liquidators – Page 4 – ░░░ INSOLVENCY INTERFACE

Most reports of director misconduct are shelved

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

Nov 042010

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

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

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

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

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

What the ASIC chart means

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

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

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

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

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

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

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

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

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The ASIC chart

ASIC’s notes to chart

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

ASIC ‘s official summary

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

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

Post-appointment income tax debts of liquidator

Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues Comments Off

Oct 102010

Is it still safe for a liquidator of an insolvent company to assume that no income tax debt has arisen during his or her administration of the company?

Until fairly recently the issue was almost a non-issue, because the Australian Taxation Office (ATO) did not appear to be interested in chasing income tax returns.

But in 2005 the ATO flexed its muscles when it declared (again) – this time through Interpretive Decision 2005/257 – that liquidators are responsible for lodgement of the company’s tax returns up to the date of appointment.

The ATO did, however, relax this rule in response to an outcry from liquidators. See my article on this blog site entitled “Tax Returns: ATO rules relaxed for Liquidators”.

But, importantly, at the same time the ATO pointed out that “liquidators, receivers and administrators … are required to prepare and lodge income tax returns for the period in an income tax year from the date of appointment … (and) … are responsible for accounting for income or profits or gains derived in their capacity as liquidator or receiver or administrator …”

Ordinarily, an insolvent company would have revenue tax losses at the date of the liquidator’s appointment. In most cases these would be available as a tax deduction against any net revenue income made during the liquidation period. But the same may not be true for net capital gains in this period.

It would seem prudent for liquidators to make sure that proper income tax returns are prepared and lodged for the pre-appointment and post-appointment periods. And also to look out for developments in interpretation of the relevant laws.

We have already seen that a liquidator, as a “trustee” for income tax purposes, has a duty under income tax legislation to prepare and lodge tax returns for the period of his or her appointment.

It follows that the ATO will issue a notice of assessment when a return is lodged and, if their is a tax liability arising as a result, will seek to collect that debt.

(Of course, the ATO also has the right to issue a tax assessment – a default assessment – even if a return is not lodged.)

The company (or “incapacitated entity”, as it is often referred to in tax legislation) is liable to pay such a tax debt.

In the winding up the debt would then have to be classified under the priority rules of the corporations legislation. It seems clear to me that it would rank, at least, in the class of “other expenses properly incurred” by the liquidator. This would put it ahead of the liquidator’s remuneration. It may also rank even higher – in fact, at the top – as one of the “expenses properly incurred by a liquidator in preserving, realising or getting in property of the company or in carrying on the company’s business”. (See section 556 of the Corporations Act 2001.)

A liquidator, as a “trustee” under income tax legislation, also has a duty to retain, out of any money received in his or her representative capacity, an amount sufficient to pay any post-appointment income tax debt. See section 254(1)(d) of the ITAA 1936. See also ATO Interpretive decision 2003/506.

Also, a liquidator appears to have a personal liable for the post-appointment tax debt “to the extent of any amount that he/she has retained, or should have retained”. See section 254(1)(e) of the ITAA 1936.

The question of what is the precise meaning and what are the precise ramifications of sections 255 and 254 of the ITAA 1936 has recently caused headaches for government officials and judges. See Income Tax Rulings IT 2544 of June 1989 and IT 2544W of June 2010. See also Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) HCA 54; and Barkworth Olives Management Limited v Deputy Commissioner of Taxation (2010) QCA 80.

Code of conduct for liquidators being revised

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

Sep 302010

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

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

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

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

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

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

Tax Returns: ATO rules relaxed for Liquidators

Returns, Taxation Issues Comments Off

Sep 082010

[This post was updated on 24/3/2014.]

No one likes doing their income tax returns. So company liquidators and receivers must be relieved that the Australian Taxation Office (ATO) has relaxed its requirements for lodgment of returns, even if it is only for periods prior to the date of appointment.

The ATO’s viewpoint (from July 2010) is set out in a web document headed “Information for trustees appointed under the Corporations Act 2001”, specifically under the sub headings “Clearances – liquidators and receivers” (last modified 15/4/2013)and “Clearance notice issued” (last modified 15/4/2013).

See http://www.ato.gov.au/Tax-professionals/Insolvency-practitioners/In-detail/Responsibilities/Information-for-trustees-appointed-under-the-Corporations-Act-2001/?page=2#Clearances___liquidators_and_receivers

and

See http://www.ato.gov.au/Tax-professionals/Insolvency-practitioners/In-detail/Responsibilities/Information-for-trustees-appointed-under-the-Corporations-Act-2001/?page=3#Clearance_notice_issued

Pre-appointment returns

The ATO says that from July 2010 ” … a risk management approach may be adopted by the ATO to determine if lodgment (of outstanding income tax returns, fringe benefit tax returns or outstanding activity statements) is required”.

A risk is defined by the Australia/New Zealand Standard for Risk Management (AS/NZS 4360:2004) as “…the possibility of something happening that impacts on your objectives. It is the chance to either make a gain or a loss. It is measured in terms of likelihood and consequence.”

The ATO states that in making its risk assessment it will have regard to, but will not be limited to, certain factors. Those factors are listed in the text box below.

Of these factors the ATO’s says that they:

” … are intended to ensure that liquidators will only be required to lodge where the circumstances reasonably support that requirement. It is expected that, in many cases, the requirement to lodge income tax returns should not arise.”

The main risk management factors to be used by the ATO in deciding whether pre-appointment returns must be lodged.

The prospect for, and likely size of a dividend being paid to unsecured creditors ;
the likelihood that the return would, if lodged, reveal an increase in the tax liabilities owed to the ATO;
the availability of books and records which would make it possible to prepare the return;
the likelihood that the liquidator’s cost of preparing those returns would be covered by the assets of the liquidated company without resulting in an inordinate adverse impact on other creditors; and
the wider community benefits of having the returns lodged.

For receivers, as distinct from liquidators, the ATO has taken the view that: ” … where a receiver has only partial control of the assets of a company, a clearance can be issued to the receiver without the need to have all income tax returns up to date. If the company is not in liquidation, outstanding returns will be demanded.” Presumably this means that if the receiver has control of all the assets, the ATO will demand outstanding returns but will take a risk management approach if the receiver protests or refuses.

Legal principle

Under income tax legislation the ATO can require a liquidator to prepare and lodge any overdue documents for a company in liquidation, including documents for periods prior to the liquidator’s date of appointment. This statement of principle is restated for the record in document 62547.

Post-appointment returns are required

The document also makes it clear that post-appointment returns are required to be prepared and lodged by liquidators, receivers and administrators:

“Under section 254 of the Income Tax Assessment Act 1936, liquidators, receivers and administrators appointed under Part 5.3A of the Corporations Act 2001 are required to prepare and lodge income tax returns for the period in an income tax year from the date of their appointment. Liquidators, receivers and administrators appointed under Part 5.3A of the Corporations Act 2001, as trustees for tax purposes, are responsible for accounting for income or profits or gains derived in their capacity as liquidator or receiver or administrator appointed under Part 5.3A of the Corporations Act 2001. “

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