IN THIS ISSUE 01 Public Examinations - A Useful Tool for Insolvency Practitioners 03 Insolvent Deceased Estates, Inheritances and Bankruptcy 04 Insolvency Myth Busters and Helpful Facts Scan to read more articles
Public Examinations - A Useful Tool For Insolvency Practitioners
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Rebecca Coates - Supervisor | Adelaide
ublic examinations are a useful tool for insolvency practitioners to obtain information and establish facts about a company’s affairs, history and management.
The key provisions are set out in sections 596A and 596B of the Corporations Act 2001 (Act) and provide external administrators (Liquidators, Administrators, Deed Administrators, Receivers and Managers), with the power to examine the company officers or persons with knowledge of the examinable affairs of the company. The examinable affairs of a company include: ►
the promotion, formation, management, administration or winding up of a corporation; or
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any other affairs of the corporation; or
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the business affairs of a connected entity to the corporation.
Who can seek an examination? Public examinations are extremely useful tools for external administrators and may also be utilised by other ‘eligible applicants’ such as: ►
The Australian Securities and Investment Commission (ASIC); and
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A person authorised in writing by ASIC.
Who can be examined?
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After considering the scope of a company’s examinable affairs, clearly almost any person with knowledge of the company’s affairs or the business affairs of a connected entity of the company may be examined. The type of examination summons which will be issued will depend upon who is the intended examinee. The options are as follows: Liability limited by a scheme approved under Professional Standards Legislation
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A mandatory examination pursuant to section 596A of the Act may be brought against a director or officer of the company; or
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A discretionary examination pursuant to section 596B of the Act may be brought against any person connected to the company’s examinable affairs. That person may have taken part or been concerned in the company’s examination affairs and has been or may have been guilty of misconduct in relation to the company. Alternatively, that person may be able to provide information about the company’s examinable affairs.
Recent authority indicates that if you wish to make an application for an examination summons, it is crucial to ensure that there is a proper purpose for the examination. Largely, that the primary purpose of the examination can show a demonstrable benefit to the company, its creditors or contributories. Without a proper purpose for the examination, the recipient of the summons may seek to have the examination set aside as an abuse of process. What can they be used for? Our team have long utilised the power of public examinations in a range of circumstances to gather information that would not generally be available. Case Study 1 In one particular matter, the company in liquidation was owed approximately $4.5 million from 18 construction companies. It was difficult to obtain a reasonable response from the construction companies as they asserted claims to set off without providing documentation to support their claims. In this instance, the liquidator determined a public examination of the project managers of the construction debtors was the most effective way to obtain the information necessary to assess the amounts owing to the company. As part of this process, production orders pursuant to section 597(9) of the Act were sought so that the construction companies were required to provide documentation in relation to the debt owed. By utilising the public examination process, the liquidator was able to obtain the information required to assess the amounts owing to the company and formulate a series of claims against the construction companies.
The project managers subject to the examination summons were required to give evidence, under oath in open court. This strategy allowed the liquidator to collect the information needed to understand the true amounts owing to the company by the construction companies, after allowing for valid costs incurred by those companies. Notably, the production of documents made by the majority of the construction debtors allowed the claims to be resolved without needing a full public examination. In total, the liquidator has so far recovered $1.35 million which otherwise would not have been recovered. Case Study 2 In another matter, the director of a company subject to a deed of company arrangement was undertaking legal actions in the company’s name. The litigation had been lengthy and had stalled as the director was unable to continue to fund the litigation. It should be noted that a number of settlement offers had been provided and rejected. The respondent was claiming that they did not have sufficient funds to meet the claim, whilst the director believed that they did in fact have the funds available. The director was under significant pressure, as a condition of the arrangement with creditors was that a contribution would be made to the Deed Fund from the legal action recoveries which he was unlikely to be able to make by the deadline. If not paid, the company would enter liquidation and a liquidator would be unfunded to continue the litigation. The deed administrator was able to gain an advantage in the proceedings by making an application to the Court seeking production orders regarding the respondent’s ability to make payment of any Order. This strategy encouraged the respondents to put forward a more reasonable offer in respect of their financial position, which enabled the matters to be settled without the need to go to trial. Takeaway If you are seeking answers to questions concerning a company’s affairs, a public examination and/or production orders may be the tool to get the job done. To learn more about our range of services and expertise across a variety of industries, visit us at svpartners.com.au or contact us on 1800 246 801 today.
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Insolvent Deceased Estates, Inheritances and Bankruptcy
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he loss of a family member is a difficult time. In addition to dealing with grief, there are typically practical issues (cleaning up and vacating a property, organising new living arrangements for dependants left behind, notifying friends and extended family) and legal matters to attend to dealing with the Will (hopefully there is a Will) and commencing the administration and distribution of the Deceased’s property. The exact wishes of the family member may not be known until the dust settles and the Executor/s of the Will review the terms of the Will and commence identifying and preparing to distribute the family member’s property. The above matters become even more complex and emotionally challenging when the family member is themselves insolvent and / or a beneficiary is anticipating being declared bankrupt or is currently an undischarged bankrupt.
Insolvent Deceased Estates If a family member passes and they do not have sufficient property / assets to pay all of their due and payable debts, their Deceased Estate may be insolvent.
Daniel Luckman - Senior Manager | Sunshine Coast
In the above scenario, an Executor or Personal Representative of the Deceased has obligations to ensure the Estate is dealt with appropriately, which may involve seeking specialist advice and applying to Court to have the Deceased Estate administered by a trustee in accordance with Part XI of the Bankruptcy Act 1966 (Part XI Administration - the insolvent administration of the deceased estate). A Part XI Administration is a modified version of a bankruptcy. In essence, the property of the Deceased Estate is recovered by the Trustee, investigations are conducted into the affairs of the Deceased and if sufficient funds are available, a dividend is paid to creditors.
