ob体育 Corporate Insolvency Update - Issue 11

ob体育听is concerned about circumstances where RLs appear not to consider, nor ask questions about, changes to company officers shortly before appointment and/or with a clearly backdated effective date of change.

We encourage RLs to actively question, examine and consider:

the length of time of an officer(s) appointment. Consider the date the change of officer(s) was notified to ob体育 and compare it to the effective date of change to determine if the officer(s) has backdated their appointment
who was responsible for the change(s) of officer(s)
why was there a change of officer(s)
did the current and/or former director(s) receive advice to change officers, and if so, who
did they receive that advice from and for what purpose?

When an RL addresses this issue early on, creditors can have greater confidence in the RL鈥檚 independence. Furthermore, it is a fundamental and prudent step that where reasonably possible, RLs make direct contact with and ask questions of the current and former officers when investigating the affairs of the company.

When accepting director-initiated appointments, RLs should consider a director鈥檚 ability to form an opinion that a company is insolvent (or likely to become insolvent) if they only became a director shortly before the appointment.

ob体育 considers RLs ignoring such fundamental and prudent steps lessen creditors鈥� confidence in RL's independence. We will consider this issue on a case-by-case basis and act if we form a view that a RL has not adequately and properly performed their duty to investigate the affairs of the company.

Remuneration

Cedenco Group decision

Fees Cog

On 11 February 2019, Justice Besanko of the Federal Court of Australia determined that where John Sheahan and Ian Lock (鈥榯he Liquidators鈥�) provided remuneration reports to creditors, in connection with their appointments as liquidators to certain companies, they did not meet the required standard. Justice Besanko found that the remuneration reports fell 鈥渨ell short鈥� of the requirement to provide creditors with sufficient information to make an informed assessment about the reasonableness of the Liquidators鈥� proposed remuneration. Furthermore, in some instances, the Liquidators obtained resolutions approving remuneration without providing the requisite remuneration reports.

In response to queries raised by ob体育 about the validity of the remuneration approval resolutions, the Liquidators鈥� sought orders (under s1322(4) of the Corporations Act) that the resolutions were not invalid by reason of non-compliance with the Corporations Act. Because His Honour was unable to be satisfied that no 鈥榮ubstantial injustice鈥� has been or is likely to be caused to any person, he refused to validate those resolutions. The Court accepted ob体育鈥檚 submission that substantial injustice has been or is likely to be caused to the creditors as they have been deprived of the opportunity for meaningful examination of, and discussion about, the fees before the resolutions were carried.

Having refused to validate the creditors鈥� resolutions, the Court set about fixing the Liquidators鈥� remuneration.

ob体育 tendered expert evidence about whether a 鈥渃ompetent and prudent insolvency practitioner鈥� would have carried out certain work streams at all or to the same extent for which the Liquidators had claimed remuneration.

The application to fix the Liquidators鈥� remuneration will return before the Court in early May 2019 following submissions by the Liquidators and ob体育 on the remuneration reductions considering Besanko J鈥檚 decision.

Based on his Honour鈥檚 commentary, when seeking remuneration approval, external administrators should:

make sure their remuneration reports comply with the requirements of the Act
ensure narrations in time sheets accurately record the tasks undertaken
review work in progress before seeking approval of remuneration to make sure the time charged is necessarily and properly incurred
write off time that is not necessary or proper
not rely on templates or precedent documents without ensuring they are specifically tailored to the external administration.

Form 5022 - Proposal without a meeting 鈥� remuneration determinations

We remind Registered Liquidators (RLs) that only an external administrator appointed on or after 1 September 2017 can use the proposal without a meeting procedure to seek approval of remuneration.

Amendments enacted by the Insolvency Law Reform Act 2016 provide that the old Act provisions continue to apply in relation to the approval of remuneration of an external administrator who is appointed before 1 September 2017. This includes the old Act remuneration approval provisions of s449E, 473 and s499 of the Act: see section 1581 of the Corporations Act 2001 (Act).

Section 75-130 of the Insolvency Practice Rule (Corporations) 2016 sets out when a proposal put to creditors for the purposes of Schedule 2 - Insolvency Practice Schedule (Corporations) (Schedule 2) is taken to be passed as a resolution without a meeting being convened. It does not apply if the matter to be resolved relates to a provision outside Schedule 2. This is because section 9 of the Act defines 鈥�resolution鈥�, when used in a provision outside Schedule 2 in relation to creditors or contributories, means a resolution passed at a meeting [own emphasis added] of the creditors or contributories鈥�.

