ResearchThe Future ofLiquidation andBankruptcy
Breakthrough  Creditors will significantly improve their  prospects of recovery by applying PPB  Advisory Screening Proces...
PPB Advisory Liquidation Screen1. Real Property Search on debtor company2. PPB Advisory Bankruptcy Scorecard for each dire...
PPB Advisory Bankruptcy Scorecard1. Real Property Assets2. Income Contributions3. Business Plant and Equipment4. Other Kno...
Results of the Bankruptcy ScorecardProcess      Data*            October 2009 to April 2010            October 2010 to Apr...
Benefits of ScreeningInformed decision making for a portfolio of debts resulting in fewerpetitions for winding up and bank...
BackgroundSection                   PageTrends and Implications      8Dividend Research           12Law Reform            ...
Trends and Implications
Summary of 2010 Sharing SessionsImplications for a future without screeningMore assetless matters with higher costsPoor va...
Current Trends                                             Trends                                                         ...
Further Evidence• Strike rate4 for administrations for the year ended 30 June 2010 has fallen to 32% from  44% for the yea...
Dividend Research
PPB Advisory Dividend Research                     Major Source of Funds                                                  ...
PPB Advisory Dividend Research1. Real PropertyWhilst the occurrence of Real Property in Official Liquidations israre, its ...
PPB Advisory Dividend Researcha. Own Assets   PPB Advisory Bankruptcy Scorecard will predict likely recovery   from direct...
Pre-Liquidation Tests3. Substantial Trading EnterpriseThe presence of a Substantial Trading Enterprise is the bestindicato...
Substantial Trading Enterprise testBecause of a lack of publicly available searches, there is skillinvolved in determining...
Substantial Trading EnterpriseCreditors are uniquely placed to possess or access significantinformation about the trading ...
Substantial Trading EnterpriseCertain types of company are not likely to have a SubstantialTrading Enterprise, for example...
Law Reform
Suggested Law Reform To remain viable as a means of dealing with assetless companies PPB Advisory seeks the following chan...
Annexures                                                                  PPB Advisory Liquidation Screen – Decision Tree...
PPB Advisory liquidation screenDecision tree        1. Company LPI             Does company                               ...
Risk score cardDebtor nameReferral solicitorContact at referral solicitorPlease complete all categories – (Please type in ...
Category D – Other assets / matters                                                                                       ...
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PPB Advisory Research The Future Of Liquidation And Bankruptcy

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PPB Advisory Research The Future Of Liquidation And Bankruptcy

  1. 1. ResearchThe Future ofLiquidation andBankruptcy
  2. 2. 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© PPB Pty Ltd 2011 2
  3. 3. PPB Advisory Liquidation Screen1. Real Property Search on debtor company2. PPB Advisory Bankruptcy Scorecard for each director of the debtor company3. Substantial Trading Enterprise test on debtor companyPPB Advisory Official Liquidation Decision Tree is annexed.PPB Advisory’s Statutory Recovery Team has created these testsby researching the source of all dividends it has paid in liquidationssince 1 July 2008.© PPB Pty Ltd 2011 3
  4. 4. PPB Advisory Bankruptcy Scorecard1. Real Property Assets2. Income Contributions3. Business Plant and Equipment4. Other Known AssetsPPB Advisory has successfully applied the annexed BankruptcyScorecard since September 2010.© PPB Pty Ltd 2011 4
  5. 5. Results of the Bankruptcy ScorecardProcess Data* October 2009 to April 2010 October 2010 to April 2011 Result Matters 189 47 A decrease of 142 Appointed matters Recoverable 38% 57% Increase in recoverable Matters 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© PPB Pty Ltd 2011 5
  6. 6. Benefits of ScreeningInformed decision making for a portfolio of debts resulting in fewerpetitions for winding up and bankruptcyDecreased expenditure on petitions. Savings can be redeployed formore complex matters such as policing non-compliance and phoenixactivityReturns to creditors from a higher percentage of appointmentsStronger relationships between creditors, advisors and IPs due tobetter value for money© PPB Pty Ltd 2011 6
