Sep 282017
 

Consultation

The Treasury has today (28 September 2017) released a consultation paper on reforms to address illegal phoenix activity. The closing date for submissions by interested parties is 27 October 2017.

The paper is available for download from the Treasury website.

Below is the foreword to the paper, by the Hon Kelly O’Dwyer MP, Minister for Revenue and Financial Services:

Phoenixing involves the stripping and transfer of assets from one company to another to avoid paying liabilities. It hurts all Australians, including employees, creditors, competing businesses and taxpayers, and has been a problem for successive governments over many decades.

Phoenixing has a significant financial impact – in 2012, the Fair Work Ombudsman and PwC estimated the cost of phoenixing to the Australian economy to be as high as $3.2 billion annually. It also undermines business’ and the public’s confidence in the corporate and insolvency sectors and the broader economy.

Companies fail for many different reasons, and it can be difficult to distinguish between those who are engaging in illegal phoenix activity and those who are simply involved in a failed company.  We are committed to helping honest and diligent entrepreneurs who drive Australia’s productivity, but we won’t tolerate those who misuse the corporate form, to defeat creditors and rip off all Australians. Continue reading »

Sep 132017
 

Phoenix

Media release, the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, 12 September 2017:

The Turnbull Government is taking action to crack down on illegal phoenixing activity that costs the economy up to $3.2 billion per year to ensure those involved face tougher penalties, the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced today.

Phoenixing – the stripping and transfer of assets from one company to another by individuals or entities to avoid paying liabilities – has been a problem for successive governments over many decades. It hurts all Australians, including employees, creditors, competing businesses and taxpayers.

The Government’s comprehensive package of reforms will include the introduction of a Director Identification Number (DIN) and a range of other measures to both deter and penalise phoenix activity.

The DIN will identify directors with a unique number, but it will be much more than just a number. The DIN will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people.

In addition to the DIN, the Government will consult on implementing a range of other measures to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers. These include: Continue reading »

Tax Office loses High Court appeal in test case regarding liquidators’ tax obligations

 Capital Gains Tax, Corporate Insolvency, Priority Debts, Returns, Tax liabilities, Taxation Issues  Comments Off on Tax Office loses High Court appeal in test case regarding liquidators’ tax obligations
Dec 102015
 

A High Court decision was been delivered today (10/12/2015)  in the long-running test case of the Commissioner of Taxation v Australian Building Systems Pty Ltd. The following is the summary of the judgment published by the High Court. (The full judgment will be found HERE.)


 

H I G H C O U R T O F A U S T R ALI A

COMMISSIONER OF TAXATION v AUSTRALIAN BUILDING SYSTEMS PTY LTD (IN LIQUIDATION); COMMISSIONER OF TAXATION v MULLER AND DUNN AS LIQUIDATORS OF AUSTRALIAN BUILDING SYSTEMS PTY LTD (IN LIQUIDATION) [2015] HCA 48

Today the High Court, by majority, dismissed appeals from the Full Court of the Federal Court of Australia. The High Court held that the retention obligation (as defined below) imposed on agents and trustees by s 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) only arises after the making of an assessment or deemed assessment in respect of the income, profits or gains. 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

Jul 062015
 

(6 July 2015) From 1 July 2015 the Australian Government’s Department of Employment will accept applications from liquidators for funding under its Fair Entitlements Guarantee programme.  The following is a copy of the FACT  SHEET for the Fair Entitlements Guarantee Recovery Programme.


FEG logo

A division of the Australian Government Department of Employment

Fair Entitlements Guarantee Recovery Programme

This fact sheet provides information for liquidators about the Fair Entitlements Guarantee (FEG) Recovery Programme which aims to improve the recovery of employment entitlements advanced under FEG.

The FEG Recovery Programme

FEG provides financial assistance for unpaid employment entitlements to eligible employees who have lost their jobs due to the liquidation or bankruptcy of their employers. Once entitlements are paid under FEG, the Commonwealth stands in the shoes of the employee as a subrogated creditor and is entitled to claim in the liquidation and is given priority over other unsecured creditors under the Corporations Act 2001 (Cth).

