Legal Insights

ASIC Enforcement update and response to COVID-19 implications for liquidators and directors

By Marelda Hibberd, Sam Kingston & Claudia Radzikowska-Tanas

• 08 May 2020 • 6 min read

ASIC has released its half yearly Enforcement Update Report for July 2019 – December 2019 (Report).

In summary, the implications for professionals such as liquidators and directors are:

  1. After the Hayne Royal Commission, ASIC confirmed that it would focus on individual accountability of company directors and executives. However, when compared to previous enforcement numbers, administrative enforcement has increased in some areas but litigated claim numbers appear broadly similar. As at January 2020 there was a slight increase in the volume of litigation in the pipeline so this may represent ASIC’s move to a “Why not litigate?” enforcement approach. It is unclear whether this approach has been completely abandoned in light of in light of COVID-19;
  2. It remains to be seen what actions ASIC will focus on this year, but regardless directors need to remain mindful of their duties. As noted in our recent alert "Softening the financial blow of COVID-19: Sweeping temporary changes made for directors and debtors", the temporary relief for directors in relation to insolvent trading should not be interpreted as an opportunity to blindly run up debt for 6 months and trade while insolvent; and
  3. Insolvency practitioners face significant challenges this year in navigating both the practical and financial challenges COVID-19 will present. ASIC has advised that it is ready to assist practitioners to get on with business and practitioners should be proactive in engaging with ASIC in a timely manner. However, in circumstances where there is expected to be a surge in assetless administrations, practitioners would also benefit from the financial assistance advocated by the Australian Restructuring Insolvency & Turnaround Association such as relief from the ASIC user pays levy.

What action has ASIC been pursuing?

When compared to previous enforcement numbers, administrative enforcement has increased in some areas but litigated claim numbers appear broadly similar. Enforcement “results” (outcomes that have been recorded) in the Report show:

Enforcement Results July 2019 - December 2019

Misconduct type

Administrative

Criminal

Civil

Action against Auditor

20

0

0

Action against Liquidator

1

0

0

Action against Director

2

1

1

Total

23

1

1

ASIC’s high publicity “scalps” in the period relevantly include:

  1. In the context of governance failures at board or executive level, the conviction of a former director and chief financial officer of Leighton Holdings Ltd (LHL) for two counts of contravening s1307(1) of the Corporations Act 2001 (Corporations Act) by engaging in conduct that resulted in the falsification of LHL’s books; and
  2. In the context of small business issues, the conviction of a pre-insolvency advisor for intentionally dealing with proceeds of crime as part of a scheme to illegally transfer company assets through the issue of fictitious invoices prior to the company’s liquidation.

When compared to numbers for the preceding period, administrative enforcement increased, particularly as against auditors. This increase in auditor enforcement reflects ASIC’s strategic priorities for 2019-2021, to prioritise matters involving auditor misconduct. The same period last year saw greater civil enforcement for corporate governance misconduct and fewer administrative actions against auditors, but litigation in progress was similar (14 criminal and 17 civil actions last year).

ASIC is in the process of litigating the following:

Litigation in Progress as at 1 January 2020

Misconduct type

Criminal

Civil

Action against Liquidator

1

2

Action against Director

10

9

Misconduct related to insolvency

1

0

Civil corporate governance misconduct proceedings

0

5

Total

12

16

A slight increase in the volume of litigation in the pipeline when compared to January 2019 – June 2019 can be observed (12 criminal and 16 civil, as compared to 9 criminal and 9 civil). This may represent ASIC’s move to a “Why not litigate?” enforcement approach. The Report does directly comment on this, other than to mention it was a focus in the last Enforcement Update Report.

Response to COVID-19

In the Report, ASIC deputy chair Daniel Crennan said “we have recalibrated ASIC’s regulatory priorities to focus on challenges created by the crisis and other highly significant or urgent matters”. That recalibration involves revising ASIC's enforcement priorities to focus on significant and urgent matters, with an ability to respond quickly to:

  • serious market misconduct and abuse;
  • instances of immediate consumer harm, including predatory lending; and
  • other egregious unlawful conduct

ASIC has delayed a number of activities not immediately necessary in light of these significantly changed circumstances, including consultations, regulatory reports, and reviews.

In the context of its shift in focus, ASIC has issued guidance to registered liquidators advising ASIC is ready to assist practitioners get on with business, including giving relief or a ‘no action’ letter where appropriate. Insolvency practitioners face significant practical and legal challenges this year arising from COVID-19 and should proactively engage with ASIC where issues arise. Liquidators will also undoubtably encounter a large number of assetless insolvencies, and practitioners would no doubt benefit from ARITA’s suggestions that ASIC give liquidators relief from its user pays levy.

It remains to be seen what actions ASIC will focus on this year, particularly in light of COVID-19. Despite ASIC’s recalibration, enforcement action will continue. ASIC has recognised that there may be some changes to the timing and process of investigations to take into account the impact of COVID-19. There will also be changes due to, among other things, constraints created by variations to usual court procedures.

Regardless of the enforcement strategy adopted by ASIC, directors need to remain mindful of their duties, and care and diligence is still required. The temporary relief for directors in relation to insolvent trading should not be interpreted as an opportunity to run up debt for 6 months and trade while insolvent.

Maddocks has produced guides to a range of legal issues raised by COVID-19. You can access these guides here.

If you require more information, contact a member of our Insolvency team.

By Marelda Hibberd, Sam Kingston & Claudia Radzikowska-Tanas

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