ASIC Corporate Insolvency Update - Issue 18

Issue 18, December 2020

Reminder about independence requirements

As the Government begins to wind back COVID-19 relief measures and gets ready to implement insolvency reforms to support small business recovery, we remind you to carefully consider your independence (and perceived independence) where the circumstances leading up to an appointment are likely to have been ‘very different’.

The advice you may have provided this year is probably not the same as you would normally provide ongoing or prospective clients. During the COVID-19 pandemic, you may have provided advice (possibly over an extended period) on:

• restructuring a business so that it remained viable during lockdown
• how to go into ‘care and maintenance’
• assisting company directors and advisers to continue trading during COVID-19.

These are scenarios you may not usually deal with and which may affect the perception of independence in a subsequent formal appointment.

Given the change in advice or in your discussions or dealings with directors and advisers, you will need to seriously consider any possible impediments to your independence should an external administration appointment be required.

We expect that when external administration appointments are accepted and you have had ongoing interactions with company directors and advisers, provided there are no independence concerns, you should make full disclosure in the DIRRI of all the dealings you have had prior to your appointment.

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What does a good AAF application for asset recovery look like?

When drafting an Assetless Administration Fund (AAF) application for asset recovery, it is important to clearly convey the:

• nature and seriousness of the alleged misconduct (you should include this when you answer the question, ‘What is the nature of the action to be taken including relevant sections of the Corporations Act 2001?’)
• impact on the company – that is, the extent of the financial detriment caused to the company and its creditors by the alleged misconduct
• likely outcome of the legal action(s).

You can improve the chances of your application being approved by considering and adequately answering the following questions as part of the funding request:

• What is the expected level of public benefit, such as the prospects of a material return to creditors?
• What is the likely availability of assets to satisfy a judgment debt or costs order?
• What is the duration of the likely litigation?
• What assessment has been made of a possible adverse outcome?
• Have the likely costs been adequately considered?
• Has independent legal advice (ideally from counsel in accordance with the grant guidelines) been obtained for each of the potential recovery actions?
• Have I clearly conveyed sufficient information about the potential recovery action and benefits to creditors of pursuing the action?

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AAF application tips and reminders

Importance of submitting the correct application

Besides meeting the eligibility criteria, it is also important that Assetless Administration Fund (AAF) applications are submitted through the most relevant stream.

For clarity, when you access the portal you will have the following two funding options:

• a supplementary report in relation to possible director banning as director or court proceedings for serious misconduct (in this context court proceedings refers to enforcement action by ASIC). This leads to the following two options:
  • a supplementary report in relation to possible ASIC director banning (known as the director banning application)
  • a supplementary report in relation to court proceedings for serious misconduct (also known as Matters other than director banning)
• to take action to recover assets (this relates to both preliminary action or RL legal action to recover assets).

Each of the streams have their own corresponding application and the questions in each vary substantially. Also, the applications flowing through each stream are dealt with by different ASIC teams.

If we find that an application was lodged through the incorrect stream, the application will typically be rejected and need to be resubmitted through the correct stream.

Clarity in applications and resources to assist

When registered liquidators provide clear and specific allegations or suspicions of misconduct, with reference to the relevant section of the Corporations Act 2001, we are better able to consider if enforcement action should be taken. When submitting an AAF application, registered liquidators and their staff are encouraged to consult the ‘substantiation guide’ which sets out the likely sources of evidence that are required by ASIC to prove each element of an offence. The substantiation guide is accessed via the Regulatory Portal and located at Annexure A of each of the Guidelines.

Vague or incomplete applications which provide no definitive suspected or alleged misconduct typically result in unnecessary clarification, rework or rejection of applications.

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Supplementary reports – observations and reminders

Since registered liquidators (RLs) began submitting initial statutory and supplementary reports (s533(2) reports) via the Regulatory Portal (the Portal) in March 2020, we have made several observations of how they can be improved to better assist us to consider:

• whether enforcement action should be taken
• if banning briefs need compiling
• if other contraventions need assessing.

Some examples of unsatisfactory s533(2) reports include:

• attaching information relating to s533(2) reports as a PDF and not entering it in the Portal
• non-reporting on breaches
• referencing (or attaching) external reports without including specific details and the steps taken to verify the contents of report
• providing insufficient detail of alleged misconduct (e.g. saying something such as ‘there is evidence to suggest the director engaged in a number of unreasonable director-related transactions’, but not including details such as dates, amounts and evidence referenced)
• alluding to, but not specifically alleging, misconduct (e.g. alluding to illegal phoenix activity without stating why this has not been specifically identified)
• leaving sections blank, not providing the trading history of the relevant company or the estimated deficiency, assets or liabilities
• providing insufficient details of directors’ involvement in the company.

Remedying the above will improve the quality of reports and help us to compile banning briefs and assess contraventions.

When lodging s533(2) reports, we request RLs to:

• answer all questions
• enter all material in the Portal (do not use the old format and attach as a PDF or attach other information as PDF documents)
• provide the most relevant and detailed information, supplying detail to satisfy each element of the alleged breach
• provide a short statement where you consider potential criminal misconduct/phoenix activity cannot be made out (e.g. due to insufficient evidence, possible defences, or alternative explanations for conduct)
• familiarise yourself with the available guides and lodgements regarding the Portal
• ensure the deficiency table is consistent with the creditor listings provided as an annexure
• compress documents to fit within the 25 MB upload limit, including evidentiary documents relied on.

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How to report funds held when your appointment ceases prematurely

You may find yourself holding company funds to finalise liabilities incurred during appointment when you are no longer the appointee in the external administration. This may occur where you were replaced, removed or not appointed as a subsequent liquidator or deed administrator following a voluntary administration.

