ASIC Corporate Insolvency Update - Issue 32

Issue 32, June 2024

Assetless Administration Fund invoicing

In order to receive payment under an Assetless Administration Fund (AAF) Grant Agreement, a registered liquidator (RL) must provide ASIC with a signed vendor form (see ASIC Corporate Insolvency Update – Issue 29), a correctly rendered tax invoice and supporting documentation (including fee accounts and/or work in progress (WIP) reports).

Each agreement has a copy of a sample tax invoice (included in Annexure B) to assist RLs prepare their own tax invoice. A correctly rendered tax invoice must include the following on the liquidator’s firm or business letterhead:

• the words ‘tax invoice’ and be dated
• the RL’s reference number and firm Australian Business Number (ABN)
• the name and ABN of the company in liquidation, and
• the electronic funds transfer (EFT) payment details of the company in liquidation, including the bank account name, bank name, BSB and account number.

The tax invoice should be itemised to show remuneration, disbursements and GST. The disbursements and the GST-free disbursements should also be itemised, with the latter itemised individually (if applicable).

When preparing tax invoices, RLs should ensure:

• supporting documentation, such as invoices and account statements, is provided for each disbursement
• the charge-out rates in the tax invoice (and supporting fee account and/or WIP report) do not exceed those set out in the executed agreement
• tax invoices (and fee accounts) only include remuneration and disbursements permissible under the agreement (e.g. it should not include time incurred to request an extension of the due date for the supplementary report or time incurred prior to the commencement date of the agreement, as they are not allowable under the agreement), and
• an amended vendor form is provided to ASIC as soon as possible if the ABN or bank account details of the company in liquidation changes.

We have identified the following common errors in tax invoices:

• simple addition and GST calculation errors
• GST-free disbursements not being itemised individually
• inadequate or, in some cases, no supporting documentation provided for disbursements
• ABNs being incorrect or not included, and
• bank details on the tax invoice not matching the bank details on the signed vendor form.

RLs should ensure supporting fee accounts and/or WIP reports are provided in Microsoft Excel format, include a detailed timesheet report and, where applicable, details of any remuneration written off by the RL.

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Reasonable inquiries or steps required when considering the restructuring plan and restructuring proposal statement

A restructuring practitioner must make reasonable inquiries when assessing the accuracy and completeness of information provided by a company in the ‘restructuring plan’ and ‘restructuring proposal statement’.

Restructuring practitioners must remember to:

• make reasonable inquiries into the company’s business, property, affairs and financial circumstances, or
• take reasonable steps to verify the company’s business, property, affairs and financial circumstances.

As soon as practicable after a company executes a restructuring plan, the restructuring practitioner must make a declaration. One of the declarations required is that the company has met the eligibility criteria for restructuring, including that a company’s total liabilities do not exceed $1 million. Restructuring practitioners should ensure they assess the company’s financial history. For example, this could include the restructuring practitioner:

1. comparing a company’s internal financial accounts with any externally prepared financial statements
2. considering the presentation of the financial accounts and assess any changes in the balances of assets, liabilities and equity
3. taking steps to understand any material movements, including debts owed by the company and when and how the debts arose, and
4. after undertaking points 1 to 3, inquiring with the director(s) about:
   1. the practitioner’s findings (e.g. any alterations to debts to either suit the eligibility criteria for restructuring or the possibility of controlling the outcome of voting), or
   2. other claims that may exist that could be provable claims.

A restructuring practitioner commits an offence if they do not undertake reasonable inquiries or steps to verify the company’s business, property, affairs and financial circumstances.

A restructuring practitioner may also take further steps if, before preparing the declaration, they become aware of any defects in the restructuring plan that are likely to affect the company’s ability to meet its obligations under the plan. The restructuring practitioner may (considering regulation 5.3B.20 of the Corporations Regulations 2001 and section 453J of the Corporations Act 2001):

• cancel the company’s proposal to make a restructuring plan, and
• terminate the restructuring of the company.

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Providing statutory reports to creditors on time

ASIC receives reports of misconduct from sophisticated and well-informed creditors about non and late lodgements of Form 5601 Statutory report by a liquidator to creditors (Form 5601). These reports must be provided to creditors in liquidations within three months of appointment and lodged with ASIC at the same time. These creditors are clearly monitoring the information registered liquidators (RLs) provide to them, so it is in RLs’ best interest to lodge on time.

Between 1 July 2021 and 31 December 2023, there were 2,849 court liquidations and 9,754 creditors’ voluntary liquidations. While the majority (95%) of Form 5601 were lodged within three months of the liquidators’ appointment, some were not. We remind RLs to provide the statutory report to creditors and ASIC within the statutory timeframe.

Our data indicates 2% of Forms 5601 were not lodged and 3% were lodged late as follows:

• 2.5% were 94 to 120 days late
• 0.3% were 181 to 365 days late, and
• 0.2% were over 365 days late.

Of the 95% of these Forms 5601 that were lodged within three months of the liquidators’ appointment, 5.2% were lodged within 0 to 30 days and 4% were lodged within 31 to 60 days. The balance of on-time reports were lodged between 61 and 90 days.

