receivers – ░░░ INSOLVENCY INTERFACE

Changes to code of conduct for liquidators and trustees

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

Sep 182013

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

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

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

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

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

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

Introduction

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

Disclosure of referrers (6.6)

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

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

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

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

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

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

Disclosure of remuneration pre-appointment (6.13)

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

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

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

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

We have developed a template for use by Practitioners at 23.2.3

Disclosure of basis of and actual disbursements (15.3.2)

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

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

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

• general information on the different classes of disbursements;

• a declaration that the disbursements were necessary and proper;

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

– who the disbursement was paid to;

– what the disbursement was for;

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

– the amount paid; and

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

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

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

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

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

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

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

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

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

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

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

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

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

Identity of directors (20.2)

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

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

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

Joint appointments (20.3)

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

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

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

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

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

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

To see the notice issued by the IPAA click HERE.

Unauthorised amendment of receiver’s BAS gets through ATO

BAS, GST, Insolvency practices, Returns, Taxation Issues Comments Off

Jul 222011

The Australian Taxation Office has been asked to explain how it is possible for a BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended by another entity without authorisation. In the actual case that gave rise to the question, a GST refund of approximately $650,000 was paid out to the receivers as a result of the unauthorised amendment. The case concerned sale of real property by the receivers.

The Tax Institute brought this matter to the ATO’s attention in March 2011 at a meeting of one of the ATO’s community consultation forums, the GST Sub-committee of the National Tax Liaison Group.

Minutes of the Meeting, recently published on the ATO website, are reproduced in full below. It appears that changes to ATO procedures may have already been made.

________________________________________________________

GST Minutes, March 2011

Agenda item 19 – Amendments of BAS lodged by representatives of an incapacitated entity. Issue 13.40 raised by the Tax Institute.

The Taxation Institute requests an explanation as to how it is possible for BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended by another entity. Are there any checks in the BAS lodgment system for these unauthorised amendments to be stopped?

The facts relevant to this issue are that two individuals (partners in an accounting firm) were appointed as receivers and managers to sell certain new residential premises owned by a property developer that had defaulted on its repayments to a bank. The receivers had been appointed by the bank.

At the time of lodging the BAS as representatives of the incapacitated entity, the receivers were not satisfied on the basis of the information made available that they could pay GST under the margin scheme and instead paid GST under the basic rules, in respect of all sales of property. The sales proceeds were all paid to the bank.

After their appointment as receivers concluded, the property developer amended the BAS lodged by the receivers (through the business or tax agent portal). A refund of approximately $650,000 was processed without the ATO apparently doing any verification or other analysis (including as to section105-65 of Schedule 1 to the TAA). That refund was paid into the bank account of the receivers and managers (as this was still current with the ATO). This was the first time the receivers became aware that their BAS had been amended.

The matter now involves an ATO investigation of various issues, including the margin scheme valuation. The only issue for the purpose of this request is whether the ATO has any checks in its systems for such unauthorised amendments.

ATO response

Representatives of insolvent or incapacitated entities must be registered, as identified in section 58-20 of the GST Act. The ATO’s practice is to register representatives under a separate Client Account Centre (CAC), but under the same ABN as the incapacitated entity. This enables transactions attributable to the period of receivership/ administration to be recorded separately to those undertaken by the entity prior to and post the period of receivership/ administration.

Authorised contact persons, as nominated by the representatives, are listed against the separate role for the representative. Although the CAC appears on the account of the incapacitated entity, the representative is effectively treated as a separate entity. As a result, only the authorised person is allowed to lodge GST returns and amendments and make changes affecting the representative’s CAC.

Accordingly, a GST return lodged by a representative of an incapacitated entity should not be amended by a person associated with the incapacitated entity itself where that person is not authorised by the representative.

However, it is possible for someone, even where not authorised, to lodge a GST return or amendment. This could be done, for example, in paper form or through the business portal. Where someone has access to the portal in respect of the relevant ABN, that access is not restricted to specific CACs. It should be noted that the portal is a safe environment; it is password protected and encrypted, however this does not prevent unauthorised action being taken by those with access to the portal. If, for example, a person authorised by the company seeks to lodge an amendment in respect of a period the company was in receivership, the fact that the amendment request is not authorised may by identified by our systems and if so the amendment would not be processed. However, this will not occur in every case. Note that all transactions in the portal are logged; identifying the specific user taking the actions, and thus even if the amendment is processed, the fact the amendment request is unauthorised could later be identified.

