Insolvency practices – Page 3 – ░░░ INSOLVENCY INTERFACE

More demanded of liquidators in reporting insolvent trading

ASIC, Assetless companies, Checklists and guides, Corporate Insolvency, External administrators, Forms, Insolvency Laws, Insolvency practices, Regulation, White collar crime Comments Off

Jan 142015

UPDATED 16/1/2015

Despite directors receiving official admonishments, detailed instructions and threats about the practice of allowing a company to trade whilst insolvent (see, for example, ASIC Regulatory Guide 217), the curse of insolvent trading seems to be growing.

So, in an attempt to reel it in – or perhaps (for the cynical) to reduce the number of reported cases – the Australian Securities and Investments Commission (ASIC) is putting the onus on liquidators to provide “better” information in their statutory reports.

Background

Where liquidators of insolvent companies become aware that a past or present director or other officer of a company may have committed an offence, they are required to make a formal report to ASIC. Several years ago ASIC came up with a form and guidelines spelling out the information it wanted from liquidators before it would take their allegations of offences any further. This change came with the introduction of an electronic means of lodging reports, but also occurred after ASIC had become fed-up with receiving offence reports considered by its investigators to be almost worthless.

The latest version of this offence report form was released on 18 December 2014. The changes that have been drawn to the attention of liquidators by ASIC concern allegations of insolvent trading. The previous version of the form (July 2008) asked little of liquidators regarding this subject: about all it wanted was a “Yes” or “No” on the availability of documentary evidence. But the new version requires far more.

In the insolvency profession the ASIC form is known as EX01. More technically it is Schedule B of Regulatory Guide 16: Report to ASIC under s422, s438D or s533 of the Corporations Act 2001 or for statistical purposes. (Note: This reporting requirement applies not only to liquidators but also to receivers or managing controllers and voluntary administrators. However for simplicity all these classes of external administrators are referred to collectively in this article as liquidators.)

ex01-embossed

Possible Misconduct – EX01

In EX01 reporting of “insolvent trading” is carried out in the section headed Possible Misconduct.

Here, ASIC asks the liquidator “Are you reporting possible misconduct?”

If the answer is “Yes”, the liquidator is invited to examine Schedule D of ASIC Regulatory Guide 16 to learn “what is likely to constitute a breach of the relevant section, and the evidence needed to prove such a breach”. Schedule D contains over 6,500 words.

There is also a warning “that ASIC may ask you to provide a supplementary report addressing in detail the possible misconduct reported and we may later require further evidence or statements from you for Court purposes”. A description of what is required in the ASIC supplementary report is set out in Schedule C: Supplementary report by receiver or managing controller under s422(2), by voluntary administrator under s438D(2), or by liquidator under s533(2). Schedule C contains about 3,000 words. Liquidators of “assetless companies” are eligible under Regulatory Guide 109 to apply for funding from ASIC for reasonable remuneration and costs in preparing a supplementary report (ASIC form EX03).

If, after considering what is involved in answering “Yes”, the liquidator still thinks the misconduct is worth reporting, or filing a complaint, he or she is directed to the section headed “Criminal Offences”.

Possible Misconduct – Criminal Offences – Insolvent Trading – EX01

Preliminary details of an allegation of insolvent trading – an offence under section 588G(3) of the Corporations Act 2001 – are sought by ASIC in the usual tick-the-box manner.

First the liquidator reports the alleged offence by ticking “Yes” to the following statement:

“In your opinion, one or more directors failed to prevent the company incurring a debt or debts at a time when the director suspected that the company was insolvent or would become insolvent as a result, and the failure to prevent the company incurring the debt(s) was dishonest.”

Having ticked that box, the liquidator is asked “Do you have documentary evidence or other to support your opinion?” and “Are you aware of documentary evidence in the possession of another person that supports this allegation?”

Up to this section the revised form is practically the same as the previous version.

But in the new version, if the liquidator reports a case of insolvent trading and has, or knows of, documentary evidence supporting this conclusion, the liquidator must provide more information by answering several extra questions.

These extra questions concern the period of insolvency, the methods and records used to determine the date of insolvency, the amount of debts incurred, and the reasonable grounds for the director had to suspect insolvency. (The actual questions are set out verbatim below, but the heading are mine.) They are the type of questions that a liquidator, especially one with sufficient funds, ought to consider as a matter of course before reaching an opinion regarding the existence (or non-existence) of insolvent trading.

Effects of changes to insolvent trading sections of EX01

Prior to the recent changes, if ASIC saw a completed EX01 form in which the liquidator had alleged a breach of the insolvent trading laws, and had also answered “yes” to questions about the possession or existence of documentary evidence “or other” to support that opinion, ASIC would have then needed to consider whether to investigate. Its task would likely have entailed obtaining, or trying to obtain, from the liquidator the extra information that is now set out in the latest version of EX01. So, as far as the extra demands in the form are concerned, ASIC would probably argue that liquidators are no greater imposed upon now than they were before.

But regardless of the information ASIC has or could readily obtain, it often decides not to investigate complaints of alleged offences. For many years this inaction has deeply frustrated a lot of liquidators. Many feel that completing an EX01 form is a waste of their time and also, where there are still funds in the insolvent company, a waste of creditors’ money. Unless the revised EX01 results in greater tangible action by ASIC (increased investigations and prosecutions and not just more detailed statistics), making the form more demanding will aggravate these feelings.

It might even see an increase in the non-reporting of insolvent trading offences (see the new question “Reasons for not reporting insolvent trading”), or in “no” being the liquidator’s response when it really should be “yes”.

Extra questions about insolvent trading – new EX01

Period insolvency commenced

Indicate the period, which, in your opinion, the company became unable to pay all its debts as and when they became due and payable:

◻ At appointment ◻ 1 – 3 months prior to appointment ◻ 4 – 9 months prior to appointment ◻ 10 – 15 months prior to appointment ◻ 16 – 24 months prior to appointment ◻ Over 2 years prior to appointment

Method/s of determining date of insolvency

How did you determine the date on which, in your opinion, the company became unable to pay all its debts as and when they became due and payable? (tick one or more):

◻ Cash flow analysis ◻ Trading history analysis ◻ Balance sheet analysis ◻ Informed by director(s) ◻Other, please specify __________________

Records used to determine date of insolvency

Which of the following records, in your possession, did you use to determine the date on which, in your opinion, the company became unable to pay all its debts? (tick one or more):

◻ Cash flow (actual / forecasts / budgets) ◻ Banking records ◻ Aged debtors’ list ◻ Aged creditors’ list ◻ Profit & loss statements ◻ Balance sheets ◻ Other, please specify _______________

Grounds for director to suspect insolvency

If you believe the director had reasonable grounds to suspect the company was insolvent or would become insolvent by incurring the debt (or a reasonable person in a like position would have reason to suspect), please identify on which of the following indicators of insolvency you have based your belief (tick one or more):

◻ Financial statements that disclose a history of serious shortage of working capital, unprofitable trading ◻ Poor or deteriorating cash flow or evidence of dishonoured payments ◻ Difficulties paying debts when they fell due (e.g. evidenced by letters of demand, recovery proceedings, increasing age of accounts payable) ◻ Non-payment of statutory debts (e.g. PAYGW, SGC, GST) ◻ Poor or deteriorating working capital ◻ Increasing difficulties collecting debts ◻ Overdraft and/or other finance facilities at their limit ◻ Evidence of creditors attempting to obtain payment of outstanding debts ◻ Other, please specify ________________

Approximate debt after insolvency

Estimate the approximate amount of debts incurred after the date (in your opinion) of insolvency:

◻ $0 – $250,000 ◻ $250,001 – less than $1 million ◻ $1 million to $5 million ◻ Over $5 million ◻ Unable to determine

Aged list of creditors

Do you have an aged creditors’ list as at (tick one or more):

◻ Date of insolvency ◻ Date of appointment

Dishonesty by director

If the director/directors was dishonest in failing to prevent the company from incurring the debt, indicate what evidence you have available to support this (tick one or more):

◻ Evidence showing that the director/directors had an opportunity to prevent the company from incurring the debt and did not. Such evidence could include: • documents evidencing discussions with the directors, employees and creditors concerning the circumstances surrounding the incurring of particular debts; • correspondence or other documents relating to the circumstances surrounding the incurring of the debt. ◻ Evidence showing that the failure was dishonest (i.e., the director/directors incurred the debt with the knowledge that it would produce adverse consequences, the failure was intentional, wilful or deliberate, and it included an element of deceit or fraud). Such evidence could include: • documents evidencing discussions with the directors, employees and creditors concerning the circumstances surrounding the incurring of particular debts; • correspondence or other documents relating to the circumstances surrounding the incurring of the debt.

Reasons for not reporting insolvent trading

If you did not report insolvent trading (s588(1)-(2) or s588(3)), was it because, in your opinion:

◻ The books and records are insufficient to establish insolvent trading ◻ The company did not incur debts at a time when it was unable to pay its debts (e.g., it ceased to trade) ◻ The directors had reasons to expect the company could pay its debts as they fell due and payable (eg. they obtained independent advice) ◻ Other, please specify ________________

Whether creditor/s are seeking compensation for insolvent trading

Has a creditor commenced, or indicated that they intend to commence, action to recover compensation for loss resulting from insolvent trading?

