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Disrupting the activities of untrustworthy advisers

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Disrupting the activities of untrustworthy advisers

The welcome heading of an email provided to Registered Liquidators from ASIC.

The body of the email read as follows:

“ASIC recently commenced writing to directors of companies subject to a winding up application to warn them about untrustworthy advisers. You can view the letter using this link.

Certain advisers use public information, like our Published Notices Website, to identify directors of companies subject to a wind up application and ‘cold call’ them offering advice. Our letter warns directors of possible untrustworthy advisers to push back against those who seek to exploit vulnerable directors.

Our concerns include that some advisers may aid and abet directors breach their duties and promote illegal conduct, (including illegal phoenix activity). This undermines market confidence and reduces assets that might otherwise be available for creditors in a formal external administration.

The letter is a further step in ASIC’s work aimed at curbing illegal phoenix activity. Our recent work includes enforcement action against advisers and registered liquidators, (see for example, media release 16-127MR).

We can’t do this work alone. If you know of misconduct involving advisers and/or registered liquidators, (and you can provide evidence), we think you have a professional responsibility to report that alleged misconduct to ASIC. You can report misconduct anonymously if you wish, (see our website – Report misconduct to ASIC).”

The Registered Liquidators at Dye & Co. Pty Ltd consider ASIC’s email above is in our view very welcome further activity from ASIC and comes on the back of a successful recent conviction against a QLD based “pre-insolvency adviser”, the details of which can be read here.

This is not to say that all “pre-insolvency advisers” are untrustworthy as there are legitimate operators who assist businesses each and every day without eliciting a director to breach their duties and/or break the law for an exorbitant fee.

The Registered Liquidators of this office have seen the financial and personal devastation that untrustworthy advisers can have on a situation.  In one instance the affected party was encouraged to transfer all of his money from his self managed superannuation fund into the “trust” account of the adviser in increments of less than $10,000 (the reportable threshold) to “protect” his assets.  This is despite superannuation being a protected asset of a bankruptcy estate in most circumstances and definitely in this instance.

Our experiences, which are consistent with the details provided in ASIC’s advice, disclose that it appears the modus operandi of the untrustworthy advisers to scour the court lists for “Judgements and “Notification of an Application to Wind Up” following the lodgement with the Court, after which time the “adviser” cold calls or issues a letter to the director to “help” him deal with the impending doom.

Part of the sales pitch is that

  1. “Liquidators won’t be getting paid by the Court so they will need to screw you over to get paid”.
  2. “Liquidators will not act in your best interests, but we do”
  3. “Liquidators cannot talk to you about the same issues that we can talk to you about”

And so on.

The reality is that an Official Liquidator is an officer of the Court and does a significant amount of unfunded work in fulfilling their statutory duties.  It is not simply a matter of trying to generate fees if there is nothing to recover via assets or liquidators rights of action.

Liquidators act in the best interests of all stakeholders of the company; this includes directors, employees, creditors and the public.  The primary role is to recover assets, investigate the affairs of the company and pursue actions that will result in recoveries for the benefit of creditors, amongst other statutory obligations.

Liquidators are at liberty to discuss all aspects of a potential appointment including the advantages and ramifications of making an appointment.  Thus directors can make a fully informed decision.

Some of the tactics employed by the untrustworthy advisers include:

  1. Getting a “stooge” director, usually a straw person to become the director.
  2. Transferring assets to another entity for no consideration (phoenix activity)
  3. Transferring personal assets from the director to a spouse or the adviser
  4. Destroying/losing the company books and records
  5. Transferring monies or making cash withdrawals from company accounts

You can be almost guaranteed that because the above tactics are illegal, an untrustworthy adviser will not put any of their “advice” in writing, instead relying on meetings and phone calls.

Notably the above actions only increase the exposure to the director or former director for breaches of director’s duties, voidable transactions and the more serious criminal breaches of both duties and actions pursuant to Section 590 of the Corporations Act 2001.  These can result in fines and/or imprisonment.  Notably the fines imposed are not extinguished by a bankruptcy.

One of the main points to note is that the untrustworthy adviser is not regulated at all and they are not registered liquidators.  Accordingly they cannot perform any external administrations and will need to refer you to a Registered Liquidator to conduct any formal external administration.  Often the untrustworthy advisers take a fee from a “client” to do the work only for the “client” to find themselves paying more for the liquidator.

The lack of regulation also means that there is no accountability and no recourse.  They are generally not members or any professional bodies, hold no professional registrations and therefore do not have any indemnity insurance should things go awry.

A registered liquidator on the other hand is likely to have had a minimum of 10 years insolvency experience and is generally a member of a professional body such as the Australian Restructuring Insolvency and Turnaround Association (ARITA), the Chartered Accountants Australia and New Zealand (CANZ), CPA Australia (CPA) and are also officers of the Court (Official Liquidators).

ARITA has its own code of professional conduct which must be followed by its members.  ARITA also has a complaints section to deal with complaints against registered liquidators. Not all registered liquidators are members of ARITA and therefore those liquidators are not directly subject to the higher standards imposed by the ARITA code of conduct. www.arita.com.au.

CANZ and CPA members also have a further code of conduct which also has accounting standards applied. www.charteredaccountants.com.au, www.cpaaustralia.com.au

ASIC also regulates all registered liquidators and monitors their conduct.  They handle complaints from the public regarding liquidators and have a complaints page.  ASIC takes disciplinary action against registered liquidators who fail to meet required standards.

ASIC, ARITA, CANZ and CPA all require minimum levels of professional indemnity insurance to be maintained by registered liquidators.

In addition there is also The Companies Auditors and Liquidators Disciplinary Board (CALDB) which is an independent statutory body set up to act as an expert disciplinary tribunal to consider applications for the cancellation or suspension of the registration of auditors or liquidators under the Corporations Act.

An untrustworthy adviser is not accountable to any of the above.

What Can I Do?

There are a number of steps you can take if faced with these circumstances:

  1. Query the quantum of the fee sought and the legality and benefits of the advice provided.
  2. Get the adviser to put their “advice” in writing.
  3. Ask who the proposed registered liquidator is and check their registrations
  4. Check if the proposed liquidator is a member of a reputable body such as ARITA. ARITA members can be looked up here.
  5. Ensure that you understand the process and if any of the activities identified above are part of the process, get another opinion from a Registered Liquidator.
  6. Inform ASIC via their complaints page, anonymously if you wish. Report misconduct to ASIC.

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