  7. 7. BackgroundSection PageTrends and Implications 8Dividend Research 12Law Reform 20
  8. 8. Trends and Implications
  9. 9. Summary of 2010 Sharing SessionsImplications for a future without screeningMore assetless matters with higher costsPoor value for money in appointing a liquidator or trustee withlimited likelihood of recoveryReluctance by IPs to take on appointments due to increased costsof compliancePublic concern about the high costs of complianceRelationships strained between Creditors, Advisors and IPs© PPB Pty Ltd 2011 9
  10. 10. Current Trends Trends Effect  Increase focus on compliance with privacy rules  Increased costs of compliance and investigations for  Compulsory mediations Insolvency Practitioner (“IP”) Social  Costs of dealing with impecunious and self- represented  Scope limitation on investigations  Increased scrutiny by Courts and Regulators  Costs borne by creditors and IP’s for vexatious litigants  Less trust in professionals  Unjustified complaints  Less cooperation from debtors  Increase in filing fees  Fewer appointments (particularly bankruptcy) Legislation  Changes in collection policies  More applications for Bankruptcy or Winding up due to  Legislation changes on trustee reporting costs  Increase in bankruptcy notice threshold  Expensive to complete administrations  National credit code  Increase costs incurred by creditors in complying with  Alternative dispute resolution legislation   Economic Focus on business case for winding up More decisions not to proceed with IP appointment  Increases in sales of debtor books  Limited ability to refinance property to settle IP claims  Reduction in borrowing capacity  Fewer appointments with assets and likelihood of return  Over geared from GFC – more shortfalls to creditors  Disclosure requirements around remuneration and  Time focused on compliance rather than adding Regulation independence value/results  Senate committee licensing and flying squads  Small matters uneconomical for IPs  Black letter bankruptcy regulation reviews  IPs leaving market  Court decisions in One.tel1 and Maxwell Smith2  Government concern about high costs31 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 © PPB Pty Ltd 2011 10
  11. 11. 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 recovery 5. Inspector General’s 2010 report on Personal Insolvency 6. ASIC Insolvency Statistics Report 225 © PPB Pty Ltd 2011 11
  12. 12. Dividend Research
  13. 13. PPB Advisory Dividend Research 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 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. 2Business Assets combine Debtors, Plant and Equipment and Inventory.© PPB Pty Ltd 2011 13
  14. 14. PPB Advisory Dividend Research1. Real PropertyWhilst the occurrence of Real Property in Official Liquidations israre, its value is so material that the prospect of a dividend is high.Real Property Searches are quick, affordable and accurate.2. Director FundedPPB Advisory successfully settles with directors for insolventtrading, loan accounts, transfers of business and assets togetherwith many terminations.These recoveries combine some or all of the above components soit is not possible or practical to accurately separate these sources.In order to generate a return to creditors, directors must haveaccess to one of three sources of funds: a. Their own assets b. Company assets c. Third party assets.© PPB Pty Ltd 2011 14
  15. 15. PPB Advisory Dividend Researcha. Own Assets PPB Advisory Bankruptcy Scorecard will predict likely recovery from directors’ personal assets.b. Company Assets Often 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 Parties Third 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.© PPB Pty Ltd 2011 15
  16. 16. Pre-Liquidation Tests3. Substantial Trading EnterpriseThe presence of a Substantial Trading Enterprise is the bestindicator 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.© PPB Pty Ltd 2011 16
  17. 17. Substantial Trading Enterprise testBecause of a lack of publicly available searches, there is skillinvolved in determining whether a company contains a SubstantialTrading 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© PPB Pty Ltd 2011 17
  18. 18. Substantial Trading EnterpriseCreditors are uniquely placed to possess or access significantinformation 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 enquiryA challenge for creditors is to make full use of that information intheir recovery processes to make better-informed decisions aboutwhether there is a Substantial Trading Enterprise and whichcompanies to wind up.© PPB Pty Ltd 2011 18
