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

© PPB Pty Ltd 2011 2

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.


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.


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


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


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


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


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


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


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.


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.


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.


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


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.


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


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)


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)


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)


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 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


Andrew ScottSenior Manager


Simon TheoboldPartner


Warren WhitePartner


Peter MacksPartner


Mark RoufeilDirector


David LeighPartner


ppb advisory research the future of liquidation and bankruptcy

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