The ATO take a risk based approach to reviewing lodgments, including amendments. This includes pre and post issue checks to identify fraudulent behaviour.

In light of the question that has been raised, we are considering whether further steps can be taken to reduce the risk of unauthorised amendments in these circumstances.

Meeting discussion

The ATO acknowledged that the situation as highlighted in the submission can occur on the portal. This issue has initiated action by the ATO to put in place steps to stop unauthorised amendments to BAS especially in these circumstances. The ATO considers this as a risk that requires further investigation and management to mitigate.

It was suggested by members that during the period that an entity was in insolvency, the ATO should incorporate steps to close off the incapacitated entity’s registration. The ATO is exploring ways for locking down those periods when administrators have been appointed or to trigger a review for amendments made to the BAS in those periods. The ATO is investigating the matter and how processes can be changed so that there is no reoccurrence.

The ATO also noted that access to the portal is logged, so unauthorised access in these cases can be identified. The ATO confirmed that if the representative entity has not made the relevant amendment (it has been made without authorisation by the formerly incapacitated entity), the representative entity would not be liable for a penalty if the amendment is a false or misleading statement.

Action item	2011.03.15 Amendments of BAS lodged by representatives of incapacitated entity
Description	The ATO will provide an update out of session or at the next meeting on the progress made to have further controls in place so that BAS cannot be amended for periods in the past when an entity was incapacitated.
Responsibility	ATO
Due date	15 June 2011

Payment Priority for Child Support Debts

Priority Debts Comments Off

Sep 102010

Australia’s Child Support Agency (CSA) is reminding insolvency practitioners of the status of pre-appointment child support deductions.

CAS says that unremitted child support deductions withheld from an employee’s wages by an insolvent employer must be paid ahead of most other debts, whether preferential, secured or unsecured.

It is pointing out that liquidators, receivers, receivers and managers, company administrators and deed administrators are “trustees” as defined in section 4 of the Child Support (Registration and Collection) Act 1988 (the CSRC Act).

The CSRC Act makes trustees liable to pay the child support debt to CSA (Section 50(1)). It also endows such debts with priority over other preferential, secured or unsecured debts (S.50(2)(a)).

CAS says that this section takes precedence over the priority provisions of the Corporations Act 2001 because it is made applicable “notwithstanding any other law of the Commonwealth or any law of a State or Territory”.

Fortunately for insolvency practitioners/trustees the CSRC Act ranks the trustee’s remuneration ahead of the child support debt (S.50(2)(a)). Trustees remuneration is specifically included in the only class of costs granted priority over child support debts, namely “costs, charges or expenses of the administration of the estate or of the winding up of the company that are lawfully payable out of the assets of the estate or of the company”.

Also specifically included in this special class are the “costs of a creditor or other person on whose petition the sequestration order or the winding up order (if any) was made”.

To obtain this priority both the remuneration and the costs of the petitioning creditor must be “lawfully payable out of the assets of the estate or of the company”. Presumably this means that they must satisfy all relevant requirements in the Corporations Act 2001.

According to the Insolvency Practitioners Association of Australia (IPA), CSA is seeing an increase in letters from liquidators claiming, incorrectly, that a child support debt has no priority.

Notice of appointment and clearance from CSA

Although there appears to be no specific law requiring a “trustee” to notify CSA of his or her appointment, it should be done:

where the trustee is aware that a current or former employee or contractor of the company is or has been making child support payments to CSA; and
where there is amongst the company’s records a letter from CSA titled either Schedule of Child Support Deductions or Notice Pursuant to Section 72A.

Even if such circumstances don’t appear to exist but the company has used or is using the services of employees or non-corporate contractors, trustees should – with the possibility of a high priority debt existing – take the precaution of informing CSA of the insolvency appointment and requesting written advice as to whether CSA has anyone on its books for the company.

According to Ms Sue Saunders, Assistant Director of CSA’s Employer Services division, who I spoke to today, CSA is happy to check its records and respond to such requests.

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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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