  19. 19. Substantial Trading EnterpriseCertain types of company are not likely to have a SubstantialTrading Enterprise, for example:• Sole employee companies (tradesmen, couriers etc.)• Labour hire companies• Deregistered and/or strike-off in progress© PPB Pty Ltd 2011 19
  20. 20. Law Reform
  21. 21. Suggested Law Reform 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)Task Current Position Desired Position Lodgement with ASIC Lodgement with ASICNotice of Appointment Advertisement in paper Internet advertisement Issue demand to officer(s) to lodge Issue demand to officer(s) to lodge If no reply from initial demand, issue a follow up reminder ASIC to follow up officer(s) with compliance notice.Report as to Affairs Reporting offence to ASIC and seeking their assistance ASIC to prosecute following compliance notice On receipt of RATA, lodge with ASIC and Court On receipt of RATA, lodge with ASIC Prepare and lodge report with ASIC within two months of receipt Not requiredSection 476 report (Form 564) Issue demand on officer(s)/external accountants to deliver books Issue demand on officer(s)/external accountants to deliver books and and records to Liquidator records to Liquidator If no reply from initial demand, issue a follow up reminder ASIC to follow up officer(s) with compliance noticeBooks and records Reporting offence to ASIC and seeking their assistance ASIC to prosecute following compliance notice Investigations undertaken to identify assets, voidable transactions Investigations to be limited to identify assets or voidableInvestigations and offences transactions where the Liquidator forms the opinion that there will be realisations or recoveries Report to be lodged with ASIC if investigations identify offences The report should be prepared only where the Liquidator hasEX01 report committed by an officer(s) or company is unable to pay a dividend formed a view that serious offences have been committed of 50 cents or more to unsecured creditors Reports prepared in situations where ASIC have requested a Report to be prepared only when fully funded by ASICEX02/EX03 reports supplementary report Required to convene a meeting of creditors to approve Whilst to inform/update creditors, minimum remuneration to beReports to Creditors remuneration, compromise of debt or enter into to settlement drawn without resolution of creditors agreements Send out the Report to all known creditors Email and website Report to Creditors is prepared and mailed to creditors containing Notice of Meeting by email and websiteCreditor’s meetings the Notice of Meeting Creditor attendance in person or by proxy Meetings to be held by circular resolutions To be lodged on every six months on all appointments To be lodged only where there have been transactionsForm 524© PPB Pty Ltd 2011 21
  22. 22. Annexures PPB Advisory Liquidation Screen – Decision Tree PPB Advisory Bankruptcy Scorecard IPA Insolvency Reform submissions to TreasuryImportant: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
  23. 23. PPB Advisory liquidation screenDecision tree 1. Company LPI Does company Yes search own real property? No 2. PPB Advisory Do Directors have Proceed with bankruptcy Yes assets? winding up scorecard No 3. Substantial Write off debt No trading enterprise Yes
  24. 24. Risk score cardDebtor nameReferral solicitorContact at referral solicitorPlease 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)
  25. 25. Category D – Other assets / matters Answer PPB ratingAre 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 ratingTotal rating - CAT ATotal rating - CAT BTotal rating - CAT CTotal rating - CAT DIs consent granted?Contacts Scott Pascoe Andrew Scott Simon Theobold Partner Senior Manager Partner t: +61 2 8116 3202 t: +61 2 8116 3063 t: +61 8 9382 8933 e: spascoe@ppbadvisory.com e: ascott@ppbadvisory.com e: stheobold@ppbadvisory.com Geoff Granger Warren White Peter Macks Director Partner Partner t: +61 2 8116 3224 t: +61 3 9269 4225 t: +61 8 8211 7800 e: ggranger@ppbadvisory.com e: wwhite@ppbadvisory.com e: pmacks@ppbsa.com.au Mark Roufeil David Leigh Director Partner t: +61 2 8116 3000 t: +61 7 3222 6800 e: mroufeil@ppbadvisory.com e: dleigh@ppbadvisory.com www.ppbadvisory.comImportant: 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 advicebe sought before acting in the areas covered herein. 00075STAT. April 2011.
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