‘Timid’ regulators, ‘complicit’ auditors, ‘rotten culture,’ and ‘ineffective’ directors

When Carillion PLC collapsed in January 2018 it had 43,000 employees and owed more than £4.6 billion, including a pension liability of around £2.6 billion.

Carillion’s financial position was so dire that it went straight to liquidation.  According to the 16 May report issued by the UK House of Commons Work and Pensions Committee, insolvency practitioners were unwilling to act as administrators because there was no ‘certainty that there was enough money left in the company to pay their costs.’

The report follows the collapse so quickly that it cannot reflect a full forensic analysis, and it is issued under Parliamentary privilege, but the criticisms are fierce.  The report says:

  • The was a ‘chronic lack of accountability and professionalism’ and the board was ‘either negligently ignorant of the rotten culture at Carillion or complicit in it.’
  • The non-Executive directors were ‘unable to provide any remotely convincing evidence of their effective impact.’
  • The resignation and sale of shares by a former finance director ‘were the actions of a man who knew exactly where the company was heading once it was no longer propped up by his accounting tricks.’
  • The auditors ‘were complicit’ in the company’s aggressive accounting judgements through their failure ‘to exercise—and voice—professional scepticism.’
  • The Pensions Regulator ‘failed in all its objectives.’
  • The UK’s Financial Reporting Council was ‘too passive,’ and ‘wholly ineffective’ in taking the auditors to task.
  • The committee had ‘no confidence’ in the FRC or the PR, who it said shared ‘a passive, reactive mindset and are too timid to make effective use of the powers they have.’

The full report is available here, together with video of some of the key evidence.

UK Pre-Packs: where to next?

A “pre-pack” insolvency is one that involves a business sale negotiated in advance of a formal insolvency, implemented by the liquidator or administrator shortly after his or her formal appointment.

Pre-packs will achieve a quicker and cheaper sale than a full blown process by an insolvency practitioner – however if a related party ends up as the purchaser, questions are often asked about how the sale price was set. A report issued this week in the UK raises doubts as to the effectiveness of a voluntary regime intended to mitigate those problems, and further change now seems likely.

Pre-packs in different jurisdictions

In the US, pre-packs are used for the very largest insolvencies – such as Chrysler in 2009 – to try to avoid the worst of the time delays and runaway legal costs of their cumbersome Chapter 11 process (a recent example reported here).

In the UK, pre-packs are typically used to deal with the very smallest businesses, where the costs of a normal sale process and settlement would swallow most of the sale proceeds.  Whilst they are an established part of the UK restructuring scene, pre-packs involving a sale to a related party – which most Australians would describe as a ‘phoenix’ transaction – have been controversial in the UK for precisely the same reasons that phoenix transactions are controversial here.

In Australia, pre-packs are seen by many restructuring and turnaround professionals as problematic, because a practitioner who is involved in pre-appointment negotiations probably falls foul of the ARITA requirements for professional independence.

The Graham Review and its recommendations

In 2013 the UK government asked prominent Chartered Accountant Teresa Graham to review the use of pre-packs, and make recommendations to improve their outcomes.  The recommendations in her 2014 Report (discussed here) included a process by which related-party transactions could be referred to a ‘Pre-Pack Pool’ – a panel of experienced business people – for review.  Notably, this is a voluntary process, and those involved must choose to refer the transaction to the PPP.

As explained on the PPP website, a randomly selected panel member will provide an independent opinion to be shared with creditors.  That opinion, provided within two business days and at a cost of £800, will not include any reason or explanation, but will simply set out one of the following three conclusions:

  1. “Nothing found to suggest that the grounds for the proposed pre-packaged sale are unreasonable”
  2. “Evidence provided has been limited in some areas, but otherwise nothing has been found to suggest that the grounds for the proposed pre-packaged sale are unreasonable”
  3. “There is a lack of evidence to support a statement that the grounds for the proposed pre-packaged sale are reasonable.”

The 2017 Annual Report

This week the PPP issued its report for the 2017 calendar year (available on their website).  Key statistics include:

  • 28% of the 1,289 administrations in the UK were pre-packs (2016: 22%).
  • 57% of those pre-packs involved sales to related parties (2016: 51%).
  • Only 11% of the related party pre-packs (28%) were referred to the PPP (2016: 28%).

