ASIC today published its annual overview of corporate insolvencies based on statutory reports lodged by external administrators for the 2014–15 financial year.
Report 456 Insolvency statistics: External administrators’ reports (July 2014 to June 2015) (REP 456) is ASIC's seventh report and provides information on the nature of corporate insolvencies, supplementing the monthly and quarterly statistics that ASIC publishes on its website.
The report summarises information from 8,354 reports that ASIC received from external administrators during the 2014–15 financial year and includes ASIC's response to their reports of alleged misconduct.
ASIC appreciates the work performed by external administrators in preparing the reports. Without these, ASIC cannot produce this report on corporate insolvency.
Profile of insolvent companies
REP 456 includes information about the profile of companies placed into external administration, including:
- industry types
- employee numbers
- causes of company failure
- estimated number and value of a company’s unsecured creditor debts
- estimated dividends to unsecured creditors.
Table 2 summarises key data from the report.
Consistent with past reports, REP 456 shows small to medium size corporate insolvencies again dominated external administrators’ reports. Of note, 85% had assets of $100,000 or less, 79% had less than 20 employees and 43% had liabilities of $250,000 (or less).
97% of creditors in this group received between 0–11 cents in the dollar, reflecting the asset/liability profile of small to medium size corporate insolvencies.
Improved statistics: Reporting of alleged insolvent trading
ASIC released an amended report template for external administrators (Form EX01) in December 2014 to help improve reporting. ASIC worked with the Australian Reconstruction, Insolvency & Turnaround Association (ARITA) regarding the changes to the reporting template. ASIC will continue to work with industry on further improvements.
The December 2014 amendments aimed to:
- capture more accurate information on alleged insolvent trading offences which might provide greater insight into the extent of insolvent trading; and
- enable ASIC to focus resources on matters that warrant further investigation.
Analysis of reports received in the revised format, (that is, post 8 December 2014 reports), highlight the following key points concerning allegations of insolvent trading:
Alleged civil breaches
- external administrators alleged civil insolvent trading in 2,447 (or 57.1%) of reports. Of those, they advised that evidence existed (and also provided details of the type of evidence that existed) to ASIC in 1,704 reports (or 69.6%). Of those 1,704 reports, 1,340 (or 78.6%) indicated that the debt incurred when the company was insolvent was less than $1 million and 1,445 (or 84.8%) had 50 or fewer unsecured creditors.
- when assessing a recovery action's merits, one other factor external administrators consider is the availability of assets to fund that action (absent creditor or third party funding). Most reports alleging a civil breach (1,380 out of 1,704 or 80.9%) disclosed assets of less than $100,000.
Alleged criminal breaches
- external administrators alleged criminal insolvent trading in 79 (or 1.8%) of reports. Of those, they advised that evidence existed (and also provided details of the type of evidence that existed) to ASIC in 39 reports (or 49.4%). Of those, 29 (or 74.4%) indicated that the debt incurred when the company was insolvent was less than $1 million and 27 (or 69.2%) had 50 or fewer unsecured creditors.
- only two reports (5.1%) alleging a criminal breach involved more than 200 creditors. One report indicated debts incurred after the date of insolvency of between $1 million and $5 million and the other, greater than $5 million. ASIC has requested and awaits supplementary reports from the external administrators on those two matters.
Allegations of misconduct (including alleged insolvent trading)
REP 456 details how often external administrators report alleged misconduct by company officers and the types of alleged misconduct most frequently reported. In the 2014–15 financial year, external administrators lodged 6,561 reports alleging misconduct.
Our next step (prior to requesting a supplementary report from external administrators or initiating an investigation) is to assess the report of misconduct based on a number of factors, including, but not limited to:
- the nature of the possible misconduct reported
- the amount of liabilities
- the deficiency suffered
- the availability of evidence
- prior misconduct; and
- the advice of the external administrator that the reported possible misconduct warrants further investigation.
After performing the above risk assessment, ASIC asked external administrators to prepare 699 supplementary reports where external administrators alleged company officer misconduct. This accounted for 10.7% of all reports, which alleged misconduct, lodged in the financial year.
Supplementary reports are typically detailed, free-format reports, which set out the results of the external administrator’s inquiries and the evidence they have to support alleged offences. Generally, ASIC can determine whether to commence a formal investigation on the basis of a supplementary report. While only a portion of the offences reported may result in a formal investigation or surveillance, ASIC uses the information for broader intelligence and targeting purposes.
