There is not much correlation between crime and insolvency, in my researches, certainly in comparison with crime in the world of solvent individuals and companies. But when a bankruptcy or liquidation does reveal criminal conduct, Australian law’s reporting requirements are variable.
Australian Criminal Investigations Commission
Despite my researches, the Australian Criminal Investigations Commission has expressed concerns about the
‘potential for serious and organised crime groups to exploit bankruptcy provisions for their own advantage … often aided by professional facilitators, who are intrinsic enablers of serious and organised financial crime.’
That was said in the Commission’s submission to a 2018 Australian Senate inquiry about the reduction in the period of bankruptcy from three years to one.
The Commission was so concerned about the proposed reduction that it made a submission to the inquiry that said:
‘Through the use of illegal phoenix activity as a business strategy by serious and organised crime groups, ACIC intelligence indicates that there are individuals who exploit bankruptcy provisions to facilitate illegal activities. These individuals and groups are often aided by professional facilitators, who are intrinsic enablers of serious and organised financial crime. A current concern to the ACIC are liquidators and unregistered pre-insolvency advisors who are developing a niche in the criminal environment by facilitating and promoting the exploitation of bankruptcy provisions and illegal phoenix type activities. For example, by encouraging directors and accountants to transfer assets to new entities for less than market value, or to destroy or alter company records’.
The Commission also identified lawyers, accountants and financial advisers who ‘assist in concealing illicit wealth and advise on tax evasion strategies’.
Why we need a 3 year bankruptcy period
In the end, a summation of ACIC’s submission to the inquiry was that
‘the more regularly people can get out of insolvency, the more chance they have to reoffend’,
which could be otherwise put as the more people we make and keep bankrupt, the less they will offend.
It was a very odd submission, comparable with ASIC’s that sought the longer period of bankruptcy to prevent directors resuming their business roles.
Neither ACIC’s nor ASIC’s submission expressed any inconsistency between a person who goes bankrupt being automatically out of commercial action for 3 years, and a director of a phoenix company who has no immediate limitation in starting again.
Since then, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 has created further criminal offences which will no doubt exacerbate these agencies’ concerns.
Reporting crime – gaps
The front-line task of detecting crime in Australian insolvencies lies with the accounting trained insolvency practitioners, not the regulators, but in a haphazard way, in these four categories:
- liquidators are required to report breaches of all laws, not only the criminal law: s 533 and related sections of the Corporations Act; but ASIC’s prosecution role is limited to offences under the Corporations Act and the ASIC Act.
- trustees are only required to report offences of the bankrupt under the Bankruptcy Act – s 19 – but are also asked to report offences of others, but also only under the BA – see IGPS 14 Referring offences against the Bankruptcy Act 1966 to the Inspector-General [1.2]
- both trustees and liquidators may be obliged to report serious offences under state law – for example s 316 Crimes Act 1900 (NSW); and
- both liquidators and trustees and their accounting staff are required to report offences under the APES 110 Code of Ethics, but only in respect of their clients (if they have any) or their employers.
There are a few reporting gaps there which may become more apparent with the potential for opportunistic crime in the context of the A$130 billion in government funding being paid during the COVID-19 crisis.
Reporting crime – who pays?
The cost of these criminal and other investigations is borne by the creditors and it can be that investigation costs in a matter can consume all remaining funds with nothing left for creditors.
A view has been given however that
‘liquidators must tread carefully in spending remaining money on legal action against company directors or their pre-insolvency advisors’,
with ASIC being the one with both the resources and the responsibility to bring actions against wrongdoers.
ASIC has an exclusive role in enforcing criminal provisions of the Corporations Act, including strict liability offences relating to director conduct as well as more serious criminal breaches. Its four separate heads of power are s 49 and s 12HC of the ASIC Act; s 534 (by the liquidator, in default of ASIC) and s 1315 of the Corporations Act.
The same comments may be made about the Inspector-General in Bankruptcy.
The UK Official Receiver
This analysis of the Australian position was prompted by the Official Receiver in the UK having recently been granted expanded powers through the Insolvency Service as a public authority that can obtain communications data, along with intelligence and law enforcement agencies, the revenue and others. The reason given was said to be that ‘fraudulent trading’ and breaches of company director disqualification orders feature in a significant number of UK investigations, and communications data will allow tracking of telephone numbers and billings, along with Internet Protocol (IP) addresses and underlying e-mail account details.
The UK OR has no real parallel in Australia. It has significant public interest roles including investigating personal and corporate insolvencies and pursuing miscreant directors. It is the initial appointee in bankruptcies and court appointed windings up and it can and does take on the liquidation of nationally significant insolvencies, Thomas Cook and British steel being examples.
The mixed Australian position in relation to investigations is difficult to explain in comparison with the UK. Here is one attempt about corporate insolvency only:
“It is clear that ASIC is not a public liquidator; what is less clear is the division of enforcement responsibilities between ASIC, acting in the public interest, and the liquidator, acting in the interests of creditors. A lack of resources in the hands of liquidators, and judicial commentary about the public interest served by liquidators in taking action, complicates the matter. Add to that the juxtaposition of enforcement by liquidators against directors, in lieu of ASIC action, with ASIC’s action against liquidators themselves for wrongdoing, especially where it involves collusion with the directors’ wrongdoing”.
The position of bankruptcy offences is only a little clearer.
In the end, if there is any increased correlation between crime and insolvency in the context of the current crisis, we need to understand that some may go unreported.
 Submission to the Senate Legal and Constitutional Affairs Legislation Committee, 5 February 2018.
 Serious Financial Crime in Australia 2017.
 Senate transcript 5 March 2018.
 Section 15 ASIC Act 2001.
 Catching Pre-Insolvency Advisors: The Hidden Culprits of Illegal Phoenix Activity (2017) 35 Company and Securities Law Journal 486-502, Helen Anderson and Jasper Hedges.
 Insolvency – it’s all about the money  UMelbLRS 6, (2018) 46(2) FLR 287-312, Helen Anderson.