Welcome to New Partner and Reforms to Insolvency Law

Mike Smith

01 May 2017

Smith Hancock Welcomes New Partner Robert Kite

We are delighted to announce the appointment of Robert Kite as a Partner of Smith Hancock. This exciting appointment realises our long-term objective to be a full service insolvency firm, as we now have the ability to accept formal and informal personal bankruptcy appointments.

Robert is both a Trustee in Bankruptcy and a Registered Liquidator, and has significant experience in dealing with all types of insolvency appointments at the corporate and personal level.

Reforms to insolvency laws take effect

The recent Insolvency Law Reform Act 2016 (ILRA) represents the most significant changes to bankruptcy and corporate insolvency laws in the last two decades.

The key reforms introduced by the ILRA will take effect from September 1, 2017 – however a number of changes commenced on March 1.

Most of the March 1 reforms are directed at promoting competency and professionalism in the insolvency industry, and include changes to practitioner registration and disciplinary processes.

The significant amendments introduced on March 1 include:

Removal of official liquidators
The term “official” no longer applies to court appointed liquidators
Relation-back day definition
A liquidator may seek to recover (claw back) payments made, or, void a transaction entered into between a company and a creditor as an unfair preference. To do so, in addition to other criteria, the liquidator must demonstrate that the transaction was entered into during the period of six months ending on the relation-back day.

When a voluntary administration (VA) is preceded by a winding up application, the relation-back day will now be the day the winding up application was filed with the court. This had previously been the date on which the VA commenced.

The rationale of this new legislation is to prevent abuse of last minute VA appointments attempting to shorten the relation-back period.

In future newsletters, we will provide commentary on the changes which will take effect on September 1, 2017.

The consequences of failing to maintain and retain company records

The recent NSW Supreme Court decision in Swan Services Pty Ltd (In Liquidation) considered the circumstances in which a company's failure to adequately maintain its books and records could result in a presumption of insolvency, and lead to claims against its directors.

Section 286 of the Corporations Act, 2001 (Cth) (“the Act”) (CA) requires a company is to retain books and records adequately recording and detailing its financial outcomes, performance and all transactions for a minimum period of seven years. The records must be maintained in such a condition that the financial statements could be audited. As a corollary, Section 588E(4) of the Act stipulates that a company is presumed to be insolvent during any period in which it has failed to adequately comply with the requirements of Section 286(1).

The NSW Supreme Court affirmed that the presumption arises in circumstances where:

No documents which could be considered to constitute “financial records” were maintained within a certain period.
Documents which were kept were inadequate or deficient in their content.

In Swan Services, the relevant factors supporting the courts finding on the presumption of insolvency include:

There was a long history of delinquency in the preparation of financial statements;
It was not possible to reconcile the Company’s financial position in the months leading up to the Liquidator’s appointment;
The financial statements (unsigned) did not agree with the returns lodged with the ATO; and
There was a poor record of compliance with Income Tax reporting and payments.

The liquidator argued that, although there were documents maintained by the company which technically fell within the general definition of "financial records" as set out in the Act, they were insufficient to permit the preparation of true and fair financial statements, and therefore breached Section 286 of the Act.

On the basis of the liquidator's evidence, the court concluded that the books maintained by the company were deficient and that Swan Services was insolvent. The Director was held to be liable for approximately $11 million for incurring debts while the Company was insolvent or a reasonable person would have expected the Company was insolvent.

Warnings for directors: maintain and retain accurate books and records at all times.

ASIC bans Queensland director

In March 2017, ASIC banned a Queensland director from managing corporations for a period of two-and-a-half years, effective from 21 January 2017.

The former director, Michael Ian Davey, came to ASIC's attention after liquidators were appointed to two companies which Mr Davey was running.

The liquidators' reports suggested to ASIC that Mr Davey had:

Failed to prevent the companies from trading whilst insolvent.
Failed to ensure that the companies paid appropriate taxes.
Failed to discharge his director's duties.
Engaged in phoenix activities (namely transferred assets from an indebted company into a new company, meaning that creditors of the original company could not recover debts owed to them).

ASIC's powers to issue a disqualification arise from Section 206F of the CA. Those powers come into force when a person has been an officer of two or more companies within a seven-year period, and those companies were wound up, with liquidators' reports being provided to ASIC regarding the company's insolvency and inability to pay debts.

Mr Davey had appealed the initial decision by ASIC to the Administrative Appeals Tribunal (AAT) seeking a stay of the disqualification and a confidentiality order regarding the disqualification and his appeal against the same.

Although he failed in his quest to keep ASIC's action confidential, the ultimate question as to the whether the disqualification will stand is still to be heard by the AAT.

According to ASIC Commissioner Peter Kell, this latest disqualification demonstrates ASIC’s ongoing pursuit of directors who are failing to act lawfully and ethically when managing corporations.

It is important for practitioners to advise clients who are directors or company officers that they must be aware at all times of their obligations and do their utmost to discharge them with diligence.