In 2014–15 financial year, ASIC assessed 17% of the cases involving a supplementary for investigation or surveillance (compared to 19% in 2013 -14). See table 1 for a breakdown of our assessment.
Table 1: Supplementary reports by outcome
|
Outcome |
2014-15 |
2013-14 |
|
Un-actionable |
|
|
|
No offence identified |
<0.5% |
<0.5% |
|
Analysed/assessed for no further action by ASIC |
|
|
|
Requested further supplementary report |
17% |
14% |
|
Insufficient evidence |
43% |
39% |
|
No action - other reason |
23% |
28% |
|
Referred for action by ASIC |
|
|
|
Referred for compliance surveillance or enforcement |
14% |
15% |
|
Assist existing investigation or surveillance |
3% |
4% |
|
Total supplementary reports assessed |
762 |
718 |
Information Sheet 151 ASIC’s approach to enforcement (INFO 151) details a range of factors that ASIC considers when deciding to investigate and take enforcement action.
Background
REP 456 is ASIC’s fifth annual report and seventh report since external administrators’ reports could be lodged electronically. ASIC’s previous reports are:
- REP 412 (refer 14-254MR) – Annual Statistics for 2013–2014
- REP 372 (refer 13-277MR) – Annual Statistics for 2012–2013
- REP 297 (refer: 12-218MR) – Annual statistics for 2011–2012
- REP 263 (refer: 11-263MR) – Annual statistics for 2010–2011
- REP 225 (refer: 10-277AD) – Triennial statistics for 2007–2010
- REP 132 (refer: 08-133) – Triennial statistics for 2004–2007
Table 2: Summary of key data from REP 254
|
2014-15 |
2013-14 |
2012-13 |
|
|
Profile of companies |
|||
|
No. of employees affected |
79% of reports concerned companies with less than 20 employees |
81% of reports concerned companies with less than 20 employees |
81% of reports concerned companies with less than 20 employees |
|
Industries with most lodgements |
Other (business and personal) services Construction (1,771 reports or 21%) Accommodation and food services (870 reports or 10%) |
Other (business and personal) services (2,482 reports or 26%) Construction (2,153 reports or 23%) Accommodation and Food Services (916 reports or 10%) |
Construction (2,245 reports or 24%) Other (business and personal) services (2,220 reports or 24%) |
|
Assets and liabilities |
85% of failed companies had estimated assets of $100,000 or less 41% of failed companies had estimated liabilities of $250,000 or less |
86% of failed companies had estimated assets of $100,000 or less 43% of failed companies had estimated liabilities of $250,000 or less |
85% of failed companies had estimated assets of $100,000 or less 43% of failed companies had estimated liabilities of $250,000 or less |
|
Deficiency |
64% of failed companies had an estimated deficiency of $500,000 or less |
65% of failed companies had an estimated deficiency of $500,000 or less |
65% of failed companies had an estimated deficiency of $500,000 or less |
|
Top 3 nominated causes of failure |
Inadequate cash flow or high cash use (3,647 or 44% of reports) Poor strategic management of business (3,518 or 42% of reports) Trading losses (2,836 or 34% of reports) |
Inadequate cash flow or high cash use (4,031 or 41% of reports) Poor strategic management of business (3,975 or 37% of reports) Trading losses (3,078 or 33% of reports |
Poor strategic management of business (3,908 or 42% of reports) Inadequate cash flow or high cash use (3,829 or 41% of reports) Trading losses (2,989 or 32% of reports) |
|
Top 3 alleged possible misconduct |
s588G(1)–(2) Insolvent trading (4,856 or 58% of reports) s286 and 344(1) Obligation to keep financial records (3,209 or 38% of reports) s180 Care and diligence—Directors’ and officers’ duties (2,739 or 33% of reports) |
s588G(1)–(2) Insolvent trading (5,425 or 57% of reports) s286 and 344(1) Obligation to keep financial records (3,466 or 37% of reports) s180 Care and diligence—Directors’ and officers’ duties (2,542 or 27% of reports) |
s588G(1)–(2) Insolvent trading (4,872 or 53% of reports) s286 and 344(1) Obligation to keep financial records (3,263 or 35% of reports) s180 Care and diligence—Directors’ and officers’ duties (2,302 or 25% of reports) |
|
Dividends to unsecured creditors |
In 97% of cases, the dividend estimate was less than 11 cents in the dollar |
In 97% of cases, the dividend estimate was less than 11 cents in the dollar |
In 97% of cases, the dividend estimate was less than 11 cents in the dollar |