Of those referrals:

  • 49% received a ‘not unreasonable’ opinion (2016: 64%).
  • 34% received a ‘not unreasonable but with limitations as to evidence’ opinion (2016: 25%).
  • 17% received a ‘case not made’ opinion (2016: 11%).

What next for UK pre-packs?

The UK passed legislation in 2015 which created a framework to allow for later regulation if the process proposed by Teresa Graham did not deliver the hoped-for outcome.

The PPP’s 2016 Annual Report noted a slow take up rate in the first year of operation – but recognised that the program was still new. However, the 2017 report shows that against the hopes of the PPP, the referral rate has fallen, and fallen significantly.

It seems likely that a review announced by the UK Insolvency Service in December 2017 will conclude that the voluntary regime has not worked. The next step is less clear: will the UK endorse the referral regime but make it compulsory, restrict or ban related-party sales altogether, or find another option?


For further reading, Michael Murray has written an excellent article recently on pre-packs: here

Restructuring & Turnaround professionals and the Royal Commission

In December (here) I suggested that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘FSRC’) had the potential to become the seventh inquiry in the last seven years to examine the conduct of Restructuring and Turnaround practitioners.

The third round of hearings which commence on 21 May specifically allocates time (the agenda is here) to considering the “approach of banks to enforcement, management and monitoring of loans to businesses.”

On 7 May the FSRC published its 10th background paper: Credit for small business – An overview of Australian law regulating small business loans.  The paper does extremely well to condense a very broad subject into 41 pages but surprisingly makes no mention whatsoever of the PPSA – which is surely significant, if only for the fact that it imposes a duty comparable to section 420A.

Two days later the FSRC released background paper 11 (both papers are available here) prepared by Treasury at the request of the Royal Commission to provide an “overview of reforms to small business lending.”  There is likewise no mention of the PPSA regime, but the paper does include comment about the ILRA legislation, as well as brief reference to safe harbour and ipso facto.

There have not yet been any reports of Restructuring & Turnaround professionals being asked to appear – but we may be getting closer.

Anti-phoenix measures announced in the 2018/19 Budget

In the budget speech tonight the Treasurer said “We are making sure small businesses don’t get ripped off by other businesses who deliberately go bust to avoid paying their bills, with tough new anti-phoenixing measures.”

Budget paper #2 available here provides more detail:

Reforms to combat illegal phoenixing

The Government will reform the corporations and tax laws and provide the regulators with additional tools to assist them to deter and disrupt illegal phoenix activity. The package includes reforms to:

  • introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
  • prevent directors improperly backdating resignations to avoid liability or prosecution;
  • limit the ability of directors to resign when this would leave the company with no directors;
  • restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator;
  • extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts; and
  • expand the ATO’s power to retain refunds where there are outstanding tax lodgements.

Illegal phoenixing involves the deliberate misuse of the corporate form. It affects all working Australians, including: customers who get scammed by not receiving their paid goods or services; small business and sole-trader creditors through lost payments; employees through lost wages and superannuation entitlements; and ultimately all Australian taxpayers through lost tax revenue. In addition, illegal phoenix operators gain an unfair advantage over their honest competitor businesses, which has a broader economic impact.

In fiscal balance terms, the cost to the budget of extending the Director Penalty Regime is estimated to be $40.0 million over the forward estimates, as existing GST debt is collected and paid to the States and Territories. There is no revenue impact in fiscal balance terms over the forward estimates as the GST and related liabilities have already been recognised. In cash terms, this initiative is estimated to have nil net financial impact on the Commonwealth. The expansion of the ATO’s ability to retain refunds is estimated to have a small but unquantifiable gain to revenue over the forward estimates period.

The reforms to combat illegal phoenixing complement and build on the work of the Government’s Phoenix, Serious Financial Crime and Black Economy taskforces, and other announced reforms such as a Director Identification Number, a combined black economy and illegal phoenixing hotline, and reforms to address corporate misuse of the Fair Entitlements Guarantee and to tackle non-payment of the Superannuation Guarantee Charge.”

