Senators, appearing for ASIC today are:

• myself, John Price, a Commissioner at ASIC
• Adrian Brown, Senior Executive Leader of ASIC’s Insolvency Practitioners team
• Brett Bassett, Senior Executive Leader of ASIC’s Small Business Compliance and Deterrence team and
• Warren Day, Senior Executive Leader of ASIC’s Assessment and Intelligence team.

I only have some brief introductory remarks.

You will see from ASIC’s publicly lodged submission that we have provided the Inquiry some statistics on external administrations in the construction industry. While those statistics have some limitations that are mentioned in our submission, the figures on the percentage of construction firms in the overall mix of firms that went into external administration do seem broadly comparable to other jurisdictions such as Scotland, England and Wales.

But this Inquiry is not just about the level of business failure in the construction industry. Over the years there have been a number of other Inquiries and reports that have raised concern that some of these failed construction companies may rise from the ashes of failure as a phoenix company  and continue on the same business (sometimes with a very similar name) as its failed predecessor. Of course, under current legislation administered by ASIC, that of itself is not necessarily a breach of any law. That is to say, some phoenix transactions are legal and some are illegal. The best way to explain the difference between them is probably in a recent Productivity Commission report that noted ‘Importantly, phoenix activity is not in and of itself illegal – its legality hinges on the intent behind the activity.’  More specifically the issue is whether there is an intention to exploit the corporate form to the detriment of unsecured creditors. If that intent is present then it is very possible a director has breached their duties under the Corporations Act. Clearly then, one of the challenges for regulatory agencies in taking  cases is this area, is proving the required level of intent to the standard required of a Court.

Bearing this in mind, and having regard to the potential damage that illegal phoenix activity may have on confidence in our markets, ASIC has used a wide range of initiatives designed to reduce the illegal phoenix company problem. These initiatives are set out in our public submission and include:

• Taking enforcement action – particularly against people who are facilitating phoenix transactions
• Disqualifying directors who have been involved in many failed companies that have resulted in low returns for creditors (after giving them the opportunity of a hearing)
• Pro-actively engaging with certain directors who may be at risk of illegal phoenix activity to try and prevent it happening
• Assisting liquidators get sufficient information from failed companies so they can report to ASIC any concerns about illegal phoenix activity
• In some cases, funding liquidators of failed companies when otherwise there would be no money to investigate possible breaches of the law including illegal phoenix activity
• Working collectively with other agencies including the ATO, Fair Work Ombudsman and others to try and deal with the issues using a ‘whole of Government’ approach.

More recently ASIC has had a focus on what happens just before a company goes into insolvency and any advice about that (in other words pre-insolvency advice) that may have been provided. This activity is not specifically regulated at present but it can give rise to various regulatory issues further down the track. A recent example is the matter of Walton constructions in Victoria and Queensland. This was a case where ASIC was concerned because the insolvency practitioners originally appointed to Walton had an existing relationship with people who provided Walton with pre-insolvency advice. Our concerns resulted in Court action by us and the original insolvency practitioners being replaced. We are happy to speak in general terms about some of the issues arising in this matter. However, public examinations relating to Walton have been sanctioned by the Court and are currently being planned by the new administrators. In order not to prejudice these proceedings our comments will need to be limited at this time.

The final point I wanted to draw to the attention of the committee is possible law reform relevant to insolvency practitioners more generally. This includes a draft Bill released by Treasury for public consultation at the end of last year, a forthcoming final report by the Productivity Commission on business entry, transfer and exits and various recommendations and commentary from the recent David Murray Inquiry.  Some the matters canvassed include things like whether it would be desirable to have a Director Identification Number to help improve tracking and data matching for regulators.

We are now happy to take your questions.