Liquidators’ professional association has new name and new head

 Corporate Insolvency, Industry People, Insolvency practices, Personal Bankruptcy, Practitioners Association (IPAA)  Comments Off on Liquidators’ professional association has new name and new head
Jan 092014
 

It’s been announced today that from January 2014 the Insolvency Practitioners Association of Australia (IPAA) will be known as the Australian Restructuring, Insolvency & Turnaround Association (ARITA), and that from February 2014 the CEO of the association will be John Winter, former head of a professional association of accountants and a person with “an extensive background in media”.

In a notice to members, Denise North, current CEO of IPAA/ARITA, said she was “delighted to report that our new name and brand are now in place” and invited members to visit the association at arita.com.au

ARITA is being described as “the peak professional body in Australia for company liquidators, bankruptcy trustees, lawyers, financiers and academics involved in restructuring, insolvency and turnaround activity. It provides advice and assistance to its members on insolvency law and practice, gives advice to government on law reform, and generally represents the interests of those in the insolvency profession.”

John Winter’s career and specialities are detailed on his LinkedIn page.

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

OR

“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. “

Relationship problems for insolvency practitioners

 ASIC, Checklists and guides, Corporate Insolvency, Ethics, Insolvency practices, Regulation  Comments Off on Relationship problems for insolvency practitioners
Oct 162013
 

Before accepting an appointment as liquidator or administrator of an insolvent company the insolvency practitioner (IP) must evaluate his or her relationships with the company and with those who are involved or have an interest in its affairs. In the following decision chart and accompanying notes I suggest that there are three main steps in the evaluation process.

Step 1 is fairly simple: the task is to ensure that the IP is not prohibited or disqualified from acting by the express laws on disqualification for reason of a specific connection that are contained in the Corporations Act 2001 (the Act), i.e., sections 448C and 532.

Step 2 may be far more difficult. It involves looking out for other relationships which the Act deems to be, prima facie, of interest to creditors of the company (sections 60, 436DA, 449CA and 506A). If such a relationship exists, the IP must evaluate whether the relationship is “relevant”. Unless such a relationship is “trivial”, it will be “relevant”.

If the IP is of the view that there are no relevant relationship, he or she may accept appointment. (His or her view that there are no relevant relationships must be declared in writing in the Declaration of Relevant Relationships presented to creditors (section 60)).

Step 3 in the evaluation process is required if the IP considers that there is a relevant relationship. Relevant relationships need to be evaluated to see whether they give rise to, or are likely to give rise to, a conflict of interest or a conflict of duty for the IP in the performance of his or her obligations. This is a complex issue, which is expanded upon in Note 3.

If the IP forms the view that because of a relevant relationship he or she has or is likely to have a conflict of interest or a conflict of duty, he or she must decline to take the appointment.

On the other hand, if the IP’s view is that there is no such conflict, the IP must – in the written Declaration of Relevant Relationships – give details of the relationship and explain why he or she believes that it does not and will not give rise to a conflict of interest or a conflict of duty.

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Changes to code of conduct for liquidators and trustees

 Checklists and guides, Corporate Insolvency, Ethics, Insolvency practices, Personal Bankruptcy, Regulation, Standards  Comments Off on Changes to code of conduct for liquidators and trustees
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.

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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.

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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:

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

Fawlty 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

(c) is not signed by all appointees.

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)

New regime for publication of insolvency notices

 ASIC, Corporate Insolvency, Insolvency Notices, Insolvency practices, Regulation  Comments Off on New regime for publication of insolvency notices
Jun 262012
 

From 1 July 2012 most insolvency notices issued by Australian registered liquidators will be published on a new website set up by the Australian Securities and Investments Commission (ASIC).

This largely replaces the existing age-old system under which notices were published in classified advertisements in newspapers and in the Federal Government’s business gazette.

Just ahead of the start of the new system and the launch of the ASIC’s special website, the ASIC has sent three documents to liquidators explaining the change:

  • “Getting started on ASIC’s new website for insolvency and other matters.” To read and/or copy CLICK HERE.

  • “Updated fact sheet for Registered Liquidators – 26/6/2012: Lodging notices for publication on the ASIC’s website.”  To read and/or copy CLICK HERE.

  • “Fact sheet – Proposed changes to publish notices electronically.”  To read and/or copy CLICK HERE.

The types of notices that must be sent to the new ASIC website are :

1. notices of winding up applications
2. notices relating to appointments
3. notices of meetings of creditors
4. notices of intention to disclaim property
5. notices calling for proofs of debt and intention to declare dividends
6. company deregistration.

