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COLLEAGUES
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THE OFFICIAL SV PARTNERS NEWSLETTER
SUBMISSIONS TO CONSULTATIONS FOR THE IMPROVEMENT OF THE AUSTRALIAN INSOLVENCY INDUSTRY Matth e w Hu ds o n - Associ a te Di rector | Bri s bane
SV Partners is committed to shaping the landscape of insolvency and related legal frameworks to drive efficiencies and improve outcomes for all stakeholders. Our team have recently submitted three critical responses to Government consultations which may have substantial implications on the insolvency industry. Our submissions addressed consultations below: • • •
the
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Personal Insolvency Consultation – Short term reform opportunities to improve the personal insolvency system; Consultation Paper 372 – Guidance on Insolvent Trading Safe Harbour Provisions – Update to RG 217; and Public Consultation on the Government’s Response to the Statutory Review of the PPSA 2009
Personal Insolvency Consultation: As a firm, SV Partners conducts one of the highest rates of personal insolvency appointments in Australia. Our submission to the Attorney-General’s Department with respect to the Personal Insolvency Consultation addresses several key points regarding proposed changes to Australia's Personal Insolvency legislation. We offer the following insights: 1. Bankruptcy Threshold: SV Partners does not support the proposed increase in the bankruptcy threshold from $10,000 to $20,000. We believe that such a small increment is unlikely to have a significant impact on the insolvency regime due to the selfregulating nature of the process. We are also of the opinion that there is a need to consider various factors such as the impact on body corporate managers, lending activities, and the cost to the Australian Financial Security Authority (AFSA) in implementing this change. 2. Response Time to Bankruptcy Notice: SV Partners opposes extending the debtor's response time from 21 to 28 days. We believe that this extension may not make a substantial difference in debtor behaviour and argue that creditors' rights need to be balanced with debtor considerations. 3. Reduced Record Period on the NPII: SV Partners supports the proposal to reduce the permanent record period on the National Personal Insolvency Index (NPII) to seven years for bankruptcies. We view this change as a positive step, provided appropriate safeguards are in place, particularly concerning "serial bankrupts." There is also the need for cultural changes in lending institutions regarding how former bankrupts are handled. In summary, SV Partners believes in the importance of balancing the rights of creditors and debtors and suggest that the proposed changes may have limited
impact on the insolvency regime, urging a broader consideration of potential consequences. Consultation Paper 372 – Guidance on Insolvent Trading Safe Harbour Provisions – Update to RG 217: In our view, the draft updated RG 217 serves as a valuable resource for specialist relevant professional advisers and Directors of medium-to-large businesses, subject to specific suggested amendments. However, we do not believe it is applicable to micro or small-tomedium businesses (SMEs) or non-specialist relevant professional advisers. Our key recommendations include: 1. Broad Awareness Campaign: The Australian Securities and Investments Commission (ASIC) should conduct an extensive awareness campaign targeted at SMEs to help Directors gain a better understanding of their legal obligations and rights, particularly in situations involving potential insolvency or financial difficulties. 2. Legal Design Theory (LDT): The submission suggests that ASIC should embrace LDT to create a modern and user-friendly guide for SMEs on topics related to insolvent trading and Safe Harbour. LDT focuses on making legal information more approachable, readable, and understandable for the general public. ASIC is encouraged to create precedent checklists and handouts that can be readily adopted by professional advisers and SMEs. These resources would serve as practical tools to help stakeholders better understand and implement ASIC's proposed four Key Principles. 3. Clarity on Advisers: ASIC should employ stronger and unambiguous language when defining what constitutes an appropriate adviser to provide advice to companies or Directors facing financial challenges or seeking safe harbour protection. This clarification aims to prevent the misinterpretation of the criteria, ensuring that unqualified or unreliable advisers are not considered suitable.
IN THIS ISSUE Submissions to Consultations for the Improvement of the Australian Insolvency Industry
Liquidator Got it Wrong
Why is my Bankruptcy Income Different from m y Ta x a b l e Income?
Lockdown and Non-lockdown Director Penalty Notices
S c a n t o re a d m o re articles
4. Additional Insolvency Indicators: Our submission suggests the inclusion of extra insolvency indicators to supplement ASIC's existing list, which is commonly used by professionals. These additional indicators can enhance the accuracy of identifying potential insolvency issues. 5. Emphasizing Individual Application of Safe Harbour: ASIC should underscore that the concept of Safe Harbour applies individually to each Director, not solely to a collective group of Directors. This emphasis highlights the importance of Legal Professional Privilege (LPP) and ensures that each Director is aware of its significance when using the Safe Harbour provisions.