Many of these measures were the subject of consultation in October 2017, as discussed here, but there are some new measures, namely the extension of the directors penalty notice regime and expansion of the ATO’s power to retain refunds.

 

Two strikes? Queensland-only anti-phoenix regimes

As well as regulating labour hire, Queensland’s new Labour Hire Licensing Act  includes an anti-phoenix element.  This is not Queensland’s first use of industry-exclusion to address phoenixing, a similar structure was used in the 2017 Building Industry Security of Payment legislation – but the ambit of the labour hire regime is far broader than many would anticipate.

Building Industry Fairness (Security of Payment) Act 

As discussed in more detail here, the Building Industry Fairness (Security of Payment) Act 2017 implemented a range of measures aimed at protecting sub-contractors from the risk of non-payment.

The anti-phoenix element arises from exclusion from the building license regime if an office bearer of a company acted as a director or secretary of a construction company that entered into insolvency administration in the prior two years.

Labour Hire Licensing Act 2018

The Labour Hire Licensing Act 2018 which commenced on 16 April 2018 to introduce a regime for registration of labour hire participants likewise includes an anti-phoenix element.  The requirement that all directors of a company must be ‘fit and proper persons’ is hardly unusual, but the criteria includes two that are particularly focused on insolvency, referencing prior directorship of a company that:

  • entered into a formal insolvency administration.
  • has failed to pay tax or superannuation due to its employees.

The changes are noteworthy because the LHLA has a reach that is far broader than would be anticipated from its name.  The regime is not limited only to external labour hire arrangements, it appears that it extends to internal arrangements that are very common in corporate groups: the use of a designated payroll company.  As a result it seems that a group employer in any industry – whether headquartered in Queensland or not – will need to register and comply with the regime in respect of any Queensland employees.

At a time when the Federal Government is implementing changes intended to reduce the stigma of business failure, it seems that the Queensland government is heading in the opposite direction – further expanding a ‘one-strike’ regime that will restrict those involved in a financial failure from acting as company directors.

No doubt the Federal Government’s Anti-Phoenix Taskforce is aware of the Queensland approach and will be watching the outcome with great interest.  If the industry-exclusion model does appear to provide a more effective means to deal with the problem of phoenixing, there may be moves to implement it more broadly.

Less butting of heads? Changes to the NSW Farm Debt Mediation Act

The Farm Debt Mediation regime established in NSW in 1994 is now well understood, and is regarded by most observers as the Australian benchmark.

The changes contained in a Bill tabled in Parliament on 10 April 2018 and available here follow a careful and thorough consultation.  Although the reforms represent more of an adjustment than a major overhaul, they are significant nonetheless.

One of the most striking changes is the creation of an offence, committed by a creditor who enforces a farm debt without having first obtained an ‘exemption certificate’ from the Rural Assistance Authority.  An exemption certificate will only be available if a ‘satisfactory mediation’ has been already undertaken and completed, or if the farmer declines mediation or fails to properly participate.

Other changes include:

  • Broadening the ambit of the scheme, to apply to ‘matters involving farm debts’ rather than ‘farm debt disputes.’
  • More specific definition of a ‘farming operation’ as a business undertaking that ‘primarily involves’ agriculture, aquaculture, the cultivation or harvesting of timber or native vegetation or any connected activity – but excludes wild harvest fishing, or the hunting or trapping of animals in the wild.
  • Confirmation that a breach of an earlier mediated outcome does not require a second round of mediation.
  • Allowing the parties to waive the 14 day cooling off period in writing.
  • Implementing a more structured approach by which the parties may reasonably request information or copies of documents from each other.
  • Sensibly allowing parties to break the current confidentiality regime if it will ‘prevent or minimise the danger of injury to any person or damage to any property.’

What’s missing?