Anyone will be able to search the new website free of charge for a particular notice.  The enquiry/search parameters will be:

* company name.
* trading name.
* appointment type (eg court liquidation, voluntary administration etc)
* notice purpose (eg meeting of creditors, appointment, declaration of dividend, disclaimer etc).
* publication date.

The ASIC expects to introduce more advanced search functionality after 1 July 2012.

Laws governing insolvency practitioners to change

 ASIC, Corporate Insolvency, Insolvency Law, Regulation  Comments Off on Laws governing insolvency practitioners to change
Dec 152011
 

On 14 December 2011 a new paper proposing changes to laws governing Australia’s insolvency practitioners was released by the departments of the Treasurer and the Attorney-General.  The paper’s introduction describes the intention and aims of the changes:

“The reforms are intended to improve value for money for recipients of insolvency services and to address cases of misconduct in the insolvency profession …. The reforms are aimed at ensuring the framework for insolvency practitioners promotes a high level of professionalism and competence by practitioners; promotes market competition on price and quality; provides for increased efficiency in insolvency administration; and enhances communication and transparency between stakeholders.”

The paper provides the following overview of the proposals:

  1. Reforms to the standards of entry into the insolvency profession are proposed to improve the balance between the need to protect consumers of insolvency services with the need for a competitive market that provides the best opportunity for maximising returns to creditors. 

  2. The qualification and experience requirements for insolvency practitioners would be aligned across the personal and corporate regimes. The requirements would include a prescribed level of formal studies in insolvency administration, adequate insurance cover, a fit and proper person test, and the requirement that the person has not been convicted of an offence involving fraud and dishonesty in the past 10 years.

  3. The framework for standards of entry would also be adjusted to allow conditions to be placed upon insolvency practitioners. This would include conditions on the registration of a particular practitioner and industry‑wide conditions. Standard conditions would be able to be imposed in relation to continuing education, quality assurance or review programs, insurance, complaint handling, residency, and inactive practice.

  4. The registration of practitioners would be aligned in a manner similar to the current personal insolvency process. Applications for registration would be determined by Committees composed of a regulator representative, an industry representative and a third person selected from a panel appointed by the Minister. Practitioners would be required to renew their registration every three years. 

  5. Reforms to remuneration arrangements are also proposed, including mandated caps on prospective fee approvals; restrictions on payments of disbursements to related entities; amendments to minimum fee entitlements; and the introduction of mechanisms for independent investigations into costs for corporate insolvency. Given recent substantial changes to remuneration arrangements in personal insolvency, there would be limited amendments to the rules regarding practitioner remuneration as part of this package.

  6. Significant communication and monitoring reforms are proposed to better empower creditors to monitor administrations and obtain information from practitioners. The laws governing committees of inspection would be aligned and consolidated, with committees of inspection being given expanded functions and rights. Creditors would have improved abilities to make reasonable requests for information; to set reporting requirements and to require meetings to be convened. Changes would also be made to allow resolutions to be passed without meetings in order to streamline the operation of administrations and reduce costs.

  7. Funds handling and record keeping rules would be aligned and made more efficient. Rules regarding the audit of accounts would be reformed and the ability of the regulators to appoint a person to audit the financial statements of an insolvency administration would be aligned. Mechanisms to enable third party reviews by insolvency practitioners of corporate administrations would also be introduced.

  8. Insurance rules would be revised and penalties for not taking out appropriate cover significantly increased. A practitioner would be required to take all reasonable steps to maintain adequate and appropriate professional indemnity insurance and adequate and appropriate fidelity insurance, with an increase in the offence from 5 penalty units ($550) to up to 1000 penalty units ($110,000) for a breach of this duty.

  9. There would be significant reforms to discipline and deregistration mechanisms. The regulators would be empowered to take direct action in relation to certain breaches. Liquidators would no longer be subject to the Companies Auditors and Liquidators Disciplinary Board’s (CALDB’s) jurisdiction. Personal and corporate insolvency practitioners would be subject to Committees modelled on the current personal insolvency disciplinary mechanisms, with an expansion in Committees’ powers. Recognised professional bodies would be able to make referrals to the Committee in the same way as regulators.

  10. Reforms are also proposed to provide creditors with powers regarding the removal and replacement of insolvency practitioners. Creditors would be given the power to remove practitioners by resolution, subject to protections against actions that amount to an improper use of the power. Amendments would provide for the efficient transfer of records from outgoing to incoming practitioners.

