ASIC Corporate Insolvency Update - Issue 30

Issue 30, December 2023

Capturing better industry data

ASIC continues to monitor the data we capture about industries impacted by corporate insolvency, as published in our Series 1 and 2 statistics (source: Form 505). This ensures we better inform the Government and others on the impact of corporate insolvency in Australia.

We review the Australian and New Zealand Standard Industrial Classification (ANZSIC) industry selected by registered liquidators (RLs) when we prepare statistics for publication.

ANZSIC codes capture many types of services. A good way to locate the most accurate code is to first use the Australian Bureau of Statistics ANZSIC ‘keyword’ search function.

In the construction industry the selection options available to RLs are:

• 301 Residential Building Construction
• 302 Non-Residential Building Construction
• 310 Heavy and Civil Engineering Construction
• 321 Land Development and Site Preparation Services
• 322 Building Structure Services
• 323 Building Installation Services
• 324 Building Completion Services, and
• 329 Other Construction Services.

We have identified that some RLs and their staff may have defaulted to selecting ‘329 Other Construction Services’. The activities that fall under ‘329 Other Construction Services’ are set out below:

• 3291 Landscape Construction Services
• 3292 Hire of Construction Machinery with Operator, and
• 3299 Other Construction Services n.e.c.

It is worth noting that ‘3299 Other Construction Services n.e.c.’ consists of activities mainly engaged in construction services not elsewhere classified. The primary activities are:

• metal wall cladding fixing to buildings
• petrol bowser installation
• sand blasting or steam cleaning of building exteriors
• scaffolding construction, and
• waterproofing of building.

To help us produce better industry data on corporate insolvencies, we ask RLs and their staff to make a selection based on the best information at hand or that is reasonably obtainable (e.g. ask the director or petitioning creditor, or use Google search information or Facebook pages), rather than selecting ‘329 Other Construction Services.’ where the industry may not seem obvious or not readily apparent in the first instance.

To improve the integrity of the published statistics we may contact RLs directly if our ongoing review of industry selection suggests the relevant RL could make more appropriate selections.

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Reminder to review your online publications

ASIC reminds registered liquidators (RLs) to review and maintain their online publications, including websites and online platforms to ensure the content is accurate.

Below are some examples of inappropriate or erroneous website content identified by ASIC:

• individuals promoting or describing themselves as RLs when they were either no longer registered or have never been a RL (possible contravention of section 20-80 of Schedule 2 of the Insolvency Practice Schedule (Corporations) 2001)
• references to individuals being a ‘Registered small business restructuring practitioner’, ‘Small business restructuring practitioner’, ‘Small business restructuring practitioner registered by ASIC’ or ‘Government registered small business restructuring practitioner’, noting no such registrations exist
• misspelling ‘ASIC’ as ‘ASICS’
• reference to the temporary restructuring relief implemented by the Government in March 2020 during the COVID-19 pandemic, which ended on 31 March 2021
• reproduction of content from ASIC’s website without acknowledging ASIC’s copyright or otherwise correctly attributing the source (see the Copyright and linking to our websites page for guidance), and
• unauthorised use of ASIC’s logo.

Previous examples of erroneous website content can also be found in ASIC Corporate Insolvency Update - Issue 22.

If RLs identify inappropriate or erroneous website content that is concerning, you may refer this to ASIC via the team contact of your state or territory on the Contacts page.

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Consequences when disclaiming real property held on trust

There may be unexpected consequences when you disclaim real property in your possession and when that property is held on trust for another entity.

What happens if the property has been validly disclaimed?

If the trust real property has been validly disclaimed it may vest in the relevant state or territory where the property is.

Depending on the relevant state or territory legislation, a mortgagee of the disclaimed real property may be required to apply for an order under section 568F of the Corporations Act 2001 (Corporations Act) (power of the court to make orders in relation to disclaimed property).

The orders sought may include:

• a declaration that the disclaimer was valid
• a consequential order under section 568F that the property vest in the applicant for the purpose of exercising its powers as mortgagee
• how the applicant is to treat the property after the vesting of the property in it
• the application of sale proceeds, and
• how any residual sale proceeds after paying out statutory charges, costs, the mortgage debt owed to the applicant and any other mortgage debt are to be dealt with.

What happens if the property has not been validly disclaimed?

If the trust real property has not been validly disclaimed and the company deregistered, the property would vest in the Commonwealth under section 601AD(1A) of the Corporations Act and ASIC could deal with the property in the usual course.

ASIC may, on behalf of the Commonwealth, perform all the duties and exercise all the powers of the Commonwealth as trustee in relation to property (section 8(6) of the Australian Securities and Investments Commission Act 2001). Where a secured creditor or council or other interested party realises the property, any surplus proceeds after the sale should be lodged with ASIC as unclaimed money under Part 9.7 of the Corporations Act.

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Preference recoveries and registered liquidator conduct

We are aware of registered liquidators (RLs) issuing demands for repayment of unfair preference claims without properly considering the potential defences available to a recipient of a preference claim. These defences include:

• the person received no benefit from the transaction, and
• where a person did receive a benefit:
  • the person had no reasonable grounds for suspecting the company was insolvent or would become insolvent, and
  • a reasonable person in the same circumstances would have had no such grounds for suspecting the company was insolvent or would become insolvent.

Some demands also seem to be made without proper consideration of when the company was insolvent at the time of the payment – this being a prerequisite to the payment becoming a voidable transaction.