To create a criminal offence for enforcement absent an exemption certificate will be seen by some as heavy-handed, but otherwise the changes should receive broad support. That said, there are some missed – albeit less significant – opportunities for improvement:

  • Currently lenders can only invite a farmer to mediate if he or she is in default.  In practice this may lead a lender to call a default earlier than they otherwise might, because that is the only way to access the mediation process.  A way to initiate mediation without a default would be useful in some situations.
  • Attendance at a mediation by all parties is preferable – but sometimes relationship breakdowns contribute to financial difficulties, and vice versa, and it can sometimes be better to mediate with one party ‘attending’ by video conference.  The amendments don’t directly facilitate this, however there is allowance for later modification of the mediation process by regulation.
  • There is no ‘minimum’ size for a farming operation.  The question: ‘how many fruit trees turn a weekender into a farm?’ remains unanswered.

If passed, the legislation will commence on proclamation.

 

Draft ipso facto regulations – for consultation

The final piece of the ipso facto reform is almost in place, following today’s release of a draft-for-consultation version of the regulations.

Ipso facto clauses (also known as ‘termination for insolvency’ clauses, and discussed in more detail here) allow termination of a contract if a party to the contract becomes insolvent – even if there is no other default.

Such clauses can be immensely damaging to businesses that enter formal insolvency administration because essential assets and services can be unilaterally withdrawn: landlords can lock out insolvent tenants, franchisors can withdraw access to franchise systems, and lessors can repossess leased equipment.

It’s true that voluntary administration will ‘stay’ such action – but the effect is only temporary.  The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill passed in September 2017 creates a permanent stay – albeit only for clauses in contracts entered into on or after 30 June 2018.

It was always intended that final detail – a list of exemptions – would be left to the regulations (now available here).  The most notable aspects are:

  • The ipso facto stay will not apply to derivatives, margin lending facilities, and invoice finance arrangements.  This is sensible, and as expected.
  • The draft regulations propose an exemption for ‘a contract, agreement or arrangement of which a special purpose vehicle is a party.’  This will be under careful scrutiny: it can’t be intended that the ipso facto stay can be defeated by simply adding an SPV entity to any contractual arrangement.
  • The stay will not affect contractual rights to combine, set off, or net out, multiple accounts.  Again, this is sensible and expected.
  • As anticipated, there is a specific protection of a secured creditor’s ability to appoint a controller, and step-in rights are likewise protected.

The most significant deficiency in the ipso facto reforms – that the stay will not apply to contracts entered into before 30 June 2018 even if they are modified after that date – remains unaddressed.

Submissions on the proposals may be made until 11 May 2018.


(For those who noticed the photo: I haven’t tried Ipso Facto wines but the Cabernet gets great reviews!)

Surfstitch: Avoiding wipeout?

ASX listed Surfstitch Ltd was placed into voluntary administration by its directors on 24 August 2017, less than four weeks before the safe harbour reforms came into effect on 18 September.

The Australian Financial Review has reported the administrators’ conclusion that the company was in fact solvent when the appointment was made.  At first glance it seems surprising that administrators were appointed to a solvent company, but the threshold question is whether:

“in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time”

It is the directors’ opinion at the time that matters, not the conclusions drawn later with the benefit of hindsight – and solvency is not always clear even with the benefit of hindsight.

According to an ABC interview, however one of the directors was not satisfied that Surfstitch was insolvent, and abstained from the vote for administration.  This highlights the practical problems that directors face, and underscores one of the advantages that safe harbour now offers: the opportunity to more carefully assess and understand the financial position of the company.

On 4 April creditors will choose between two rival deed of company arrangement proposals.  One proposal will see the business sold in return for three-year convertible notes issued by the purchaser, the other will see a debt for equity restructure and later relisting.  Trade creditors and employees will be paid in cash under both proposals.


Update: on 4 April the creditors accepted the three year convertible note proposal, putting their faith in a valuation uplift over that period.

Receivers: escaping the One Nation ‘net’?

On 28 March Pauline Hanson’s One Nation party proposed amendments that were intended to make receivers and managers, investigative accountants, and valuers, all subject to the Australian Financial Complaints Authority scheme.

AFCA is a single external dispute resolution scheme that will replace three existing schemes: the Financial Ombudsman Service, the Credit & Investments Ombudsman, and the Superannuation Complaints Tribunal, discussed in more detail here.