◻ Yes ◻ No

Possible Misconduct – Breaches of civil obligations – Insolvent Trading – EX01

Insolvent trading may also be a breach of civil penalty sections 588G(1)-(2) of the Act. The revised form EX01 also seeks details of allegations of this nature, by asking about the period of insolvency, the methods and records used to determine the date of insolvency, the amount of debts incurred, and the reasonable grounds for the director had to suspect insolvency. The questions are practically the same as those asked when a criminal offence is alleged (see above). In the previous version of EX01 only three brief questions were posed, which concerned the availability of evidence and the perceived legitimacy of a director’s defence.

ARITA launches its plans for reform of the corporate insolvency recovery system

Corporate Insolvency, Insolvency Law, Insolvency practices, Practitioners Association (ARITA) Comments Off

Oct 222014

” Working at the coal face of insolvency and restructuring, our members have a unique view of the effectiveness of our legislative framework in restoring the economic value of underperforming businesses. For the optimum operation of markets, it’s vital that their expertise is utilised to ensure our legislative framework is the best that it can be.”

This statement from the Australian Restructuring Insolvency and Turnaround Association (ARITA) – the professional body to which most insolvency practitioners belong – accompanies publication (14-10-2014) of its discussion paper on dealing with corporate financial distress in Australia.

ARITA says that its discussion paper – “A Platform for Recovery” – identifies seven current issues in the insolvency regime and proposes law and practice reforms to remedy them. The paper’s Executive Summary is as follows:

ARITA executive summary

The following are further statements made by ARITA on the launch its plans:

“As Australia’s insolvency and recovery professional body, we must have a clear and well-articulated policy position across the full gambit of issues that we cover, that all key stakeholders are aware of. Our new discussion paper … identifies seven current issues in the insolvency regime and proposes law and practice reforms to remedy them. The discussion paper does not go into the detail of specific legislative change, but concentrates on concepts and their merits …. The goal of the discussion paper is to stimulate active and informed discussion of the issues that are raised. This will inform ARITA’s final policy position …. A foundation of our thinking is that the current “one size fits all” approach to dealing with companies in financial distress is flawed.”

A copy of A Platform for Recovery may be viewed and obtained at this location on the ARITA website.

ARITA is inviting contributions to the debate. To go to their discussion forum, go to …. www.arita-forums.com.au

Financial System Inquiry: insolvency practitioners have their say

Corporate Insolvency, Financial System Inquiry, Insolvency practices, Practitioners Association (ARITA) Comments Off

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

ASIC gives FSI a glimpse of its views on external administration regime

ASIC, Corporate Insolvency, Financial System Inquiry, Insolvency Law, Insolvency practices, Official Inquiries, Regulation Comments Off

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:

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.

Financial Systems Inquiry poses questions about insolvency regime

Corporate Insolvency, Insolvency Law, Insolvency practices, Official Inquiries, Personal Bankruptcy, Practitioners Association (ARITA), Regulation Comments Off

Jul 172014

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?

This is the question being asked about external administrations in the Interim Report of the Financial System Inquiry (FSI) (July 2014). The FSI says it would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:

No change to current arrangements.
Implement the 2012 proposals to reduce the complexity and cost of external administration for SMEs. [See below for details of these proposals.]

The brief section of the FSI’s report dealing with external administration may be viewed HERE. (The full report in pdf format is available HERE.)

David Murray, FSI chairman. Artwork from bluenotes.anz.com

US Chapter 11 regime?

Adoption by Australia of a US Chapter 11 style form of external administration could still be an option, although the FSI has already given it the thumbs down, as this extract from its interim report shows:

“The Inquiry considers adopting such a regime would be costly and could leave control in the hands of those who are often the cause of a company’s financial distress. Capital would be maintained in a business that is likely to fail, which would restrict or defer the capital from being channelled to more viable and productive enterprises. Adopting such a regime would also create more uncertainty for creditors by limiting their rights. The Inquiry notes that Chapter 11 has rarely enabled businesses to continue as going concerns in the long term. There is little empirical evidence that Australia’s voluntary administration process is causing otherwise viable businesses to fail. The Inquiry would like stakeholders to provide any empirical evidence that supports that view.”

Second round of submissions to FSI

Submissions in response to the Interim Report are due by 26 August 2014. Submissions can be lodged online using the Financial System Inquiry special facility, or may be lodged by email or post: fsi@fsi.gov.au or Financial System Inquiry, GPO Box 89, Sydney NSW 2001.

Insolvency reform proposals of 2012

The 2012 insolvency reform proposals to which the FSI specifically refers in its request for second round submissions concern:

Registration and discipline of insolvency practitioners (See note 1 at end of post for more information).
Specific rules relating to external administrations (note 2).
Regulator powers and miscellaneous amendments (note 3).

The Explanatory Material issued with the Insolvency Law Reform Bill on 19 December 2012 can be viewed HERE.

“Thought leadership”

The Australian Restructuring Insolvency & Turnaround Association (ARITA) (previously known as the Insolvency Practitioners Association) says it has embarked on “a major project to drive thought leadership around our insolvency regime”. It is asking insolvency practitioners who want to make a submission to FSI to work with the professional association:

“ARITA has embarked on a major project to drive thought leadership around our insolvency regime. Along with some of ARITA’s excellent previous work, significant new work has already been completed and ARITA members will soon be asked for comment on key aspects of our policy positions. This work is, obviously, well timed to support the FSI request for submissions. ARITA will actively work to represent the views of its membership and the profession to the FSI. We would urge all members and their firms to work with ARITA on providing strong and consistent representation to the FSI. If you or your firm is looking at making its own submission, please let ARITA know so that we can collaborate with you.” ARITA Press Release 15/7/2014

NOTES re Proposals in December 2012 Insolvency Reform Bill:

Note 1: Registration and discipline of insolvency practitioners

Common rules regarding: the physical registers of insolvency practitioners; registration and disciplinary Committees.

Note 2: Specific rules relating to external administrations

Common rules regarding: •

Remuneration and other benefits received by the insolvency practitioner;
The handling of administration or estate funds;
The provision of information by insolvency practitioners during an external administration or bankruptcy;
The meetings of creditors during an external administration or bankruptcy;
Committee of inspection formed as part of an external administration or bankruptcy; and
The external review of the administration of an estate or insolvency.

Note 3, part (a): Regulator powers and miscellaneous amendments

Provide ASIC with further powers to assist it in its oversight of the regulation of registered liquidators. In particular, the Bill amends the ASIC Act to:

enable ASIC to require the provision of information and books as part of an ASIC proactive surveillance program;
enable ASIC to provide administration information to a person with a material interest in the information; and
improve the transparency of ASIC oversight of the corporate insolvency industry.

Note 3, part (b): Regulator powers and miscellaneous amendments

Amend the Bankruptcy Act to enable ITSA to provide information relevant to the administration of the corporate law to ASIC.

Note 3, part (c): Regulator powers and miscellaneous amendments

A range of miscellaneous amendments, including:

amending the Acts to strengthen the penalties for breach of a bankrupt’s or directors’ obligations to provide a report as to affairs (RATA), or the books of the company, to an insolvency practitioner;
amend the Corporations Act to provide a process for the automatic disqualification of directors that have failed to provide a RATA, or the books of the company, to a registered liquidator until they have complied with those obligations; and
amend the Acts to enable the assignment of an insolvency practitioner’s statutory rights of actions.

Report on Senate inquiry into ASIC recommends self-rating of director offences in liquidators reports

ASIC, Australian Senate 2013-14, Corporate Insolvency, Insolvency practices, Offences, Official Inquiries, Practitioners Association (ARITA), Practitioners Association (IPAA), Regulation Comments Off

Jun 272014

Recommendation 17 of the Senate Economics References Committee final report (26/6/2014) on the performance of the Australian Securities and Investments Commission (ASIC) is:

“… that ASIC, in collaboration with the Australian Restructuring Insolvency and Turnaround Association and accounting bodies, develop a self-rating system, or similar mechanism, for statutory reports lodged by insolvency practitioners and auditors under the Corporations Act 2001 to assist ASIC identify reports that require the most urgent attention and investigation.” (Page 244, para. 15.66)

Source: Final report of Senate Economics References Committee on Performance of the Australian Securities and Investments Commission, 26/6/2014

Committee’s comments preceding this recommendation

Before making recommendation 17 the Senate Committee’s Report looks at “Reports from industry professionals” including external administrators. It states as follows (note: I’ve removed its footnotes):

External administrators

15.55 The Corporations Act also places an obligation on liquidators, receivers and voluntary administrators (external administrators) to report suspected breaches of the Corporations Act to ASIC….

15.56 Reports made pursuant to these sections are referred to as statutory reports and are an important source of information about possible breaches of the law….

15.57 Liquidators also have the discretion to lodge further reports if, in their opinion, it is desirable to draw the matter to ASIC’s attention.

15.58 In 2012–13, external administrators lodged 9,788 reports with ASIC. Of this number, initial external administrators accounted for 95 per cent or 9,254 reports. ASIC recorded that 81 per cent of the initial reports involved companies with fewer than 20 employees. The construction industry was subject to the highest number of reports accounting for just over 24 per cent. Of the initial external administrators’ reports, receivers lodged one per cent under section 422; administrators lodged 3.8 per cent under section 438D; and 95 per cent of the reports were submitted by liquidators under section 533.

