Mr Jeffrey Lucy, Chairman of the Australian Securities and Investments Commission (ASIC), today urged company directors and chief financial officers to actively manage the financial position of their company to prevent insolvent trading.

At an address to the G100 National Congress in Sydney today, Mr Lucy emphasised the need for directors to take early action in addressing financial difficulties in order to maximise the chances of a company surviving.

Mr Lucy highlighted how ASIC’s National Insolvent Trading Program is working with companies of all sizes to deal with possible insolvent trading before it occurs, and to change the culture of denial of financial difficulties that exists amongst some company directors.

‘In the 2003/2004 financial year, ASIC’s National Insolvency Coordination Unit (NICU) conducted surveillance visits of 649 companies throughout Australia, including a number of related companies. Of these, 71 companies appointed a voluntary administrator or liquidator following a visit by ASIC*’, Mr Lucy said.

‘ASIC’s involvement contributed to the appointment of external administrators ‘sooner rather than later’ to six listed companies’, Mr Lucy said (Refer Attachment to this media release for examples).

Mr Lucy noted that the program is not intended to get ‘heads on sticks’ in terms of insolvency appointments. Rather, it aims to make company directors aware of their company’s financial position, and their responsibilities to avoid insolvent trading.

As a result of ASIC’s visits, many company directors have sought professional advice about improving their management reporting, potential refinancing and restructuring options, or advice from insolvency professionals. With respect to listed companies, for example:

• ASIC’s involvement had an impact on a corporate group’s refinancing arrangements, resulting in the protection of unsecured creditors and employees’ entitlements;
• one company converted certain related party debt to equity and provided a letter of financial support from a major shareholder;
• another company undertook a complete overhaul of its forecasts after ASIC’s review identified fundamental flaws in the original forecasts.
• directors of a company who were also major creditors provided letters of deferment of debt.

‘ASIC also encourages company directors to seek advice from insolvency professionals, where appropriate, and to take their own steps to appoint an external administrator, where necessary’, Mr Lucy said.

‘If however, ASIC believes the company is insolvent, or at risk of becoming insolvent, ASIC will not hesitate to pursue its own action for the appointment of an external administrator, in order to protect the interests of creditors’, he said.

Background

The National Insolvent Trading Program is a focused approach to dealing with possible insolvent trading before it occurs. It involves a review of a company for the purposes of ensuring compliance by directors of their duties as set out in section 180 of the Corporations Act 2001 (the Act) and directors' duties to prevent insolvent trading under section 588G of the Act.

Established in July 2003, the program is an initiative from ASIC’s National Insolvency Coordination Unit (NICU), which is responsible for the coordination of insolvency activities undertaken by ASIC.

The national program follows on from the successful pilot project conducted in Sydney and Melbourne from January to June of 2003.

The NICU team comprises senior insolvency accountants and lawyers, together with senior insolvency manager secondments from the profession. It relies on support from Deloittes, Ernst & Young, PricewaterhouseCoopers, KPMG, McGrath Nicol+Partners, Ferrier Hodgson and Prentice Parbery Barilla for these secondments.

Fore more information about the program, visit ASIC’s website at www.asic.gov.au/insolvency.

* Refer Attachment to this media release

End of release

Attachment to Media release 04/314: Summary of actions relating to ASIC’s National Insolvent Trading Program 2003-04

A. Insolvent trading program statistics for the 12 months to 30 June 2004

B. Examples of appointments of external administrators to listed companies following an ASIC visit

• Brandrill Limited (WA), a drilling contractor, is both in voluntary administration and receivership. It recently announced that Mizuho International PLC has agreed to purchase Brandrill’s outstanding secured debt. A proposal for a deed of company arrangement, that is expected to result in creditors receiving a higher return than compared to a liquidation, and that will allow the company to be re-listed, was accepted by creditors on 17 September 2004.
• Kaefer Technologies Limited (WA) is a manufacturer and installer of industrial cladding and insulation products. Under the Deed of Company Arrangement executed, a dividend to unsecured creditors of 100 cents in the dollar is expected by the end of December 2004. The operating assets of the company were sold to the overseas parent company. The Deed of Company Arrangement also requires the administrators to try to sell the listed shell.
• Poltech International Limited (Victoria), is involved in technology and manufacturing. In November 2003, both a voluntary administrator and receiver were appointed to Poltech. Although creditors are not expected to receive a cash dividend under the Deed of Company Arrangement, they have been allotted 10 per cent of the shares in the public ‘shell’ of the company. 80 per cent of the shares were allotted to a third party for consideration and the remaining 10 per cent represent the diluted shareholdings of existing shareholders. Poltech is no longer in external administration.

