ASIC Corporate Insolvency Update - Issue 15
Issue 15, April 2020
This information is current at the time of publication, however subject to change as circumstances continue to evolve.
Staff illness, the practice of social distancing, restrictions imposed by government, and other self-imposed corporate restrictions on social gatherings due to the COVID-19 pandemic, may make it difficult or even impossible to perform several required tasks relating to an external administrator or controller appointment, including:
- holding meetings of creditors
- conducting investigations and preparing statutory reports within the timeframes required by law
- preparing and lodging documents within the timeframes required by law
- attending company premises to take control of records or conduct trade-on activities.
We also recognise that the disruption caused may make it difficult for RLs to comply with the continuing professional education condition imposed on your registration as a liquidator.
We encourage you to identify and make contemporaneous notes for your external administration files about how the COVID-19 pandemic has affected your ability to comply with your statutory requirements and the practical steps you have considered and taken to address this.
We will take these circumstances into account when administering the law and regulations. Where appropriate we will consider giving a ‘no-action letter’ (see Regulatory Guide 108 No-action letters).
We consider that ‘exceptional circumstances’ exist and will waive late fees resulting from the impacts of the COVID-19 pandemic. You will need to apply for the fee waiver in the normal way and provide evidence that the late lodgement is a result of the impact of the COVID-19 pandemic.
We hope you will review your firm’s arrangements to respond to expected disruptions caused by the COVID-19 pandemic, including;
- the capacity for staff to work remotely if necessary
- how existing administrations might be administered if staff are unable to work
- your firm’s policies and processes for undertaking the ongoing requirements of your appointments given access and staffing issues, and
- your policies for assessing your firm’s capacity to take new appointments (including whether those appointments might be accepted jointly with a registered liquidator from another firm or whether aspects of the administration might need to be outsourced because of lack of capacity due to staffing issues).
As the National Cabinet has further limited most indoor and outdoor non-essential gatherings to two people, we plan to release further guidance for RLs soon about convening meetings.
We encourage you to contact us to discuss the impact of the COVID-19 pandemic on your ability to perform your duties and functions – we stand ready to work with you to deal with any problems you encounter.
In 2017, new laws were introduced allowing creditors to replace liquidators by resolution passed at a creditors meeting.
Preliminary reasons for the replacement of liquidators were identified in Issue 8 of the Corporate Insolvency Update. To better understand why creditors were exercising their new power, we contacted registered liquidators who had been replaced.
We found that creditors were exercising their rights to change the appointee for a variety of reasons – however, these reasons rarely included allegations of misconduct. Instead, creditors indicated they had exercised their rights because they preferred to:
- deal with a registered liquidator they had previously dealt with
- use their existing panel of liquidators
- appoint someone who was not chosen by the directors.
Other reasons for replacement included the registered liquidator moving to a different firm, retiring or ceasing to practice.
We discontinued this work after the article because:
- there were no discernible patterns of poor behaviour by liquidators driving the replacements
- our focus is on liquidator behaviour rather than creditor behaviour.
Liquidators report annually about resignations and replacements in Form 908 Annual return by liquidator. Although this data is not publicly available, it does help us identify emerging trends. For this reason, we remind you to include all resignations and replacements in your form.
Last year, as part of our Form 5022 project (Issue 8 and Issue 11), we observed instances of failed proposals without meetings. To understand more about why proposals failed, in particular those involving remuneration, we looked at the data sets relevant to these occurrences.
A review of the data suggests that resolutions failed when:
- creditors’ reports were generic, not company-specific and did not inform creditors about what happened to the company
- remuneration reports were generic, not company-specific or customised, and creditors were unable to decide if the remuneration claimed was necessary or proper
- the remuneration amount claimed was significant but not supported by commentary in the creditor and remuneration reports
- creditors lacked interest or motivation to vote (e.g. we observed proposals fail due to no votes or to only one objection)
- particular institutional creditors had a remuneration voting policy to either not vote on remuneration at all, or only for past remuneration but not future remuneration.
