City Insolvency Discussion Group

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1 City Insolvency Discussion Group Wednesday, 1 March 2017 Pre-insolvency advisors and illegal phoenix activity Presented by Murray Thornhill, Director HHG Legal Group

Place West Perth WA 6005 Phone: (08) 9322

2 Murray Thornhill Director Tim Colcutt Associate West Perth Level 1, 16 Parliament Place West Perth WA 6005 Phone: (08) Mandurah Suite 3, 106 Pinjarra Road Mandurah WA 6210 Phone: (08) Albany 49 Peels Place Albany WA 6330 Phone: (08)

3 Murray Thornhill, Director HHG Legal Group

4 Recent developments Liquidators Duties Phoenix Activity Pre-insolvency advisors Reforms Examples Conflicts of Interest Pre-appointment meetings

5 Phoenixing companies too easy and lucrative in Australia, new report finds (ABC, 24 February 2017, Dan Oakes and Sam Clark) Scrutiny of phoenix trading intensifies (Financial Review, 26 February 2017, Adele Ferguson) Melbourne man identified in multi-million dollar tax evasion investigation still in business (ABC, 7 February 2017, Dan Oakes and Sam Clark) ASIC scrutinises insolvency practitioners' independence (The Australian, 6 December 2016, Richard Gluyas)

6 Turnaround business advisor Stephen Hall Assisted a director to conceal ownership of assets. Fined $6,600. FWO v James Nelson Pty Ltd & Anor [2016] FCCA 531 Sole director stripped and transferred assets from an old company to defeat employees claims. Ordered to pay $98,000. Chartered Accountants Mr Scott and Mr Dwyer Operated a pre-appointment advisory business. Cited fictitious persons as company directors and lodged false and misleading information with ASIC. 8 and 12 months imprisonment

7 Phoenix activity is not defined in legislation. The term is most often used where an indebted company transfers assets at less than fair value to a new company, which has similar directors or members. The Technically Legal Phoenix Genuine business failure Illegal Insolvent No intention to defraud creditors No breach of directorial duties No asset transfer or assets are sold at arm s length/market value Positive outcome for creditors Usually transparent to creditors Insolvent Transferring assets to defeat creditors Breaching directorial duties Sale of assets to new company for less than market value Negative return for creditors No transparency to creditors

8 Once appointed, a liquidator owes a general duty to act honestly and impartially, a duty to act in good faith and in the best interests of the company and its members. A liquidator owes professional duties pursuant to the codes of conduct, specifically in relation to conflicts of interest.

Directors and officers duties: Duty of care and diligence - s 180 Good faith, best interest and proper purpose -s 181 Improper use of position - s 182

588FE Uncommercial transactions s 588FB Insolvent transactions s 588FC unreasonable director-related transactions s 588FDA Fraudulent Transactions Failing

debts; fraudulent conduct s 592 Frauds by officers s 596 Entering into agreements or transactions to avoid employee entitlements -s 596AB Transaction

9 Directors and officers duties: Duty of care and diligence - s 180 Good faith, best interest and proper purpose -s 181 Improper use of position - s 182 Improper use of information - s 183 Director's duty to prevent insolvent trading by company s 588G Transaction related provision Voidable transactions s 588FE Uncommercial transactions s 588FB Insolvent transactions s 588FC unreasonable director-related transactions s 588FDA Fraudulent Transactions Failing to disclose property of the company, improper disposition or fraudulent concealment of property, or the concealment of debts s 590 Incurring of certain debts; fraudulent conduct s 592 Frauds by officers s 596 Entering into agreements or transactions to avoid employee entitlements -s 596AB Transaction related provision Voidable transactions s 588FE Uncommercial transactions s 588FB Insolvent transactions s 588FC Unreasonable director related transactions s 588FDA

10 Tax evasion Avoiding employee entitlements (wages and superannuation) Avoiding creditors Asset protection or illegal phoenix activity Hiding breaches of director duties

Installing of dummy / replacement directors (including the homeless or elderly) without consent. The new directors may become liable for the existing company debts.

11 Installing of dummy / replacement directors (including the homeless or elderly) without consent. The new directors may become liable for the existing company debts. Advising to create a new company to collect payables owed to the old company. Typically, illegitimate pre-insolvency advisors cold call troubled companies, offering assistance to protect assets from creditors

12 ACT State Revenue Office Australian Border Force Australian Competition & Consumer Commission Australian Criminal Intelligence Commission Australian Financial Security Authority Australian Securities & Investments Commission Australian Taxation Office Australian Transaction Reports and Analysis Centre Clean Energy Regulator Commissioner of State Revenue VIC Department of Employment Department of the Environment Department of Treasury and Finance SA Fair Work Ombudsman NSW Police Force NSW Fair Trading Office of State Revenue NSW Office of State Revenue QLD Office of State Revenue WA Queensland Building & Construction Commission Return to Work SA State Revenue Office TAS Territory Revenue Office NT Western Australia Building Commission

13 No specific regulations in Australia unlike the UK. High failure rate of pre-packs in the UK. In Australia, pre-position sales involves a prearranged sale of assets of a company, which is then effected after the company enters into administration. The productivity commission appears to be satisfied with the current regulatory scheme in relation to related party transactions including reliance on directorial duties.

14 Advice to related parties prior to appointment will not necessarily create a conflict preventing a liquidator for acting. Reliance on referrals from accountants could create a conflict of interest.

15 Donald the director of Company B approaches you as a prospective liquidator. What are the do and don ts of a scope at a preliminary meeting bearing in mind you may or not be the liquidator?

16 1. Explain that information gained from any meeting could be used in the administration of the company, and that the general nature of the conversations will be disclosed to creditors prior to acceptance of the appointment. 2. Explain who you are act for in administration. 3. Keep discussions general and restricted to the Company s financials where possible. 4. Don t commit yourself to any action or create any expectation. 5. If confronted with a complex question, don t feel pressured to answer it, but don t ignore a direct question 6. If you want to be in a position to accept the appointment, refer a company director to another practitioner or a lawyer for advice

17 The liquidator may report to ASIC insolvent trading breaches director s duties failure to maintain proper books Advising inter-entity loan accounts will be recovered by the liquidator Preference recoveries if applicable Priority entitlements, such employee benefits, and possible exclusion of family members

Company A (an associated entity say owned by Director s brother) rents plant to the Director s Company B (its B s Director asking about the process) you notice Company A has not perfected a security

18 Company A (an associated entity say owned by Director s brother) rents plant to the Director s Company B (its B s Director asking about the process) you notice Company A has not perfected a security registration on PPSR. What should or should not be discussed about this? A director works out during the discussion to wait for a big debtor deposit to be received before making an appointment so a company overdraft account (secured against the Director s home) is reduced to nil.

19 Director ID Numbers Greater restrictions on directors involved in failed businesses, once restricted directors must apply to the Court to set aside the restriction Independent panels to value sale of assets to related parties Sharing of data with liquidators by the ATO and ASIC Provision of tax debt data to credit reporting agencies

20 Thank you Any questions?

21 City Insolvency Discussion Group Next CIDG session: Wednesday, 5 April 2017 Liquor Licensing Considerations in Insolvency Situations Joanne Matich

Liquidator s Statutory Report to Creditors

Liquidator s Statutory Report to Creditors Metaltech Fabrications Pty Ltd (in Liquidation) ACN: 099 488 034 ( the Company ) Prepared pursuant to section 70-40 of the Insolvency Practice Rules (Corporations) 2016 Dated 12 February 2018 Liquidator