More recently, in the current financial year, insolvency appointments have been made to:

• CMC Power Systems Limited (CMC) (NSW) - The directors of CMC, which was involved in combustion engine technology, appointed voluntary administrators, following an application by ASIC to appoint a provisional liquidator to the company because of concerns it was insolvent. To protect investors in CMC, ASIC successfully applied for an injunction in the Supreme Court of NSW restraining CMC from withdrawing funds raised under a prospectus that was subject to a stop order. These funds have now been refunded to investors. Under the deed of company arrangement agreed to by creditors, a Malaysian company has provided funding to allow the company to continue to operate (Refer ASIC Media Release 04/227).
• Intercard Wireless Limited (NSW) - In August, voluntary administrators were appointed to Intercard Wireless, a research and development company, after ASIC raised concerns with the managing director that the company was continuing to incur debts when there were reasonable grounds to suspect that it was insolvent. ASIC understands that creditors have approved a deed of company arrangement that will result in a better return to creditors than if the company was wound up.

C. Examples of insolvency appointments to unlisted companies following an ASIC visit

• Mysupercentre.com Pty Ltd (MSC) (Queensland) – this online grocery shopping service appointed a voluntary administrator on 10 August 2004 following a NICU surveillance, during which the director acknowledged that the company may have been insolvent. The creditors have since voted to put the company in liquidation.
• Chris’s Sightseeing Tours Pty Ltd (Victoria) – the director of this coach company and travel agent appointed a voluntary administrator on 11 May 2004. The appointment of the voluntary administrator was terminated on 2 June 2004, following the appointment of an official liquidator by the Supreme Court of Victoria on application by a creditor of the company. Two other companies in the same group, Signal Communications Pty Ltd (mobile phone retail outlets) and Melbourne on the Move Pty Ltd, a tour company, have also had official liquidators appointed as the result of successful applications by the Australian Tax Office (ATO).
• Ran Holdings International Pty Ltd and its main subsidiary Radisson Maine Property Group (Australia) Pty Ltd (NSW) – ASIC successfully applied to have a provisional liquidator appointed to these two property companies in June 2004 due to concerns about their solvency (refer ASIC Media Release 04-191). ASIC is currently involved in Court proceedings to have the companies wound up and an official liquidator appointed. The decision in the proceedings has been reserved.
• Dom Distributing Pty Ltd (NSW) – ASIC successfully applied to have an official liquidator appointed to wind up this IT distribution company in August 2004 (refer ASIC Media Release 04-255).
• Inspired Life Pty Ltd (WA) was involved in the operation of three gyms. The company’s managing director took insolvency and legal advice. In the process of selling the company’s business, steps were taken to ensure the company did not incur debt in the period leading up to settlement of the sale. The directors then appointed a voluntary administrator on 5 September 2004. As the business was sold as a going concern prior to voluntary administration, the company was able to maximise the sale price. A winding up application by the ATO has been adjourned.

D. Other outcomes achieved as a result of ASIC’s National Insolvent Trading Program involving unlisted companies

• The directors of one large private company reconciled their tax liability, updated their records to reflect this liability, and notified the ATO.
• The directors of another large private company sought significant additional funding to replace an existing overdraft facility and provide additional working capital.
• The director of an under-performing, medium-sized business agreed that it would take considerable time to recoup accumulated losses, and merged the company with a competitor, creating a viable business with economies of scale.
• The director of a small company, about which NICU expressed insolvency concerns, restored the company to a solvent state by injecting capital and paying creditors. The director also hired a new bookkeeper, engaged an accounting firm to prepare detailed accounts for ASIC, and enrolled in a MYOB training course.
• Directors of a number of small and medium-sized companies implemented financial systems or engaged external accountants to assist in preparing-up to-date company accounts, and reconciling outstanding superannuation and tax liabilities, to ensure they had a clear understanding of the financial position of the business. Some of these also made arrangements to discharge or reduce their tax debts.