PPB Advisory Research The Future Of Liquidation And Bankruptcy
Transcript of PPB Advisory Research The Future Of Liquidation And Bankruptcy
ResearchThe Future of Liquidation and Bankruptcy
Breakthrough
Creditors will significantly improve their prospects of recovery by applying PPB Advisory Screening Processes before commencing or proceeding with winding up or bankruptcy proceedings
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PPB Advisory Liquidation Screen
1. Real Property Search on debtor company
2. PPB Advisory Bankruptcy Scorecard for each director of the debtor company
3. Substantial Trading Enterprise test on debtor company
PPB Advisory Official Liquidation Decision Tree is annexed.
PPB Advisory’s Statutory Recovery Team has created these tests by researching the source of all dividends it has paid in liquidations since 1 July 2008.
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PPB Advisory Bankruptcy Scorecard
1. Real Property Assets
2. Income Contributions
3. Business Plant and Equipment
4. Other Known Assets
PPB Advisory has successfully applied the annexed Bankruptcy Scorecard since September 2010.
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Results of the Bankruptcy Scorecard Process
Data* October 2009 to April 2010 October 2010 to April 2011 Result
Matters Appointed
189 47 A decrease of 142 matters
Recoverable Matters
38% 57% Increase in recoverable matters
Consents 280 57 Decrease in 223 Consents
The Bankruptcy Scorecard has significantly reduced the average write off for matters in bankruptcy by an average of approximately $8,500. Recoverability of matters has increased by nearly 20% since the implementation of the Scorecard.
*Data compared for the periods October 2009 to April 2010 & October 2010 to April 2011
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Benefits of Screening
Informed decision making for a portfolio of debts resulting in fewer petitions for winding up and bankruptcy
Decreased expenditure on petitions. Savings can be redeployed for more complex matters such as policing non-compliance and phoenix activity
Returns to creditors from a higher percentage of appointments
Stronger relationships between creditors, advisors and IPs due to better value for money
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Background
Section Page
Trends and Implications 8
Dividend Research 12
Law Reform 20
Trends and Implications
Summary of 2010 Sharing Sessions
Implications for a future without screening
More assetless matters with higher costs
Poor value for money in appointing a liquidator or trustee with limited likelihood of recovery
Reluctance by IPs to take on appointments due to increased costs of compliance
Public concern about the high costs of compliance
Relationships strained between Creditors, Advisors and IPs
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Current Trends
Trends Effect
Social
Increase focus on compliance with privacy rules Compulsory mediations Costs of dealing with impecunious and self- represented Increased scrutiny by Courts and Regulators Less trust in professionals
Increased costs of compliance and investigations for Insolvency Practitioner (“IP”)
Scope limitation on investigations Costs borne by creditors and IP’s for vexatious litigants Unjustified complaints Less cooperation from debtors
Legislation
Increase in filing fees Changes in collection policies Legislation changes on trustee reporting Increase in bankruptcy notice threshold National credit code Alternative dispute resolution
Fewer appointments (particularly bankruptcy) More applications for Bankruptcy or Winding up due to
costs Expensive to complete administrations Increase costs incurred by creditors in complying with
legislation
Economic
Focus on business case for winding up Increases in sales of debtor books Reduction in borrowing capacity Over geared from GFC – more shortfalls
More decisions not to proceed with IP appointment Limited ability to refinance property to settle IP claims Fewer appointments with assets and likelihood of return
to creditors
Regulation
Disclosure requirements around remuneration and independence
Senate committee licensing and flying squads Black letter bankruptcy regulation reviews Court decisions in One.tel1 and Maxwell Smith2
Time focused on compliance rather than adding value/results
Small matters uneconomical for IPs IPs leaving market Government concern about high costs3
1 Onefone Australia Pty Limited v One.Tel Ltd [2010] NSWSC 1120 (1October 2010)2 Donnelly v Maxwell‐Smith [2010] FCAFC 1543 IPA Submission to Treasury 27 April 2011
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Further Evidence
• Strike rate4 for administrations for the year ended 30 June 2010 has fallen to 32% from 44% for the year ended 30 June 2009.
• Average fees taken drawn by private trustees for the 5 years ended 30 June 2010 has reduced to approximately $10,000 per estate5 despite upward pressure on costs and increases in charge out rates over the same period.
• 40% of liquidations are totally assetless, 61% have estimated assets less than $10,000. 93% have estimated dividends of zero6.