The ‘technical difficulties’ with the PHON proposals, referenced by Senator Cameron in speaking against the proposal, might include that:

  • Valuers and Investigative Accountants only provide opinions – they do not ‘take action,’ and so any redress for wrongful action taken by others should not be borne by them.
  • In any event, it would be quite difficult to develop a process by which an opinion could be mediated or arbitrated.
  • AFCA would need to develop and maintain very significant technical skills to undertake a meaningful assessment of the work performed by valuers, restructuring and turnaround professionals.

Senator Fierravanti-Wells rebuffed the PHON assertion that receivers were ‘largely unregulated’ – noting that receivers were ‘registered with and directly overseen by ASIC, the companies regulator.’  As discussed here, ASIC has allocated $10.196m to the regulation of 711 registered liquidators – almost double the amount it spends regulating six times as many registered auditors.

The proposal was defeated comfortably: 43 – 2.  But the discussion (copy below) highlights that the technically complex insolvency regimes can be confusing to outsiders, and clearly demonstrates the challenges for the restructuring & turnaround profession as we try to educate the general community about the problems caused by ‘non-mainstream’ and pre-insolvency advisers.


 

The hansard proof is available here and is reproduced below (with some minor formatting changes):

“Senator GEORGIOU (Western Australia) (17:34): On behalf of Pauline Hanson’s One Nation, I move amendment (1) on sheet 8383:

(1) Page 45 (after line 26), after Schedule 2, insert:

Schedule 3—Amendments relating to the appointment of receivers and valuers in the AFCA regime

Corporations Act 2001

1 After paragraph 1051(2) (a)

Insert:

(aa) the membership of the scheme is open to every person who is appointed to act in the capacity of a receiver and manager, investigative accountant or a valuer, of an entity mentioned in paragraph (a); and

2 Application

The amendment made to the Corporations Act 2001 by this Schedule applies in relation to the appointment of receivers, investigative accountants or valuers made after the commencement of the item.

Senator CAMERON (New South Wales) (17:34): Labor will not be supporting this amendment. This amendment would amend the legislation regarding the Australian Financial Complaints Authority. When the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Bill 2017 was debated, Labor noted that the bill would unfortunately not make much difference in relation to the way banking disputes were handled. The average banking customer would not see much difference between the Financial Ombudsman Service and the government’s Australian Financial Complaints Authority once it is established. We noted that, in relation to banking disputes, the bill was basically a rebadging exercise and the name ‘authority’ was a misnomer. This amendment seeks to include valuers, investigating accountants and receiver managers in the AFCA scheme. However, stakeholders, including the Institute of Public Accountants, in their reply to the Ramsey review, raised a number of technical issues with regard to including such third parties in the AFCA framework. While we cannot support this amendment today, we acknowledge concerns about the conduct of banks, which is why we have fought so hard for a royal commission.

Senator GEORGIOU (Western Australia) (17:36): This amendment includes valuers, investigating accountants and receiver managers in the Australian Financial Complaints Authority, AFCA, scheme. Bank appointed valuers, investigating accountants and receiver managers act in a largely unsupervised environment. Misconduct in this sector has been raised in numerous past government and Senate inquiries. The Australian Small Business and Family Enterprise Ombudsman has recommended changes, and so have various other inquiries.

If we are serious about stopping white-collar and banking misconduct in Australia, we should support these changes, and we call for your support to do this with us. The problem is that the new AFCA, in its current form, will not investigate misconduct by bank appointed valuers, investigating accountants and receiver managers. The Financial Ombudsman Service, FOS, will not investigate cases of misconduct by valuers or accountants or receivers, even when the bank is aware that there has been misconduct. AFCA will be the same under the existing proposals. So, in some respects, it is a toothless tiger. As an example, I have a letter from FOS showing they will not investigate because, once the receiver is appointed, the receiver acts as an agent for the company and not the person who appointed it. In other words, the bank could appoint the most corrupt and incompetent receiver and be aware of misconduct and yet be totally unaccountable. The ombudsman cannot help unless the bank gives the regulator permission to investigate the crime. In the example submitted, Bankwest informed FOS that it is not prepared to waive the issues that may exist to enable a fresh dispute to be considered by FOS. So, if the bank wants to prevent an investigation, it can do so with a loophole in the legislation.

