Our August Newsletter ('Phoenix Rising: ASIC Keeps Eagle Eye on Professional Adviser') noted ASIC’s prosecution of a business adviser who assisted a director to breach his statutory duties.
ASIC has now written to company directors highlighting the need for caution when contacted 'out of the blue' by advisers seeking to assist them in cases of supposed financial distress.
Notices of winding up applications are required to be lodged with ASIC and are therefore readily available for public inspection. A number of professional firms (lawyers and insolvency practitioners) distribute daily lists of such notices to professional (and other) contacts.
A notice of winding up application is usually an indication that the relevant company may be in some form of financial distress. There are consequently a number of professional (and other not-so-professional) advisers who will be keen to offer their advice and services to the directors of that company. It is apparent that a small number of these advisers are suggesting actions which may be considered illegal. These actions can lead to serious consequences for directors including large fines or imprisonment. Warning signs of potentially bad advice include:
- offering 'the impossible'
- suggesting the transfer of business or assets to another company without adequate payment
- reluctance to provide their advice in writing
- indications that they have access to a 'friendly' liquidator
- suggesting the destruction of books and records or withholding them from an appointed liquidator
ASIC is attempting to identify these advisers and the liquidators to whom work is referred and has asked that directors notify them if they are contacted.
In the meantime, ASIC has also written to registered liquidators noting their concerns against cold-calling directors in such situations and requesting that evidence of any such misconduct be reported to ASIC.
Clearly, directors who believe their companies may be in financial distress should consider contacting a qualified practitioner as soon as possible. However, cold-calls from 'self-proclaimed specialists' can result in directors not receiving the best advice for their circumstances.
The ATO and ASIC have recently conducted raids on 13 businesses and residences across the country in a bid to crack down on those 'pre-insolvency' firms who have allegedly encouraged phoenix activities, tax avoidance, and GST evasion.
The petitioning creditor in many winding up applications is the Deputy Commissioner of Taxation (ATO) or the Workers Compensation Nominal Insurer. The creditor will have received a consent to act from an official liquidator known to the creditor (or their legal advisers) and such liquidator is, therefore, likely to be an appropriate person to deal with the proposed liquidation.
It is frequently the case that directors of the companies involved in these matters are cold-called by advisers and promised an immediate solution to their problems by having the company placed in voluntary administration prior to the case being heard in court. The court is then often persuaded that there is no benefit to the creditors in replacing him / her with another appointee effectively chosen by the creditor.
In view of ASIC’s growing concerns in this area, we suggest that creditors (including secured creditors) should be on the lookout for appointments made immediately prior to the hearing of the winding up application and consider whether such an appointee is appropriate.