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S V P A RTNER S 7. Clarity on "Reasonably Likely": The submission suggests that ASIC should provide clearer guidance on the interpretation of the phrase "reasonably likely" in the context of leading to a better outcome under section 588GA(1)(a) of the Corporations Act 2001. The existing explanation in RG 217.75 is insufficient, particularly for SMEs and general readers. 8. Reminder on Insolvent Trading Safe Harbour Report: ASIC should remind the relevant Minister of the Final Report into the Review of the Insolvent Trading Safe Harbour, which was issued nearly two years ago. Despite the government's agreement with most of the recommendations in the report, no amendments have been made to section 588GA of the Corporations Act 2001 since its incorporation approximately six years ago. These recommendations collectively aim to improve the clarity, accessibility, and effectiveness of ASIC's guidance, particularly in assisting SME Directors in navigating complex financial situations and complying with their legal obligations. Public Consultation on the Government’s Response to the Statutory Review of the PPSA 2009 SV Partners has taken the lead in crafting a comprehensive submission to the AttorneyGeneral's Department regarding the Personal Property Securities Act (PPSA). While expressing partial support for the Whittaker Review, we highlight disagreements with certain proposed government changes. Notably, SV Partners oppose the removal of the ABN requirement for trust registrations and the easing of Purchase Money Security Interest (PMSI) recognition over commingled goods. We also expressed support for maintaining priority liens for external administrators, streamlining the registration process, and calling for a thorough review of the interplay between Section 340 of the Act and priorities afforded to the Fair Entitlements Guarantee (FEG) under the
Corporations Act. SV Partners has offered a detailed and considered response to the Whittaker Review and the subsequent government-proposed reforms. While acknowledging some areas of alignment with the proposed changes, we have expressed significant reservations and concerns regarding certain key aspects of the reform agenda. This comprehensive response seeks to provide insights into our perspective, reflecting our nuanced stance on these crucial matters. After nine long years of development, the government provided stakeholders less than two months to submit their feedback. SV Partners, like many other stakeholders, finds this timeframe to be inadequately short, particularly considering the depth and complexity of the proposed reforms. Key points which we have recommendations to include:
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1. PPS Interest Registration: One of the contentious points revolves around the requirement to register Personal Property Security (PPS) interests. The government proposes shifting from the existing framework, which requires registration against the Australian Business Number (ABN) of a trust, to registration against the Australian Company Number (ACN) of the Trustee. SV Partners opposes this change, with a preference for retaining the current ABNbased registration requirement. We believe the ABN-based system offers greater clarity and ease of use in identifying PPS interests associated with trusts. 2. PMSI Creditors Registration: The proposal to remove the requirement for Secured Creditors to tick the PMSI button on the register is another point of contention. SV Partners stands in opposition to this change, suggesting that maintaining the PMSI button requirement is more prudent. Preserving this requirement ensures that creditors clearly indicate their PMSI status, fostering transparency in the registration process.
3. Recognition of PMSI Creditors: We have expressed our concerns about the government's intent to make it “easier” for PMSI Creditors to be recognised over commingled goods. While the government's objective is to simplify the process, SV Partners anticipates that this change could potentially introduce additional complexities. Our apprehensions underscore the need for careful consideration when adjusting established legal frameworks. 4. Priority Liens for External Administrators: SV Partners aligns with the government's proposal to allow external administrators to retain priority liens over Secured Creditors. This position is reflective of the importance of providing External Administrators with the tools necessary to efficiently manage insolvency proceedings. We recognise the value of maintaining this priority, as it facilitates the orderly distribution of assets during insolvency proceedings. 5. Streamlining the Registration Process: SV Partners welcomes the government's intention to streamline the registration process. Recognising the inefficiencies and complexities that can be associated with registration, we view any reform in this domain as a positive step. Simplifying registration procedures can benefit all stakeholders involved in the process. 6. Review of Circulating Assets Definition: In addition to specific reforms, SV Partners advocates for a comprehensive review of the interplay between the statutory definition of circulating assets under section 340 and the priorities afforded to the FEG under the Corporations Act. This recommendation underscores the importance of carefully examining the relationship between these elements to ensure a fair and equitable distribution of assets in insolvency scenarios. As the reform process unfolds, SV Partners will continue to provide input with the intention of shaping the final outcomes, influencing the direction of corporate regulatory reform in Australia.