15.59 Importantly, external administrators alleged misconduct in more than two-thirds of reports (6,761) involving an overall possible 16,562 breaches. Although this number accounts for an average of between two and three breaches per report, almost 30 per cent of reports or 2,493 recorded no misconduct. ASIC asked the external administrator to prepare a supplementary section 422, section 438D or section 533 report for 677 of the 6,761 reports that identified possible misconduct. In its analysis of the statistics, ASIC explained that its request for an additional report is a function of its assessment of risk based on a number of factors, including, but not limited to:
*   the nature of the possible misconduct reported;
*   the amount of liabilities;
*   the deficiency suffered;
*   the availability of evidence;
*   prior misconduct; and
*   the advice of the external administrator that the reported possible misconduct warranted further investigation.

15.60 In a 2007 report, the Australian National Audit Office (ANAO) observed that given the large number of statutory reports received by ASIC each year that allege offences against the Corporations Act, it was appropriate that ASIC had systems in place to prioritise its regulatory action, through risk scoring. It found that ASIC’s recording of statutory report information was accurate to a high degree. The ANAO recognised that ASIC could use a wide variety of possible remedies to deal with offences identified in statutory reports or other deficiencies that warranted some sort of regulatory action. They ranged from warning letters to directors for the less serious offences to prosecution and potentially imprisonment for more serious offences. It noted that where ASIC identified that a statutory report raised issues of regulatory significance, it sought further information about the matter from the external administrator.

15.61 According to the ANAO report, ASIC did not always obtain that additional information. Based on its sample, it found that in 40 per cent of instances, ASIC did not obtain additional information that it had requested. The ANAO concluded:

… the small number of statutory reports subject to regulatory action by ASIC each year indicates that there is opportunity for greater regulatory action on these reports.

15.62 Mr David Lombe, President of the Australian Restructuring Insolvency and Turnaround Association (ARITA) was of the view that ANAO’s 2007 findings were still relevant and applicable. He noted the thousands of reports lodged with ASIC each year but not acted upon. In Mr Lombe’s view, there was a ‘general perception within the business community that, if you do certain things at a certain level, there will be no effective review’. He explained further:

“The difficulty that we have as official liquidators is that you get a matter off the court list and often that matter has no funds in it, so there are no available assets. Often that is a process by which directors have deliberately done that—it has been a deliberate course of action. If you report the matter to ASIC and there is no assistance from that space, there is not much you can do. If you felt really aggrieved by it or you felt that it was a matter that was of sufficient importance, you may be able to persuade a firm of solicitors to act on a pro bono basis, but that is very difficult. I found myself in that sort of situation with Babcock & Brown, where I had inadequate funds to be able to pursue a proper investigation. The only thing that was available to me was to ask creditors to fund me, which they did, which then allowed me to do a public examination, which brought out the conduct of directors and other stakeholders in that company. If you do not have funds in a matter, the courses are very limited.”

15.63 By way of example, Mr Lombe expanded on his concerns citing the requirement to lodge a section 533 report, which deals with offences committed by directors. He explained that for the liquidator to understand what has happened, he or she needs to

‘review the books and records, determine the transactions, try to find out what assets are there, look at insolvent trading and look at preference payments and all those sorts of things’.

The liquidator is required to file that report, which takes time. So, according to Mr Lombe, the reports involve both time and money, and often with official liquidations there are no assets at all and, if there are, creditors are effectively paying for the report. He noted that thousands of such reports are lodged with ASIC but most of them come back ‘no further action’. In his view, it is frustrating for liquidators because they feel, ‘Why am I bothering to do it?’ Mr Lombe concluded that ‘you can understand someone’s frustration, where they have reported offences and nothing happens’.

15.64 When asked whether liquidators, in their statutory reports, could assist ASIC to distinguish the very serious breaches from the less so, ARITA indicated that it ‘might be a useful reform’. After considering the matter further, ARITA informed the committee that if it were consulted, it could assist ASIC to determine a risk scoring profile. It explained further, however:

“But we consider that the decision on how the information required by s533 is ‘risk-scored’ for action is ultimately one for the regulator and its decision and methods should not be publicly disclosed. For one thing, this would appear to give the ‘green light’ to the commission of certain offences that are deemed not serious enough to warrant action by ASIC.”

15.65 ARITA also stated that ‘a more co-operative approach between ASIC and liquidators should also be pursued’. The committee believes that ASIC and ARITA should work closely together to develop a more effective and efficient reporting mechanism that would assist ASIC to identify the alleged serious breaches from the less so.”

Insolvency Services Standard for public accountants to be strengthened

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

May 282014

Australia’s Accounting Professional and Ethical Standards Board (ASESB) is revising the professional standard that governs accountants in public practice who perform insolvency services.

On 21 May 2014 ASESB issued an exposure draft of the proposed revisions. It is seeking feedback from insolvency accountants and “other stakeholders” by 4 July 2014.

Chairman of ASESB, Stuart Black, says

“The proposed new requirements to (the professional standard) APES 330 will further strengthen the professional requirements applicable to liquidators and administrators and provide a reference for creditors, regulators and other stakeholders to evaluate and monitor practitioner conduct”

The Media Release states that:

“APESB sets the code of ethics and professional standards by which members of Australia’s three major professional accounting bodies (CPA Australia, the Institute of Chartered Accountants Australia and the Institute of Public Accountants) are required to abide.”

Overview of the proposed changes

The exposure draft contains the following list of “significant revisions” to the existing APES 330:

Revision or addition of the following definitions: Administration, Appointment, Approving Body, Contingent Fee, Controller, Firm, Independence, Insolvency Services, Insolvent Debtor, Member, Member in Public Practice, Professional Activity, Professional Bodies, Professional Services, Professional Standards, Referring Entity, and Related Entity;
Removal of the defined terms: Associated Entity, Controlled Entity, and Witness Report;
Extending the scope of the standard to include members’ voluntary liquidations with the exception of having to comply with the Independence requirements of the standard;
Introduction of a requirement to disclose the source of a referral where the Appointment follows a specific referral;
Introduction of a requirement to declare in the DIRRI that no information or advice, beyond that outlined in the DIRRI, was provided;
Use of the term “believing” to clarify that it is the Member in Public Practice’s reasons for believing that the Pre-appointment Advice provided or the relationship disclosed does not result in a conflict of interest or duty;
Extension of the prohibition on providing Pre-appointment Advice to both an insolvent Entity and its directors; to include an Insolvent Debtor and any corporate Entity associated with that individual;
New guidance to encourage disclosure of relationships with Associates of the insolvent Entity that were more than two years prior to the Appointment;
Amendment of the current prohibition of consenting to an Appointment where prior business dealings were held to exclude immaterial dealings, or those business dealings that occurred more than two years prior to the Appointment;
Additional guidance on what is considered a material business relationship;
A new requirement to provide the basis of fee calculations and where relevant the scale
Mandating that where fee estimates are provided that these be provided in writing with explanations of the variables that may affect the estimated fee;
An obligation on the Member in Public Practice to provide details of Expenses that may be charged from the Administration and the basis of how the Expenses will be charged and recovered by the Firm;
Prohibition of Members in Public Practice claiming any pre-appointment disbursements as an Expense;
Requirement for consistency between fees charged and those sought for prospective fee approval;
The scale of rates used to calculate prospective fees must be that approved by the Approving Body
Where a Member in Public Practice accepts an Appointment with another Member, all Members are equally responsible for all decisions on the Appointment;
Payments received for the costs of an Administration from third parties must be disclosed to the Approving Body and approved (other than in an Appointment as a Controller);
Detailed requirements and guidance on Expert Witness obligations has been replaced by referring Members in Public Practice to APES 215 Forensic Accounting Services; and
New requirements for a Member in Public Practice to use appropriate procedures to ensure statutory timeframes are met in a timely manner.

Deadline for comments

The deadline for stakeholder comments is 4 July 2014. APESB says it welcomes comments from respondents on any matters in the exposure draft (ED 01/14).

Comments should be addressed to:
The Chairman, Accounting Professional & Ethical Standards Board Limited
Level 7, 600 Bourke Street, MELBOURNE, VIC, 3000.

A copy of each submission will be placed on public record on the APESB website. http://www.apesb.org.au/apesb-exposure-drafts-open-for-comment.

Sources and Links

APESB Media Release 21 May 2014

APESB At A Glance, APES 330 Insolvency Services ED, May 2014

Proposed Standard: apes 330 Insolvency Services

Footnote

The Australian Restructuring Insolvency & Turnaround Association (ARITA) also has an extensive Code of Professional Practice. That governs members of ARITA, but has also been accepted by some judges in hearings concerning misconduct as a guide to the professional standards expected of all insolvency practitioners. Accordingly, the changes by the accounting bodies to APES 330 may not make much real difference to practice standards. But of course the accounting bodies must have their own rules in place.

ASIC report seeks more ideas on reducing red tape

ASIC, Corporate Insolvency, Forms, Insolvency practices, Regulation Comments Off

May 232014

Australia’s corporate regulator, the Australian Securities and Investments Commission, estimates that 10 per cent of its 362 statutory forms could be removed, consolidated or streamlined in the name of reducing “red tape”.

This is revealed in Report 391 – ASIC’S deregulatory initiatives, published on 7 May 2014.

Removal

Those forms identified for possible removal include ones which ASIC says are “not required or used regularly by ASIC or the public”. ASIC says that:

A number of the forms identified for removal are currently required to be provided to ASIC under the law, but provide information that might not be necessary for ASIC to hold. Subject to stakeholder comments, we may suggest that these forms be removed through legislative amendment.

Other forms are marked for removal on the basis that:

the “information is available from the company”;
they are “obsolete“; and
they are “Administrative only”.

Forms that may no longer be required in corporate insolvency administration

Below I’ve listed the insolvency forms identified by ASIC for removal because the “information is not used by ASIC” *. (Per Table 1 of Appendix 1 of Report 391.)