The FEG Recovery Programme is administered by the Department of Employment (‘Department’) with the purpose of funding actions that will improve recovery of amounts advanced under FEG.

Under the FEG Recovery Programme funding may be provided to liquidators to enable recovery efforts, including legal proceedings, which the liquidators would not otherwise have the financial resources to pursue.

How to apply

Actions that the Department may consider funding include, but are not limited to:

  • voidable transaction claims, such as unfair preferences and uncommercial transactions;
  • insolvent trading claims;
  • transactions entered into with the intention to avoid employment entitlements; and
  • claims against receivers and secured creditors for failure to pay employment entitlements.

Liquidators of insolvent entities where employment entitlements have been paid under FEG can apply for funding assistance where:

  •  they are aware of one or more claims that might be brought, on behalf of the company, against any person or persons; and
  • those claims have reasonable prospects of success and, if successfully prosecuted, will result in the company recovering property that will improve the return for employment entitlements.

Applications for funding assistance can be made by completing the Funding Application Form available on the FEG website and returning:

  •  by email to: FEGRecovery@employment.gov.au
  •  by post to: Fair Entitlements Guarantee Branch Department of Employment GPO Box 9880 CANBERRA ACT 2601

Considerations

When determining whether to provide funding, the Department will have regard to:

  •  the merits, prospects of success and risks of the proposed action;
  • the complexity of the proposed action and its likely duration;
  • the total costs that are likely to be incurred, compared to the admitted value of the Department’s proof of debt and the scope for improved recovery;
  • the availability of favourable evidence;
  • whether the proposed defendant or defendants have sufficient assets to satisfy an adverse judgment; and
  • whether sufficient information has been provided, as part of the initial application or in response to a request for further information, to enable the Department to make its funding decision.

If your application is accepted, you will be required to enter into a funding agreement with the Department. The funding agreement will govern what the Department will pay for and how monies recovered are to be applied.

A draft of the funding agreement will be provided to you if your application is accepted. The Department will not be liable to pay any amounts until the funding agreement has been executed and will only provide funding in accordance with the funding agreement.

Want more information?

You can contact the FEG Hotline if you would like more information about the FEG Recovery Programme:

If you speak a language other than English, call the Translating and Interpreting Service (TIS) on 13 14 50 for free help anytime.

Further information about FEG is also available on the FEG website (www.employment.gov.au/FEG).

The information contained in this fact sheet is not legal advice. Where necessary, you should seek your own independent legal advice relevant to your particular circumstances. The Commonwealth is not liable for any loss resulting from any action taken or reliance made by you on the information contained in this factsheet.     Updated: June 2015


 

Jun 192015
 

(19/6/2015) A lively public hearing before the Senate Committee looking into insolvency in the Australian construction industry has been told by several speakers that sub-contractors should be protected by requiring head contractors to place money in trust funds. The Committee also heard about debt collection methods, outlaw bikie gangs and new allegations concerning events leading up to the collapse of Walton Construction in October 2013.

Those appearing before the Committee on 12 June 2015 included Mr Dave Noonan, National Secretary of the Construction and General Division, Construction, Forestry, Mining and Energy Union (CFMEU), representatives of the Subcontractors Alliance, Project Resources, Masonry Contractors Association of NSW, EcoClassic Group Pty Ltd and Erincole Building Services Pty Ltd.

MORE TO COME: At the close of the day Senator Cameron said: “Chair, there might be other issues once we have a look at the Hansard. We might need to get some of this group back again further on. This inquiry is going to run for a bit of time yet, so we will need to have a look, see what you said and come back.”

The official Hansard transcript of the hearing on 12 June 2015 was recently published on the Parliament’s website. A PDF copy of the 56 page transcript may be downloaded from that site by clicking here.

