The Federal Court of Australia has reaffirmed the well-established principle that liquidators are required to open and maintain separate bank accounts for each company to which they are appointed.

The proceeding arose after ASIC raised concerns with Worrells Solvency and Forensic Accountants (Worrells) that their use of a compound bank account for all corporate external administration appointments, rather than separate accounts for each appointment, did not comply with the Corporations Act 2001 (Corporations Act) and Corporations Regulations 2001 (Regulations).

Worrells subsequently commenced proceedings in the Federal Court seeking a declaration that regulation 5.6.06 of the Regulations did not require the opening of a separate bank account for each appointment as a liquidator, administrator or receiver. Alternatively Worrells sought an order authorising, upon the giving of certain undertakings, the use of a compound bank account pursuant to regulation 5.6.09 of the Regulations. ASIC intervened in the proceeding and opposed the orders and declarations sought by Worrells, principally on the basis that they were not permitted by law.

Worrells argued that there were commercial benefits, such as higher interest and fewer bank fees and administration costs, in using a compound account. In ASIC’s view these benefits did not outweigh the risks associated with using a compound account, such as the increased risk of misallocation, misapplication or misappropriation of funds, which is minimised when a separate account is used for each external administration. ASIC did not allege any impropriety on the part of Worrells nor did it allege any creditor funds were at risk in this case. ASIC’s intervention followed concerns that Worrells’ interpretation of the provisions might create a precedent for other insolvency practitioners to operate a compound account without appropriate safeguards in place.

The Court declined to make the orders sought by Worrells. Instead, the Court declared that the proper construction of regulation 5.6.06:

• does not permit a liquidator to operate a single or compound bank account into which monies of more than one company in liquidation are paid, and
• does not provide for the payment into a single or compound account of monies payable to an insolvency practitioner in their capacity as administrator, deed administrator or managing controller of a corporation.

Upon certain undertakings, the Court authorised Worrells to use the compound accounts solely to complete the winding up of companies to which they were appointed as liquidators as at 30 August 2010. All other funds must be removed within 28 days and deposited into separate accounts. Worrells liquidators were relieved from civil liability under the Act for their failure to comply with regulation 5.6.06 of the Regulations for any company to which they had been appointed liquidator on or prior to 30 August 2010.

Worrells are required to open separate bank accounts for all new appointments as liquidator, administrator, deed administrator or managing controller accepted after 30 August 2010.

ASIC welcomes the Court’s decision as it provides clarification for insolvency practitioners about the legal requirements for maintaining external administration bank accounts.