Form 540 – Statement in writing of posting of notices of appointment to settle list of contributories – Reg. 5.6.59(2)
Form 545 – Statement in writing of giving notice to persons placed on the list of contributories – Reg.5.6.62(5)
Form 555 – Notice of controller extending time to submit report as to affairs – S.429(4)
Form 558 – Court order extending time to provide report as to affairs – S.429(5)
Form 562 – Notice of liquidator extending time to submit report as to affairs – S.475(7)(b)
Form 911 – Verification or certification of a document – Reg. 1.0.16

* NOTE: The phrase “Information not used by ASIC” used in the Appendix appears to be an abbreviation of the phrase “information not required or used regularly by ASIC or the public”.

Forms that, if removed, could impair corporate insolvency administration

ASIC has marked other forms for possible removal because “the information is available from the company“. But liquidators of small companies – especially “phoenix” companies – frequently find it difficult or impossible to obtain information from the company. So removal of the following forms (or, more precisely, the requirement to lodge them with ASIC) may impair the efficient investigation of insolvent companies:

Form 909 – Notification of office at which registers are kept – Sections 100(1)(d), 172, 271, 1302(4) and 601CZC
Form 991 – Notification of location of books on computer – Sections 1301 and 1301(4) – inspection of books
Form 992 – Notification of change of location of books kept on computer – Sections 1301 and 1301(4) – inspection of books
Form 313 – Notification of address in Australia of information relating to financial records kept outside Australia – Section 289(2) – place where records are kept outside the jurisdiction. (See next heading.)

Cloud computing

In recent years the uptake of cloud computing services by Australian businesses has increased dramatically. One common characteristics of cloud computing is that business books and records are held outside the Australian jurisdiction. Under section 289 of the Corporations Act 2001 “if financial records about particular matters are kept outside the (Australian) jurisdiction, sufficient written information about those matters must be kept in this jurisdiction to enable true and fair financial statements to be prepared (and) the company must give ASIC written notice in the prescribed form of the place where the information is kept”.

The proposed removal of Form 313 shows that this requirement is to be abolished.

Simplification and consolidation

Two form used in corporate insolvency administration are marked for simplification:

Form 529 Notice of meeting: Creditors to consider voluntary winding up
Form 905A Notification of ceasing to act as or change of details of a liquidator.

Ideas and Comments

cut red tape

ASIC is seeking ideas and/or comments to be submitted to it by 18 June 2014. These are to be sent to:

Ashly Hope, Strategic Policy Advisor
Australian Securities and Investments Commission
GPO Box 9827 Melbourne VIC 3001
Email: deregulation@asic.gov.au

Sources and links:

ASIC Media Report 14-099MR “ASIC reports on red tape reduction and invites feedback”, 7 May 2014

Report 391 ASIC’s deregulatory initiatives published 7 May 2014. ASIC says: “This report provides an overview of ASIC’s commitment to reduce compliance costs for our regulated population, including ongoing work and new initiatives. It should be read by all businesses and individuals who are required to comply with laws and regulations administered by ASIC and those who have an interest in engaging with ASIC on our approach to deregulation.”

Employees of 19 abandoned companies rescued by ASIC. Companies named.

ASIC, Corporate Insolvency, Insolvency Law, Insolvency practices, Insolvency Statistics, Phoenix company activity, Regulation, White collar crime Comments Off

May 152014

Since mid-2012, when the Australian Securities and Investments Commission (ASIC) was given the power to wind up companies that met certain criteria, ASIC has ordered the winding up of 19 companies.

In its media releases ASIC has estimated that those 19 companies have over $1.5 million in unpaid employee entitlements (wages, leave, etc.) owing to 100 workers.

As a result of the companies being wound up, those workers will be entitled to claim payment of their entitlements from the Fair Entitlements Guarantee (FEG) scheme administered by the Department of Employment.

The following chart lists the 19 “abandoned companies” wound up by ASIC. They are called “abandoned” because ASIC believes they are no longer carrying on business and that their directors have effectively walked away from them and their debts. abandon-companies

Background:

In July 2012 ASIC was given the power to order the winding up of a company in certain circumstances [Part 5.4C of the Corporations Act 2001] [Section 489EA]. In the lead up to this legislation the phrase “abandoned companies” was coined to describe such companies. Shortly after obtaining these powers ASIC decided that its primary consideration when exercising its discretion would be whether ordering the winding up of a company would facilitate employee access to funds from the government’s General Employee Entitlements Scheme (GEERS), since replaced by the Fair Entitlement Guarantee scheme (FEG). [ASIC Consultation Paper 180]. This objective had been the main reason behind introduction of the new law, which was part of the Gillard Government’s Protecting Workers’ Entitlements package of April 2012. A precondition for an employee of a company receiving a payment from GEERS/FEG is that the company be placed into liquidation.

Links:

ASIC media release 13-233MR “Workers to gain access to entitlements after ASIC employs new powers” 27 August 2013 ASIC media release 14-097MR ” ASIC wind-up actions enable access to employee entitlements” 6 May 2014

Insolvency industry reps quizzed at Senate inquiry into ASIC

ASIC, Australian Senate 2013-14, Corporate Insolvency, Insolvency Law, Insolvency practices, Practitioners Association (IPAA), Prosecution of Liquidators, Regulation, Standards, White collar crime Comments Off

Apr 152014

senate committe report book Four senior representatives of the Australian Restructuring Insolvency and Turnaround Association (ARITA) (formerly (IPAA) gave evidence on 2 April 2014 at the public hearing held by the Senate Economics References Committee which is inquiring into the performance of the Australian Securities and Investments Commission (ASIC).

Although the Senate is inquiring into ASIC, most of the questions faced by the ARITA representatives – and the sometimes lengthy discussions that followed – concerned insolvency administration, law and reconstruction, as well as the insolvency profession itself.

The following extract from the Hansard transcript provides insights into both ARITA’s current views on a range of issues to do with corporate insolvency and the kind of recommendations that the Senate committee might make.

I have split the transcript up by inserting the following subject headings:

ASIC AND ARITA WORKING TOGETHER
PROCESSING OFFENCE REPORTS (S.533 ETC) – FIRST DISCUSSION
ASIC AGENDA FOR INSOLVENCY
SPLITTING UP ASIC OR INTERNAL REFORM?
BUSINESS RESTRUCTURING: ADOPTING U.S. CHAPTER 11 METHOD
WHITE-COLLAR CRIME WITHIN THE INSOLVENCY PROFESSION (ARIFF ETC.)
STATUTORY REPORTS BY LIQUIDATORS REGARDING OFFENCES (S.533 ETC) – SECOND DISCUSSION
COMPLAINTS ABOUT INSOLVENCY PRACTITIONERS. STOP ORDERS.
PRE-PACK INSOLVENCY ADMINISTRATIONS
WHAT CHANGES IN THE LAW WOULD HELP ASIC PERFORM BETTER?
RENEWING A LIQUIDATOR’S LICENCE
LIQUIDATOR’S FEES FOR SMALL COMPANIES
DUTY OF CARE IN EXERCISING POWER OF SALE
ACCESS TO INFORMATION HELD BY ASIC
LIQUIDATORS LICENCES AND STOP ORDERS (AGAIN)

Appearing for ARITA were:

David Lombe, President
Michael McCann, Deputy President
Michael Murray, Legal Director
John Winter, Chief Executive Officer

The committee chairman is Senator Mark Bishop.

_________________________________________________________________

Extract from Hansard transcript of Senate Economics References Committee 2 April 2014

1. ASIC AND ARITA WORKING TOGETHER

CHAIR: I have some general questions. I think we might be going to explore four or five different issues and then my colleagues will jump in as appropriate. Firstly, do you consider that ASIC works effectively with your organisation?

Mr Lombe: In my view, the liaison side of the relationship has improved. I think, in the last two or three years, ASIC have been more active in consulting with ARITA. We have regular liaison meetings with them as a body. They have also, I think, ramped up their activity with senior practitioners, and there are regular meetings with them. In general terms, I think the liaison process is much better and that they are very much listening to some of the issues that are raised by ARITA and members.

2. PROCESSING OFFENCE REPORTS (S.533 ETC) – FIRST DISCUSSION

CHAIR: Do you draw any shortcomings to our attention?

Mr Lombe: One of the biggest issues that I would draw to your attention is that, in every administration, there is a form of offences report. In other words, if a liquidator, in reviewing the books and records or reviewing the conduct of the directors, forms a view that they have committed an offence under the act, they are required to make a report. In many cases, it is compulsory that they do that. The issue for us—and I believe it is a resources issue—is the fact that they are not being acted upon. That those reports are not being acted upon is a bit like the broken window in New York. I think there is a general perception within the business community that, if you do certain things at a certain level, there will be no effective review. We prepare thousands of reports each year and they are not being acted upon.

CHAIR: How do you know they are not being acted upon? Why do you assert that?

Mr Lombe: We simply get a letter saying, ‘There will be no action taken in relation to this matter.’ So it is very definite.

CHAIR: It is a standard form response?

Mr Lombe: Yes, it is.

CHAIR: There are always degrees of significance. Something can be a routine breach, an inadvertent breach or a breach that has no consequences, while something else can be quite deliberate, fraudulent and planned. What do you do with the second group when they say no action will be taken?

