City Insolvency Discussion Group Wednesday, 1 March 2017 - - PowerPoint PPT Presentation

Wednesday, 1 March 2017 Pre-insolvency advisors and illegal phoenix activity

Presented by Murray Thornhill, Director – HHG Legal Group

City Insolvency Discussion Group

Murray Thornhill Director Tim Colcutt Associate

West Perth Level 1, 16 Parliament Place West Perth WA 6005 Phone: (08) 9322 1966 Mandurah Suite 3, 106 Pinjarra Road Mandurah WA 6210 Phone: (08) 9535 1855 Albany 49 Peels Place Albany WA 6330 Phone: (08) 9841 2322

Murray Thornhill, Director HHG Legal Group

Recent developments Liquidators Duties Phoenix Activity “Pre-insolvency advisors” Examples Reforms Pre-appointment meetings Conflicts

• f Interest

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)

“Turnaround business advisor” Stephen Hall Assisted a director to conceal ownership of assets. Fined $6,600. FWO WO v v James mes Nelson

• n Pt

Pty Ltd & Anor r [201 016] 6] FCCA CA 531 531 Sole director stripped and transferred assets from an old company to defeat employees claims. Ordered to pay $98,000. Chartere rtered d Accoun

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tants nts – Mr Scott t 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

The ‘Technically Legal Phoenix’ Genuine nuine busine ness failure re Illega gal Insolvent Insolvent No intention to defraud creditors Transferring assets to defeat creditors No breach of directorial duties Breaching directorial duties No asset transfer or assets are sold at arm’s length/market value Sale of assets to new company for less than market value Positive outcome for creditors Negative return for creditors Usually transparent to creditors No transparency to creditors 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.

 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 Improper use of information - s 183 Director's duty to prevent insolvent trading by company s 588G Trans nsactio tion n relate ated d prov

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ision

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Voidable transactions s 588FE Uncommercial transactions s 588FB Insolvent transactions s 588FC Unreasonable director related transactions s 588FDA Frau audu dulen lent t Trans nsac actio tions ns 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 Trans nsactio tion n relate ated d prov

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ision

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Voidable transactions s 588FE Uncommercial transactions s 588FB Insolvent transactions s 588FC unreasonable director-related transactions s 588FDA

 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.

 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

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

 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.

 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

• f interest.

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?

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

 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 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.

 Director ID Numbers  Greater restrictions on directors involved in failed businesses,

• nce 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

Thank you – Any questions?

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

City Insolvency Discussion Group