To add insult to injury, if the damage caused by the misconduct is greater than the limit of FOS, it can fall outside the jurisdiction. This limit could encourage greater misconduct. To avoid investigation, a bank or the agent has to ensure that they create a level of damage above the limit. With the banking royal commission now underway and further cases of misconduct being exposed, now is the time to strengthen legislation and regulate this troubled industry. The Australian Small Business and Family Enterprise Ombudsman has confirmed in discussions that there is very little regulation on these banks and appointed entities. They admit that, in some cases, receivers just refuse to provide details of their work to the owners of companies they are appointed over. They often charge hundreds of thousands or millions of dollars for their work, with no accountability for what they have done. We have seen cases where receivers have employed the same lawyers the banks employed and then they act for the companies they are the receiver over—a conflict of interest in itself—and then they refuse to disclose to the owners and companies what the lawyers have done.

I refer to a letter from the Australian Small Business and Family Enterprise Ombudsman to Senator Jane Hume, Chair of the Senate Economics Legislation Committee, dated 29 September 2017. It reads: ‘Despite the welcome step of establishing AFCA, we believe there are important considerations which are still missing from the jurisdiction of the proposed authority, namely the role of third party agents such as valuers, investigating accountants and receivers.’ The ombudsman’s inquiry report into small-business loans dated 12 December 2016 made a series of recommendations, including recommendation 13 that:

External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigative accountants and receivers …

Current state

  • The jurisdiction of the FOS does not allow consideration of disputes:

 (a) between a small business and a third party such as valuers, investigative accountants and receivers appointed by the bank … … …

  • The only alternative for small business in these cases is the court system, yet:
  • small businesses do not have the expertise to challenge banks through the court system
  • there is a substantial asymmetry of power between banks and small businesses
  • small businesses do not have the financial capacity to hire expert legal advice to help them balance this asymmetry of power.

Recommended change

That the independent EDR – external dispute resolution one-stop-shop – that is, AFCA – have jurisdiction to consider disputes between small businesses and banks, where disputes relate to the conduct of third parties appointed by banks.

This clearly indicates that our amendments need to be supported. The Australian Small Business Ombudsman said:

  • Many problems identified during the Inquiry relate to the conduct of third parties appointed by banks.
  • Currently, there is no realistic way to seek redress for these actions. ASIC does not take action on behalf of individuals and the court system is not a viable alternative.
  • The lack of accountability must be addressed.

The Australian small business ombudsman would support legislative changes to the AFCA to make banks responsible for the conduct of their appointed valuers, investigative accountants and receivers.

The LNP have argued that these changes are unconstitutional. However, the Senate Procedure Office have said they can’t see any constitutional problems with this amendment and they believe it is compatible with corporations law. Also under section 51, heads of power, banks, financial institutions and service providers are covered federally. We have run this by the Parliamentary Library. They have advised that our amendment is a solution to the issues raised by the ombudsman and they cannot see any constitutional reason why it can’t work. The government objects to this amendment on the basis that it is unconstitutional. We have repeatedly asked the government to identify any reasons that this amendment may be unconstitutional and they have failed or refused to clarify these reasons. The only explanation can be that this amendment in fact is constitutional.

This amendment needs to be supported if we want to help those affected by bank misconduct. Given the bank and receiver misconduct covered by numerous past government inquiries and the misconduct now being revealed by the banking royal commission, we request the Senate support the proposed constructive changes to bring this largely unregulated sector under control. This chamber should take the word of the Parliamentary Library, the ombudsman and the Senate Procedure Office ahead of a government who would rather protect their banking mates.

Senator FIERRAVANTI-WELLS (New South Wales—Minister for International Development and the Pacific) (17:43): The government will not be supporting this amendment. Valuers and accountants are regulated under state and territory based professional conduct frameworks. Receivers and liquidators are registered with and directly overseen by ASIC, the companies regulator. They are subject to the regulatory framework contained in the Insolvency Law Reform Act. The new AFCA scheme provides an out-of-court dispute resolution scheme for consumers who are in dispute with a licensed financial product or service provider. Valuers, accountants and receivers are not licensed providers of financial products or services to retail clients.