Mr Lombe: The difficulty that we have as official liquidators is that you get a matter off the court list and often that matter has no funds in it, so there are no available assets. Often that is a process by which directors have deliberately done that—it has been a deliberate course of action. If you report the matter to ASIC and there is no assistance from that space, there is not much you can do. If you felt really aggrieved by it or you felt that it was a matter that was of sufficient importance, you may be able to persuade a firm of solicitors to act on a pro bono basis, but that is very difficult. I found myself in that sort of situation with Babcock & Brown, where I had inadequate funds to be able to pursue a proper investigation. The only thing that was available to me was to ask creditors to fund me, which they did, which then allowed me to do a public examination, which brought out the conduct of directors and other stakeholders in that company. If you do not have funds in a matter, the courses are very limited….

3. ASIC AGENDA FOR INSOLVENCY

CHAIR: What needs to be higher on ASIC’s agenda?

Mr Lombe: A reform package. There is the reform bill that is in parliament at the moment, but that is really in many ways at a lighter level. It is not a significant reform. It is harmonisation. It is giving more powers to creditors. But, importantly, it does not deal with, for example, a chapter 11 regime which might be considered. It does not deal with ipso facto clauses which may cause in an insolvency matter the liquidator or the voluntary administrator to lose the power to have a lease in respect of a store or a property, which then means that you cannot sell the business or restructure it. Prepacks are another item. There are a number of items that we have on our agenda for reform. I think it could be higher on ASIC’s list of things that they are looking at.

4. SPLITTING UP ASIC OR INTERNAL REFORM?

CHAIR: We had the discussion this morning—and I think you might have been in the back while we were having it—that over time ASIC has been given more and more responsibilities as the financial services industry has grown. Is there a case for splitting ASIC up or for internal reform of the organisation itself? Or is it just a resourcing issue?

Mr Lombe: From our perspective, it is not a splitting-up matter but a consolidation with AFSA, the regulator that controls bankruptcy. That was considered by the government previously and the ultimate result was that they decided not to move them together. With the economies of scale, I think I could see a better way of dealing with liquidators and trustees. At the moment they are two separate groups of people. But if you have a trustee he is more than likely a liquidator and vice versa. So I think there would be ways of making sure that, if you have an issue with, for example, a trustee’s conduct, that would be known to the regulator. Whereas at the moment there is a situation where potentially there could be an issue and it is not seen. Just in terms of dealing with liquidators and registered trustees, I can see some benefits to having one body.

5. BUSINESS RESTRUCTURING: ADOPTING U.S. CHAPTER 11 METHOD

CHAIR: Let’s turn to current insolvency laws in the context of the US chapter 11 processes. Is the current insolvency framework appropriate for restructuring a business in this country or is value destruction inevitable once an insolvency practitioner has been appointed?

Mr Lombe: That is a very big question.

CHAIR: It is.

Mr Lombe: What I would say to you is that our regimes work well. I am not sure whether you are aware of this but there was a paper called Safe harbour which talked about trying to allow businesses to be restructured without the value destruction. I think that particular issue got some discussion but it was very brief. I think we need to go back to that. In terms of chapter 11, again I do not want to mislead you. It is not necessarily a popular thing amongst insolvency practitioners. We very much have a wide church of insolvency practitioners that deal with smaller matters, medium-sized matters and larger matters.

CHAIR: Why is it not necessarily popular?

Mr Lombe: I think people have a view that it is a very expensive process. It is an American process. You are leaving the people who caused the problem in charge of the company still. What I would say to that is that we do not need to adopt holus-bolus the situation in the US. It could work effectively in Australia. I would refer you to a matter that I was involved in. The organisation was called United Medical Protection, which was a medical insurer who insured about 60 per cent of Australian doctors. Basically, medical services ceased at that particular point. In relation to that matter, it was a chapter 11 in Australia, being run by me as a provisional liquidator using the provisional liquidation regime and being carried out by a Supreme Court judge, Justice Austin. That was very much a situation where, effectively, for all intents and purposes you had a chapter 11 running in Australia. Chapter 11 is not for mum-and-dad grocery stores that go into liquidation.

CHAIR: No, it is not; it is for major enterprises.

Mr Lombe: It is for major enterprises. If you put a major enterprise into a VA the costs with the VA are probably going to approximate the costs if you had to go off to a court and talk to a judge. Often, it is advanced that a judge is not capable, or that our judges would not be able to do this. I do not agree with that assessment. I have found first hand, in dealing with Justice Austin, that our judges are very capable of dealing with it. In the US they have a separate bankruptcy court, but I do not believe that that is a major issue. I am a firm believer in chapter 11, but I might pass to one of my colleagues, Michael Murray, to give a little bit of background to that.

Mr Murray: As Mr Lombe said, chapter 11 is an arrangement whereby the restructuring of the company is left in the hands of the directors, or existing management, but under the control of a court. In Australia, we take a different approach where what we call the voluntary administration regime involves the appointment of an administrator or company liquidator to be in charge of the company—so in Australia the existing management does not have any further role in the restructuring of the company. There are pros and cons to each arrangement. In Australia it is commonly said that we do not have the same culture that they might have in America, in terms of attitudes to corporate failure, and that we would probably find it difficult, as Mr Lombe mentioned, to leave the management of the enterprise with the directors during the restructuring exercise.

CHAIR: But that is an indigenous concern. They leave the directors in control in the United States, and hundreds of companies have gone into liquidation over the years under chapter 11 and then traded out to be viable, ongoing concerns—all the auto companies, the airline companies. Just because there are some concerns in this country that, perhaps, the directors were not as competent as they could have been—the evidence from overseas is that that is not an issue. Why would it be different here?

Mr Lombe: I have a view—this is a personal view; it is not an ARITA view—that we are too obsessed with insolvent trading and with charging directors rather than saving jobs and saving businesses. You have given a number of quotations—

CHAIR: That is what this discussion is about: value creation and value destruction.

Mr Lombe: Exactly. There is no doubt that if you appoint a voluntary administrator, you appoint a receiver, you appoint a liquidator, there is value destruction. There is no doubt about that. Chapter 11 has a different connotation, which is why I am, personally, in favour of it. But, as I say to you, it is not necessarily a popular view.

CHAIR: No. I hear that loud and clear, but what I am pressing down on is: so what if it is not a popular view? If hundreds of companies have been saved to be now effective, viable concerns returning dividends to shareholders and employing tens of thousands of people, who cares if people in this country are upset?

Mr Lombe: These things need to be debated more. They need to be discussed. I was extremely disappointed that that safe harbour document just disappeared without being properly publicly debated.

CHAIR: Mr Murray, I interrupted you

Mr Murray: I was going to follow up on the point that Mr Lombe raised about the insolvent-trading laws in Australia, which are regarded internationally as quite severe. They are seen as an impediment to flexibility of restructuring, and the issue of value destruction comes up in that context. There is seen to be too much of a readiness to go into a formal insolvency arrangement where a more informal or more flexible arrangement might serve a better purpose.

CHAIR: So is there a bit of value in having a significant public debate around this issue?

Mr Lombe: I believe there is, and certainly for ARITA at the moment it is very much on the top of our agenda to come out with a piece of thought leadership which might encourage people to look at reform, because I think 1993 was the last serious reform we had, when the voluntary administration regime was brought in. We have been tinkering at the edges. There are some worthwhile things in the reform bill—I am not saying that there is not—but I think we should have that debate about substantial reform.

CHAIR: So your organisation is doing a fair bit of internal policy thought on the efficacy of an alternative situation, as opposed to a straight application of the insolvency laws and the immediate harm that flows from that.

Mr Lombe: Yes. Wherever I go as president of ARITA, I am making those sorts of statements—that we need to be looking at this. We need to be looking at reform. We need to have a dialogue about these sorts of matters.

CHAIR: Mr Medcraft, I think, said to us that the United States chapter 11 bankruptcy system is a very good structure. He believes it significantly mitigates the loss of value that results from essentially going in and just selling up whole entities and that it is far less harmful in terms of job losses and general destruction of value.

Mr Lombe: I would certainly agree with that part of his statement. I do not know about the rest of it, but I certainly agree with that.

CHAIR: There is some substance there on the table?

Mr Lombe: There is, yes. We would obviously like to encourage ASIC along those lines.

6. WHITE-COLLAR CRIME WITHIN THE INSOLVENCY PROFESSION (ARIFF ETC.)

CHAIR: ASIC has called for a review of penalties for white-collar crime. Do you have experience in white- collar crime within your professional organisations?

Senator WILLIAMS:   I can give you some names: McVeigh, Macdonald, Patterson, Ariff. You need any more?

Mr Lombe: Are you alluding to Mr Ariff?

CHAIR:   I am, by way of introduction. But more generally the question is: are current penalties and their application sufficient in the area of white-collar crime or do they need to be reviewed? That is really the issue.

Mr Lombe: Looking at the Ariff matter, to start off, that is a real blight on our profession. It is extremely regrettable and it is still a matter that gets a lot of discussion at the ARITA table. We are extremely embarrassed by it. The other thing that I would say is my view was the matter potentially was not handled as quickly as our profession would have liked. I think there were other ways. There is a thing called the Crimes Act which could have been looked at. Also, in terms of being an officer of the court, this matter could have been brought to the court. It could potentially have stopped him practising by having a receiver or some practitioner appointed to his practice to stop it, because I think it is the position that, whilst the investigation was going on and whilst the matter was proceeding in court, he was stealing funds. It is extremely regrettable and, as I say, it is a blight on our profession and we are extremely embarrassed by it.

But I would say this fellow was a criminal. He misappropriated moneys. We can sit down with a blank piece of paper and I can have a lawyer with me—the best lawyer in Australia—writing about how you stop people doing what Mr Ariff did, and the answer is you cannot because he is simply a criminal.

