IN THIS ISSUE 01 Is This The Perfect Storm?
Is This The Perfect Storm?
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Alan Scott - Director | Adelaide
et me start this paper with a disclaimer. I am not an economist, merely an accountant with over 40 years’ experience in the insolvency business.
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Then came 2007. With an overheated financial market, hot air backed securities in the US housing market and large financial institutions selling financial products that I am certain their custodians, ie. the directors, would not have had a chance of understanding, we saw the start of the Global Financial Crisis. Did the financial world fall apart? Very nearly, but fortunately not, as some very astute minds managed to guide the US financial system through the crisis with minimum collateral damage and the world emerged ready to forget whatever mistakes seem to occur every 10 years or so in the financial markets.
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In the late 2000s/early 2010s, the Australian Senate embarked on an enquiry into the banking system. The upshot of this was that banks dramatically reduced the use of receiverships as a mechanism to recover outstanding debt and by the mid-2010s insolvency appointments, both corporate and personal were in decline.
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In the mid to late 2010s we saw a push for a further enquiry into the Australian financial system which led to the Hayne Royal Commission. From the insolvency/ bank recoveries perspectives, the same old cases were wheeled out again. In the view of this insolvency practitioner, in the majority of cases the borrowers stuck their heads in
What have I seen in the last 40 or so years?
03 The Quirky World of Provable Debts in Bankruptcy 04 Creditor Defeating Dispositions - An Initial Decision in Australian Courts on Phoenixing
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Housing interest rates exceeding (including on my own home);
15%
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The 1987 share crash;
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A plethora of insolvencies in the late 1980s and early 1990s;
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Failure of property developers in the early 1990s;
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Commercial interest rates of over 20% from 1st tier lenders;
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The 1997 Asian financial crisis;
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The Dotcom boom & bust;
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Constant flow of insolvency work throughout the 1980s, 1990s and early 2000s but with a change in its nature from Receiverships to Voluntary Administrations as the banks became a little skittish about making appointments especially with various politicians taking up the cudgels on behalf of their constituents;
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SV Partners the sand and did not use the power of communication with their financiers. A definite mistake when the borrower owes the financier perhaps tens of millions of dollars and the future of the thirdgeneration farm or other business is on the line.
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Inflationary pressures on wages.
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Anecdotally, many Australian families are, for the first time seeking assistance from organisations such as Foodbank to put food on the family table to feed their children and themselves.
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Interest rates at all-time lows, resulting in a property price bubble.
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Right at the end of the 2010s, an event of pandemic proportions arose in a part of China with worldwide ramifications, including the explosion of the work from home policy. Have we seen the start of the end of the CBD? In 2022 the consequences remain and the financial consequences probably will affect the Australian economy for several generations.
Interest rates are rising both internationally and locally. Rising interest rates will have many effects on the Australian economy, including:
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Worse was to come in late February 2022, when Vladimir decided to uninvitedly annexe Ukraine. Apart from the tragic loss of life, the effects of this action are plain for all to see: • •
Massive allocation of funds by the West to supply armaments to Ukraine;
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Economic sanctions on Russia, including its oil & gas sector causing enormous problems in EU countries which were or still are reliant on Russian oil & gas; and
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Shortages of timber for housing;
As Ukraine tends to be the wheat belt of Europe, the war is an enormous blow to Europe’s ability to feed itself.
Closer to home we have seen footage of the disastrous floods throughout many regions of New South Wales and Queensland. For some, particularly those in the outback of those two States, the floods have brought life back to the regions, but for many, such as the unfortunate people of Lismore, the floods wrought a disaster of epic proportions.
So What Happens Now? I am not going to consult my crystal ball, just base the following on how I would expect the economy to perform given what I have witnessed over the last 40 years. Australians have just voted in a new Labor government which is still in a honeymoon period. Unfortunately, the things it will have to deal with on an economic front over the next 6 to 12 months will sorely test them. Consider the following: ►
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Inflationary pressures on both goods & services.
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The National Debt is reported to have blown out to above $1 trillion as a result of the economic measures used to ensure a financially stable Australian economy during the pandemic.Compare this to the GFC when the outgoing Coalition handed an apparent $20 billion buffer to the incoming Rudd Labor government. This time there is no buffer for any further stimulus measures required to prop up the economy.
