BizLawCentral: Australian insolvency practitioners must not commingle estate funds

The referral to the Court came after an inspection by the Australian Securities and Investments Commission - which is rapidly becoming one of the most ill-named agencies in the world, dealing as it does with so many aspects of corporate management in addition to those in its title.

ASIC inspected the accounts and practices of Worrells Solvency and Forensic Accountants and found that Worrells used "a compound bank account for all corporate external administration appointments" and that, ASIC said, "did not comply with the Corporations Act 2001 and the Corporations Regulations 2001.

Worrells disagreed and referred the matter to the Court for a declaration "that regulation 5.6.06 of the Regulations did not require the opening of a separate bank account for each appointment as a liquidator, administrator or receiver. Alternatively Worrells sought an order authorising, upon the giving of certain undertakings, the use of a compound bank account pursuant to regulation 5.6.09 of the Regulations."

ASIC was not a party to the proceedings - there is no "defendant" in an application for a declaration: it amounts to a person going to court and saying "hello, Judge. We're not sure what the law is so we want you to tell us so that we don't get into trouble in the future. We think it's this and we'd like you to confirm it."

ASIC, however, joined in the proceedings as an interested party and then opposed Worrells application - "principally on the basis that the declarations and orders sought by Worrells were not permitted by law."

In short, ASIC said that the law is clear, Worrells had no chance of success and that, if the Judge made the order that compound accounts were possible, that flew in the face of the legislation.

Worrells arguments appear, according to ASIC's version of events, to have been based not on law but on commercial and administrative concerns: "Worrells argued that there were commercial benefits, such as higher interest and fewer bank fees and administration costs, in using a compound account. In ASIC’s view these benefits did not outweigh the risks associated with using a compound account, such as the increased risk of misallocation, misapplication or misappropriation of funds, which is minimised when a separate account is used for each external administration. ASIC did not allege any impropriety on the part of Worrells nor did it allege any creditor funds were at risk in this case. ASIC’s intervention followed concerns that Worrells’ interpretation of the provisions might create a precedent for other insolvency practitioners to operate a compound account without appropriate safeguards in place," says ASIC.

Far from making orders in the terms sort by Worrells, the Federal Court ordered that Regulation 5.6.06 does not permit the operation of a single or compound bank account for multiple estates and does not "provide for the payment into a single or compound account of monies payable to an insolvency practitioner in their capacity as administrator, deed administrator or managing controller of a corporation."

The court authorised Worrells to continue with their present arrangements in relation to insolvencies begun prior to September this year but all later cases must be removed to individual accounts; upon giving certain undertakings, Worrells is not to be held subject to ASIC proceedings in relation to the earlier accounts.