There may well be a case for better processes that make it easier to deal with these sorts of matters. I would say at the moment there are things in place which could have been accessed, but maybe there needs to be some reform to deal with this, to make it easier to deal with those sorts of things. I am not talking about someone who makes a mistake in their declaration of relationships, independence or indemnities. I am talking about someone who is taking money illegally, misappropriating money out of a matter. In that case, that has to be treated differently.

There are powers for ASIC to investigate those matters and get the material to understand that that is not a legitimate payment but a payment for a trip for his family, or things of that nature. From that perspective, I think there is some basis there. I might just ask Mike McCann, who is our vice president, to comment on that.

Mr McCann:  The other day someone like Ariff was a criminal, and in a lot of cases of white-collar fraud or crime it is the directors of companies who are perpetrating similar crimes or other fraudulent activity, and they are true criminals.

In the case of Australia a lot of the penalties that we have seen handed out have been relatively modest compared to some of the high-water marks in the US et cetera, where they seem to have a much more rapid and much more draconian penalty regime. They seem to prosecute very quickly and the penalties are very severe. As a deterrent, I suspect that our penalty regime here is not quite sufficient, because there is a culture of crime and fraud being conducted around the country. While that is still the case in many countries, I think there could be more of a deterrent.

In our practice, obviously, we come across a lot of companies who have failed, for various reasons. To be honest, the majority are probably due to incompetence and misfortune, but there is certainly a hard-core element of fraudulent or criminal activity by people who have the status of directors of companies.

CHAIR: You said there is ‘core’ illegal activity.

Mr McCann:   You do see on a recurring basis—not the same people necessarily—activity which is tantamount to fraud or criminal activity. You see that a lot in some these investment schemes that we are well aware of. That activity has been perpetrated very blatantly with the intention of taking funds from investors and similar parties. That is a criminal activity.

CHAIR: So you are saying to us that the penalty regime that applies is not an effective deterrent?

Mr McCann: Seemingly so, because we seem to have recurring activity of that sort of behaviour. People do go through that process. It takes them some time to be prosecuted and, if they are prosecuted, they serve a period. I am not sure if I am correct, but usually three to six years is a fairly serious sentence. I think in the US a lot of these crimes receive in excess of 10 years penal sentences.

Mr Lombe: Mr Chairman, could I make a small correction to what was said by the previous witness. It is on this topic. What it relates to is a comment that he made that ASIC had not pursued a criminal insolvent trading case for more than 10 years. I can tell the committee today that in fact they are pursing the Kleenmaid matter. It is a matter that is in Queensland. I think we are all familiar with the Kleenmaid product—washing machines, fridges and associated things. ASIC have taken criminal action against those directors and in fact a committal hearing finished this week and those directors have been committed to face trial.

7. STATUTORY REPORTS BY LIQUIDATORS REGARDING OFFENCES (S.533 ETC) – SECOND DISCUSSION

CHAIR: Thank you for that. Can we talk about statutory liquidator reports for a while? There is a huge volume filed every year—almost 7,000—from auditors and liquidators. We have had a submission from a number of firms that essentially says that auditors are frustrated with the statutory reporting process and that an enormous amount of time and expense is put into the preparation of such reports. They are filed with ASIC. There may well be some significant recommendations in their reports for follow-up action—drawing to attention shortcomings or deficiencies in various areas—and, by and large, they are received, noted, filed and moved on. In that light, does your organisation have concerns about the process and follow-up action deriving from the filing of the reports?

Mr Lombe: Yes. That was the issue I was talking about a little bit earlier—the extension reports. For example, in a liquidation by the court, you are required to lodge a section 533 report, which deals with offences committed by directors. What that means as a liquidator is you need to review the books and records, determine the transactions, try to find out what assets are there, look at insolvent trading and look at preference payments and all those sorts of things to understand what has gone on. We are required to file that report, and it does take time. So it is time and money, and often in these official liquidations there are no assets at all. If there are, creditors are effectively paying for that.

You are quite right: thousands of them are lodged and most of them come back ‘no further action’. I think it is frustrating to liquidators because they feel, ‘Why am I bothering to do it?’

The answer is, ‘You are required to do it under the law, so you need to do it.’ So we do not support anyone not lodging section 533 reports. But you can understand someone’s frustration, where they have reported offences and nothing happens.

CHAIR: The question then becomes: does ASIC use these thousands of reports it receives to effectively analyse and detect patterns of dubious behaviour?

Mr Lombe: I think you could probably say they have used them in the past to come up with a phoenix activity, so they have then had a focus on phoenix activity, and still do. I believe they are reading them for trends, but the frustration is that you are reporting an offence that you believe should be prosecuted in that particular company. So the fact that they are monitoring trends or things that are coming up is certainly useful, because it may mean that they see a trend and therefore they can take some action against it. But the fact that it is not being prosecuted is a frustration. I think sometimes that happens in larger matters as well.

CHAIR: So it is the lack of prosecutorial action that you complain of?

Mr Murray (?): I was just going to say at times, so do you use those reports where they have directors in a number of companies and they use that to identify a recurring activity for a particular individual or individuals, and then can you use that as a basis to seek a banning order, banning that party from being a director?

CHAIR: Let us get down to brass tacks. Does your organisation have a complaint about ASIC’s response to the reports once filed?

Mr Lombe: We have certainly raised this issue with ASIC, and the answer that comes back, in my recall, is that they simply do not have the resources to deal with it.

CHAIR: What is it that they do not have the resources to do?

Mr Lombe: To investigate the matters and prosecute the directors.

CHAIR: In its 2007 report, the ANAO looked at this issue and they found that, given the large number of reports received by ASIC each year that alleged offences against the Corporations Act, it was appropriate that ASIC had systems in place to prioritise its regulatory actions through risk scoring. It noted further:

… the small number of statutory reports subject to regulatory action by ASIC each year indicates that there is opportunity for greater regulatory action on these reports.

Are those findings from six or seven years ago relevant today?

Mr Lombe: I think they are very relevant.

CHAIR: In your view, could liquidators in their reports assist ASIC in distinguishing between the very serious breaches from the less-so? There are limited resources; there have to be priorities. Everything is not absolutely important. Is there a mechanism that could be developed whereby the industry advise ASIC that this set of issues or this set of complaints or this set of directors or this set of companies really are most egregious and need to be attended to?

Mr Lombe: I think that might be useful reform if that were the case. If there were some way of collating or rating, if you like, particular matters, I think that could be useful. At the moment the liquidator simply prepares his report and describes—

CHAIR: Perhaps you could develop a framework whereby, on a score of zero to 100, all of those above 80 points, for example—whatever the criteria are—are particularly egregious and warrant follow-up action, and the rest are therefore for analysis and noting purposes.

Mr Lombe: Yes.

CHAIR: Is it worthwhile giving consideration to the development of such a recommendation?

Mr Lombe: I think that would be worthwhile.

CHAIR: We are talking about developing criteria for risk scoring that liquidators and trustees would apply in the development of their report and provide to ASIC.

Mr Lombe: That is correct. If, for example, a bankrupt does something or does not cooperate, does not file his statement of affairs or whatever, his bankruptcy can be extended, so there is an actual penalty in those sorts of things. Whereas, in a liquidation, if there is a particular offence or whatever that does not get investigated then there is no penalty.

CHAIR: If that were the practice, after it were developed and became common practice, that would be a very, very up-to-date mechanism for noticing trends and behaviours and taking the appropriate either regulatory or prosecutorial action for the more severe cases.

Mr Lombe: That is right. Maybe in a situation where there are automatic offences, if you have done such and such, you cannot be a director for four years.

CHAIR: We will give consideration to such recommendations. Questions on this issue? Do you want to go onto the complaints about insolvency practitioners or do you want to go somewhere else?

8. COMPLAINTS ABOUT INSOLVENCY PRACTITIONERS. STOP ORDERS.

Senator WILLIAMS: Just about ASIC doing their job, Chair. We come to Mr Ariff and the frustration there with it being four years almost until ASIC acted. In this inquiry when I asked why it took three years to scrub out one particular financial planner when they had been given a file from the Commonwealth Bank. It is the speed at which ASIC acts that I have been finding frustrating when we know Ariff’s record and what he did.

In your submission you say that:

We mention that we support the IPA being given access to ASIC complaints details etc under the ILRB. The present laws do not allow ASIC to share information with IPA, nor IPA with ASIC.

That is the situation you were saying.

Mr Lombe: That is the situation except I would correct that we normally provide that information to ASIC.

Senator WILLIAMS: So you are saying you need more transparency between your organisation and ASIC to work on issues.

Mr Lombe: Definitely. For example, we might be looking at a particular complaint about a particular member. We might look at it and really struggle to see a lot wrong with it once we have gone through submissions and those sorts of things. But this same practitioner, for example, could be subject to a very serious ASIC investigation. We don’t know about that, so we are making a decision about a practitioner in isolation. That is the key point we are trying to make.

Senator WILLIAMS: While I have been running through this inquiry, Mr Lombe, I would like a stop order power be given to ASIC. In the case of financial planners, clear evidence is given to ASIC that they have given the wrong advice, have not done their job properly, ripped people off, done whatever—forgery, fraud, you name it. ASIC can just ring up that financial planner and say, ‘From this minute, you’re banned from operating as a financial planner. You can go to the AAT, if you wish to appeal it.’ How would you feel if that was also put on liquidators? If the liquidators were licensed instead of registered, so the licence was renewed every three years, and then ASIC could have gone to Ariff and in one phone call scrubbed him out. How would you feel about representing your organisation if that was to be put in place?