Insolvent Beneficiaries Due to the private and confidential nature of being bankrupt, the fact a beneficiary of a Will is in financial difficulty or is an undischarged bankrupt may not be known by family members. Unfortunately, if it is not known, the terms of a Will and gifting of inheritances can have unintended consequences. If a person in financial difficulty becomes entitled to receive an inheritance prior to their bankruptcy, their inheritance is
usually divisible property and will vest in their bankruptcy trustees upon their bankruptcy. If a person has been declared bankrupt and they become entitled to receive an inheritance prior to their discharge from Bankruptcy (which is usually 3 years after they file their Statement of Affairs / Bankruptcy Form, but may be longer), their inheritance is usually divisible property and vests in their bankruptcy as an asset of their Bankrupt Estate. This is commonly referred to as after-acquired property of a bankrupt. Inheritances can be quite substantial (e.g. an interest in an unencumbered family home) and it can be heartbreaking to realise an inheritance gifted to an insolvent beneficiary or undischarged bankrupt may not be received by them. Some of the practical implications of dealing with bankruptcy and deceased estates are explored further in articles on the SV Partners website. SV Partners are experienced at dealing with the above situations. If you or your client come across the unfortunate circumstances where deceased estates and insolvency collide, we are here to help. Contact your local SV Partners office today for specialist advice.
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Insolvency Myth Busters ...and Helpful Facts
Jason Cronan - Director | Sunshine Coast
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nsolvency is often a scary and confusing process for your Clients and their loved ones. Below are some practical issues and implications, to assist you and your Clients.
Fact 1 - All bankruptcies are NOT 3 years The period of bankruptcy is 3 years (plus 1 day) from the time a Bankrupt files a Bankruptcy Form (formerly called a Statement of Affairs) with the Australian Financial Security Authority (AFSA), the Federal Government Agency that regulates personal insolvencies. As a result, the period of a bankruptcy depends on when a Bankruptcy Form is lodged with AFSA. ►
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For a voluntary bankruptcy (Debtor’s Petition), the bankruptcy period is 3 years and 1 day from the date of bankruptcy, as a Bankruptcy Form needs to be lodged to start the bankruptcy. For a bankruptcy initiated by a Creditor through the Court (a Sequestration Order), a Bankrupt will not usually file a Bankruptcy Form on day 1 of the bankruptcy, therefore the bankruptcy will end 3 years and 1 day after that document is filed with AFSA. For example, if the Bankruptcy Form is lodged 3 months after the bankruptcy, the bankruptcy period will run for 3 years, 3 months and 1 day.
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If a Bankrupt never lodges a Bankruptcy Form, the bankruptcy will continue forever!
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A bankruptcy can be extended by the Bankruptcy Trustee lodging an Objection to Discharge with AFSA. An objection is typically lodged due to a Bankrupt not complying with their obligations. The bankruptcy can be extended by an additional 2 or 5 years, depending upon the grounds of the objection (or longer if in relation to a Bankrupt not returning to Australia when required). A Bankrupt has a right of appeal, and an objection can be cancelled or withdrawn by the Trustee or AFSA.
It is therefore important for Bankrupts to lodge a Bankruptcy Form. Some of the consequences of a prolonged bankruptcy are: ► ►
If a Bankrupt acquires assets during the bankruptcy, they can lose them as they vest in the Bankruptcy Trustee to deal with (known as after acquired property). If a Bankrupt is a beneficiary of a deceased estate, the interest bequeathed to the Bankrupt can also form part
of the bankruptcy. ►
If the Bankrupt’s income increases, they can be liable to pay income contributions.
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It can impact a Bankrupt’s ability to obtain finance.
The Federal Government is also considering (again) implementing a 1-year bankruptcy. We will provide updates on any developments. Fact 2 - Directors are NOT automatically liable for company ATO and superannuation debts We see a lot of confusion from Company Directors (and sometimes Advisors) regarding a Director’s potential liability for a Company’s unpaid tax and superannuation liabilities. Directors are not automatically liable to pay unpaid tax debts and superannuation for a Company. A Director only becomes liable to pay unpaid GST (including luxury car tax and wine equalisation tax), PAYG and superannuation under the Director Penalty Notice (DPN) legislation. If a Company does not pay these amounts by the due date, a Director can avoid automatic personal liability by ensuring the BAS and/or superannuation guarantee charge statement (SGCS) are lodged with the ATO within the required timeframe. If the lodgements are done within the required timeframe, the ATO can still issue a DPN to the Director (by sending it to the Director’s address as per ASIC’s records) to pursue the personal liability. In this case, the Director has options to avoid being personally liable (the debt being paid or entering into an insolvency arrangement prior to the DPN deadline). If a Company does not pay the GST, PAYG and/or superannuation AND does not lodge a BAS and/or SGCS by the required dates, the Director/s automatically become liable to pay the amounts owed by the Company. The personal liability can only be avoided by the debts being paid. Therefore, it is important that your Clients: ►
lodge a BAS and/or SGCS if it cannot pay its GST, PAYG and superannuation on time; and
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ensure their contact details with ASIC are accurate.
If you or your client require specialist insolvency advice, SV Partners can assist. Contact our team on 1800 246 801 today. Liability limited by a scheme approved under Professional Standards Legislation