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The major banks may well have an increase in non-performing loans, both housing and corporate;
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From the homeowner’s point of view, the increase may mean the homeowner is unable to continue to pay the mortgage and the family So there you have it...The Perfect Storm home may be at risk; ► Inflationary pressures on Goods & Services Homeowners or property investors
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The other piece of arsenal the ATO have is the use of Garnishee Notices which can effectively freeze a company’s cash flow, vastly diminishing its ability to survive. The ATO is now well placed to commence recovery action wherever warranted.
who are highly geared are expected to be the most affected;
We know that the banks have all been stress testing their loan applications at much higher interest rates prior to loan approval. There have also been reports of brokers ”helping” clients pass the stress test by telling them to alter their living expenses so that they qualify for the loan. Falling house prices which, depending on the position taken by financiers, may affect those who are highly geared. Those more mature readers may remember financiers making harsh decisions when equity levels reduced below finance lending covenants.
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Falling share prices both internationally and locally. This will affect peoples’ retirement savings and their superannuation funds. Various pundits have been predicting a correction for some time but the high prices have been supported by very low interest rates. Hopefully we won’t reach margin call territory again.
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During the period of the pandemic, the ATO has been particularly lenient in enforcing the recovery of debts owing for all forms of taxation which appears to have resulted in many billions of dollars, some say $50 to $60 billion, owing to the ATO. This is about to change.The ATO is believed to have issued more than 55,000 Notices of Intention to Issue a Director’s Penalty Notice, prior to the election. Now that most of those Notices of Intention have expired, the directors of recalcitrant corporate taxpayers can expect to receive a Directors’ Penalty Notice in the near future. Such documents are not to be ignored and we refer our readers to here.
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Inflationary pressures on wages
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Rising Interest rates
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Falling share prices
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Falling house prices in the major cities
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ATO with instructions to rein in the debts due by taxpayers.
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National Debt at previously unimaginable record levels.
What To Do? Directors should seriously consider what effect one or all of the above will have upon their business. If the business is presently able to pay its debts, is up to date with taxation lodgements, and maintains good relations with its creditors and financiers, we would recommend that stress testing of financial forecasts, both profit & loss and cash flows, will ensure that the directors will see what to expect if, say sales drop by 20%, wages increase by 5 or 6% or a major new customer changes suppliers and subsequently suffers from financial distress. The alternative questions could be asked of what cash flow stresses will be felt if sales increase by 20%. However, if the business is presently not in a position to pay its debts, is not up to date with taxation lodgements and/or relationships with suppliers & financiers are somewhat testy, or after stress testing their profit & loss and cash flow, there is concern that a problem is looming - then early communication with each of those parties generally assists with garnering their support. When a DPN arrives in the letterbox, the opportunity to deal with the ATO is generally almost passed. Contact us to discuss the options. The earlier the problem is identified, the more options are likely to be available.
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The Quirky World of Provable Debts in Bankruptcy
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e were recently approached by a solicitor to consent to act as Bankruptcy Trustees (to replace the current Bankruptcy Trustees) in a matter where the solicitor’s client had initiated proceedings against his former employers for compensation pursuant to section 545 of the Fair Work Act 2009. Background The solicitor’s client had worked in the hospitality industry for two related companies from 2016 to 2020. During this time, his corporate employers had failed to pay minimum award rates for ordinary time, overtime, penalty rates for weekends and public holidays. The client’s solicitor sought compensation under section 545 of the Fair Work Act for the underpayment of wages in addition to interest and pecuniary penalties. The original proceedings commenced in July 2020. The corporate employer entities were voluntarily placed in Liquidation in September 2021. The director and former director subsequently submitted debtors’ petitions for their voluntary bankruptcies in October 2021. In February 2022, by Order of the Federal Circuit and Family Court of Australia, the director and former director were ordered to pay compensation to the client for his loss suffered totalling $200,000 and pecuniary penalties in the sum of $75,000.
Relevant Legislation ► ►
Section 82 of the Bankruptcy Act 1966 details the debts provable in a bankruptcy. Section 82 (2) of the Act states demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.
Anne Meagher - Director | Brisbane
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Section 82 (3) of the Act states penalties and fines imposed by a court in respect of an offence against a law are not provable in bankruptcy.