Consequently, RLs appointed to an external administration before 1 September 2017 must hold a meeting of creditors or contributories (if relevant) to pass the resolution approving their remuneration.

We also remind RLs to lodge a separate Form 5022 for each resolution sought, rather than including multiple resolutions in one Form 5022. The form requires the RL to specify only a single type of resolution e.g. 鈥淭his proposal is about: Remuneration of the liquidator鈥�.听 If the RL includes multiple resolutions, then the lodged form is inaccurate.

We reviewed a sample of Forms 5022 lodged concerning remuneration and identified a number of instances of incorrect lodgements, either in relation to the information included on the form and/or the documents attached. We will write to these RLs individually.

As set out in our previous article (Issue 8, July 2018), we expect that you will lodge all the documents you sent to creditors or members to consider the proposal, including:

the remuneration proposal and accompanying circular to creditors
any reports provided that are relevant to the proposal including the remuneration report
any other documents containing information relevant to the proposal.

Do not lodge completed voting slips returned to you by creditors or members.

We encourage you to review your policies and procedures to ensure that you use proposals without a meeting appropriately and that lodgements are correct, including attaching relevant documents.

RLs should also review their files to ensure all fee resolutions are valid and take steps to remedy any resolutions that may not be.

Assetless Administration Fund

Reviewing Liquidator Panel

ob体育 now has a Reviewing Liquidator Panel comprised of 15 suitably qualified and experienced registered liquidators that ob体育 can appoint as reviewing liquidators under section 90-23 of Schedule 2 of the Corporations Act 2001 and fund from the Assetless Administration Fund.

ob体育 has appointed a reviewing liquidator to six external administrations and has notified this appointment to the external administrator of the companies. ob体育 has decided to appoint a reviewing liquidator to another two external administrations and is seeking consent from a panel member before making the appointment and notifying the external administrators of those companies.

ob体育 considered there were sufficient indicators of possible illegal phoenix activity in these eight external administrations.

Funding for each reviewing liquidator appointment will differ depending on the circumstances of the appointment, such as the amount of investigation and reporting required and the number of companies subject to review.

The reviewing liquidator鈥檚 powers include the power to:

interview the external administrator and his/her staff
direct any of the parties that he/she has the power to interview to give a written statement about a specified matter
direct the external administrator to produce specified books relating to the external administration.

The reviewing liquidator also has any other power which is necessary for, or reasonably incidental to carrying out the review, which could include the power to interview and obtain records from advisors to the company or directors (if necessary to carry out the review).

While the reviewing liquidator has no power to force or compel compliance with his/her requests, they do have a duty to carry out the review based on the information available to the reviewing liquidator.听 In the event the Reviewing Liquidator is unable to obtain the required information, and reports this to ob体育, ob体育 will consider what additional action to take to obtain the information required.

Save the date - Assetless Administration Fund workshops for Registered Liquidator

Benchmark Target

ob体育 is organising face to face workshops for registered liquidators (RLs) at ob体育鈥檚 offices in Melbourne, Sydney, Adelaide, Perth and Brisbane. The two-hour workshops will explain what funding is available under the Assetless Administration Fund (AAF) and how RLs can access the fund. There will be practical examples and the opportunity to ask questions about the use of the AAF. In particular, ob体育 will offer guidance to RLs about how to maximise their prospects of receiving funding and how to prepare focused reports that enhance the prospects of ob体育 taking enforcement action.

We will send an invitation to RLs in the coming month.

Workshop locations and dates are:

Location	Date
Melbourne	3 June 2019
Sydney	7 June 2019
Adelaide	17 June 2019
Perth	27 June 2019
Brisbane	4 July 2019

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These no-cost workshops are for RLs only and not their staff.

Form 5603听

Benchmarks We refer to our previous article (Issue 8, July 2018) regarding lodgement of Form 5603.

Liquidators should only lodge a Form 5603 when they have fully wound up the company鈥檚 affairs (see definition of 鈥榚nd of administration鈥� in Schedule 2, Insolvency Practice Schedule (Corporations) s5-5).

Some common examples of where you do not lodge a Form 5603 are:

your appointment is stayed and/or terminated under s482
another Registered Liquidator (RL) replaces you as liquidator by order of the court and/or resolution passed by creditors
you transition from one type of liquidation to another, for example members鈥� voluntary liquidation transitions to a creditors鈥� voluntary liquidation or you seek an order of the Court to appoint yourself as a court appointed liquidator when you previously acted as a creditors鈥� voluntary liquidator
you retire or leave a firm and another RL replaces you as liquidator of your sole appointments (note for joint appointments the ongoing appointee can simply lodge forms in the normal course).

