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Liquidators and administrators - forced to continue use of separate accounts

07 Sep 2010

Hynes Legal were recently involved in a federal court test case concerning the operation of administrators’ and liquidators’ bank accounts.

The operation of banking facilities is covered by regulations 5.6.06 and 5.6.09 of the Corporations Regulations. The proceedings sought to have permission to maintain a common, compound account for administrations and liquidations.

The court found that the regulations do not permit this and notwithstanding evidence of benefits to creditors, (including increased interest and reduced fees), the court was not prepared to provide a general approbation of a common account. The decision Re Worrell [2010] FCA 934 was delivered by His Honour Justice Greenwood on 30 August 2010.

The regulations

Regulations 5.6.06 and 5.6.09 relevantly provide:

5.6.06 Payment into Liquidator’s General Account

1.   A liquidator must:

(a) unless otherwise directed by the Court or the Committee of Inspection - open a

    bank account to be known as the liquidator’s general account; and

(b) pay into that account all money received by the liquidator not later than seven

    days after it has been received.

5.6.09 Special Bank Account

1. The Court may give directions regarding the payment, deposit or custody of:

(a) money; and

(b) bills, notes or other securities; that are payable to, or into the possession of, a

     liquidator.

2.  If an application is made to the Court to authorise the liquidator to make

    payments into and out of a special bank account, the Court may:

(a) authorise the payments for the time and on the terms as it thinks fit; and

(b) if the Court thinks the account is no longer required - at any time order it to be

     closed.

The system

A common account system was implemented and operated successfully for some time. The evidence before the court was that the system was and is sophisticated, contained safeguards and controls to ensure that there was no improper dealing with funds and had worked in that manner for some years without issue.

It also allowed benefits to creditors of:

  1. maintenance of a separate deposit to ensure increased interest returns to creditors);
  2. reduced bank fees - in that only one account was maintained as opposed to one account for each liquidation; and
  3. reduced costs as only one account needed to be reconciled and that could be performed each day at minimal cost.

Forensic evidence was also given from a fraud examiner, which showed that the system has strengths and that the prospects of fraud and defalcation are in fact higher when multiple account systems are maintained.

Readers will be familiar with the decision in Ariff - which involved substantial defalcations by a liquidator totaling very substantial sums of money. These were in fact perpetrated through the use of multiple accounts.

Other areas where common accounts used

Those who practice in the field will be aware that in bankruptcy, the use of a compound account is permitted and the in the case of debt agreements, there is a specific requirement to maintain a compound account. It is also permitted in a pooling arrangement.

The court’s attention was drawn to the common account system in place with solicitors’ trust accounts.

Findings

The court relevantly found that:

  1. the circumstances were not special enough to warrant a departure from the standard regime (paragraph 106 of the judgment);
  2. notwithstanding that, for liquidations and administrations currently under the auspices of the applicants, they could be concluded utilising the compound, common account;
  3. while relevant to the court’s decision-making, the question of advantages and disadvantages - giving rise to change - is something to be considered by professional bodies and ultimately the legislature; and
  4. given the applicants had established the system in good faith and in the best interests of professional practice, an order was made under section 1322(4)(c) excusing any prior non-compliance with regulation 5.6.06.

This is, we suggest, an area where the legislature should consider making changes both in the interests of uniformity between personal and corporate insolvency and ensuring appropriate, cost-effective and secure systems and procedures can be utilised to bring the administration of insolvent companies into the 21st century.