Section 70-50 of Schedule 2 of the Corporations Act 2001 and Rule 70-40 of the Insolvency Practice Rules (Corporations) 2001 require a liquidator to lodge the Form 5601 at the same time the report under Rule 70-40 is provided to creditors. A report to creditors under Rule 70-40 must be provided to creditors within three months after the liquidator is appointed (including where a replacement liquidator is appointed).

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Updates to Initial Statutory Report

On 15 March 2024, ASIC updated the Initial Statutory Report (ISR) in the ASIC Regulatory Portal. There were three changes made to the ISR. The main change was to now capture creditor defeating dispositions specifically in the misconduct table, rather than reporting misconduct of that nature under ‘other’ and then providing an explanation in the free text box. If a creditor defeating disposition is selected, additional questions will appear regarding the parties involved and the availability of evidence.

We also amended the text in the ISR regarding the threshold for a large proprietary company in accordance with regulation 1.0.02B of the Corporations Regulations 2001 (Corporations Regulations). The number of employees was increased from 50 to 100, and the amount of consolidated gross assets was increased from $12.5 million to $25 million. Consolidated revenue remained unchanged at $50 million.

The final change made to the ISR was to implement business rules to ensure that the appointment type selected (i.e. liquidation, simplified liquidation, voluntary administration or controllership) was consistent with the provisions being reported under (section 533, section 438D or section 422 of the Corporations Act 2001 or regulation 5.5.05 of the Corporations Regulations). We had identified numerous lodged reports where the provision selected did not apply to the appointment type.

These changes apply to new ISRs commenced after 15 March 2024. The changes will not be made in any draft ISRs.

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Ensuring cyber risk of externally administered companies is managed and resourced

Everyone needs to stay vigilant and ensure cyber risk is appropriately managed and resourced especially when a registered liquidator (RL) is appointed as external administrator.

Companies in external administration are likely to increasingly become a target for cyber criminals. The appointment of an RL is a clear signal to the market that an organisation is in a period of transition – and cyber criminals are quick to capitalise on this opportunity.

Increased job uncertainty, resourcing constraints and burnout rapidly compound to create cyber blind spots for employees at a time the company is most vulnerable. With over 90% of cyber incidents caused by human error, simple user actions such as errant clicks and misused passwords can have severe consequences.

ASIC found in 2023 that 45% of respondents have limited or no cyber security awareness training at their organisations: see Report 776 Spotlight on cyber: Findings and insights from the cyber pulse survey 2023 (REP 776). Employees can either be the first line of cyber security defence or an organisation’s greatest vulnerability.

Although watertight technology to deal with cyber risk is essential, without a cyber-conscious and risk-aware workforce – and adequate incident detection, escalation and remediation – an organisation is exposed to the serious consequences of a cyber-attack.

We encourage all RLs to undertake a cyber risk assessment of the company on their appointment, to ensure cyber risk is appropriately managed and resourced.

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Proper conduct of creditors’ meetings

This is a reminder to registered liquidators (RLs) of the importance of ensuring proper conduct of creditors’ meetings, especially in relation to the creditor voting process. Creditor votes and resolutions should be correctly accounted for and properly recorded.

RLs should ensure that all relevant meeting procedures, checklists and supporting materials are regularly reviewed and reinforced. RLs should especially be alert to the requirements for meetings using virtual meeting technology.

If a resolution is proposed, the person presiding at the meeting must allow a reasonable time for attendees to consider the proposed resolution, ask questions and propose any amendment to the resolution. We have seen instances of meetings where the chairperson did not allow time for discussion of proposed resolutions nor provided an opportunity for attendees to ask questions.

We may consider regulatory action if RLs do not comply with meeting requirements.

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Firm membership

ASIC requests that registered liquidators (RLs) review and update their ‘firm membership’ details, where appropriate, on the registered liquidator register. To update these details, RLs need to lodge Form 905A Notification of change to details of a liquidator (to update the firm membership) and Form 905AB Changes in address details (only) and email of a registered liquidator (to update the address) in the liquidator portal.

A review of the register indicates that nearly 30% of the register does not record a ‘firm membership’ against an RL. We can see that in most of those instances there is a ‘firm name’ recorded under the ‘principal place of practice’, which is not the correct field to record this information. The field ‘principal place of practice’ should only contain an address.

We have provided a guide for lodging Form 905A and Form 905AB (PDF 507 KB). This guide provides useful information about how RLs maintain their details on the register.

We intend to monitor the register over the next few months, and will contact RLs directly to discuss the accuracy of the register where no firm membership is recorded. We note this may be wholly appropriate for RLs who are not part of a firm.

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Media releases

Below are our most recent releases related to corporate insolvency:

24-114MR ASIC disqualifies NSW director for five years

24-105MR ASIC disqualifies QLD director for maximum five years

24-088MR ASIC protects small business by disqualifying four directors for failures relating to the management of small proprietary companies

24-078MR ASIC disqualifies QLD construction director for five years

24-077MR ASIC insolvency data shows increase in companies failing

Contacts

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