does not create a conflict of interest;

(b) fails to disclose all companies involved in appointments to a group of companies, and whether or not circumstances existed between the group entities that may give rise to a conflict and, if so, how the appointees would manage those issues; and/or

More detailed guidance on how to make sure a DIRRI is adequate was given to registered liquidators in an email sent to them on 28 June 2013 by Adrian Brown, leader of ASIC’s Insolvency Practitioners Team.

The email extract below is Mr Brown’s description of “seven key areas for improving the likelihood that your DIRRIs do comply with the law, relevant professional standards and the IPA’s Code of Professional Practice.”

“1. Disclose pre appointment dealings/advice

Provide meaningful information about the nature and extent of pre-appointment meetings (regardless of the nature of the meeting or dealing, be it face to face meetings, telephone discussions or email/ other electronic communications) with the company’s directors and any of their advisors.

2. Disclose relationships

Disclose all relevant relationships in accordance with the Act, professional standards and the IPA Code to ensure full disclosure and transparency. We suggest you consider:

· how the relevant relationship might impact your ability to act in the best interests of creditors; and

· whether there is a reasonable chance that creditors might consider that independence is, or appears to be, compromised by that relationship if it were to subsequently come to light.

3. Provide a reason why a relationship does not result in a conflict

Give a reason why you believe each relevant relationship does not result in a conflict of interest or duty. The reasons provided must be specific to the appointment and should not simply be a restatement of example reasons provided in the IPA Code.

Merely stating that a relationship will not affect your independence, or that you received no payment for pre-appointment advice or meetings, is NOT a “reason”.

4. Disclose when appointed to a group of companies

Where the appointment is to a number of companies in a group, the DIRRI should specifically refer to each company and cite a reason why you believe that multiple appointments will not result in a conflict of interest or duty.

You should also consider what steps you must take should you become aware of an actual or potential conflict after the appointment.

5. Disclose external administrations with common directors

Documented conflict checks undertaken pre-appointment should show if you or your firm acted, or continue to act, as external administrator of another company with the same or a common director where the appointment occurred within two years before the new appointment.

Where this occurs, the relationship should be disclosed together with the reason why you believe the new appointment will not result in a conflict of interest or duty.

6. Disclose indemnities and other up-front payments

Disclose full details of the nature and extent of all non-statutory indemnities and up-front payments. This should include stating whether there are any conditions governing the indemnity, including what the indemnity can be used for.

7. Review and sign the DIRRI

It is vital that you carefully review every DIRRI before signing it. All appointees must sign the DIRRI.”

ASIC’s message is taking a long time to get across to some liquidators …

Three years ago (May 2010) Mr Stefan Dopking, then ASIC’s leader of the Insolvency Practitioners & Liquidators Stakeholder Team, wrote to registered liquidators to reveal the findings of its compliance review of DIRRIs in 2009. What ASIC found then was strikingly similar to its findings in 2012, as this extract from Mr Dopking’s letter shows:

“The review identified a number of areas where we believe the adequacy of disclosure needs improvement. In particular, our general observations are that:

a large number of Declarations did not adequately disclose the nature of the relationships or provide adequate reasons to explain why the disclosed relationships did not result in a conflict of interest or duty;

Declarations did not clearly articulate whether the registered liquidator’s firm (i.e. partners or related bodies corporate) was included in the Declaration;

the majority of Declarations did not disclose the nature and extent of pre appointment meetings and advice;

prior or contemporaneous appointments as external administrators of other companies with common directors were not adequately disclosed in over 20 instances;

many Declarations did not provide sufficient information to adequately identify the party providing an indemnity or sufficiently disclose the nature and extent of the indemnity provided;

many Declarations were not signed by both joint and several appointees (ASIC is of the view that each appointee must consider whether any relevant relationships exist that require disclosure and the Corporations Act 2001 (‘the Act’) requires each appointee to sign the relevant Declarations); and

it was not evident from the minutes of the meeting of creditors in many cases that Declarations were tabled at the meeting of creditors as required by the Act3. Minutes of the meeting of creditors should evidence compliance with this statutory requirement.”

The law requiring liquidators to prepare DIRRIs for creditors came into effect in January 2008.

(End of post)

Proposed levy to pay for liquidation of assetless companies

Assetless companies, Insolvency practices, Official Inquiries, Treasury Options paper 2011 Comments Off

Aug 102011

The Insolvency Practitioners Association of Australia (IPA) has suggested that solvent companies pay a fee to fund the liquidation of small assetless companies. The proposal is that this new pool of funds be used to pay a set fee to liquidators who are willing to do the work.

The IPA’s proposal is made in its July 2011 submission to the Treasury, in response to an Options Paper on regulation of insolvency practitioners.

This fund would be in addition to the existing Assetless Administrations Fund (AAF). The problem with the AAF is that it is not open to liquidators of assetless companies unless and until they have conducted preliminary investigations and made preliminary reports to the Australian Securities and Investments commission (ASIC), and then only for the purpose of paying for additional investigations and reports by liquidators where it appears that directors ought to be banned or prosecuted.

The IPA is the professional body covering over 85% of registered insolvency practitioners in Australia. In its submission, forwarded this week to members, it says:

“Currently there is no process for an assetless insolvent corporation to be wound up in the absence of a director or creditor able and prepared to indemnify the practitioner’s remuneration. In the case of a court liquidation, practitioners are required to conduct the administration with no prospect of remuneration.