  11. Regulators’ powers would be amended in relation to information gathering, information provision to stakeholders, and their ability to require meetings to be called. The ability of the regulators to gather information would be clarified and enhanced. The reforms would facilitate cooperative arrangements between the personal insolvency regulator and corporate insolvency regulator. Mechanisms would be introduced to ensure transparency in relation to regulator resourcing, the levels of complaints and referrals, regulator activity and regulatory outcomes.

  12. Specific reforms are also proposed to ensure that the insolvency framework works for small businesses. It is proposed that reforms would be introduced to ensure compliance by directors with filing and record provision obligations; allow practitioners to assign causes of action; facilitate greater co‑operation between the Australian Securities and Investments Commission (ASIC) and the Insolvency and Trustee Service Australia (ITSA) on connected insolvencies; and improve the utilisation of the existing Assetless Administration Fund (AA Fund).

  13. The Government’s 2010 Corporate Insolvency Reform Package has also been revised to ensure it is consistent and complements the proposed reforms set out in the Proposals Paper.

 The paper – titled ‘A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia’ –  may be viewed and downloaded from the following links: 

Interested parties have been invited to comment on the paper by 3 February 2012.  Written submissions are to be sent to:

The Manager
Governance and Insolvency Unit
Corporations and Capital Markets Division
The Treasury
Langton Crescent
PARKES ACT 2600
Email: insolvency@treasury.gov.au

Phone enquiries may be made by calling Alix Gallo on (02) 6263 2870.

When should liquidators apply to court for approval and directions?

 Checklists and guides, Industry People, Insolvency practices, Legal opinion, Regulation  Comments Off on When should liquidators apply to court for approval and directions?
Sep 212011
 

 Michael J Galvin, barrister and insolvency law expert from Melbourne, has kindly contributed the following article for insolvency practitioners on applications for Court approval and directions, and the powers of administrators and liquidators.

 

 Applications for Court approval and directions

In addition to cases where liquidators and administrators are obliged to seek directions (see later in this paper), there are many circumstances where it may be thought desirable to apply for Court approval.  

This will be so where the liquidator or the administrator is uncertain as to the course he or she should adopt in relation to a matter (e.g. Re Mento Developments (2009) 73 ACSR 622).  It is particularly so where it is anticipated that a decision is likely to be controversial or where there is likely to be a complaint about a transaction which a liquidator or administrator proposes entering into, or has entered into (e.g. see Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) 79 ACSR 373; Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111).

Section 479(4) of the Corporations Act 2001 provides that a liquidator may apply to the Court for directions regarding any matter arising in the winding up.  Section 511 makes similar provision for liquidators in creditors’ voluntary windings up, including liquidations which have ensued from a voluntary administration. Whilst they are expressed in different terms, it has been held that there is no material difference between the provisions.

Section 447D gives the Court power to give directions to administrators, and deed administrators, about matters arising in connection with the performance or exercise of their functions and powers.

Sections 479(4), 511 and 447D have a common pedigree.  The history of s 479(4) and its relationship to applications by trustees (particularly of deceased estates) for judicial advice were considered in detail by McClelland J. in GB Nathan & Co Pty Ltd (in liq) (1991) 24674 (see also Macedonian Orthodox Community Church St Petka Inc (2008) 249 ALR 250; see also Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111 (Mansfield, Besanko and Flick JJ).

The primary purpose of the court’s power to give judicial advice is the protection of those appointed by the Court to administer estates from allegations that they have acted improperly (Southern Cross Airlines Holdings Ltd (1998) 1 Qd R 84 at 93).  It is also aimed at protecting the interests of trusts (Macedonian Orthodox Community Church St Petka Inc at [71] & [72]).

That is not to say that the court will grant a direction or approval whenever sought (Southern Cross Airlines Holdings Ltd at 92).  It is important that the proposed direction:

  • relates to the manner in which the liquidator should act in carrying out the liquidator’s functions; and
  • will not adversely affect the legal rights or interests of other persons (or allow the liquidator to do so with impunity) (Southern Cross Airlines Holdings Ltd at 92).

However, an application for directions may be readily converted to an adversarial proceeding where the circumstances warrant it (Re Mento Developments (2009) 73 ACSR 622).

The power to give judicial advice extends to whether or not a liquidator is justified in prosecuting or defending proceedings (particularly having regard to the associated costs of doing so) (Macedonian Orthodox Community Church St Petka Inc at [71] & [72]).

The court may exercise its power to give judicial advice even with respect to and the liquidator’s proposal to enter into a commercial arrangement (Re Timbercorp Securities Ltd (in liq) (2009) 74 ACSR 626).

