ASIC Statistics and Enforcement

Latest Insolvency Statistics from ASIC

It’s the start of another calendar year, so how are Australian businesses faring? Here is a review of the latest statistics and observations made by the Australian Securities and Investments Commission ("ASIC") following review of statutory reports lodged by liquidators, receivers and voluntary administrators for the year ending 30 June 2016. 

• 10,078 external administrator reports were lodged, with NSW accounting for 38.2%.
• Of those, 79% related to companies with less than 20 employees.
• The industries with the highest levels of representation were business and personal services (31%) and construction (21%).
• 86% of the failed companies were assessed at having estimated assets of $100,000 or less - 61.2% had estimated assets of $10,000 or less.
• The top three claimed causes of failure comprised inadequate cash flow (46%), poor strategic management (46%) and poor financial control (34%).
• Possible causes of misconduct leading to insolvency included insolvent trading (61%), obligation to keep financial records (42%), and failure of directors to act with care and diligence (38%).
• Most categories of potential misconduct related to alleged breaches of civil obligations (81.1%).
• The dividends estimate to unsecured creditors in 97% of cases was less than 11 cents in the dollar.

ASIC Enforcement Outcomes – January to June 2016

During the six months to June last year, ASIC's enforcement activities included:

• Starting 101 investigations, and completing 93.
• Removing 24 individuals from the provision of financial services.
• Laying 96 criminal charges. 
• Issuing 75 infringement notices (collecting revenue of $1.12m as a result).

ASIC's activity covered market integrity, corporate governance, financial services and small business compliance requirements. It is anticipated that ASIC will continue to focus on these areas in upcoming months.

Some of the most significant cases prosecuted by ASIC during this period included:

• Successful insider trading convictions recorded against Hui Xiao (former Hanlong Mining Managing Director) and Oliver Curtis.
• Securing the convictions in the Supreme Court of Queensland of five former executives of the MFS Group (also known as Octaviar) for breaches of directors’ and officers’ duties arising from the misappropriation of $143.5m of unitholders' money for the repayment of other debts within the group.

One of the key trends apparent from ASIC's recent statistics is an ongoing proactive approach in relation to maintaining market integrity and corporate governance.

With this in mind, we examine four of the most significant developments in this area during late 2016.
 
1. Four Years Imprisonment for Global Rule Director

In October 2016, Frederick Leslie Hansen, formerly a director of Gold Coast-based Global Rule Pty Ltd, pleaded guilty to having used his position to cause a detriment to the company on several occasions between October 2008 and September 2010. Mr Hansen pleaded guilty to two (2) counts of dishonestly using his position as a director of Global Rule and was sentenced to four (4) years imprisonment.  Global Rule was an unregistered investment scheme which promised annual returns of over 21% to investors.
 
The specific allegations centered on Mr Hansen intentionally permitting the company to incur unrelated personal debts of $8.4m, and subsequently using $5.7m of investors' funds to repay the debts.

At the time of liquidation, it was estimated that $16.3m remained owing to approximately 170 individual lenders.

2. Disqualification of incompetent director

In December 2016, ASIC disqualified George Nassar from managing companies for the maximum timeframe of five years. The disqualification arose from a finding that Mr Nassar was an incompetent director.

ASIC stepped in after an investigation concluded that Mr Nassar, who was involved in 18 companies which had ultimately failed, did not ensure the maintenance of proper financial records, failed to ensure that superannuation was paid, did not assist liquidators, and allowed himself to be appointed to several companies which continued to incur liabilities – despite those companies already facing financial difficulties.

3. Fines for false statements

Sam Grace, a Sydney-based company director of Grace Enterprises (NSW) Pty Ltd, pleaded guilty to the offence of lodging a document with ASIC containing a false or misleading statement.

That document, an application for the voluntary deregistration of a company, contained a statement to the effect that the company was not a party to ongoing legal proceedings. This was false, as Grace Enterprises was involved in proceedings before the NSW Civil and Administrative Tribunal at the time.

ASIC Commissioner, Greg Tanzer reiterated in November 2016 that it is essential for ASIC's records to be up-to-date, in part to ensure that another party's legal rights are not interfered with, as would have been the case if Grace Enterprises could have been deregistered despite the ongoing legal proceedings. 

4. Results of ASIC's surveillance program

During the 2014/2015 financial year, ASIC started a surveillance program focusing on payment systems in the construction industry.

ASIC required principal contractors to ensure that subcontractors had met their payment obligations to their own employees, and provide statutory declarations to this effect, before head contractors would finalise invoices. During the surveillance, two subcontractors were found to have provided false statutory declarations. On one occasion, the principal contractor rendered payment in reliance on the statutory declaration.

Although strict enforcement action was not taken, ASIC required both subcontractors to review internal policies to avoid further potential misconduct.

ASIC's recent actions demonstrate an ongoing commitment to ensuring that businesses and directors fulfill their duties and obligations.

Helping clients to control tax debts

As many advisers will already be aware, the 2016/2017 Mid-Year Economic and Fiscal Outlook proposed a number of tax changes. One of these, coming into force on 1 July 2017, permits the Australian Taxation Office ("ATO") to disclose to credit ratings agencies details regarding the tax debt of certain businesses. It is contemplated that this will affect businesses with a tax debt of over $10,000, which has been owing for at least 90 days and have not made arrangements with the ATO.

Companies whose tax debt information is provided to ratings agencies could experience a downgrade in their credit rating, and a taxation debt default can remain on the credit file for up to five years.

To avoid this, accountants should consider advising clients who are potentially facing this situation to ensure that all debts are paid as quickly as possible, and if this can’t happen, that the ATO is kept fully informed of all developments and is kept in the loop regarding the ability of the client to start making repayments.