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

Mar 252015
 

The Final Report on the review of Australia’s Personal Property Securities Act (PPSA) was tabled before Parliament on 18 March 2015.  (It was written by Bruce Whittaker, Partner, Ashurst.)

PPSA-final-report-cover

Cover of report

Extracts from Executive Summary

…. The Personal Property Securities Act 2009 (referred to in this report as the Act) has improved consistency in Australia’s secured transactions laws, but submissions emphasised that the Act and the Register are far too complex and that their meaning is often unclear, and that the resultant uncertainty has not allowed the Act to reach its potential…. …. Much can be done to improve the Act. The Act is significantly longer than the corresponding legislation in other jurisdictions, and while some of that additional length is attributable to constitutional or other machinery provisions, much of it flows from the very prescriptive nature of some of the drafting, and from the inclusion of additional provisions that may be of only marginal benefit…. …. There is no one single step that by itself will produce a major improvement to the Act. Rather, improvement needs to come from the making of many small changes…. …. The reforms introduced by the Act will only realise their objectives if the people that it affects are aware of it, and understand how it affects them. Government went to considerable efforts to raise awareness of the Act around the time that the Act was passed, but general awareness of the Act appears to have remained low, and the complexity and unfamiliarity of the content of the Act have meant that many do not know how to work with it….

Recommendations

There are 394 recommendations in the Final Report.  They appear in a table  in Annexure E, beginning at page 502 of the report.  DOWNLOAD: The full report is available for download at this AG department website.

Non-compliance with the Act

As someone who believes that our laws must be drafted using plain writing skills, and as one of those who felt strongly and said from the start that the  Personal Properties Securities Act 2009 was far too complex and confusing for the vast majority of people to understand (and hence, badly written), the Report’s comments to this effect are worth repeating here.  They appear under the heading  “3.2.3  Causes of non-compliance with the Act”:

The lack of awareness and understanding of the Act among users is also the primary reason why businesses are failing to comply with it. A person who is not aware of the existence of the Act, or of the fact that it could apply to them, is most unlikely to be operating in a manner that is consistent with the rules set out in the Act, particularly as those rules are very different in some critical respects to the laws that preceded them. Similarly, even people who are aware of the Act and of the fact that it affects them are often failing to comply with its rules because they do not understand those rules properly. One submission from the rural sector observed, for example, that the Act:

has not achieved a clear and appropriate outcome for small business; rather it has created a raft of uncertainty, misrepresentation and total confusion for all small business operators in Rural Australia.

The extracts from submissions that are set out above in Section 3.1.2 all make the same point: that the Act and the Register are far too complex. This was a consistent theme across the submissions as a whole.

The Act deals with a complex area of the law – one that traverses our entire economy, and that manifests itself in different sectors of the economy in very many different ways. The area does not lend itself to one simple set of rules, and the Act will always be complex. The submissions demonstrated, however, that the Act is more complex than it needs to be. In my view, a number of factors have contributed to this outcome.

First, as noted earlier, many of the concepts and much of the terminology in the Act have been adopted from overseas models. Those models were not created in a legal vacuum, but were founded in and based on the substance of the legal systems for which they were developed. In particular, while Article 9 of the Uniform Commercial Code in the United States was regarded as revolutionary in the way that it created a standard set of rules for all types of security interests, it was also very much a creature of the state of law and commercial practice in the United States at the time it was developed. Clearly, the economic structures and legal systems in Australia in the early 21st century are very different to those that prevailed in the United States in the middle of the previous century. As a result, terminology and concepts that made sense and were relevant for Article 9 as part of United States law will not necessarily make the same sense, or have the same relevance, in the Act as a component of current Australian law.

Secondly, it appears that the architects of the Act may have tried too hard to be helpful. The Act is far longer than its Canadian and New Zealand counterparts, even allowing for the additional provisions that were included to accommodate constitutional and other machinery requirements. The developers of the Act appear to have endeavoured to produce a “best of breed” piece of personal property securities legislation, by picking out the best elements of the offshore models and then adding additional detail in an effort to explain more clearly exactly what is required. Rather than helping Australian businesses, however, this had the effect of creating very specific and detailed operational requirements. It limited flexibility and required changes to operating practices in order to align them with the structures required by the new rules.