4. Where PPB Advisory has made any recovery5. Inspector General’s 2010 report on Personal Insolvency6. ASIC Insolvency Statistics Report 225
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Dividend Research
PPB Advisory Dividend Research
Since 1 July 2008 PPB Advisory has paid 42 dividends to creditors in Official Liquidations
The sample contains 58 sources of funds because several dividends had more than 1 major source.
1 Director Funded dividends combine sources of Loan Account Recoveries, Insolvent Trading, Asset buybacks, terminations and voluntary contributions.2 Business Assets combine Debtors, Plant and Equipment and Inventory.
Major Source of Funds Number %
1 Real Property 4 7
2 Director Funded1 24 41
3 Business Assets 2 12 21
3 Cash at Bank 13 22
3 Preferences 5 9
Total 58 100
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PPB Advisory Dividend Research1. Real Property
Whilst the occurrence of Real Property in Official Liquidations is rare, its value is so material that the prospect of a dividend is high.
Real Property Searches are quick, affordable and accurate.
2. Director Funded
PPB Advisory successfully settles with directors for insolvent trading, loan accounts, transfers of business and assets together with many terminations.
These recoveries combine some or all of the above components so it is not possible or practical to accurately separate these sources.
In order to generate a return to creditors, directors must have access to one of three sources of funds:
a. Their own assetsb. Company assetsc. Third party assets.
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PPB Advisory Dividend Researcha. Own Assets
PPB Advisory Bankruptcy Scorecard will predict likely recovery from directors’ personal assets.
b. Company AssetsOften directors may refinance, pledge or sell company assets to settle with the liquidator. The Substantial Trading Enterprise test therefore applies to this category.
c. Third PartiesThird Parties (often related) may provide funds to directors to generate a return to creditors. To predict cases where this behaviour is likely, it is assumed that the directors behave in self interest and will benefit by procuring funds from a third party (for example, to preserve the business or with a genuine prospect of repaying the third party from future profits). Therefore the Substantial Trading Enterprise test also applies to this category.
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Pre-Liquidation Tests3. Substantial Trading Enterprise
The presence of a Substantial Trading Enterprise is the best indicator that the following sources of funds may exist.
a. Debtors, Plant & Equipment
Book Debts and Plant and Equipment were the most commonly recovered business assets which generate a return.
b. Cash at Bank
Usual sources of Cash at Bank are trade receipts, debtor receipts and business or asset sales. Increasingly these funds arrive by EFT.
It is assumed that the low cost of realisation of Cash at Bank is the reason it features so significantly in dividend returns.
c. Preferences
Preference recoveries require the payment of a creditor within 6 months of the winding up. A trading enterprise at the date of the petition increases the likelihood of voidable payments.
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Substantial Trading Enterprise test
Because of a lack of publicly available searches, there is skill involved in determining whether a company contains a Substantial Trading Enterprise.
Indicators of Substantial Business Enterprise include:
• Business Premises• Number of Employees• Turnover• Plant and Equipment• Major Customers/contracts• Bank Accounts• Registered Charges/ PPSA Register
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Substantial Trading Enterprise
Creditors are uniquely placed to possess or access significant information about the trading activities of a company via:
• Credit Applications
• Sales/purchases
• Payment History
• Day to Day Contact
• Statutory Returns (e.g. declarations, BAS etc.)
• Direct enquiry
A challenge for creditors is to make full use of that information in their recovery processes to make better-informed decisions about whether there is a Substantial Trading Enterprise and which companies to wind up.