We recommend the establishment of a fund to have practitioners wind up small assetless corporations, on the basis of a set fee available either to all providers, or to a panel of willing providers , and with the ability for the practitioner to apply to the current assetless administration fund if their work identifies the likelihood of offences. ( As an example, under the regime operating in Hong Kong, practitioners bid for work of this kind quoting a fixed fee for the administrations they would undertake.)

This scheme could be funded via a levy imposed at the time of initial company registration, or by a small annual fee charged on every corporation. The large number of corporations at any time means that the annual fee could be very low and still provide adequate funds for the operation of the scheme.

There are very low barriers to the formation of a corporation inAustralia, and every corporation in the economy benefits from the health and reliability of the insolvency regime. While the frequency of insolvent administration is very low, any corporation has the potential to enter the insolvency regime at some future point. It is therefore reasonable that the costs of administering assetless insolvent corporations be born equally by corporations across the economy.

An alternative approach would be for ASIC to administratively deregister such companies without a formal insolvency process. (But) In our opinion, this option would encourage poor corporate behaviour. By ensuring that a company is left with no assets in the event of insolvency, a director might seek to avoid any investigation into the failure of the company and any possible breach of duties.

The recommended approach ensures that a minimum level of investigation is done which can lead to further applications for funding in the event that offences or recoverable transactions are identified.

Such initial funding to wind up these companies would also:

• Ensure protection of employees’ rights by allowing employees to access the GEERS scheme (or any such replacement arrangement); (GEERS is the General Employee Entitlements and Redundancy Scheme, administered by the Department of Education, Employment and Workplace Relations)

• Provide a deterrent to poor corporate behaviour by directors, though this needs to be supported by a proactive corporate regulator; and

• Assist ASIC to identify directors who should be banned from continuing in such a role. “

_____________________________________________________________________

The IPA submission – which is 36 pages long and seems to respond to all the issues and questions raised in the Options Paper – will be published, along with all other public submissions, in a few weeks.

Insolvency Practitioners Assoc urges member caution on tax liability

Practitioners Association (IPAA), Priority Debts, Tax debts, Tax liabilities, Taxation Issues Comments Off

Mar 102011

Australia’s Insolvency Practitioners Association (IPA) has told members to:

“be aware that the sale of an asset of the insolvent company or individual may trigger a capital gains tax (CGT) liability. The practitioner then needs to determine the status of that liability. The law in relation to where CGT liability falls on the sale of an asset by an insolvency practitioner is not clear”.

The warning appears today (March 10, 2011) on the IPA website.

The issue of post-appointment tax debts has been highlighted on this blog as follows:

o Post-appointment income tax debts of liquidator (October 10, 2010)

o Taxing capital gains made during liquidation (October 15, 2010)

o Legal opinion warns external administrators about personal liability for company taxes (November 16, 2010)

The IPA’s complete statement reads:

“Capital gains tax – need for caution in insolvency administrations

Insolvency practitioners should be aware that the sale of an asset of the insolvent company or individual may trigger a capital gains tax (CGT) liability. The practitioner then needs to determine the status of that liability. The law in relation to where CGT liability falls on the sale of an asset by an insolvency practitioner is not clear.

For example, in the case of a controllership, the liability may be a liability of the company itself, or a personal liability of the controller. In the case of a bankruptcy, the CGT liability may fall on the bankrupt or become a liability of the trustee or simply be a post-bankruptcy debt.

The IPA has been in discussions with the ATO for some time in an attempt to come to a correct position. The ATO is yet to give its view or issue any ruling.

The IPA will advise members of any developments in clarifying the legal position with the ATO. In the meantime, members should be aware of this issue and take their own advice as necessary in relation to CGT liabilities in their administrations.

Any questions, please contact us.”

It would be interesting to know what the IPA’s point of view is on this tax issue. Presumably there is disagreement between it and the ATO as the two of them work together to “come to the correct position”. More than likely the point of contention concerns the personal liability of external administrators.

Regulator challenges liquidator’s right to practice

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

Feb 162011

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

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

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

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

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

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

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

__________________________

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

Code of conduct for liquidators being revised

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

Sep 302010

Due to “various factors”, including the Senate Inquiry into Liquidators and Administrators, the Australian association of insolvency practitioners has drafted changes to its code of conduct.

On 29 September 2010 the latest version of the code (Version 2) was released to members of the Insolvency Practitioners Association of Australia (IPA) and made available to the public via its website: http://www.ipaa.com.au

Visitors to the site can view the existing Code of Professional Practice (COPP) — which is Version 1, issued in May 2008 — and a version of the proposed new code marked up for changes between versions 1 and 2.

Typically such codes set out the ethical principles, values, behaviours and standards of practice expected of members

The IPA says that its COPP is the standard for professional conduct in the insolvency profession. It says that: “The primary purposes of the COPP are to educate IPA members as to their professional responsibilities; and provide a reference for stakeholders against which they can gauge the conduct of Practitioners”.

IPA members have until 20 October 2010 to provide feedback or raise any concerns in respect of the draft Version 2. The IPA expects that Version 2 will be in operation prior to the end of 2010.