ASIC Corporate Insolvency Update - Issue 13

Issue 13, October 2019

Independence

Untrustworthy adviser warning letter

Registered liquidators (RLs) who take appointments after a winding up notice has been issued may unknowingly create a perception of a lack of independence.

In July 2016, we started a program to raise director awareness about unsolicited contact from untrustworthy advisers. This involved writing to directors whose companies received notices of winding up applications. To date, we have sent approximately 11,500 letters to directors in 10,000 companies.

We have now evaluated our program to determine what, if any, impact the letters have had on whether the directors took steps to appoint registered liquidators of their choice. The table below shows that approximately 2% of companies entered a form of voluntary external administration (EXAD) after a winding up notice was lodged but before our letter was sent.

Approximately 3,200 companies (or 32%) did not enter any form of EXAD, although about 350 were deregistered or had current strike-off action underway.

The analysis shows that about 6,700 companies (or 67%) went into EXAD. Notably, 5,530 companies (or 82% of all companies that entered EXAD) went into official or provisional liquidation.

Number and percentage of companies entering various forms of external administration before and after untrustworthy advisor letter sent 

Appointment type # % # % Total
  Before letter sent After letter sent  
Court winding up (including provisional liquidation) 77 1.1% 5,453 81.32% 5,530
Voluntary administration 161 2.4% 655 9.77% 816
Creditors voluntary liquidation 19 0.3% 170 2.54% 189
Secured creditor appointments 121 1.8% 45 0.67% 166
Members voluntary liquidation 1 0.0% 3 0.04% 4
Deed of company arrangement/Scheme of arrangement 1 0.0% - 0.00% 1
Total 380 5.7% 6,326 94.33% 6,706

We are continuing to monitor those companies which enter voluntary EXAD after receiving our letter by overlaying referral data to identify patterns of referrers or RL appointments.

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Remuneration

What fees are you entitled to without a remuneration determination?

We recently published the indexed maximum default remuneration amounts an external administrator is entitled to during the 2019–20 financial year.

The maximum default amount an external administrator is entitled to depends on the amount relevant to the financial year they are appointed, not the maximum default amount applicable at the time it’s drawn. For appointments occurring during the period 1 July 2019 to 30 June 2020 the maximum default amount is $5,272 (exclusive of GST).

An external administrator is only entitled to reasonable remuneration not exceeding the applicable indexed amounts if:

  • no remuneration determination has otherwise been made
  • the external administrator is appointed on or after 1 September 2017.

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Assetless Administration Fund

AAF supplementary reports—attaching relevant documents 

When providing us with supplementary reports under section 533 of the Corporations Act 2001, it’s important to include relevant material in support of the registered liquidator’s (RLs) opinions.

Providing and properly referencing relevant material helps us to understand the issues, and why the RL thinks the information is important. In contrast, providing irrelevant material detracts from the importance of the issues identified.

When attaching documents to AAF supplementary reports, it’s important to always:

  • include relevant documents we do not already have
  • tell us why you are attaching the document(s) to your report
  • explain what part of the document is relevant to your report and why.

Similarly, it’s important not to:

  • expect the reader to know why you’ve added the document to your report
  • expect the reader to draw the same information, conclusions and assumptions as you did when looking at the attached document
  • include documents obtained from the ASIC company register (such as company extracts).

Remember, your supplementary report should clearly explain the findings of your investigations and your opinions.

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Commonly lodged forms – INFO 29 updated

We have reissued Information Sheet 29 External administration, controller appointments and schemes of arrangement – most commonly lodged forms (INFO 29) to help liquidators comply with their lodgement requirements.

The information sheet reflects the changes made to the Corporations Act by the Insolvency Law Reform Act 2016 and follows liaison with the Australian Restructuring Insolvency Turnaround Association (ARITA) about the revisions.

INFO 29 contains 13 updated flowcharts to help external administrators, controllers and scheme administrators meet their obligations. It also outlines our expectations for commonly lodged forms and certain publication requirements when:

  • an external administrator (liquidator, voluntary administrator or deed administrator) has been appointed to a company
  • a controller (receiver, receiver and manager, controller or managing controller) has been appointed over company property
  • an administrator of a scheme of arrangement has been appointed.

It provides guidance to external administrators on:

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Creditor approval to enter agreements or compromise debts

In exercising a registered liquidator’s (RLs) powers while winding up a company, an RL may wish to enter into agreements on behalf of the company. If the agreement is a ‘long-term agreement’ (within the meaning of section 477(2B) of the Corporations Act 2001), the RL must not enter into the agreement without the approval of the Court, of the committee of inspection, or of a resolution of creditors.