LIQUIDATOR GOT IT WRONG Malcolm Fi e l d - Di rector | Perth
Okay, I got it wrong. As you know, it can be dangerous to say that as a professional, but I think it's fair to say that professionals, even the most diligent, will not always be right. So what am I talking about? The Company’s project had been completed, its plant returned to Perth from site, but the two Directors were in dispute as to how the plant should be realised and the proceeds applied. They came to “agree” that the court should appoint me as Liquidator to deal with the company’s assets and liabilities. One area of dispute was the events leading up to the termination of employment of the Managing Director (MD). The other Director was not an employee and so he was not on the payroll. Given the project had ended, some run-off issues attended, leaving the main issues being sale of the company plant, settlement of minor liabilities and distribution of a $1M to $2M surplus, it appeared to me that that these issues were equally the responsibility of each Director (general duties) and that the MD’s role must
have ceased at some point after the project had ended and before the court made the winding up orders. While the MD had not attended any company/project premises in many months, he asserted that his employment had continued right up until the Court made ordered the winding up. The MD submitted a proof of debt for entitlement in excess of $400,000. It seemed to me that the claim should be admitted for only a fraction of this sum so a partial admission/partial rejection notice was issued which gave the MD a 21 day period to apply to the Court to set my decision aside and make an alternate adjudication upon the claim. There was a number of factual and legal arguments, which I’ll keep short for the purposes of this article, but they included: • •
my lawyer’s view that the employment contract had been abandoned; the circumstances around the employment of the Managing Director and how the
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terms came to be incorporated (or not) into the employment contract – including some tracing of the flow of email correspondence and how the MD had amended the template contract to provide for his termination only by a unanimous decision of the board; and while it initially struck me as odd to have a unanimous decision of the board (of 2 Directors) to remove the MD, would it have been any fairer if the other Director could unilaterally terminate the MD’s employment?
The other Director had himself added as a party to the proceedings and there were some tense times in court while the parties tested each other on the terms of the MD’s contract. This case is arguably a classic shareholder dispute case and hopefully a reminder that there are multiple ways to interpret the same set of facts, so parties should try to be pragmatic, seeking the middle ground where possible. The Supreme Court Master was not playing
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King Solomon. In a judgment that referenced Goldilocks and the Three Bears, the Master found in favour of the MD, directing me to admit the claim in full, to pay the MD’s costs. I count myself lucky that the Court found that my costs ought properly be paid from the assets of the company too. The other Director paid his own costs and had his shareholder distribution reduced as a result of all of the other costs being paid from the winding up of the company. As an unstated gesture of good faith, I undertook the final component of the file at no charge, a 25% write-off on the job. It was the right thing to do in that case. The Liquidator and legal fees consumed 10% of the available assets – a good result compared to many liquidations,
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however, time again, I suspect both Directors/Shareholders would have preferred a no cost outcome over this one. What can you takeaway from all of this? Liquidator proof of debt determinations are sometimes black and white, representing a “quasi judicial determination by an Officer of the Court” while other times it would be prudent to obtain legal advice and consider whether an appeal to the Court is the right course of action for the Creditor. A deal may be capable of negotiation which is a better outcome for all Creditors! At SV Partners we are always happy to discuss your client’s scenarios and the options available to them.
svpartners.com.au | 1800 246 801 Fo l l ow U s
WHY IS MY BANKRUPTCY INCOME DIFFERENT FROM MY TAXABLE INCOME? Travi s Ol se n - Di re cto r | Ad e la i d e
Most people associate the term income with the income that is disclosed in their tax return, however if a person becomes bankrupt, what is included as income in the Bankruptcy Act 1966 (Act) is much broader.
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In the September Quarterly Newsletter, Daniel Luckman of our Sunshine Coast office described how a bankrupt was not prevented from earning income during the period of their bankruptcy and how that income was treated for the purposes of the bankruptcy.
Examples of Income There are many unique situations that arise in a bankruptcy context and the following are examples of benefits/other income that may not normally be included in an individual’s tax return but are included in the bankruptcy income contribution assessment.