In each of these examples, the company's affairs听may have not been fully wound up, so you should lodge a part year Form 5602 and not a Form 5603.

We recommend that incoming RLs check that the outgoing RL has lodged a Form 5602 and not a Form 5603.

Note also that we have previously provided guidance in Information sheet 29 that ob体育鈥檚 expectation is that you should not resign as liquidator where a receiver or controller remains appointed.

If you lodge or identify that another RL lodged a Form 5603 in error, please email ob体育 on [email protected] with the reasons why deregistration should not occur. If deregistration has already occurred, you should seek legal advice about making an application to Court to reinstate the company.

Indicators of illegal phoenix activity

Illegal Phoenix

An example of illegal phoenix activity is the use of a new company to continue the business (or part of it) of another liquidated company with the intent of avoiding paying the liquidated company鈥檚 creditors. Other examples could include the transfer of business to the director, now operating as a sole trader. Indicators that possible illegal phoenix has occurred include:

new director(s) appointed shortly prior to the liquidation
the current or previous director is a director of a newly incorporated company or a related company trading in the same industry
although financial statements or other documentation indicate the existence of specific assets, the directors have not disclosed any assets
the main creditors are statutory creditors with little or no trade creditors
the transfer of some or all employees to a new entity
the new company is operating from the same premises and/or using the same website
the new company is trading with the same suppliers and customers.

Although these indicators may appear suspicious, a transfer of business may have been legal and the Registered Liquidator (RL) should ask further questions. Such questions might include:

was the transfer of business adequately documented?
was a formal independent valuation of the tangible and intangible assets obtained?
were any liabilities assumed by the new entity?
did the company receive consideration, in cash or other benefit, and did that consideration represent market value?
how did the company deal with the consideration received?

As for any legal action, the prosecution of a director cannot be successful without good quality information and documentary evidence to support the allegations.

A recent example (refer to 18-351MR) illustrates how such misconduct when reported to ob体育, can result in the successful prosecution of a director for offences relating to illegal phoenix activity.

The Court sentenced Mr Saunders on conviction to twelve months imprisonment after pleading guilty to charges related to illegal phoenix activity, and as a result, automatically disqualified him from managing corporations for five years. Mr Saunders, the former director of Metropolitan Design Pty Ltd (the Company) operated a business providing drafting, mechanical design and project management services.

ob体育 commenced an investigation after receiving a report from the liquidator of the Company, Mr Anthony Warner, who had successfully applied for funding from the Assetless Administration Fund.

The investigation found that between 13 April 2015 and 22 September 2015, Mr Saunders instructed debtors of the Company to redirect payments owed to the Company to his personal sole trader bank account and therefore, unfairly gained an advantage for himself.

Welcoming newly Registered Liquidators

Hand Shake

The Insolvency Practitioners Team (IP Team) has been meeting with newly registered liquidators (RL) to:

welcome them and provide points of contact at ob体育
seek some general feedback
outline and discuss 鈥渨hat good looks like in the insolvency profession鈥澨�
point out available resources.

Following the meeting, we provide the RL with a series of links to essential information concerning the responsibilities of RLs, as well as general information concerning ob体育鈥檚 operations.

The RLs have responded positively and appreciated the opportunity of a face-to-face meeting and ongoing contacts.

The IP Team appreciates the feedback provided by RLs during these meetings and (where applicable) forwards such feedback to other ob体育 teams for their consideration.

The meetings have assisted ob体育 to highlight important topics, sometimes not so well known, such as ob体育鈥檚 approach to enforcement (INFO 151) and ob体育 Regulatory Guide 109 and its various appendixes providing liquidators with guidance concerning the preparation of Assetless Administration Fund applications. In addition, RLs have provided their view regarding the state of their respective markets and observations regarding the industry generally.

This program will continue with the main aim of facilitating communication between ob体育 and RLs, to provide and receive feedback and explore innovative ideas.