Senator HANSON (Queensland) (17:44): Everyone has been calling for a royal commission into the banking sector, and the coalition government have actually instigated that. Labor say they’ve been calling for a royal commission into the banking sector, as have the Greens and One Nation and, I believe, Senator Hinch and others, and we were very pleased to see it happen. Now we are talking about the valuers and liquidators involved in this. In the Senate inquiry that One Nation had last year, it came out that they played a very big role in the devastation that shut down a lot of people in the farming sector who lost their properties, yet nothing was done about it.

We are now proposing an amendment to include those people in this bill. We have confirmation that it can be done under this bill. If Labor are so much for all the battlers out there, why don’t they want some accountability to ensure that these people are taken to task for their actions? Why aren’t Labor prepared to stand up for this? This is an amendment that calls for accountability, so that they cannot just do what they want to do and destroy people’s lives. The government, from the minister’s office, is saying that this is unconstitutional. We have asked: which part of the Constitution? Absolute silence! Nothing has come back to us. They can make a comment like that, but they can’t back it up with evidence.

They come under the Corporations Act—and that’s fine—but there is no reason why either side cannot pass this amendment. Do you really want to stand up and ensure accountability in this country from the banking sector? They hire these liquidators and receivers. They don’t pay for them, though; it’s the people who are going under who have to pay the bills for this. They rack up hundreds of thousands of dollars, and that’s why people lose their properties. But you sit here in deafening silence and you’re not prepared to make them accountability to the public. You sit there and say that you’re for the battlers and you call for a royal commission into the banking sector. Is this Labor? Is this what you really want?

Labor constantly accuses One Nation of being out there grandstanding and not being prepared to stand up for the battlers and the farmers. Yet, here we are, moving an amendment to legislation that is going to be so beneficial to people in this country. It will make them accountable, and Labor just sits there and does absolutely nothing about it. You know who’s really fighting for the people of this country, the battlers. It’s One Nation.”

Secret Harbour?

Must a listed company disclose that it has taken steps to ‘enter’ the Safe Harbour regime?

Doing so would almost certainly result in the withdrawal of trade credit facilities and thereby cause a liquidity crisis.  But the ASX listing rules impose a quite rigorous continuous disclosure regime, requiring disclosure regardless of the damage it may cause to a business.

The update to Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B released this month and available here directly addresses the question, providing very helpful guidance.

Background

Rule 3.1 requires immediate notification to the ASX of:

“any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s security”

Paragraph 5.10 of GN 8 specifically confirms that rules applies to companies experiencing financial difficulties:

“The fact that information may have a materially negative impact on the price or value of an entity’s securities, or even inhibit its ability to continue as a going concern, does not mean that a reasonable person would not expect the information to be disclosed.  Quite the contrary, in ASX’s view, this is information that a reasonable person would generally expect to be disclosed.”

Taking steps to enter Safe Harbour is evidence that directors are concerned about solvency.  Surely the forming of a view that safe harbour is appropriate falls in the category of information that would have a materially negative impact on share price?

Updated Guidance

The updated Guidance Note directly addresses the issue, explaining that:

ASX has been asked whether the fact that the entity’s directors are relying on the insolvent trading safe harbour in section 588GA of the Corporations Act requires disclosure to the market”

Updated paragraph 5.10 recognises that Safe Harbour is a conditional carve-out from a director’s potential liability for insolvent trading.  GN 8 highlights that the legislation does not include an exemption from disclosure obligations, and so Rule 3.1 continues to apply – but goes on to explain:

“The fact that an entity’s directors are relying on the insolvent trading safe harbour to develop a course of action that may lead to a better outcome for the entity than an insolvent administration, in and of itself, is not something ASX would generally require an entity to disclose”

The guidance recognises that investors would always expect directors of an financially stressed business to consider whether there was a better alternative than an insolvency administration:

“The fact that they are doing so is not likely to require disclosure unless it ceases to be confidential, or a definitive course of action has been determined.”

A practical outcome

This is a very practical position for the ASX to take.  Companies can maintain essential confidentiality rather than disclose issues that would almost certainly trigger a crisis of confidence, the freezing of credit facilities, and a severe liquidity crunch.