By Darrell Jardine, Partner, Michael Hansel, Partner, Nicole Radice, Partner and Sam Kingston, Senior Associate
As part of the Federal Government's ongoing push to deter 'phoenix activities', the Australian Securities and Investments Commission (ASIC) has been given new powers to deal with companies that have been abandoned by their directors, including the power to order that a company be wound up in a range of circumstances.
Here, partner Darrell Jardine and senior associate Sam Kingston outline what insolvency practitioners and company directors need to know about the changes that have been introduced.
- 'Phoenix activities' occur where directors transfer the assets of a distressed company into a new company, leaving the old company with no assets to pay creditors. The new entity then rises from the ashes of the old and continues business through the new structure.
- ASIC can now order the winding up of a company in a range of circumstances, in which case the company is taken to have passed a resolution that it be wound up voluntarily.
- In addition to changes that will help employees of companies abandoned by their directors, changes have also been made to streamline the publication of notices before, during and after the external administration of a company. It is expected that these changes will save approximately $15 million over the first four years of operation.
- The Senate enquiry into the regulation of the insolvency industry raised concerns about ASIC being 'overburdened'. These changes will impose additional obligations on ASIC, and it remains to be seen what impact this will have on the regulator's already full agenda.
ASIC's new powers
The key changes recently introduced are as follows:
- ASIC now has administrative power to order that a company be wound up in a range of circumstances, including where:
- the following are met:
- the response to a return of particulars given to the company is at least six months late;
- the company has not lodged any documents under the Corporations Act in the last 18 months;
- ASIC has reason to believe that the company is not carrying on business; and ASIC has reason to believe that making the order is in the public interest.
- the company's review fee has not been paid in full at least 12 months after the due date for payment.
ASIC may also order the winding up of a company if it has reason to believe the company is not carrying on business and, at least 20 days before making the order, gives the company and each director a notice stating its intention to make the order. ASIC is required to inform the company or directors that they may submit a written objection to ASIC within 10 business days after receiving the notice. If no objection is made within that timeframe, ASIC can make the order.
Where ASIC orders that a company be wound up, the company is taken to have passed a resolution that it be wound up voluntarily. ASIC is also empowered to appoint the liquidator and determine the liquidator's fees.
- ASIC's powers are intended to help employees of companies abandoned by their directors to access the government funding provided by the General Employment Entitlements and Redundancy Scheme (GEERS) by placing those companies into liquidation earlier. An employee can only access GEERS where the company is in liquidation. There have been concerns previously that where a company had limited or no assets, its directors could abandon it and delay the employee's access to their GEERS entitlements.
- Insolvency practitioners appointed to companies are now required to advise the Department of Families, Housing, Community Services and Indigenous Affairs where the company is a Paid Parental Leave Employer, as the Department is responsible for administering the Paid Parental Leave Scheme. The Department's view is that it needs such notification because it will cease making certain government payments to the employer and will pay these direct to the employee instead.
This change is intended to ensure that employees receive their paid parental leave entitlements, rather than those payments being made to companies that are in financial difficulties. It places an additional notification requirement on insolvency practitioners, but in the Department's view, this is not an onerous one.
- Changes have recently been formalised to the publication requirements for parties such as petitioning creditors and insolvency practitioners. Previously, notices were published in the print media or ASIC gazette - often a costly outlay. The changes mean that those notices can now be published through a single corporate insolvency notices website maintained by ASIC. It is expected that the website will be operational from 1 July 2012.
Implications of these changes
ASIC has previously been empowered to seek Court orders for the winding up of a company, but can now wind up companies administratively, and is not bound to take into account the same considerations that the Court would. ASIC's new powers are quite broad - for example, the assessment of whether to wind up a company because it is 'in the public interest' gives ASIC considerable discretion.
While the changes are unlikely to affect the majority of directors, as always, directors will need to be vigilant to ensure that they respond to notices that they receive from ASIC within the timeframes outlined.
The Federal Government is still considering amendments to the current regulatory framework for the corporate and personal insolvency systems, with three options for possible reforms set out in a Regulation Impact Statement. The third (and preferred) option proposes reforms to align and enhance the regulatory frameworks and is, according to the Impact Statement, the most costly option for regulators (including ASIC) and insolvency practitioners.
ASIC is becoming more active in enforcement actions against a variety of professions, including financial advisers, directors and insolvency practitioners. The changes outlined above and the proposed changes set out in the Regulation Impact Statement indicate that ASIC has a busy time ahead.
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