We have recently seen creditors being asked to pass a blanket resolution under section 477(2B) to approve any type of ‘long-term agreements’ which may be entered into in the future by the liquidator. A composite example is:

For the purpose of section 477(2B) of the Corporations Act 2001, the Liquidator is authorised to enter into agreements on the company’s behalf (including, but not limited to, leases, agreements under which security interests arise or are created or a litigation funding agreement), where the term of any such agreement may end, or the obligations of a party to the agreement may (according to the terms of the agreement) be discharged by performance more than three months after such agreement is entered into, even if the term may end, or the obligations may be discharged, within those three months.

The Court, when asked to give approval under section 477(2B), has indicated that it will rarely approve an agreement which has important terms that are unclear: see, for example, the principles applicable to gaining the Court’s approval in Vickers, in the matter of J M Kelly Builders Pty Ltd (in liquidation) [2019] FCA 918 at [3].

When seeking approval from creditors under section 477(2B), practitioners should:

  • obtain the approval before entering into the agreement, noting the Court may give retrospective approval to an agreement in appropriate circumstances, and
  • consider whether they have provided sufficient details about the important terms of the agreement to creditors to allow them to consider the impact of the agreement on the duration of the liquidation, and whether it is, in all the circumstances, reasonable and in the interests of the liquidation, and
  • provide an explanation about why they have sought a blanket approval if the practitioner has determined it appropriate to seek such approval from the creditors.

Similarly, liquidators seeking approval to compromise a debt under section 477(2A) should consider whether they have provided enough detail about the debt that is to be compromised.

Providing enough information to creditors about the long-term agreement, the compromise of debt or an explanation of the blanket approval before the meeting will allow the creditors to determine whether they wish to participate at the meeting, and to fully consider how they wish to vote in relation to the resolution.

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The important role of voluntary administrators

The role a voluntary administrator (VA) plays when investigating the business and affairs of a company is vitally important to the interests and decision-making of all creditors of the company.

A VA’s statutory duty is to investigate the company’s business, property, affairs and financial circumstances. When considering such duties, a VA must carefully consider the size and complexity of the matter, given this will drive the course and scope of investigations required.

The VA’s report on their investigations is crucial to enable creditors to make an informed decision about the company’s future.

Even when faced with the prospect of limited funds and/or when a liquidation appears inevitable, a VA’s report plays a vital role for all creditors.

Where liquidation is the outcome, the report can:

  • affect decision-making on various matters relevant to the liquidation. This can include creditors being prepared to consider funding the liquidator’s further investigations, or the pursuit of recovery actions
  • influence the liquidator’s decision-making (to at least some degree) in terms of:
    • what matters are earmarked for further inquiry or investigation
    • the volume of work to be carried out concerning those matters; and
    • the priority to be given to them
  • have an ongoing impact on the cost and duration of the liquidation.

If the VA considers they cannot obtain sufficient information and complete the necessary investigations to form an appropriate opinion within the normal timeframes, they should consider if it’s appropriate to:

  • apply to the Court for an extension of the convening period, or
  • ask creditors to decide whether to adjourn the meeting (to allow for further information received about the company’s affairs after a report is given to creditors for consideration, and to allow for further investigations).

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Disclaiming real property and your obligations

If registered liquidators (RLs) do not take all steps required to disclaim real property, including lodging documents with the relevant land titles office (LTO), the disclaimer may not be legally effective.

RLs must provide written notice of the disclaimer to:

  • each person who appears to have an interest or claim to the property
  • the registrar or relevant authority responsible for registering the transfer or transmission of the property (if required by law).

Disclaiming real property results in the property reverting to Crown ownership in the relevant state or territory where the property is located. Where the RL disclaims property, they need to provide the relevant state or territory’s crown solicitor with a written notice of disclaimer.

Where the disclaimed property is land, RLs need to lodge the notice with the relevant LTO. As the process for lodging a transfer may differ in each state and territory, it’s important for the RL to check with the relevant LTO.  

If the notices are not given to the relevant crown solicitor and LTO, the disclaimer may not be legally effective. A possible remedy is reinstatement of the company still owning the real property, and with accrued liabilities relating to it.

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Quarterly insolvency statistics

ASIC's quarterly insolvency statistics for the June quarter of the 2018–19 financial year show an increase from the previous quarter of 15.3% in companies entering external administration (EXAD). Appointments totalled 2,095 compared to 1,817 in the previous quarter. The quarterly total was 2.8% higher than the 2018 June quarter (2,038).

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

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Last updated: 30/06/2020 08:36