The third main factor that has led to this situation, in my view, is that the development of the Act appears to have been approached as a design process, too divorced from the realities of the marketplace that it was designed for. While Government did provide the business and legal community with opportunities to comment on drafts of the legislation, the sense of many of those who were involved in the consultation process was that input from the business and legal community was not sufficiently incorporated into the policy design and the detailed drafting. As a result, there is a misalignment in some areas between the policy and drafting of the Act on the one hand, and the operating realities of the Australian business environment on the other. This has created confusion and uncertainty, rather than clarity and certainty.

This is not intended to reflect adversely on the individuals involved in the actual drafting of the Act, or those who instructed them. Rather, it is a reflection of the magnitude and complexity of the task.

Whatever the reasons for the confusions and complexities in the Act, they have made the Act very hard to understand and to work with, not just for businesses but even for legal specialists as well. This is exacerbated by the fact that the complexities compound each other – unfamiliar terms and uncertain concepts are used in complex provisions, in a way that can make it even more difficult to determine how those complex provisions inter-relate with each other. The cumulative effect is that the Act can be very difficult to understand and to work with.

It is clear that much can and should be done to streamline the Act, and to align it more closely with the realities of the marketplace that it applies to. That is the subject of Chapters 4 to 9 of this report.

The big challenge for amendments to the Act that are made as a result of the Final Report is that they make the Act and its practical application much easier to understand.

Sep 032014
 

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

ARITA submission Part 1

ARITA-exec-summary-part2

ARITA-exec-summary-part3

 

Aug 292014
 

Background

In the brief External Administration section of its Interim Report in July 2014 the Financial Systems Inquiry (FSI) aired criticisms of Australia’s external administration regime as it applies to small and medium companies (SMEs), and sought views from interested parties. (See my previous blog on this subject.) Specifically it asked for views on “the costs, benefits and trade-offs of the following policy options or other alternatives: 1. No change to current arrangements. 2. Implement the 2012 proposals to reduce the complexity and cost of external administration for SMEs.” Also, the FSI sought more information in response to the question, “Is there evidence that Australia’s external administration regime causes otherwise viable businesses to fail and, if so, what could be done to address this?” The following is ASIC’s response to these questions, taken from it’s second submission to the FSI  on 26/8/2014:


ASIC logo

 Response by Australian Securities and Investments Commission (ASIC)

(Note: Headings added by author)

CLICK HERE to see copy of full ASIC second-round submission

The anticipated benefits of the 2012 insolvency law reform proposals

(Author’s note: These proposal are in the Insolvency Law Reform Bill 2013 )

Para.468     ASIC welcomes the anticipated benefits of the Australian Government’s 2012 insolvency law reform proposals, which largely aim to harmonise and align the systems of corporate and personal insolvency by introducing: (a) a streamlined model for winding up or restructuring small- and medium-sized enterprises; and (b) a review of current external administration options for restructuring large and complex, financially distressed companies to consider whether Australia could adopt attributes of external administration processes in other jurisdictions to achieve better outcomes.

Para.469     However, we note that these proposals do not fully address the issue of perceived complexity in Australia’s insolvency regime, or the issue of the costs of the regime. The law reform proposals arose out of the 2010 Senate inquiry into the conduct of insolvency practitioners and ASIC’s involvement. The 2010 Senate Inquiry’s terms of reference reflected concerns about registered liquidator conduct and ASIC’s supervision of registered liquidators, rather than more fundamental policy issues.

Para.470      The vast majority of external administrations occur in the small- and medium-sized enterprise market. For these companies, the opportunity exists to consider how the winding up and restructuring processes might be further streamlined to reduce complexity and costs. Initiatives to reduce costs while appropriately remunerating registered liquidators for their work, increasing competition and ensuring consistency in external administration processes would also help maximise the potential return to creditors and help build confidence in the insolvency regime.