Further:

A liquidator is entitled to seek directions on the administration of the winding up even though the issue about which he seeks a direction may be or become an adversarial issue in other proceedings;

The direction or advice is to be directed to advising the liquidator on whether or not he or she is justified in conduct and winding up in a certain way and not deciding disputes between competing parties;

The direction or advice should not seek to resolve an issue between competing parties, but the fact that the advice may tend to foreclose an issue in other disputed proceedings is not of special significance in the court exercising its discretion to give private advice to the liquidator; and

Where a liquidator seeks advice on an issue which may be contested between competing parties, the court should be alert to not going further than is necessary to give the advice sought (Re Mento Developments (2009) 73 ACSR 622 at [49]).

It is common, for the applicant liquidator to nominate willing parties to act as contradictors in the proceeding. These are usually persons, such as creditors or classes of creditors, who have an interest in the outcome of the application. The identification of such persons is helpful because they are usually able to promote counter arguments that assist the Court in resolving the relevant issue or issues. The costs of such persons are usually agreed in advance to be met out of the assets of the liquidation.

Opinions differ as to the appropriate wording of a direction. Some judges prefer to give a direction that a liquidator is “justified” in taking a particular action. Others prefer to direct that the liquidator would be acting “reasonable” were he or she to adopt a particular course.

As to the equivalent law governing trustees in bankruptcy, see Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111.

 When is Court/creditor approval required

A. Liquidators

As to liquidators’ powers generally, see s 477 Corporations Act 2001.

Liquidators are prohibited from doing any of the following unless they have the approval of the Court (Federal or Supreme), the approval of the committee of inspection (if there is one) or a resolution of creditors:

  • compromise a debt due to the company which is greater than $100,000 (s 477(2A));
  • enter into an agreement on the company’s behalf (such as a lease or a charge) which may remain on foot or involve the performance of obligations beyond three months from the date of the agreement (s 477(2B)).

Quaere whether settlement of a claim against a director for insolvent trading, which according to the terms of s 459M is a debt due to the company, requires Court or creditor approval.

A liquidator in a creditors’ voluntary winding up is prohibited from doing any of the following without the leave of the Court, unless and until the initial meeting of creditors under s 497 has been held:

  • pay any class of creditors in full (subjection to s 556) (ss 477(4) and 477(l)(b);
  • compromise or make any arrangement with creditors, or persons claiming to be creditors, of the company, or whereby the company may be rendered liable (s 477(4) and s 477(l)(c)); and
  • do anything necessary for the winding up of the company and distributing its property (ss 477(4) and 477(2)(m)).

The exercise by a liquidator of the powers conferred by s 477 is always subject to the control of the Court. Any creditor or contributory, or ASIC, may apply to the Court with respect to any exercise, or proposed exercise, of any of those powers (s 477(6); note also the power of the Court to review the actions, decisions and omissions of liquidators under s 1321).

A liquidator must have regard to any directions given by resolution of the creditors or by the committee of inspection. A direction by the former will override a direction by the latter (s 479(1)). The liquidator may convene meetings of creditors to ascertain their wishes, and is obliged to convene a meeting if required to do so by creditors having one tenth of the company’s debt (s 479(4)).

B. Administrators

While a company is under administration, the administrator:

  • has control of the company’s business, property and affairs;
  • may carryon the company’s business and manage its property and affairs;
  • may terminate or dispose of all or part of the business, and may dispose of any of the property; and
  • may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration (s 437A(l)).

The administrator has additional powers:

  • to remove a director from office;
  • to appoint a director;
  • to execute a document, bring or defend proceedings, or do anything else, in the company’s name and on its behalf; and
  • whatever else is necessary to the purposes of part 5.3A (s 442A).

A transfer of shares in a company during administration is void, unless:

  • the administrator has given written and unconditional consent to the transfer;
  • the administrator gives written consent and any conditions have been satisfied; or
  • the Court authorises the transfer (s 437F(1)).

An administrator’s consent to a transfer of shares is subject to review by the Court (s 437F(5) and (6). The Court will only authorise the transfer under s 437F(l)(c) if it is satisfied the transfer is in the best interests of the company’s creditors as a whole.

An administrator is prohibited from disposing of property subject to a charge, or property used by the company but owned by someone else (e.g. property leased by the company), unless:

  • the disposal is in the ordinary course of business;
  • the charge or owner consents; or
  • the administrator obtains the leave of the Court (s 442C).

The Court will only grant leave if it is satisfied that the chargee’s or owner’s rights are adequately protected (s 442C(3».

As in the case of liquidators, the actions, decisions and omissions of administrators, and deed administrators, are subjection to review by the Court (s 1321).

