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

City Insolvency Discussion Group Wednesday, 1 March 2017 Pre-insolvency advisors and illegal phoenix activity Presented by Murray Thornhill, Director – HHG Legal 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 Liquidators “Pre -insolvency Phoenix developments Duties advisors” Activity Conflicts Pre-appointment Reforms Examples of Interest meetings

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 on 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 ounta 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

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’ Illega gal Genuine nuine busine ness failure re 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 Sale of assets to new company for sold at arm’s length/market value less than market value Positive outcome for creditors Negative return for creditors Usually transparent to creditors No transparency to creditors

 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: Frau audu dulen lent t Trans nsac actio tions ns Duty of care and diligence - s 180 Failing to disclose property of the company, Good faith, best interest and proper purpose improper disposition or fraudulent concealment of -s 181 property, or the concealment of debts s 590 Improper use of position - s 182 Incurring of certain debts; fraudulent conduct s Improper use of information - s 183 592 Director's duty to prevent insolvent trading by Frauds by officers s 596 company s 588G Entering into agreements or transactions to avoid employee entitlements -s 596AB Trans nsactio tion n relate ated d prov ovisi ision on Trans nsactio tion n relate ated d prov ovisi ision on Voidable transactions s 588FE Voidable transactions s 588FE Uncommercial transactions s 588FB Uncommercial transactions s 588FB Insolvent transactions s 588FC Insolvent transactions s 588FC Unreasonable director related transactions s unreasonable director-related transactions 588FDA 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 Department of the Environment Australian Border Force Department of Treasury and Finance SA Australian Competition & Consumer Fair Work Ombudsman Commission NSW Police Force Australian Criminal Intelligence NSW Fair Trading Commission Office of State Revenue NSW Australian Financial Security Authority Office of State Revenue QLD Australian Securities & Investments Office of State Revenue WA Commission Queensland Building & Construction Australian Taxation Office Commission Australian Transaction Reports and Analysis Centre Return to Work SA Clean Energy Regulator State Revenue Office TAS Commissioner of State Revenue VIC Territory Revenue Office NT Department of Employment 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 of 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, 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

Thank you – Any questions?

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