2017 Dean-Willcocks Advisory Presentation | Minimising exposure of professional advisors in the event of client insolvency

Dean-Willcocks Advisory
Minimising exposure of professional advisors in
the event of client insolvency
Presenters
Dean-WillcocksAdvisory
Ron Dean-Willcocks, Anthony Elkerton & Cameron Gray

Disclaimer
This information is a summary based on Dean-Willcocks
Advisory’s understanding of the relevant legislation and
any proposed changes. The information is intended to be
general advice and it is general in nature and may not be
relevant to individual circumstances. You should not do or
refrain from doing anything in reliance on this information
without obtaining suitable professional advice.
DW Advisory Pty Limited ABN 80 208 006 148
Liability limited by a scheme approved under Professional Standards Legislation
experience | integrity | solutions

insolvency can happen to anyone
• Pan pharmaceuticals
• Global financial crisis
• News corp
• Paul hogan
• Your client

it’s almost always somebody else’s fault

guess who usually gets the blame?
Human nature being as it is, very seldom do directors take responsibility for
insolvency, the finger pointing starts and surprise, surprise the finger is often
pointed at the advisor

everything is subject to scrutiny
In the event of insolvency, litigation or regulatory enquiry, every piece of paper, diary
note, telephone conversation and the like is subject to scrutiny either by a liquidator,
opponent lawyers, the ATO or the regulator, including:
• Electronic data
• Deleted electronic data
• Diary notes
• Voice mail messages
• Text messages

• Conversations
• Draft document(s)
• Work papers
• Advice/instructions for asset planning/tax
• Minutes and board papers
• Expert reports

Scrutiny may not be as a consequence of the value of a relevant transaction, it may be
disciplinary
Non compliance with ATO, OSR, ASIC or other statutory bodies demands may
be criminal

minimising tax is not the only consideration
All too often structuring is tax driven without regard for asset protection and/or estate
planning/personal liability

the australian taxation office (ATO) awareness
The ATO have numerous methods of recovery, including:
• Served at a registered office or delivered to director personally
• 21 days only to make an application to court to set aside
• If not, the debtor is presumed insolvent and creditor may proceed to wind up the
company
STATUTORY DEMAND
As against the company

• Has the effect of creating a charge in favour of the ATO over monies due to a taxpayer,
including the taxpayer’s cash at bank, related party debit loans and debtors generally
• The garnishee can be served on:
i. Bank - often the bank from which GST/BAS/IAS is paid from/to
ii. Related parties
iii. Other debtors
NOTICE OF INTENDED LEGAL ACTION/GARNISHEE
NOTICE UNDER SECTION 260-5 TAX ADMINISTRATION ACT

• Directors are personally liable by way of penalty for PAYG (W) and SGC from the due date
for lodgement
• It is possible for the penalty to be remitted but only if the BAS/IAS and SGCS are lodged
within 3 months of due date
• To recover a director penalty, the ATO has to issue a Director Penalty Notice (‘DPN’). If
relevant returns are lodged within 3 months of due date then the DPN provides 21 days to
inter alia appoint a voluntary administrator or liquidator. In such circumstances the penalty is
remitted
As against directors personally

• However, if the BAS/IAS and/or the SGCS are not lodged within 3 months of the due date,
directors remain personally liable for PAYG(W) and/or SGC with no further prospect of the
penalty being remitted

• Served at the director’s residential address as last notified to ASIC. Effective even if
director has left the address and/or served to address of registered tax agent
• Must appoint a voluntary administrator or liquidator within 21 days or director remains
liable for PAYG (W) and the SGC. Director remains liable regardless, for PAYG(W) and/or
SGC where BAS/IAS and/or SGCS are three months over due for lodgement (this is called a
‘Lockdown DPN’)
DIRECTOR PENALTY NOTICES (DPN)

• If the company has been deregistered by ASIC (for example failure to comply with
annual company statement requirements) it may be difficult to reinstate the company
within 21 days to appoint the voluntary administrator or liquidator

• Payments to the ATO under repayment arrangements are often recoverable by a
liquidator as a preference given they are easily identified because of the documentation
usually involved with such arrangements and the information provided to the ATO in order
to obtain such arrangements
• PAYG(W) paid to the ATO pursuant to a payment arrangement with a company and
recovered by a liquidator from the ATO as a preference may then be recovered by the ATO
from the director under the Corporations Act
Beware of possible liability of directors arising from the
Australian Taxation Office repayment arrangements

office of state revenue (OSR)
Though not common knowledge, nor utilised frequently, the OSR have similar powers to
the ATO to issue garnishees and also to issue ‘compliance notices’ which are similar to
DPNs

inter-agency phoenix forum
Internally known as the ‘Super Committee’ includes key government agencies;
• Australian crime commission
• Australian federal police
• Australian taxation office
• And others
Established to bring together key government agencies to share intelligence and
identity, design and implement cross-agency strategies to reduce and deter
fraudulent phoenix activity
• Australian securities and investments commission
• Department of employment
• State and territory revenue offices

structure issues
• Who owns assets?
• Basic structuring:
- asset entity
- employer entity / entities
- trading entity
- premise leasing entities
- lessee entity / entities
• Hard to see why trustee is not a company
• Loan accounts are assets too! and are recoverable by liquidators!