Author: Michael J Galvin 5 September 2011

Michael’s Profile

 From the date of his admission in 1989 until commencing the Readers’ Course earlier in 1999, Michael worked with Gadens Lawyers, formerly J M Smith & Emmerton.  He became an associate in 1991 and then a partner in 1994.  He conducted an extensive insolvency practice as a solicitor for ten years advising liquidators, receivers, voluntary administrators, company directors, debtors, creditors, trustees and the Insolvency and Trustee Service Australia.  He appeared in a variety of proceedings as a solicitor advocate including commercial hearings and trials in the Magistrates’, County, Supreme and Federal Courts and public examinations under the Corporations Law and Bankruptcy Act. Michael is co-author of the recently published Butterworth’s loose-leaf service “Bankruptcy Law and Practice”.

Telephone: (03) 9225 8235 Secretary: (03) 9225 6059 Chambers: Lonsdale Chambers, Level 5, 530 Lonsdale Street, Melbourne Vic 3000.  Clerk: Michael Green (03) 9225 7222.

Large majority of insolvency administrators comply

 ASIC, Forms, Insolvency Laws, Insolvency practices, Insolvency Statistics, Practitioners Association (IPAA), Regulation  Comments Off on Large majority of insolvency administrators comply
Jun 162011
 

The Australian Securities and Investments Commission (ASIC) has found that “the large majority” of registered liquidators are complying with their statutory duty to lodge six-monthly accounts of receipts and payments (Companies Form 524) (“financial statements”) in respect of external administrations they are conducting.

In a special compliance program the ASIC analysed its database of approximately 24,800 companies in external administration at March 2010.   It  identified 517 external administrations where a Form 524/financial statement  had been outstanding for a period of more than six  months; and 171 registered liquidators who appeared to be at fault.

Preliminary results of  the program were published  in the December 2010 issue of  “ASIC Insolvency Update – an update for registered liquidators”.  

Final results have just been published in an article by the ASIC  in the June 2011  edition of  “Australian Insolvency Journal”, the journal for members of the Insolvency Practitioners Association of Australia (IPA).  The  article and the chart accompanying it show that:

  • In only 2.1% of external administrations were financial statements by the administrator overdue (517 out of 24,800).
  • In  the 517 identified external administrations:
    •  there were an estimated 2,472 financial statements outstanding;
    • one registered liquidator had more than 800 outstanding financial statements;
    • another registered liquidator had 135 outstanding financial statements;
    • 612 financial statements were lodged as a result of the ASIC  project; and
    • 469 financial statements would be lodged as a result of the project because the external administrators had acknowledged that they had not been lodged.
  • The ASIC wrote to 171 registered liquidators regarding outstanding financial statements. 63% of the liquidators were from small to medium size firms (of 1 to 9 practitioners). 7 registered liquidators  “did not respond (to the ASIC) within the project timeframe”. 
  • The most common reasons for not lodging financial statements were:
    • “inadequate monitoring of internal control systems (including lack of staff supervision);
    • inadequate internal control systems;
    • staff turnover combined with heavy workloads; and
    • incorrect use or delayed implementation of insolvency-based software.”

There are some other findings and explanations reported in the article.  ASIC Commissioner, Michael Dwyer, says: “It was pleasing to see that the large majority of practitioners complied with their obligation to lodge accounts”.

[Undoubtedly the ASIC’s final report will appear in a form available to non-members of the IPA shortly. As soon as a link becomes available I will insert it in this blog.]

Government funding of liquidators: latest figures released

 ASIC, Assetless Administrations Fund, Insolvency Laws, Insolvency Statistics, Offences, Regulation, White collar crime  Comments Off on Government funding of liquidators: latest figures released
Feb 232011
 

Figures just released by the Australian Securities and Investments Commission (ASIC) show that 644 grants totalling over $8.6 million have been paid to liquidators out of the Federal Government’s Assetless Administration Fund (AA Fund) between 19/12/2007 (the first payment) and 21/2/2011.

Creation of the AAFund was announced in October 2005 and officially launched on 22 February 2006.

Liquidators of companies with few or no assets may apply to ASIC for grants to finance preliminary investigations by them into the failure.  Where ASIC is satisfied that enforcement action may result from a liquidator’s investigation and report, it may approve a grant.

Liquidators can seek funding to carry out an investigation and report in circumstances where they believe director bannings may be appropriate; or for other matters; such as where the liquidator believes there is or may be evidence of possible offences or other misconduct in relation to the Corporations Act 2001.

The largest single payment to date is $442,000 in 2009, to a liquidator who received  $739,000 in total in that year .  Most payments have been $8,250.

Click here to see the latest list of grant recipients.   (… to 9 May 2011)

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