Mr Lombe: I think you need to have some form of investigation in relation to these matters because the nature of insolvency is there are confrontations and that can be—

Senator WILLIAMS: We had the 2010 Senate inquiry into liquidators and the previous government did draw up a white paper. I know the current government is working more to complete that. CarLovers are costing $1.8 million in legal fees to have Ariff removed. Who in administration has got a lazy $1.8 million to pay legal fees? That is outrageous.

Mr Lombe: Yes. I understand the point you are making. I think there needs to be a more streamlined position where there are serious issues of conduct. It needs to be easier or there needs to be a more streamlined process that works better to do that.

Senator WILLIAMS: Mr D’Aloisio told us at Senate estimates to deregister a liquidator is very difficult. If we have them licensed and ASIC have the power, it may never be used, but it puts your industry on notice that if you do do the wrong thing, one phone call and the next day you are down at Centrelink.

Mr Lombe: I would like to see a bit more than one phone call, frankly. I would like to see a proper process—

Senator WILLIAMS: The point I am making is I believe they should have the powers to say, ‘Right-o. We’ve got clear evidence here of wrongdoing,’ as they could have done with Singleton Earthmoving or Independent Powdercoating or whatever the companies were that were done over. But they haven’t got that power; instead, the company had to spend almost $2 million to have him removed out of one company. I think that is outrageous.

Mr Lombe: That is certainly wrong. I think there needs to be a more streamlined process; I agree with you—

Senator WILLIAMS: So do I.

Mr Lombe: where there is serious misconduct.

Senator WILLIAMS: There will be changes coming, I can assure you. I think you will be happy with them. I want ASIC feared. I want them to be a corporate watchdog where people are too scared to do the wrong thing. There is a lot of money out there, especially in superannuation, and there are people who do the wrong thing, clearly. I want to have a corporate watchdog that is feared out there in your industry or the financial planners or whoever to say: we do the wrong thing, ASIC will slam us straightaway.

Mr Lombe: We certainly do not support misconduct. As I mentioned before, we are very embarrassed by the Ariff matter and we certainly support a better process to deal with someone who has a serious allegation of misconduct against them.

Senator WILLIAMS:   You saw the recommendations. The committee was chaired by former South Australian Labor senator Annette Hurley, and I thought it was a good inquiry. Mr Murray, was it you who said at first that we did not need the inquiry, or was it Ms North?

Mr Murray: It was not me; it was our previous president.

Senator WILLIAMS:   So you think there should be closer work with ASIC in terms of transparency and sharing information with the organisation?

Mr Lombe: Yes, I would be very much in favour of that.

Senator WILLIAMS:  That would be something you would like to see this committee recommend?

Mr Lombe: Yes, I would.

9. PRE-PACK INSOLVENCY ADMINISTRATIONS

Senator WILLIAMS: Is there anything else you would like to see? I agree with your pre-packs, by the way. I think that is something to really look at closely. I have done a lot of work with some liquidators about pre-packs to save the cost and return more money to their creditors; that is what it is all about.

Mr Lombe: It usually stops that destruction of value. Often you have got businesses with complex arrangements—leases, agreements, licensing and all that sort of stuff. As soon as you have an event of insolvency, they are void; they can be terminated. That is the difficulty in restructuring a business.

Senator WILLIAMS: The assets sold way below their value.

Mr Lombe: That can be the outcome. Often the reason that occurs is that you have had a destruction of value by the existing directors; they have traded the business down. By the time the liquidator, the voluntary administrator or the receiver gets appointed, the business has been seriously impacted by the trading.

10. WHAT CHANGES IN THE LAW WOULD HELP ASIC PERFORM BETTER?

Senator WILLIAMS: If you were in charge of Australia for one day, what changes would you make to our Corporations Law so that ASIC can perform their job better?

Mr Lombe: I would be trying to give ASIC some more resources, or have resources shifted, so that ASIC can focus on some of those key investigated aspects that I have been talking about today.

11. RENEWING A LIQUIDATOR’S LICENCE

Senator WILLIAMS: Do you support user pays?

Mr Lombe: One thing that has always amazed me in Australia is that I can go out today and set up a company and incur $1 million worth of a credit and I do not have to put any money down at all. I do not have to put a deposit down for creditors or whatever if the company gets liquidated. So I think there is some angle to that.

Senator WILLIAMS: I am referring more to when we license your industry. You pay a licence fee every three years. Perhaps when you apply for a licence you should have a face-to-face interview instead of something on paper. People can write anything about their character and good standing, and I think that needs to be addressed as well. But they are issues that we will address later.

Mr Lombe: One of the issues that was addressed in the reforms is that, if you want to become a liquidator, it is a paper driven exercise. If I want to become a liquidator, I have got some experience and some references and I give those to the regulator. I have never understood why there is not a face-to-face interview. The law is going to change if that bill comes in. When I became a trustee, I had to sit an exam and I had to sit through two hours of questions. So I think a face-to-face interview is the right thing in terms of when you initially get licensed. At the end of the day, it is probably something to consider in relation to ongoing licensing.

Senator WILLIAMS: I said to my eldest son, who is a chartered accountant, ‘Why didn’t you become a liquidator?’ and he said, ‘You’ve got to be joking!’ He really baulked at the idea.

Mr Lombe: A lot of people like the insolvency space because it is not merely liquidating companies but assisting companies to restructure. We do a lot of work to save companies from getting into liquidation and voluntary administration.

Senator WILLIAMS: If we can save the companies—whether it be pre-pack or chapter 11—we are saving the jobs. As the chair has said, a lot of creditors would not like the freezing of assets and payments et cetera. Case International is a big agricultural machinery manufacture right around the world. They were in serious trouble 15 years ago; now they are a prime player in agricultural machinery and those jobs have been saved.

Mr Lombe: I certainly support what you are saying and that is what our profession is developing into. The business acumen that our practitioners have is so important.

Mr Winter: In terms of the pathways into practice, from ARITA’s perspective we have an extensive education requirement which is effectively two units of Masters level study, which is delivered by Queensland University of technology. That is part of our requirement to become a member of ARITA. So, at a professional level, we are expecting a high standard, and of course you need to be a member of Chartered Accountants, CPA, or your relevant Law Society in order to gain membership of ARITA as well.

12. LIQUIDATOR’S FEES FOR SMALL COMPANIES

Senator WILLIAMS: It has been suggested to me that the liquidators’ fees should be capped when liquidating smaller companies. How do you feel about that?

Mr Lombe: I think that is something that should be investigated.

Senator WILLIAMS: Because 96 per cent of liquidations return less than 10c in the dollar to the creditors.

Mr Lombe: I think a capped fee situation is something that should be investigated. One of the things I would also say is that you might get a particular matter and there might be a capped fee on it, and then you look at it and you say, ‘There’s insolvent trading that I want to pursue and there are preference payments that I want to pursue,’ so in those situations you would have to go back to the creditors and say, ‘There are these things that need to be pursued,’ and the creditors would authorise you by increasing that cap. At the end of the day, creditors control liquidators and voluntary administrators being paid.

Senator WILLIAMS: They do to a certain extent. For example, KordaMentha, when they liquidated Ansett, were exempted, seven out of the 10 years, from reporting to ASIC. No-one should be exempted in the first year, so that ASIC can get a listing of the assets. It is ironic that during that period KordaMentha grew their offices right around Australia. We do not know how much they charged.

Mr Lombe: I do not think that is a political matter. I think it was an anomaly that existed then.

Senator WILLIAMS: I think there should have been three liquidators sent into Ansett—one for the aircraft, one for the real estate and one for the spare parts and machinery or whatever. It probably would have been over in two or three years instead of 10.

13. DUTY OF CARE IN EXERCISING POWER OF SALE

CHAIR: Can we now turn to section 420A of the act, ‘Controller’s duty of care in exercising power of sale’. It imposes a duty on the controller of a company, including liquidators, to take all reasonable care, when selling the property of a company, to obtain the best price that is reasonably obtainable, having regard to the circumstances when the property is sold. We have received a number of written complaints, and I think all of us have been lobbied extensively by persons who have been or are still aggrieved at a liquidation process. I have been made aware of allegations concerning hotels in Fremantle worth $2 million or $3 million sold off for $80,000 or

$100,000, without notice. A whole range of people have been to see me on those sorts of matters. The other example, of course, is the South Johnstone sugar mill case. The allegation is that it was sold at a much

undervalued asset price. That is the context in which I want to have a discussion about section 420A. How is this

section of the act enforced and what authority, if any, does ASIC have to deal with such allegations of assets being sold way under value?

Mr Lombe: Let me just start, and I might ask Michael Murray to help me a little bit on this question. Section

420A is a section which relates to the duties of receivers, so we are talking about receivers disposing of assets. Section 420A is very much a procedural-type issue. In other words, I get appointed to a hotel—

Senator WILLIAMS: Does that include liquidators as well?

Mr Lombe: No, it does not.

Senator WILLIAMS: Section 420A does not cover liquidators?

Mr Lombe: No. It covers receivers.

CHAIR: What is the difference between a receiver and a liquidator?

Mr Lombe: A receiver is appointed usually—unless it is a court-appointed receiver—pursuant to a fixed and floating charge. A liquidator is appointed by the court or via the voluntary administration process if no deed of company arrangement is put in place.