structure issues
• Shareholding, very important owned by correct entity
• Who are the directors?
• Possible liability of holding company for insolvent trading of its subsidiaries
• Trading names, must be registered in the correct entity
• Correct trading entity

loan account issues
• Annual offset of loan accounts. At a minimum you must annually offset debits and
credits in circumstances of solvency
• Perfect world = one net creditor (or net debtor if can’t be avoided)
• Pay dividends when you can, don’t have surplus assets sitting in a balance sheet,
franking credits assist
• Minute dividends
• Ensure opening balance = closing balance, consequences if not done can be
significant
• If it’s a Dividend 7A loan it’s still an asset to be recovered by a liquidator

loan account issues
• Time to address loan accounts is day 1 if possible, at the time of the transaction. Ensure
net cash in or net cash out against same/correct entity
• Personal assets in balance sheet, why?
• Don’t have debit balance loans in your creditors note to balance sheet and vice versa

loan account issues
• Don’t be lazy with your accounts. Correct classification required;
- current/non current
- director/directors loans
- shareholder/shareholders loans
- subordinated loan
This can be important to minimise exposure of directors e.g. “was a loan to the directors
or a director? Was it to directors or shareholders”? Depending on who owns the assets this
can be critical if a liquidator seeks to recover the loan

retention of title - ‘ROT’/security interest
• ROT Must be registered on Personal Property Securities Register to be enforceable
• It’s a Minefield
• ‘All monies’ provisions generally should be included in ROT agreement
• ‘Financing Statement’, which supports registration of the ROT agreement as security
interests on the PPS register, must contain prescribed data. Inaccuracies may render the
security interest void
• ROT arrangements must be registered on PPS Register as Purchase Money Security Inter-
est (‘PMSI’) to retain priority in specific collateral. Very specific time frames for registration
– or priority may be lost

retention of title - ‘ROT’/security interest
• The underlying ROT agreement, ‘security arrangement’, must be capable of enforce-
ment – need to establish that the agreement is part of the supply contract e.g., signed
credit application, detailed on invoices etc
• Ensure arrangements are in correct trading name – for both seller and buyer – and de-
tails on the security agreement supports details on the Financing Statement registered on
the PPS Register

correct entity
• For Retention of Title and Personal Guarantee to be effective, you need to ensure the
seller is invoicing exactly the same entity that has effected the credit application (and over
which the PPS Financing Statement has been registered, and for which the
personal guarantee has been provided)
• Need to inter alia ensure raising a purchase order on the correct entity to ensure benefit
of warranty, after sales service and any contractual entitlements
• Recipient created invoices are beneficial
AS A SELLER
AS A BUYER

insolvent trading
A company is solvent, if and only if it is able to pay all of its’ debts, as and when they
become due and payable. This is the law!

the seven deadly signs
1ATO action
2Arrears of superannuation
contributions
3Bank critically reviewing facilities
4Client compromising large debts
for quick cash recovery
5Creditors stress
6High turnover in senior staff
7Considering finance from ‘lenders of last resort’

personal guarantees
• Avoid at all cost
• Can have a massive impact
• Need to maintain a register
• Once given remain effective indefinitely unless terminated
(in respect of debt subsequent to termination)
• If you don’t remember who is guaranteed then you may need to consider restructure,
it can be that important

good house keeping
• Registered Office
- Why c/- the accountant / lawyer. You can be sued for not acting on a
statutory demand
• Director’s residential address at ASIC
- Ensure correct
- Critical in respect of the ATO Director Penalty Notice
• Shareholding as per ASIC records
• D & O Insurance – circumstances prevail where you should not have it

good house keeping
• Timely preparation of accurate accounts
• Periodic consideration of client structure recommended
• Individuals should rarely personally act as trustees
• If an insolvency event is likely then must review client circumstances
• Deregister/Liquidate unwanted entities

other practical issues
• Unpaid entitlement to trust distribution are assets in the event of bankruptcy/liquidation
• Beneficiary of Deceased Estate. In the event of bankruptcy, post bankruptcy assets
including entitlements from deceased estates may be recovered by the Trustee in
Bankruptcy. Testamentary Trust(s) may avoid such issues
• Divorce settlement and shareholder settlements if paid from company funds may result
in a loan that is a company asset or constitute a preference payment

dumb staff
• Correspondence leading to any transactions
• Back dating documents
• Inflated/incorrect/misleading statements of assets and liabilities
• Insolvency reports
• Directors minutes
• Good structure/sloppy paperwork

insolvency can happen to anyone

it’s almost always somebody else’s fault!

guess who usually gets the blame

Presented by
Ron Dean-Willcocks,
Anthony Elkerton &
Cameron Gray
www.dwadvisory.com.au

2017 Dean-Willcocks Advisory Presentation | Minimising exposure of professional advisors in the event of client insolvency

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