Alternative funding models and professional standards

Para.471     ASIC suggests that in considering how the external administration process can be streamlined for small- and medium-sized enterprises, consideration should be given to: (a) alternative funding models, as discussed in ASIC’s main submission to this inquiry and which are the subject of recommendations made by the Senate inquiry into the performance of the Australian Securities and Investments Commission. The funding model affects, among other things, the supervision of registered liquidators and, potentially, their remuneration; and (b) professional standards and regulation, including those relating to investigation and reporting to creditors and to ASIC.

External administration regime and business failure

Para.472     ASIC is not aware of empirical evidence supporting the view that Australia’s external administration regime causes otherwise viable businesses to fail. If empirical evidence supporting the contention that viable companies unnecessarily enter external administration does exist, ASIC believes the Australian Government could consider legislative change that would address this, and that would achieve better outcomes for creditors.

Damage to entity value

Para.473     We are aware, however, of concerns in the market that unnecessary external administrations, which destroy entity value and result in significant cost, are the result of: (a) a lack of a ‘safe harbour’ from what are said to be stringent insolvent trading laws (which can make a director personally liable for a company’s debts); and (b) the positive obligation/duty on directors to appoint an external administrator if their company is insolvent, or might become insolvent.

Para.474     We acknowledge the possibility that the formal appointment of an external administrator can also reduce the value of a company’s business, and note that there is anecdotal evidence to support this view.

Voluntary administration as a ‘quasi liquidation’

Para.475     ASIC’s statistics on voluntary administration and deeds of company arrangement suggest that, for small companies, there is often not a viable business worth saving as many companies that enter voluntary administration end up in liquidation. This is supported by a recent review of 72 sample deeds of company arrangement (85% of which related to what might be described as small company insolvencies). The review found that 72% of these deeds were compromises akin to liquidation and involved no, or very limited, trading on of the business under the deed (although the dividend return paid to creditors was greater than that estimated if an immediate winding up of the company had occurred). In other words, the statistics show that companies often use the restructuring option of voluntary administration as a ‘quasi liquidation’.

Continuation of viable businesses

Para.476      The current insolvency legislation provides for the continuation of a viable business. Where there is a viable business of a company in liquidation, the liquidator has the ability to sell that business. Alternatively, the liquidator can appoint a voluntary administrator to facilitate the company’s restructuring with a view to its continued operation.

Reasons often cited as inhibiting corporate restructuring

Para.477     We note that four main reasons are often cited as inhibiting corporate restructuring in Australia: (a) the perceived stringency of our insolvent trading laws; (b) destruction of value by ipso facto clauses in contracts, which enable creditors to pursue enforcement action or enforce their contractual rights. This issue impacts on the extent of any moratorium on creditor claims during the period of a company’s restructuring; (c) a lack of formal ‘pre-pack sale’ regulation, which allows a sale of the business, or some company assets, to be negotiated prior to the appointment of an external administrator; and (d) the inability to bind third parties.

Para.478      In principle, we consider these matters worthy of further discussion and consultation noting they have proved contentious in the past.

US Chapter 11 style regime

Para.479     In terms of any legislative change, ASIC does not advocate a wholesale adoption of a US Chapter 11 style regime or other processes. However, we note that the US Chapter 11 regime, along with the administration regimes in the United Kingdom and Canada, might be worth examining to identify elements that could address the issues claimed to inhibit effective corporate restructuring in Australia.

Consider different laws for large and small companies

Para.480      We consider that a ‘one size fits all’ approach to the external administration or reorganisation of failed and distressed entities may not be appropriate. The framework for external administration needs to take account of the fact that issues affecting large proprietary and public companies differ from those affecting small- and medium-sized enterprises.

Para.481     Legislative changes to facilitate corporate rehabilitation might therefore consider the different characteristics of large and small companies, and policy settings may need to be specifically tailored for these sectors, in order to promote deregulation, facilitate efficient reallocation of resources and improve competition.