Liquidator assistance program

Changes Fixes

The Liquidator Assistance Program (LAP) is a tool available to all Registered Liquidators (RLs) to assist them to obtain company books and records in situations where the company鈥檚 officers and third parties do not cooperate. For the 2017/2018 financial year, ob体育鈥檚 LAP received 1,358 requests for assistance, resulting in 1,302 warning letters being issued to company officers. Where the LAP was able to assist with the RL's request, ob体育 was successful in 593 requests in obtaining compliance by company officers, assisting RLs with their statutory duties including helping them locate assets.听听

Without books and records, there is likely to be no evidence for investigations, or the evidence may be difficult and/or costly to obtain and reduce the chances of successful recoveries or prosecutions. Assetless Administration Funding applications are also generally less likely to be successful if the RL is unable to recover books and records i.e. evidence to support possible offences.

ob体育 acknowledges that the timetable associated with the LAP may sometimes delay the finalisation of an external administration, however this is less likely where there is ongoing communication between the LAP team and the RL.

Ongoing communication also optimises the outcome. We encourage RLs to:

request ob体育鈥檚 assistance as early as possible and as soon as the RL establishes that the company officer(s) and any third party is not cooperating
remember the LAP is State-based and relies on the location of the RL, not the location of the external administration or its officers
communicate with the LAP team the RL鈥檚 intention to finalise the liquidation as it may affect the ability of the LAP team to satisfactorily conclude its activities.

ob体育 notes that on some occasions, RLs have declined to provide prosecution statements on the basis that they were unwilling to attend court and requested that ob体育 send warning letters to the defendants. This decreases the likelihood of obtaining books and records as there is no follow up.听

Mental health training for RLs and their staff

Hand Shake In December 2018, the Insolvency Mental Health Awareness Program (IMHAP) was launched to develop and support new mental health training programs for practitioners who support Australians impacted by personal bankruptcy or the insolvency of a company. 听 ob体育, AFSA, and ARITA worked with Mental Health First Aid Australia to create a program to educate insolvency professionals on the connection between insolvency and mental health and how they can better engage with people experiencing financial distress.

The program has a dual focus: understanding the mental health of people accessing bankruptcy and insolvency services and addressing possible mental health implications for professionals providing these services.

The training programs range from a , which is intended for all insolvency professionals, to more detailed and face-to-face courses for those who would benefit from more intensive training and knowledge.

Completion of the training will count towards the RL鈥檚 continuing professional development requirements.

We encourage all RLs and their staff to undertake the training.

Get to know the IP team

ob体育鈥檚 Insolvency Practitioners team is a national team of 29 staff spread across five states. We have a full time equivalent staff of 23, with some part time staff. We are a specialist team within ob体育 and all accounting staff have prior insolvency experience.

You might be interested to learn that of our staff:

four are current or former registered liquidators
18 are CA ANZ members and 1 is a CPA member
seven are ARITA members and another 11 have completed the ARITA Advanced Certification (formerly Insolvency Education Program)
the majority of our accountants have more than 10 years鈥� insolvency experience prior to joining ob体育
one has a Masters in Commercial Law and another has an MBA
two are lawyers, one of whom is a member of the Law Institute of Queensland and both hold practising certificates
we have worked in small, medium and large practices across all types of corporate insolvency appointments.

Quarterly Insolvency Statistics

ob体育's quarterly insolvency statistics for the December quarter of 2018/19 financial year, show a decrease from the previous quarter of 7.8% in companies entering external administration (EXAD). Appointments totalled 2,011 compared to 2,182 in the previous quarter. The quarterly total was 11.2% higher than the 2017 December quarter (1,809).

The percentage of companies entering EXAD for the quarter, relative to new incorporations, continues to remain below 4%.

ob体育 contacts

听 Hand Shake

Email support 听

Law Reform	[email protected]
Published Notices	[email protected]
Legal notification	[email protected]
Statistics	[email protected]
Liquidator assistance program	[email protected]
IFM (General)	[email protected]
IFM Metrics for RLs	[email protected]
Comments / feedback on this newsletter	[email protected]
Registered Liquidator queries (matters other than specified above)	[email protected]
Request for publicly available data (for a fee)听	[email protected]

Note: IP Legal email is for notification of court proceedings required to be served on ob体育 under the court rules and eligible applicant requests only.

Insolvency Practitioner team contact

Victoria & Tasmania	Yvan Dang (Snr Accountant) Email: [email protected] Direct: (03) 9280 3405
New South Wales & ACT	Carl Sibilia (Snr Manager) Email: [email protected] Direct: (02) 9911 2994
Queensland	Adrian Furby (Snr Specialist) Email: [email protected] Direct: (07) 3867 4840
Western Australia	Adrian Saggers (Snr Manager) Email: [email protected] Direct: (08) 9261 4065
South Australia & NT	Hywel Thomas (Snr Accountant) email: [email protected] mobile: 0431 909 079

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