It is possible that payment of these liabilities are not finalised within the period to lodge a return for the administration.

You should lodge your final accounts within the reporting period to avoid any late fees. This could either be a:

• Form 5603 End of Administration Return – if you were an administrator or receiver until the end of the appointment period, or
• part-period Form 5602 Annual Administration Return – if you were a liquidator or an administrator who ceased part-way during the voluntary administration period.

You are able to lodge your final accounts with a positive closing cash balance. Once you have finalised and discharged your liabilities, you can then lodge a Form 492 Request for Correction to correct and report on the final payments. This subsequent lodgement cannot be lodged through the liquidator portal and must be lodged in paper.

Any agreed processes between yourself and the incoming appointee to account for the balance of funds held is a matter for you and the new appointee, provided all funds are ultimately accounted for.

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Recent increase in registered liquidator population

We have recently observed the first overall increase in the population of registered liquidators (RLs) since the introduction of the new registration regime in March 2017.

The number of RL applications began to rise in the December 2019 quarter and have been maintained at a higher level throughout 2020. This has resulted in an increase in registrations over the first three quarters of 2020. For the 2020 financial year to 30 November 2020, there have been 15 new registrations (compared to 17 for the full 2019 financial year). This has resulted in a net increase of 12 RLs from 1 July 2020 to 30 November 2020, with a net increase in those able to take appointments of 14.

This is a pleasing trend as the previous three years saw a decline in the RL population. The longer-term trend will ultimately depend on market forces, including the impact of the Government’s insolvency reforms to support small business recovery which are proposed to commence from 1 January 2021 (subject to the passing of legislation).

We updated our Series 4 quarterly RL statistics to include age, gender, number of RLs practising in a firm and years of registration. We have previously provided this data in our annual report on the supervision of registered liquidators but will now update it quarterly.

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Changes to penalty for lodging false or misleading documents

Recent amendments change the penalty for lodging a false or misleading document with ASIC. This includes documents relating to a person’s registration as a liquidator or documents lodged for an external administration or controller appointment.

Specifically, section 1308(3) of the Corporations Act 2001 (the Act) introduces a strict liability offence where the lodging party fails to take reasonable steps to ensure that a statement made or document lodged with ASIC is not materially false or misleading. This means there is no need to establish the ‘intention’ of the lodging party. The penalty for breaching section 1308(3) of the Act is up to $4,440.

RLs should also note that section 1308(1) of the Act retains the existing provision establishing a fault-based offence for knowingly making a false or misleading statement in a document. The maximum penalty for breaching section 1308(1) of the Act is five years’ imprisonment (see Schedule 3, item 60).

These changes have resulted from amendments to the Act as a result of the introduction of the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures) Act 2019 (Cth) (the FSR Act) in February 2020. The purpose of the FSR Act is to strengthen the criminal and civil penalties for misconduct that apply under the Act and other legislation that we administer.

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Composition and utilisation of the abandoned company liquidator panel

With the possibility of more abandoned companies due to the current environment, we addressed some questions at a recent forum about the composition and use of the abandoned company liquidator panel.

The Abandoned Company Liquidator Panel (currently comprising 35 members) was established after publication of a grant opportunity under the Assetless Administration Fund (AAF). The selection criteria related specifically to ASIC exercising its power under section 489EA of the Corporations Act 2001 to appoint a liquidator to an abandoned company for the purpose of facilitating employee access to the Fair Entitlements Guarantee (FEG) for payment of outstanding entitlements. The current panel cannot be used to fund the appointment of a liquidator to an abandoned company for any other purpose.

We issued Regulatory Guide 242 ASIC’s power to wind up abandoned companies (RG 242), which outlines when we will wind up an abandoned company to facilitate access to FEG. Panel members receive a grant of $13,200 (GST incl) from the AAF to carry out the liquidation.

Since inception in 2012, ASIC has wound up 138 companies to help employees to access FEG assistance. For the 2020/21 financial year, we have so far wound up 15 companies. We have published the appointments for the current and the last two financial years.

The current Panel will expire on 5 July 2025 unless ASIC decides to refresh the membership of the Panel before that date.

We are reviewing RG 242 and the circumstances under which we might use the AAF to fund the remuneration of a liquidator we appoint to an abandoned company for reasons other than to pay employees. This will require a new grant opportunity to be published setting out new selection criteria.

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Media releases

Below are our most recent media releases related to corporate insolvency.

20-230MR Director pleads guilty to breaching directors’ duties

20-235MR ASIC bans former property developer from managing corporations for five years

20-241MR Former director pleads guilty to fraud

20-260MR Company officers charged with breaching their duties

20-265MR Supreme Court inquiry finds liquidator Peter Ivan Macks provided fabricated documents to ASIC

20-277MR Former director disqualified from managing companies for five years

20-283MR Former director pleads guilty to breaching directors’ duties

20-298MR ASIC bans company officer for failing to assist liquidators

20-317MR ASIC disqualifies director from managing companies for five years

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Quarterly insolvency statistics

In response to the COVID-19 pandemic, we have been releasing weekly statistics about companies entering external administration (Series 1B.1 to 1B.6).

As the year progresses, the significant decline in companies entering an external administration for the first time continues with on the same months in 2019: April (33.3%), May (44.4%), June (48.6%) July (55.9%) August (64.7%) September (56.5%) and October (62.3%). Financial Year to the end of October (59.8%).

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Contacts

Email support and contact details for ASIC team members for each state are available on the Contacts page.

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