Further articles have been prepared by SV Partners on other aspects of income, which are relevant and may be of interest including: • •
What is Income? Written by Malcolm Field of our Perth office Post-Bankruptcy Income and After Acquired Property – Beware the Pitfalls! Written by Fabian Micheletto of our Melbourne office
What is Income – in Bankruptcy? Section 139L(1) of the Act, sets out what is considered income for the purposes of Division 4B of Part VI of the Act (income contribution division). The definition includes income according to its “ordinary meaning” which is modified by a number of additions to what is considered income even if it does not fall within the ordinary meaning of income. These additions include (but are not limited to): • •
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Benefits that fall within that meaning in the Fringe Benefits Tax Assessment Act 1986 (FBT); Loans or other monies paid to the bankrupt (or for the benefit of the bankrupt) from associated entities, which may not necessarily be enforceable at law; and Funds received by another person/entity as a result of work done or services performed by the bankrupt.
What is not Income – in Bankruptcy? The Act specifically excludes certain receipts as not being income including (but not limited to): • Child Support received;
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Funds received under a legal-aid scheme; Superannuation contributions where those obligations are provided under a State, Territory or Commonwealth law; and Family tax benefits.
Housing and Vehicles Provided by Relatives It is not uncommon for a house or motor vehicle to be provided to a bankrupt rent-free, not in any employment capacity, which will be caught as income for the purposes of the Act. Whilst the FBT applies only to employers, section 139L(1)(v) of the Act, modifies the operation of the FBT to assess the benefit received as if “the provider were the employer of the bankrupt as an employee and the provider had provided the benefit in respect of the employment of the bankrupt”. The income may be an equivalent market rent in the case of free housing provided to the bankrupt or in the case of a motor vehicle, the benefit will be calculated by reference to a statutory formula as set out in the FBT (with necessary modifications for the purposes of bankruptcy). Funds Provided by Family to Assist with Expenses An example that may be caught by the Act’s income definitions is where a bankrupt’s children attend a private school and due to a reduction or loss in income, the bankrupt’s family pay the school fees. Section 139(L)(1)(vi) of the Act captures as income the value of any loan provided by an associated entity of the bankrupt, even if: • •
The loan is not paid to the bankrupt but is paid or applied at the bankrupt’s discretion; or The loan isn’t considered a loan at law or
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in equity. Accordingly, the value (or a portion thereof) of the school fees may be assessed as income in the bankrupt’s income contribution assessment. Revenue Received by Another Entity Circumstances can arise, where a person who is about to become bankrupt may interpose between them and their source of income another legal entity. As an example let’s assume that the bankrupt’s spouse may be a Director of a company that is Trustee of a discretionary trust, but where the bankrupt provides all the services that generate the income. Now assuming that the Personal Services Income provisions set out in the tax legislation do not apply, the company as Trustee of the trust would prepare its own tax returns and distribute the income to any beneficiary at its discretion. This may exclude the bankrupt or may include a small amount to the bankrupt but not enough to require any contributions to be paid to the bankrupt’s Trustee, with the balance being payable to the spouse or other related party beneficiary. Using the above example, section 139L(1)(vii) of the Act may capture the income of the trust as being income of the bankrupt. The Trustee in Bankruptcy must take into account expenses necessarily incurred by the trust in earning the income, except expenses of a capital nature. These expenses may differ from deductions allowed for income tax purposes. For example, depreciation on depreciable assets does not reduce the bankrupt’s income for the purposes of the income contribution calculation. Accordingly, the bankrupt’s income for the purposes of calculation of income contributions may be significantly increased even though they didn’t receive the income (or received a small distribution thereof). But wait there’s more Whilst the Act defines certain other receipts as income, the Act also provides a mechanism for the Trustee to assess income of a bankrupt
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S V P A RTNER S as greater than the amount the bankrupt either receives or declares for income tax purposes. Section 139Y of the Act allows the Trustee to determine that the bankrupt receives or received remuneration in excess of the amount they were actually paid. A PAYG employee working for an unrelated entity will not usually encounter this situation, however, where the bankrupt is employed by a related entity the Trustee will usually closely scrutinise the arrangement. The section sets out the requirements for determining the reasonable remuneration which include:
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Assessment of the minimum rates or salary for the employment based on an industrial instrument; or
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The amounts that might reasonably be expected to be received for similar work or services if there was no connection between the bankrupt and the employer.
Lastly, even if a bankrupt does not receive the funds which may be reinvested, accumulated, capitalised or otherwise dealt with on behalf of the bankrupt, section 139M of the Act allows the Trustee to assess these monies as being income of the bankrupt.
Conclusion Most people will associate income with the income they include in their tax return which holds true in most situations. However as shown above, if a person becomes bankrupt, their income may be significantly greater than the amount they declare to the tax office due to broader definitions of income as set out in the Act. The Act provides wide powers for the Trustee to assess income of a bankrupt even in circumstances where that person never receives the funds.