Consequences of failed remuneration proposals may include:
- negative creditor perception of the industry and liquidator's performance
- rejection of all proposals put to frustrated creditors on the day including resolutions relating to approval of internal disbursements and early destruction of books and records
- further work and resources to rectify failed proposals, including improved communication with creditors, new creditors’ report, new remuneration report, a meeting or an application to the Court for approval.
Registered liquidators should consider when to put a proposal to creditors. For example, it may be difficult in some circumstances to provide a meaningful remuneration report to creditors within 10 business days of appointment because investigations are in their infancy.
Our review of the data suggests that remuneration proposals put to creditors early in a liquidation are more likely to succeed if the amount claimed is relatively small and appears to be for work required to be done up until the three-month statutory report sent to creditors. Liquidators will have dealt with assets, progressed investigations and firmed up potential recovery actions – providing creditors with a clearer idea of what they have achieved, what they hope to achieve and when they hope to achieve it.
Claims for future remuneration are estimates – and the data indicates that large future remuneration claims that are sought early without being clearly explained by the liquidator are often rejected by creditors.
Reflecting on the ‘Value with Money Assetless Administration Fund Workshops’ held in 2019, we would like to remind you that the Assetless Administration Fund (AAF) extends beyond funding investigations regarding potential offences committed by directors.
A reinvigorated focus area is funding to take action to recover assets where misconduct is suspected – including, but not limited to, possible fraudulent or unlawful phoenix activity.
Over the past 12 months, only one application has been lodged for asset recovery actions – the application was approved for significant funding. We encourage you to embrace this opportunity to help us help you make recoveries – this will maximise returns for creditors and better regulate the industry and its stakeholders.
Types of funding options to consider:
- breaches of directors’ and officers’ duties (section 180–184)
- uncommercial transactions (section 588FB)
- entering into agreements/transactions to avoid employee entitlements (section 596AB)
- creditor defeating dispositions (section 588FDB).
Under the Corporations Act 2001, we have the power to appoint a reviewing liquidator.
We may exercise the power:
- on our own initiative
- on application by a person with a financial interest in the external administration of the company, or
- on the application of an officer of the company.
The reviewing liquidator’s powers include the power to:
- interview the external administrator and their staff
- direct any of the parties they have the power to interview to give a written statement about a specified matter
- direct the external administrator to produce specified books relating to the external administration.
We can appoint a reviewing liquidator if there are signs of illegal phoenix activity or other serious misconduct, including, but not limited to:
- common referrers and/or the existence of pre-insolvency advisers
- shadow or replacement directors
- backdating of documents
- creation of newco prior to the external administration of oldco
- pre-positioning of asset sales and licensing of businesses to related parties
- transfer of business/assets/IP for under, or no, consideration
- lack of investigating/reporting to date
- large statutory creditors.
While the conduct of the external administrator(s) is subject to the reviewing liquidator's inquiries, the appointment is not an indication that the external administrator has failed in their duties. The reviewing liquidator’s role is to inquire, investigate and report their findings, objectively and independently.
Since the powers were introduced, we have appointed 10 reviewing liquidators to 22 companies.
The Assetless Administration Fund (AAF) provides grants to applicants dealing with assetless liquidations. These applications have recently transitioned from the existing lodgement via the Liquidator Portal to the ASIC Regulatory Portal. When preparing an AAF application for matters other than director banning you must make sure the content included is clear, accurate and concise. Information provided should tell a story rather than raise more questions. It is important that the person preparing the application is familiar with Regulatory Guide 109 Assetless Administration Fund: Funding criteria and guidelines (RG 109). Note that guidance contained in RG 109 will be transitioned to grant guidelines and published on GrantConnect by 30 June 2020, at which time RG 109 will not be accessible via ASIC’s website.
A good application is easy to read and easy to assess – resulting in fewer questions asked by ASIC and a quicker outcome for the applicant. The information in the application should be as current as possible and any subsequent changes should be communicated on a timely basis.
A good application clearly addresses:
- the relevant criteria and nature of the misconduct – who did what and when
- the relevant persons and their role in the management of the company
- the alleged offences.
Appendix 10 of RG 109 provides guidance to identify and articulate the relevant elements of each alleged offence. It is important to clearly articulate the required elements where criminal offences are alleged. The applicant should also be familiar with Information Sheet 151 ASIC's approach to enforcement to maximise the likelihood of the matter being selected for formal investigation.
