ASIC today published its annual overview of corporate insolvencies based on statutory reports lodged by external administrators for the 2017–18 financial year.

Report 596 Insolvency statistics: External administrators' reports (July 2017 to June 2018) (REP 596) provides information on the nature of corporate insolvencies, supplementing the monthly statistics that ASIC publishes on its website.

An external administrator's role includes investigating company failure and reporting to creditors and to ASIC.

ASIC uses external administrator reports in its work, including in reporting to the market on corporate insolvency.

Key points

• Small to medium size corporate insolvencies dominate external administrators’ reports. Of note, 84 per cent had assets of $100,000 or less; 78 per cent had fewer than 20 employees; and 39 per cent had liabilities of $250,000 or less.
• 97 per cent 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.
• Reports lodged more than two months and less than six months after appointment increased from 44% in 2016/17 to 54.7% of reports lodged in 2017/18.  Reports lodged more than six months after appointment fell from 43.5% in 2016/17 to 32.7% in 2017/18. The improvement in lodgement time periods appears to be a result of the new three-monthly reporting requirements for creditor voluntary liquidations introduced by the Insolvency Law Reform Act 2016 and the introduction of ASIC’s Industry Funding Model in 2017.   
• ASIC requests supplementary reports from external administrators’
  (897 in 2017–18) where a report meets certain thresholds (see annexure 2).
• It is important to note that an external administrator’s report of misconduct is an allegation and may not be substantiated by sufficient evidence to warrant action. We will not take action in every instance an external administrator reports alleged misconduct and we obtain a supplementary report. Information Sheet 151 ASIC’s approach to enforcement (INFO 151) sets out the matters we consider before taking further action after completing our assessment of a supplementary report.
• External administrators advised that they had either commenced or were contemplating initiating recovery actions for insolvent trading for 1,987 reports, compared to 5,265 reports alleging a civil breach for insolvent training. It is the external administrators’ responsibility to pursue compensation for insolvent trading from directors for the benefit of creditors.

Future reports

ASIC is currently reviewing the content and format of the statutory reports lodged by external administrators and have consulted with a small group of external parties for feedback on the proposed changes. We will keep registered liquidators advised of those changes as we get closer to releasing an updated form.

Annexure 1: Reporting of alleged insolvent trading

Following are key points concerning alleged insolvent trading based on external administrator reports:

Table 1: Overview of insolvent trading allegations

• Non-payment of statutory debts (PAYGW, SGC and GST) (64 reports or 81.0%)
• Difficulties paying debts when they fell due (e.g. evidenced by letters of demand, recovery proceedings, increasing age of accounts payable (50 reports or 63.3%)
• Financial statements that disclose a history of serious shortage of working capital, unprofitable trading (31 reports or 39.2%)

Annexure 2: Allegations of misconduct

REP 596 details how often external administrators report alleged misconduct by company officers and the types of alleged misconduct most frequently reported. In the 2017–18 financial year, external administrators reported alleged misconduct for 6,577 reports out of the 7,613 lodged, or 86.4%.

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 several 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 external administrator's advice as to whether the reported possible misconduct warrants further investigation.

After assessing the reports, ASIC asked external administrators to prepare 897 supplementary reports where external administrators alleged company officer misconduct. This amounted to 13.6% of all reports that alleged misconduct lodged in the financial year.

Supplementary reports are typically detailed, free-format reports, that set out the results of the external administrator's inquiries and the evidence they have to support the allegations of offences. Generally, ASIC can determine whether to commence a formal investigation based on 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 2017-18 ASIC referred 13% of these for compliance, investigation or surveillance, compared with 18% in 2016–17. More than 25% of the cases identified as 'analysed and assessed for no further action' resulted from ASIC having insufficient evidence to warrant commencing a formal investigation and it being considered unlikely to obtain further evidence. In another 20% of assessed cases, ASIC requested a further report from the external administrator. All 'no further action' cases are retained for intelligence purposes for possible future use.

ASIC considers a range of factors when deciding to investigate and take enforcement action, as detailed in Information Sheet 151 ASIC's approach to enforcement (INFO 151).

Annexure 3: Profile of insolvent companies

REP 596 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, and
• estimated dividends to unsecured creditors.

Table 2 summarises key data from the report.

Background

REP 596 is ASIC's eighth annual report and tenth report since external administrators' reports could be lodged electronically. Here are links to our last three reports:

• REP 558 (refer 17-428MR) – Annual Statistics for 2016–2017
• REP 507 (refer 16-436MR) – Annual Statistics for 2015–2016
• REP 456 (refer 15-337MR) – Annual Statistics for 2014–2015

Table 2: Summary of key data from REP 596