Before RLs issue demands for repayment of unfair preference claims, they should determine the date of insolvency and confirm the payments were within that period. RLs should also consider the potential defences available to an unfair preference recipient and address those potential offences before demanding repayment. The court stated in Parker, in the matter of Worldwide Specialty Property Services Pty Ltd (in liq) v Worldwide Specialty Property Services Pty Ltd (in liq) [2017] FCA 687 at paragraph 68 that ‘[a] demand should only be made by a liquidator if the liquidator believes, on reasonable grounds, that there is a proper legal and factual basis to make such a demand’.

As we noted in our submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into corporate insolvency in Australia, we are also aware that some RLs are ‘grouping’ preference claims so that any court proceeding reaches the jurisdictional limit to enable proceedings to be commenced in a Supreme Court instead of one of the lower courts. If RLs choose to do this we expect they have properly determined that the payments are likely to be preferences, including considering likely defences.

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External Administrator Assistance Program – keep precedents up to date

ASIC’s External Administrator Assistance Program can help when:

• company officers fail to provide a report on company activities and property (ROCAP) (e.g. section 475 of the Corporations Act 2001 (Corporations Act)) or fail to provide books and records or assistance (section 530A)
• other individuals fail to provide books and records (section 530B), or
• asset recovery assistance is requested (section 530C), noting that ASIC will only issue a warning letter.

We have noticed that some letters issued to directors referred to incorrect penalty amounts.

We recommend you review your template notices and directors’ pack to ensure references to penalties are up to date with Schedule 3 of the Corporations Act.

If you are unfunded and need to take action to recover assets, including making an application to the court using section 530C, you should make an application to the Assetless Administration Fund using the Asset Recovery grant opportunity, noting the eligibility and assessment criteria.

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Update on ASIC orders about creditor defeating dispositions

This article provides an update on ASIC’s administration of laws to combat illegal phoenix activity, which came into effect on 18 February 2020. These provisions target creditor defeating dispositions (CDDs) where company property is disposed of:

• for consideration payable to the company that is less than the lesser of the market value of the property or the best price reasonably obtainable in the circumstances, and
• to prevent, hinder or significantly delay the property from becoming available for the benefit of creditors in the winding-up of the company.

ASIC has power to make a limited range of orders. ASIC may make orders either on its own initiative or after receiving a request from a registered liquidator (RL). The court’s powers to make orders in relation to these matters are significantly wider than ASIC’s.

Since February 2020, ASIC has received 22 requests in relation to 15 companies from RLs to make orders under section 588FGAA(3) of the Corporations Act 2001 (Corporations Act). Orders have been made in relation to five requests. Five requests have been rejected by the ASIC delegate and 12 remain under consideration. ASIC has made several money orders and one order requiring the return of a vehicle that was the subject of the CDD.

Section 588FGAC of the Corporations Act provides that a person must not engage in conduct that contravenes an order under section 588FGAA(3). Failure to comply with section 588FGAC is a criminal offence. ASIC currently has one matter under investigation for suspected contraventions of section 588FGAC of the Corporations Act.

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Published notices website – former company name

We refer to our previous articles (see ASIC Corporate Insolvency Update - Issue 15 and ASIC Corporate Insolvency Update - Issue 19) on disclosure of former company names.

We continue to see instances of notices lodged on the published notices website where the former company name is not identified.

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: see section 161A of the Corporations Act 2001.

This is an important statutory requirement as it helps creditors identify their exposure to companies in external administration.

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Restructuring practitioner appointments – when a plan proposal lapses

We know that a few registered liquidators (RLs) have been unable to commence drafting a Form 505 Notification of appointment or cessation of an external administrator after lodging Form 5608 Notice of ending of restructuring (Form 5608) using EX05 Notice of ending of restructuring transaction in the ASIC Liquidator Portal.

This is because lodging Form 5608 automatically ceases the restructuring practitioner role and prevents the subsequent lodgement of Form 505 to cease the role.

To stop this happening, you must commence drafting both the Form 5608 and Form 505 in the ASIC Liquidator Portal before lodging either form. Once both forms are complete, you should lodge Form 5608 first and then Form 505.

We will update Flowchart 14: Restructuring practitioner of a company in Information Sheet 29 External administration, controller appointments and schemes of arrangement: Most commonly lodged forms (INFO 29) to clarify the lodgement sequence.

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Media releases

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

23-331MR ASIC disqualifies food services industry director for one and a half years

23-297MR ASIC disqualifies NSW director for maximum five years

23-291MR ASIC disqualifies Canberra property developer for two years

23-289MR Former Ralan Group managing director pleads guilty to fraud

23-285MR ASIC prosecutes 100 individuals for failing to assist registered liquidators

23-282MR NSW Central Coast construction services directors disqualified

23-272MR NSW director sentenced for falsifying company books

23-259MR ASIC disqualifies Philip Whiteman from managing corporations for maximum five years after engaging in illegal phoenix activity

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Insolvency statistics

The rise in insolvency activity continued into the first four and a half months of the 2023–24 financial year (3,929 external administrations (EXADs) as at 19 November 2023), up 35% from the same period of the previous financial year (2,911 EXADs). Court liquidations have also risen to 85% of pre-COVID-19 levels during the current financial year after remaining close to COVID lows during the last financial year.

The increase in EXADs follows the 61.7% increase in the 2022–23 financial year (7,942 EXADs) from the 2021–22 financial year (4,912 EXADs). Company failures also rebounded to pre-COVID-19 levels (7,937) during the last financial year.

See ASIC insolvency statistics for more information.

Note: The pre COVID-19 figure of 7,937 EXADs is an average of the 2016–17, 2017–18 and 2018–19 financial years.

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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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