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Substantial Trading Enterprise
Certain types of company are not likely to have a Substantial Trading Enterprise, for example:
• Sole employee companies (tradesmen, couriers etc.)• Labour hire companies• Deregistered and/or strike-off in progress
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Law Reform
Suggested Law Reform
Task Current Position Desired Position
Notice of Appointment
Lodgement with ASIC Lodgement with ASIC
Advertisement in paper Internet advertisement
Report as to Affairs
Issue demand to officer(s) to lodge Issue demand to officer(s) to lodgeIf no reply from initial demand, issue a follow up reminder ASIC to follow up officer(s) with compliance notice.Reporting offence to ASIC and seeking their assistance ASIC to prosecute following compliance noticeOn receipt of RATA, lodge with ASIC and Court On receipt of RATA, lodge with ASIC
Section 476 report (Form 564)Prepare and lodge report with ASIC within two months of receipt Not required
Books and records
Issue demand on officer(s)/external accountants to deliver books and records to Liquidator
Issue demand on officer(s)/external accountants to deliver books and records to Liquidator
If no reply from initial demand, issue a follow up reminder ASIC to follow up officer(s) with compliance noticeReporting offence to ASIC and seeking their assistance ASIC to prosecute following compliance notice
InvestigationsInvestigations undertaken to identify assets, voidable transactions and offences
Investigations to be limited to identify assets or voidable transactions where the Liquidator forms the opinion that there will be realisations or recoveries
EX01 reportReport to be lodged with ASIC if investigations identify offences committed by an officer(s) or company is unable to pay a dividend of 50 cents or more to unsecured creditors
The report should be prepared only where the Liquidator has formed a view that serious offences have been committed
EX02/EX03 reportsReports prepared in situations where ASIC have requested a supplementary report
Report to be prepared only when fully funded by ASIC
Reports to CreditorsRequired to convene a meeting of creditors to approve remuneration, compromise of debt or enter into to settlement agreements
Whilst to inform/update creditors, minimum remuneration to be drawn without resolution of creditors
Send out the Report to all known creditors Email and website
Creditor’s meetingsReport to Creditors is prepared and mailed to creditors containing the Notice of Meeting
Notice of Meeting by email and website
Creditor attendance in person or by proxy Meetings to be held by circular resolutions
Form 524To be lodged on every six months on all appointments To be lodged only where there have been transactions
To remain viable as a means of dealing with assetless companies PPB Advisory seeks the following changes to Official Liquidation law and practice (in bold)
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AnnexuresPPB Advisory Liquidation Screen – Decision Tree
PPB Advisory Bankruptcy Scorecard
IPA Insolvency Reform submissions to Treasury
Important:This information is not advice.Readers should not act solely on the basis of information contained in this document.We recommend that formal or independent advice be sought before acting in the areas covered herein.May 2011
PPB Advisory liquidation screenDecision tree
1. Company LPI search
Does company own real property?
2. PPB Advisory bankruptcy scorecard
Do Directors have assets?
3. Substantial trading enterpriseWrite off debt
Proceed with winding up
Yes
Yes
Yes
No
No
No
Risk score card
Debtor name
Referral solicitor
Contact at referral solicitor
Please complete all categories – (Please type in answers in whole, eg TRUE not T)
Category A – Real property Answer PPB rating
Number of encumbered properites
Number of unencumbered properties
Number of caveats on the property (Excluding Caveat by Petitioning Creditor)
Number of caveats on the property by Petitioning Creditor
Number of mortgages over the property
Have proceedings been commenced by the mortgagee? (True or False)
Is the property being rented? (True or False)
Total score (accept if > = 5)
Category B – Income Answer PPB rating
Are you aware of the debtors current employment / income / pension status? (True or False)
Is the debtor’s income between $75,000 and $100,000? (True or False)
Is the debtor’s income greater than $100,000? (True or False)
Is the debtor’s employer a related party? (True or False)
Total score (accept if > = 5)
Category C – Business Answer PPB rating
Does the debtor currently operate a business? (True or False)
What is the nature of the business? (Sole trader = True otherwise False)
Are you are aware of whether the business has unencumbered debtors or plant and equipment? (True or False)
Total score (accept if > = 5)
www.ppbadvisory.com
Important: This information is not advice. Readers should not act solely on the basis of information contained in this document. We recommend that formal or independent advice be sought before acting in the areas covered herein. 00075STAT. April 2011.
Category D – Other assets / matters Answer PPB rating
Are there any other assets with a value greater than $10,000? (True or False)
Is the debtor a vexacious / litigious person? (True or False)
Is the debtor self represented? (True or False)
Number of companies the debtor holds shareholdings?
Total score (accept if > = 5)
Total Score ( Accept Appointment if any Category is >= 5) Answer PPB rating
Total rating - CAT A
Total rating - CAT B
Total rating - CAT C
Total rating - CAT D
Is consent granted?
ContactsScott PascoePartner
t: +61 2 8116 3202 e: [email protected]
Geoff GrangerDirector
t: +61 2 8116 3224 e: [email protected]
Andrew ScottSenior Manager
t: +61 2 8116 3063 e: [email protected]
Simon TheoboldPartner
t: +61 8 9382 8933 e: [email protected]
Warren WhitePartner
t: +61 3 9269 4225 e: [email protected]
Peter MacksPartner
t: +61 8 8211 7800 e: [email protected]
Mark RoufeilDirector
t: +61 2 8116 3000 e: [email protected]
David LeighPartner
t: +61 7 3222 6800 e: [email protected]