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Wednesday 18 December 2019

19-363MR ASIC reports on corporate insolvencies 2018–19

ASIC today published its annual overview of corporate insolvencies for the 2018-2019 financial year.

Report 645 Insolvency statistics: External administrators’ reports (July 2018 to June 2019) (REP 645) provides an overview of the nature of corporate insolvencies, supplementing the monthly insolvency statistics that ASIC publishes on its website, and is compiled from reporting by external administrators.

Some key observations from the report are:

  • Small to medium size corporate insolvencies continue to dominate external administrators’ reports. 85% had assets of $100,000 or less, 76% had fewer than 20 employees and 38% had liabilities of $250,000 or less;
  • 96 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;
  • ASIC requested 875 supplementary reports from external administrators where the initial report meets certain thresholds in assessing if further action was warranted(refer annexure 2);
  • Generally, due to a lack of evidence or because ASIC considered no further action was required given the circumstances, over the last three years on average, fewer than 20% of these supplementary reports resulted in further regulatory action;
  • External administrators advised that in nearly 50% of reports where they alleged a civil breach for insolvent trading, they had either commenced or were contemplating initiating recovery actions for insolvent trading. External administrators’ are best placed to assess the available information and determine whether it’s in the best interest of creditors to pursue compensation for insolvent trading from directors.

Registered liquidators continue to improve the timeliness in lodging their reports with ASIC, with 60.5 per cent now lodged within the period of between two months and less than six months after appointment (increased from 54.7% in 2017/18). The improvement reflects a longer-term trend.

Further insights, including information on allegations of director and officer misconduct, are available in the report.

Background

An external administrator's role includes investigating company failure and reporting both to creditors and ASIC. ASIC uses external administrator reports in its work, including in reporting to the market on corporate insolvency.

The data that forms the basis of these reports is drawn from the reports lodged by external administrators as required under sections 533(1), 438D and 422 of the Corporations Act.

From March/April 2020, these statutory reports will be lodged via the ASIC Regulatory Portal. The format of the form will change as a result. Registered liquidators would be familiar with the portal as part of their annual industry funding obligations. More detailed information about lodging statutory reports via the portal will be communicated to registered liquidators in early 2020.

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

Alleged Insolvent Trading

Civil Breach

Criminal Breach

No of reports alleging insolvent trading

5,350 reports (71.4%)

89 reports (1.2%)

No of reports alleging insolvent trading that had evidence to support allegation

4,719 out of 5,350 reports (88.2%)

57 out of 89 reports (64.4%)

Estimated debts incurred after date of insolvency of less than $1million

3,818 out of 4,719 reports (80.9%)

34 out of 57 reports (59.6%)

Estimated debts incurred after date of insolvency of more than $5 million

52 out of 4,719 reports (1.1%)

8 out of 57 reports (14.0%)

Top three indicators – grounds for director to suspect insolvency

  1. Non-payment of statutory debts (PAYGW, SGC and GST) (3,765 reports or 79.8%)
  2. Financial statements that disclose a history of serious shortage of working capital, unprofitable trading (2,472 reports or 52.4%)
  3. Difficulties paying debts when they fell due (e.g. evidenced by letters of demand, recovery proceedings, increasing age of accounts payable (2,338 reports or 49.5%).
  1. Non-payment of statutory debts (PAYGW, SGC and GST) (37 reports or 64.9%)
  2. Financial statements that disclose a history of serious shortage of working capital, unprofitable trading (31 reports or 54.4%)
  3. Difficulties paying debts when they fell due (e.g. evidenced by letters of demand, recovery proceedings, increasing age of accounts payable (26 reports or 45.6%).

Annexure 2: Allegations of misconduct

REP 645 details how often external administrators report alleged misconduct by company officers and the types of alleged misconduct most frequently reported. In the 2018–19 financial year, external administrators reported alleged misconduct for 6,638 reports out of the 7,498 lodged, or 88.5%.

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 875 supplementary reports where external administrators alleged company officer misconduct. This amounted to 13.2% 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 alleged 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 2018-19 we referred 24% of these for compliance, investigation or surveillance, compared with 13% in 2017–18. In 87% of the cases we identified as ‘analysed and assessed for no further action’ resulted from ASIC having insufficient evidence to warrant commencing a formal investigation and being unlikely to obtain further evidence. In another 14% of assessed cases, we 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 645 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

REP645 is ASIC’s ninth annual report and eleventh report since external administrators’ reports could be lodged electronically. Here are links to our last three reports:

  • REP 596 (refer 18-342MR) – Annual Statistics for 2017-2018
  • REP 558 (refer 17-428MR) – Annual Statistics for 2016-2017
  • REP 507 (refer 16-436MR) – Annual Statistics for 2015–2016

Table 2: Summary of key data from REP 645

Profile of companies

2018-19

2017-18

2016-17

No. of employees affected

76% of reports concerned companies with fewer than 20 employees

78% of reports concerned companies with fewer than 20 employees

79% of reports concerned companies with fewer than 20 employees

Industries with most lodgements

  • Other (business and personal) services (2,114 reports, or 28%)
  • Construction (1,601 reports, or 21%)
  • Accommodation and food services (1,159 reports, or 15%)
  • Other (business and personal) services (2,150 reports, or 28%)
  • Construction (1,642 reports, or 22%)
  • Accommodation and food services (1,064 reports, or 14%)
  • Other (business and personal) services (2,230 reports, or 29%)
  • Construction (1,611 reports, or 21%)
  • Accommodation and food services (884 reports, or 11%)

Assets and liabilities

  • 85% of failed companies had estimated assets of $100,000 or less
  • 38% of failed companies had estimated liabilities of $250,000 or less
  • 84% of failed companies had estimated assets of $100,000 or less
  • 39% of failed companies had estimated liabilities of $250,000 or less
  • 84% of failed companies had estimated assets of $100,000 or less
  • 43% of failed companies had estimated liabilities of $250,000 or less

Deficiency

62% of failed companies had an estimated deficiency of $500,000 or less

62% of failed companies had an estimated deficiency of $500,000 or less

64% 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 (3,841 or 51% of reports)
  • Poor strategic management of business (3,216 or 43% of reports)
  • Trading losses (2,915 or 39% of reports)
  • Inadequate cash flow or high cash use (3,743 or 49% of reports)
  • Poor strategic management of business (3,484 or 46% of reports)
  • Trading losses (2,994 or 39% of reports)
  • Inadequate cash flow or high cash use (3,626 or 47% of reports)
  • Poor strategic management of business (3,542 or 46% of reports)
  • Trading losses (2,753 or 35% of reports)

Top 3 alleged possible misconduct

  • s588G(1)–(2) Insolvent trading (5,350 or 71% of reports)
  • s180 Care and diligence - Directors’ and officers’ duties (4,141 or 55% of reports)
  • s286 and 344(1) Obligation to keep financial records (3,294 or 44% of reports)
  • s588G(1)–(2) Insolvent trading (5,264 or 69% of reports)
  • s180 Care and diligence - Directors’ and officers’ duties (4,097 or 54% of reports)
  • s286 and 344(1) Obligation to keep financial records (3,329 or 44% of reports)
  • s588G(1)–(2) Insolvent trading (4,878 or 63% of reports)
  • s180 Care and diligence -Directors’ and officers’ duties (3,818 or 49% of reports)
  • s286 and 344(1) Obligation to keep financial records (3,335 or 43% of reports)

Dividends to unsecured creditors

In 96% 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 96% of cases, the dividend estimate was less than 11 cents in the dollar

Last updated: 18/12/2019 12:00