As has been widely reported, both in professional publications and indeed in the general media, in mid-August 2016, the Australian Tax Office and the Australian Securities and Investments Commission conducted raids on a number of business premises, including on the Gold Coast, as part of a joint task-force investigation into the, so-called, “pre-insolvency” industry.

For those not familiar with the concept, firms operating in the pre-insolvency industry target companies in financial distress. They primarily provide “advice” as to the restructuring of business affairs prior to the appointment of external insolvency practitioners. It was reported that the August raids carried out by the ATO and ASIC centred on two pre-insolvency firms and, it is alleged, was motivated by those firms actively encouraging and indeed facilitating tax evasion, and “phoenix” activity, both of which are illegal.
The typical modus oporendi for pre-insolvency firms is to cold-call directors of companies that have winding up applications filed against them (it is requirement under the Corporations Regulations for creditors to advertise the filing of a winding up application).

The difficulty is that the, so-called, “pre-insolvency” industry is currently unregulated. For a number of years there have been calls from the insolvency profession, made up of liquidators, bankruptcy trustees and solicitors, for action to be taken. Despite the profession voicing its frustration, very little was done to clamp down on this activity. Aside from some minor exceptions, for example the prosecution of some advisors the pre-insolvency “advisors” have largely been allowed to operate with impunity.

What is of concern, and indeed has been for some time, to those working in the insolvency profession, which is strictly regulated, is that directors, and indeed individuals in their personal capacity, are being given bad and in many cases wrong advice as to the effect and consequences of the appointment of an external insolvency appointee. The majority of advisors are not qualified as lawyers or accountants and fall outside any regulatory framework.  This is concerning given they are advising directors about significant matters including the directors’ duties under the Corporations Act 2001 (Cth) (where breaches in Australia can result in criminal ramifications).

That is not to say all companies operating outside of the regulated insolvency sphere are to be wary of. There certainly are a number reputable firms that we at Rose Litigation Lawyers work with. Those firms employ qualified accountants, ex-bankers and other persons with both appropriate qualifications and suitable experience. Indeed we have increasingly seen a number of those firms employ qualified accountants with experience working with national insolvency firms as well as qualified practitioners (liquidators/trustees) to lead and manage their teams.

We contend that any director of a company experiencing difficultly or seeking to restructure the business of their companies ought obtain legal advice given the tough stance ASIC and the ATO are now taking.

We at Rose Litigation Lawyers welcome the action taken by the ATO and ASIC. As the saying goes, “your most important step is your next one”. We shall watch with anticipation how the ATO and ASIC investigation develops. It is unquestionable that the regulators will be pushing this further, and we have already seen accountants and advisors being forced to be examined under oath in public examinations into the companies affairs pursuant to the Corporations Act.

If you or your business is cold-called by unknown parties (it is rare that only one firm would contact a distressed company given that pre-insolvency firms work from the same public databases) we would counsel caution before imparting any information and details about your business. If you or your business are experiencing financial distress speak with your accountant or contact the team at Rose Litigation Lawyers as to your options.

 

Article Written By: Billy Fitzgerald

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