IPAA – Page 2 – ░░░ INSOLVENCY INTERFACE

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)

Are Official Liquidators funding the Court Liquidation scheme?

Assetless companies, Corporate Insolvency, Insolvency practices, Insolvency Statistics, Regulation Comments Off

May 142013

According to a recent study, the cost of being an official liquidator can be a bit rich.

“In respect of official liquidations generally, the survey showed that on an annual basis, insolvency practitioners are required to personally fund disbursements of $1.4 million and remuneration of $47.3 million in the conduct of their roles as Official Liquidators.”

This is one of findings in a research paper titled “An Analysis of Official Liquidations In Australia”, written by Amanda Phillips of Ferrier Hodgson, Sydney, and published on 13 May 2013 via the website of the Insolvency Practitioners Association of Australia (IPAA).

More detail of the estimates on annual remuneration and disbursements for official liquidations generally is shown in this table:

	Charge made/cost incurred (million dollars)	Recovered from company assets (million dollars)	Funded by Official Liquidators (million dollars)
Remuneration	55.6	8.3	47.3
Disbursements	1.9	.5	1.4

Another finding is that “based on the data provided by survey respondents, the average cost to administer an official liquidation is $17,475 over an average period of 7 to 12 months.”

Ms Phillips surveyed members of the IPAA. The survey covered official liquidations which commenced during the period 1 July 2011 to 30 September 2011. The paper says that “Sixteen Official Liquidators provided data in relation to 90 matters, which represented 10% of the total national official liquidations that commenced during the period 1 July 2011 to 30 September 2011.”

In addition to remuneration the paper reports on aspects of official liquidation including the nature of a typical official liquidation, the duration of appointments, an industry analysis, the turnover & size, the dividends to unsecured creditors and funding for Official Liquidators.

Ms Phillips was the 2012 winner of a scholarship from the Terry Taylor Scholarship fund administered by the IPAA. Her 33 page paper is available in pdf format from the IPAA site by clicking HERE.

Government says no to single regulator of insolvency laws

ASIC, Official Inquiries, Personal Bankruptcy, Productivity Commission 2010, Regulation Comments Off

Oct 142011

The Government has examined the case for making one regulator responsible for both personal insolvency laws and corporate insolvency laws and decided to retain the status quo.

Hence, it will be business as usual for the Insolvency Trustee Service Australia (personal insolvency) and the Australian Securities and Investments Commission (corporate insolvency).

The Australian Productivity Commission (APC) recommended in its report on the Annual Review of Regulatory Burdens on Business: Business and Consumer Services (the Report) that the Government consider the option of having a single regulator of what are, in many respects, similar laws.

In response to this recommendation (part of number 4.3), the Government says:

“The Government is not proposing to establish a new single regulator of personal and corporate insolvency regimes. There would be major upfront costs of merging the regulators, which may not necessarily be offset by long-term savings. The extent to which simply unifying the regulators would result in an improved regulatory environment is not clear. Separate policy considerations apply to many aspects of personal and corporate insolvencies and there is not currently sufficient evidence that a one-size-fits-all approach for all issues would necessarily optimise outcomes for stakeholders. The removal of the responsibility for regulation of corporate insolvency from the corporate regulator would result in corporate insolvency losing its important connection with other parts of ASIC, for example in relation to major corporate administrations, regulation of insolvent trading and of director and corporate misconduct that may have occurred in the lead up to, or during, an insolvency event.”

The Government’s formal response to the Report was released by the APC on 13 October 2011 and may be found HERE.

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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