Relevance to our matter After much discussion with the current Bankruptcy Trustees and our referring solicitor, it was determined that although the solicitor’s client had a claim against the bankrupts (the director and former director of the corporate employers) pursuant to the Order of the Federal Circuit and Family Court of Australia, the timing of the Order meant the claim was not provable in the current bankruptcies. The Order dated February 2022, was obtained post the date the director/former director submitted their debtors’ petitions for bankruptcy and ultimately became bankrupt in October 2021. Accordingly, his claim is seen to have crystalised post bankruptcy – at the time of the bankruptcy, the debt was unliquidated and therefore not provable. As a side note, even if the Order had been made prior to the bankruptcies occurring, the pecuniary penalties pursuant to section 82 (3) of the Act would not have been considered provable debts. Despite the client’s continued efforts to obtain the judgement order and quantify his claim against the parties, his current dilemma is whether to now proceed with issuing a bankruptcy notice and incur further costs to press on to a second bankruptcy. The complication here is the initial bankruptcy continues, the Trustees will continue to fulfil their duties and to realise any assets of the initial bankrupt estate and only when they have completed their role and the creditors of their estate are paid 100 cents in the dollar, will any surplus funds be paid into the second bankrupt estate. Liability limited by a scheme approved under Professional Standards Legislation
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Creditor Defeating Dispositions
An Initial Decision in Australian Courts on Phoenixing
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Michael Carrafa - Executive Director | Melbourne
hilst these relatively new provisions under the Corporations Act 2001 (Corporation Act) concerning creditor-defeating dispositions came into effect on 18 February 2020 and were introduced into the Corporations Act 2001 by way to the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2019 (Cth), they have rarely been utilised, most likely due to the fact that the corporate insolvency world has been subject to government moratoriums and lockdowns. This would appear to be changing. Why were these provisions introduced? Illegal phoenixing activity is still rife in the Australian corporate world and poses threats to revenues of businesses and governments at all levels as well as the integrity of the Australia Corporate system. The aim of the provisions is to give liquidators another avenue in pursuing assets. These provisions are aimed to prevent these dispositions of property assets, as well as providing remedies and increasing the Australian Securities and Investments Commission’s (ASIC) powers. Definition of Dispositions
Creditor
Defeating
Pursuant to section 588FDB of the Corporations Act, a disposition of property is a creditor-defeating disposition if: ►
The consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement for the disposition was made or, if there was no such agreement, at the time of the disposition:
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The market value of the property; or
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The best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time.
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The disposition has the effect of preventing the property from becoming available for the benefit of the company’s creditors or hindering/significantly delaying the process of making the property available for the benefit of the company’s creditors.
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The transaction, or the act done for the purpose of giving effect to it, was not entered into, or done: 1.
Under a compromise or arrangement approved by a Court; or
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Under a deed of company arrangement executed by the company; or
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By an administrator of the company; or
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By a restructuring plan made by the company; or
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By a restructuring practitioner by the company; or
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By a liquidator of the company; or
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By a provisional liquidator of the company.
Duties of company officers The Act sets out the following new duties to prevent creditor-defeating dispositions: An officer of a company must not engage in conduct that results in the company making a creditor-defeating disposition of property of the company; and
A person must not engage in conduct of procuring, inciting, inducing or encouraging the making by a company of a disposition of property that results in the company making the disposition of property.
Recent Case Law The first case has been decided under Australia statutory powers to set aside “creditor defeating dispositions”. In Intellicomms Pty Ltd (In Liq)[2022] VSC 228, Associate Justice Gardiner of the Victoria Supreme Court considered a transaction involving a business sale agreement entered into minutes before Intellicomms Pty Ltd (Intellicomms) passed a resolution to enter into voluntary liquidation. The sale was to a related entity of Intellicomms director and was for approximately $20,000 (significantly less that the amount a creditor was willing to pay to acquire the business). In his decision, AJ Gardiner described the transaction as featuring “all the hallmarks of a classic phoenix transaction” and made orders setting the business sale agreement aside as a “creditor-defeating disposition” pursuant to sections 588FDB(1) and 588FE(6B) of the Act. ASIC’s powers Dispositions
on
Creditor-Defeating
The ASIC may also make an order setting aside a creditor defeating disposition (without the involvement of the Court) under section 588FGAA. Pursuant to section 588FGAA of the Act, ASIC may make an order to request that property involved in a creditor-defeating disposition be returned/restored, at an amount that fairly represents the proceeds paid.
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