LOCKDOWN AND NON-LOCKDOWN DIRECTOR PENALTY NOTICES Shau n Fernando - Associate Director | Melbourne
Company Directors are legally responsible for ensuring that a company's tax and superannuation obligations are reported and paid on time. Most of our readers would be aware of the director penalty regime, and how the ATO can utilise these legislative provisions to force the Director(s) of a company to personally pay outstanding:
guarantee charge statements within three (3) months of the due date for lodgement, however the PAYG withholding, GST and/or SGC debts remain unpaid. The notice gives the Director 21 days to take one of the following actions:
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Pay As You Go Withholding (PAYGW) Goods and Services Tax (GST) Superannuation Guarantee Charge (SGC).
A Director becomes liable to a penalty at the end of the day on which the company is due to meet its obligation. At this time, the penalty is created automatically. The ATO does not need to issue any notices or take any action to create the penalty. However, the Commissioner of Taxation (or the appropriate Delegate of the Commissioner), must not commence proceedings to recover a director penalty until 21 days after a Director Penalty Notice (“DPN”) is issued to a Director. Even if you resign as a Director of the Company, you can be liable for director penalties for liabilities of the Company. Similarly, if you are appointed as a new company Director, you can become personally liable for any unpaid amounts. There are two types of DPN’s: non-lockdown DPN and lockdown DPN. Non-lockdown DPN A non-lockdown DPN can be issued to a Director of a company that has lodged its business activity statements (BAS), instalment activity statements (IAS) and/or superannuation
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pay the debt in full; or appoint a Voluntary Administrator (VA) over the Company; or appoint a Small Business Restructuring (SBR) Practitioner over the Company; or appoint a Liquidator over the Company.
There is a misconception that Directors can avoid personal liability by entering into a payment plan with the ATO within 21 days, however this is not correct. The payment plan simply allows the Director to repay the liability by way of instalments, however the Director becomes personally liable for the whole debt after the end of the 21-day period. In the event the Company (or the Director) defaults on the payment plan, the ATO can commence proceedings against the Director personally, seeking recovery of the relevant tax debt(s). Lockdown DPN A lockdown DPN can be issued to a Director of a company where the Company has failed to lodge its BAS, IAS and/or SGC statements within three (3) months of their due date for lodgement. In this case, the penalty permanently locks down on the Director and there is no ability to remit the penalty (i.e. avoid personal liability), except by paying the debt in full. It has been reported that the ATO intends to utilise the DPN regime more often in 2024 as the
ATO ramps up its actions to recover $30 billion in overdue small business tax. We have recently become aware that the ATO can (and will) issue lockdown DPN’s on company Directors even after the Director has: • • •
placed the Company into Liquidation; or appointed a Voluntary Administrator over the Company; or appointed a Small Business Restructuring Practitioner over the Company.
We have seen instances where the ATO has issued lockdown DPN’s on company Directors where the Directors have placed the Company in Voluntary Administration and Creditors (particularly where the ATO was the only major creditor) have subsequently resolved to accept the Directors’ proposal for a Deed of Company Arrangement (DOCA). Many company Directors and professional advisors are not aware of the difference between a standard DPN (i.e. non-lockdown DPN) and a lockdown DPN. It is important to understand your obligations as a company Director and, in particular, how you may not be able to avoid personal liability of certain company debts, including tax debts, even if you appoint an insolvency practitioner over the Company. The moral of the story is to have your lodgements up to date and seek specialist insolvency advice sooner than later! Your local SV Partners’ team is always available to assist you and your clients with any DPN or other insolvency related queries.
LATEST NEWS 20 years as a Registered Liquidator David Stimpson - Executive Director | Queensland
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Congratulations to Queensland Executive Director, David Stimpson, who celebrated his 20th Anniversary as a Registered Liquidator. David became a Registered Liquidator on 13 November 2003 and is one of the founding Directors of SV Partners.
ARITA Life Member Alan Scott - Director | Adelaide In recognition of his unparalleled and sustained commitment, the ARITA - Australian Restructuring Insolvency & Turnaround Association Board proudly (and to Alan's great surprise) awarded Alan Scott the esteemed title of Life Member. Life membership is a distinction given only to those who’ve truly set the gold standard in their contributions. Liability limited by a scheme approved under Professional Standards Legislation
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