CHAIR: Are there similar or the same obligations in different sections on liquidators as there are on receivers?

Mr Lombe: They are different. Correct me if I am wrong, Michael, but my understanding of the liquidator’s duties is that he is not to act recklessly in the realisation of an asset. He does not have a section 420A but—

CHAIR: So you have got a lesser test.

Mr Lombe: A lesser test, yes.

CHAIR: Not to behave recklessly.

Mr Lombe: Yes. I think they are the right words, Michael?

Mr Murray: A liquidator has to act in the interests of creditors and, in acting in the interest of creditors, he properly should get market value or good value for the assets. But it is expressed more precisely in respect of receivers. To some extent, they are parallel, I think, or fairly equal.

CHAIR: But, whether it be receiver or liquidator, the allegation that is, repeatedly, assets are flogged off at way below their real value or market price if there was a contested market to acquire the particular asset. Does ASIC have any ability to get involved where such allegations are made. If not, why not?

Mr Lombe:   Can I just make an initial statement in relation to 420A. I started talking about a procedural
section. What that means is that a receiver should look at the asset, he should go and obtain an evaluation in relation to the asset, he should make whatever inquiries he needs to make in respect of that asset to understand the nature of that asset, he should seek expert advice in relation to that asset if he needs to. He should do whatever he needs to do to understand that asset. He should then embark upon a selling process. Now, that selling process

would be one where he would instruct an appropriate agent. So, if you are selling a major hotel, then you are looking for a person who sells hotels, not someone who sells pubs. You would get someone of that nature, you would get expert advice as to how it should be realised and then you would kick off an appropriate advertising campaign. That might be eight weeks for expressions of interest, and there ought to be a staggered process of providing information to people et cetera. Then you would go through the process of obtaining the best offer. That would be one way of doing it. You could put it to auction, which would be another way of doing it.

So the idea of section 420A is to put in place a regime to ensure that you get the best price or a market price in relation to that asset. That is what it is trying to ensure. My understanding is that it is not in that section that ASIC can take action. Although you are obviously breaching the law, my understanding, again, is that it would need to be someone like a creditor or a director who says, ‘You’ve breached section 420A,’ and who would need to prosecute that through the courts. That is my understanding.

CHAIR: Or indeed the owner of the asset.

Mr Lombe: Yes, the owner of the asset. I do not think ASIC normally gets involved—

Mr Murray: Typically, it is the owner of the business that challenges the receiver on the sale of the asset, saying that it was sold at under its value. Correct me if I am wrong, Mr Lombe, but often owners of businesses have an unrealistic expectation of the value of their business, and it is not an uncommon complaint that what was a wonderful business was sold too cheaply, but that is not the reality.

Mr Lombe: I can give you an example of a major hotel—you would know the name; it is a hotel in Sydney. It was previously bought at $45 million. It was sold for around $20 million. This particular hotel was the subject of various programs on TV about the destruction in value that had occurred. In fact, the hotel, rather than having 200 guests in it—or 200 rooms multiplied by the number of guests—had three or four people in it. So you can destroy the value of particular assets. The reason I gave that example of a hotel is that the income a hotel can generate is about occupancy. If you have no income from that hotel, your price will be affected. In an insolvency situation, when you get appointed, that asset can be seriously distressed, and that is why the asset just will not be sold or will sell at a very low level.

CHAIR:   Okay. I understand the point you are making about section 420A and the process that should be followed to realise maximum value when the assets are realised, and I also accept the point that Mr Murray made that often the owner of a business will have an inflated view of its value. Is there any recourse available to the owner of the asset or creditors both before and after the sale if they believe the asset has been significantly undervalued and flogged off at way below market price?

Mr Lombe: I think their recourse is to take legal action against the receiver for sale at below value.

CHAIR: And, essentially, alleged negligence, I suppose.

Mr Lombe: Well, it is alleged that they breached section 420A.

CHAIR: Is that the only avenue you are aware of?

Mr Murray: Yes, they can take court action. I would have to say, from my experience in reading the law reports, they do not often succeed—I say that as a generalisation. You asked whether ASIC has a power. ASIC has a power generally over receivers, which is under section 423 of the Corporations Act, in respect of misconduct or inattention to their duties, and there is a similar power in respect of liquidators. That is an overarching power that ASIC has in respect of the conduct of receivers.

CHAIR: Okay. Based on your experience, gentlemen, does this section 420A, as it applies to liquidators and receivers in the context of allegations of the sale of assets at way under market price, need to be strengthened in any respect or is it adequate?

Mr McCann: I think it is very adequate. As a practising receiver I know it is one of the things we are most mindful of whenever we take possession, say, for a bank of an asset and take it to market. We are very mindful of obtaining value and going through that process to ensure we are attaining the maximum possible price for the asset. That means we are very rigid around following a due process for the sale—in fact, to the point that, on day one of an appointment, you often get presented with people saying, ‘I want to buy that asset,’ and they put an offer on the table and you have to say, ‘That’s great. That looks like a very good offer but I cannot accept it because I have to go through a process to make sure that is the right value.’

CHAIR:   Does due process in realising the value of the assets necessarily involve a public process and competition and tenders? If not, should it?

Mr Lombe: It does and it should.

CHAIR: I received complaints that business that have been wound up and the assets flogged off for way, way below market price was done by some fix where there was no tender process, and all of a sudden the new owner had it.

Mr Lombe: That is wrong.

Mr McCann: In the case of receivership that is clearly wrong.

CHAIR: Is it also illegal?

Mr Lombe: It is in breach of the law.

Mr McCann: However, in a case of liquidation there are circumstances where a liquidator with no funds has an asset and has no ability to trade or continue the business to allow an opportunity to achieve a higher value, if that is possible, and may need to act to close down the business and sell the assets, because there is no way that they can pay employees the next week or the next day because there are no funds available. In that case you will see a more rapid fire-sale type of situation.

Mr Lombe: It again goes to that issue of a liquidation versus a receivership.

14. ACCESS TO INFORMATION HELD BY ASIC

CHAIR: Yes, I get that point. You noted that ASIC receives and stores prescribed information under legislation and some of this information can be made public. But you argue that anonymous and aggregate statistics can be made public if ASIC so chooses. Can you put some more meat on those bones about why and how information should be made public?

Mr Murray: I think we are making the point there that Mr Harris made earlier about access to statistics. We feel frustrated—along with Mr Harris and other academics—about the lack of statistics, particularly in the insolvency area. We compare that very much, for example, to AFSA—the Australian Financial Security Authority, which is the bankruptcy regulator. They produce good statistics which inform the law reform process in bankruptcy. We do not have that sort of information in corporate insolvency. We were able to attend the previous session with Mr Harris, where you made a suggestion to him that he formulate some areas where ASIC might better produce information.

CHAIR: Could you take the question that I gave to Mr Harris and provide us, with some degree of urgency, a written note advising the type of information that ASIC has that should be made publicly available and that would be of use?

Mr Murray: Yes.

Mr Lombe: I would make you aware of a situation. ARITA gives a research prize so that someone can do research. One of our prize-winners was looking at deeds of company arrangement. When you go into voluntary administration, there is a decision about whether you go into liquidation or a deed of company arrangement. He was trying to work out how many companies go into deeds of company arrangement and how successful those deeds of company arrangements are. He wanted to get access to information from ASIC to be able to do that very important research. It would have cost thousands of dollars and ASIC just said, ‘We can’t give that information to you.’

CHAIR: Can’t or won’t?

Mr Lombe: Won’t.

CHAIR: Did they offer a reason?

Mr Murray: I think they said that they cannot—and I think this was referred to earlier—because they are legislatively prevented from waiving fees or giving out information.

CHAIR: Can you take that request on notice and provide us a written response?

Mr Lombe: Within the month?

CHAIR: Yes.

Mr Murray: Yes.

CHAIR: And also advise us if there are legislative prohibitions in the act that we need to have a look at as well in formulating our recommendations. If ASIC are prohibited under the law to provide the information, unless the act is changed, they cannot. So we need to be aware of that as well.

15. LIQUIDATORS LICENCES AND STOP ORDERS (AGAIN)

Mr Murray: I would like to make a final comment, please. Senator Williams, you mentioned earlier the issues about practitioner regulation and the cost of, for example, removing Mr Ariff from CarLovers and the cost to creditors, and also the idea of regulating a practitioner by way of ASIC immediately terminating their licence. I just wanted to point out—and I am sure you are aware—

Senator WILLIAMS: A stop order; not terminate their licence—put their licence on hold.

Mr Murray: I just wanted to point out that, following on from this report that we were involved in before, we have the bill and there is quite a regime in the bill giving powers to ASIC and also its counterpart AFSA in relation to those sorts of circumstances that you described. Also, in respect of removal of a practitioner, you do not have to go to court under the bill; the creditors can make that decision by—

Senator WILLIAMS: Has that bill has been introduced to the House?

Mr Murray: It is not in the House; it is what is called—

Senator WILLIAMS: It is being planned.

Mr Murray: It is an exposure draft and we have been working closely with Treasury with respect to refinements of its draft.

Senator WILLIAMS: I have looked over it piece by piece, the proposals, and have kept a close eye on it. Are you pretty happy with the proposals?

Mr Murray: We are—yes. We would like to think we have had a fair degree of input into it and we would encourage its further progress into parliament.

Senator WILLIAMS: Good. I have been briefed and I am very happy with what has been proposed.

Mr Murray: Thank you.

CHAIR: Thank you very much for your assistance today and for your involvement.

Mr Murray: Thank you.

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