Clearly articulating and substantiating the alleged offences will help ASIC help you.
You will recall that we advised all registered liquidators (RLs) in mid-January 2019 about ASIC’s pilot program for ASIC staff attending creditors’ meetings. The aim of our pilot was to better understand how RLs conduct meetings and account to creditors. This included assessing the quality of the meeting materials provided to creditors by attending randomly selected creditor meetings.
ASIC staff attended 10 randomly selected creditor meetings from late February to the end of June 2019.
We identified good meeting conduct and practices when RLs (or their appointed representatives):
- had well-prepared, established procedures to guide and assist the meeting process for the commencement, running and finalisation of a meeting
- were able to use appropriate terminology and language with creditors, greatly assisting the role played by creditors, and
- maintained control both before and during the meetings.
We also identified some practices and behaviours for assessment and improvement, including that RLs and their firms should:
- carefully plan the meeting before it is convened – for example, determine the notice requirements when a meeting is to be held or what considerations are required for the location of a meeting
- consider what creditors need to be fully informed of at a meeting – for example, when and how questions are asked, voting procedures and voting rights, and
- understand the importance of good minute keeping and what must be performed to fulfil an RL’s statutory duties.
The key message for all RLs (and their staff) from the pilot is to ensure all relevant meeting procedures, checklists and supporting materials are regularly reviewed and reinforced.
We have used the results of the pilot to improve our meeting attendance processes and checklists, which we use when we attend meetings at the request of stakeholders or where we consider it is in the public interest to do so.
The ‘creditor-defeating disposition’ reforms enacted by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 apply to dispositions of property that occur on and after 18 February 2020.
A disposition of property of a company is a creditor-defeating disposition if:
- the consideration payable to the company for the disposition is less than the lesser of the market value of the property or the best price reasonably obtainable having regard to the circumstances, and
- the disposition has the effect of preventing, hindering or significantly delaying the property from becoming available for the benefit of creditors in the winding-up of the company.
A liquidator may seek to recover a creditor-defeating disposition by:
- applying to the Court for an order to make the transaction voidable and consequential orders relating to the transaction, or
- requesting ASIC to make an order in relation to the disposition, which may include:
- directing a person to transfer property disposed of by the company back to the company
- requiring a person to pay an amount to the company that represents some or all of the benefits the person received because of a disposition, or
- requiring a person to transfer property that, in ASIC’s opinion, fairly represents the application of proceeds of property that was disposed of.
Transactions done as part of a ‘safe harbour’ restructuring are protected from being recovered.
Also, a disposition of property is not voidable if it is undertaken by an administrator or liquidator (including a provisional liquidator), or done under a deed of company arrangement or by way of a compromise or arrangement approved by a Court.
A liquidator making an application to ASIC for an order will need to provide as much credible and relevant evidence as possible that the transaction is a creditor-defeating disposition.
If insufficient evidence is available, a liquidator might consider applying for assetless administration funding to conduct public examinations or other investigations to obtain sufficient evidence.
Registered liquidators are reminded that they must include the former company name if a company changes its name within six months on documents, including notices lodged on the published notices website: section 161A of the Corporations Act 2001.
This is an important statutory requirement as it helps creditors to identify their exposure to companies in external administration.
In some instances the name of the company is changed to the ACN to conceal the external administration and limit the number of creditors aware of the situation – preventing them from asserting their rights as creditors.
- 19-359MR ASIC disqualifies director for five years for engaging in illegal phoenix activity
- 20-004MR ASIC disqualifies three Gold Coast directors from managing companies
- 20-027MR Former Kleenmaid director sentenced to nine years imprisonment for fraud and insolvent trading
- 20-050MR Pre-insolvency adviser imprisoned for money laundering
- 20-071MR Former director disqualified after transferring business and leaving insufficient assets to pay creditors
Our insolvency statistics for the December quarter of the 2019–20 financial year shows an decrease in companies entering external administration of 8.9% from the previous quarter. Appointments totalled 2,103 compared to 2,309 in the previous quarter. The quarterly total was 4.6% higher than the 2018–19 December quarter (2,011).