This was published 14 years ago
Corporate regulator dragged into undertaker inquiry - and deservedly so
By Adele Ferguson
When the Senate launched an inquiry into corporate undertakers last week, it sent the insolvency industry into PR overdrive and opened up a can of worms for the Australian Securities and Investments Commission, still stinging from its One.Tel loss.
Unlike the previous six inquiries into the insolvency industry, the latest widens the brief to include the corporate regulator's role before a business's collapse.
With collapses like Great Southern, Babcock & Brown, Westpoint, Opes Prime, ABC Learning and Allco still fresh, and the exponential rise of phoenix companies, an examination of ASIC could prove illuminating.
So too the role of the liquidators, where public resentment has been brewing for years over excessive fees, abuses of power and gross misconduct, over-servicing, protracted settlements, lack of transparency, conflicts of interest and, in some quarters, even the promotion of phoenix schemes that allow companies to be reborn soon after they fail.
A federal joint parliamentary report entitled Corporate Insolvency Laws: A Stocktake, published in June 2004, showed that criticisms of the industry were not just anecdotal; nor were they the inevitable consequence of being capitalism's undertaker. It revealed that few professions receive as many documented complaints.
Indeed, ASIC estimates insolvency practitioner complaints account for fewer than 2 per cent of total complaints and breach notifications. At face value this might seem small but there are only 576 practising liquidators in the country, compared to the millions of companies and other entities that ASIC monitors. The more obvious conclusion is we have a systemic problem that needs to be addressed.
But we can't know because ASIC doesn't disclose whether it is spending more or less time investigating complaints against liquidators. Nor does it calculate an investigation referral rate specifically for them.
While most liquidators act responsibly and effectively, a system heavily based on self-regulation appears to be giving too many opportunities for bad behaviour.
But the role of ASIC also needs to be examined. In many of the big collapses, it as warned well in advance about some issues, but appears to have done nothing, and in smaller cases, when a company has been put into administration, it turned a blind eye.
In the case of Babcock & Brown, which collapsed earlier this year under a mountain of debt, ASIC has been silent and its creditors, which have lost a fortune, had to stump up $500,000 to create a fighting fund to investigate the actions of Babcock's directors and senior management in a public examination to be conducted next year. Meanwhile, the carcass is being ripped apart, and if ASIC eventually decides to investigate, the case will be cold and the damage already done.
In the case of Stuart Ariff, complaints about his conduct as a liquidator go back to at least 2005.
ASIC finally did something two years later, in 2007, when CarLovers' main creditor, Malaysia's Berjaya Group, frustrated with ASIC's disinterest, went to the media and revealed Ariff had ripped out $13 million in disbursements and fees over four years, including lavish family holidays and limousines. It was about three times the company's original deficiency of $4.5 million declared by Ariff on July 17, 2003, just after his appointment.
Ariff, who until recently had a powerful network of business associates, and who scored a number of his administrative appointments courtesy of Tom Karas, a financier to underworld figures including Mick Gatto, was banned for life as a liquidator in August 2009 and ordered to pay $4.9 million compensation to the myriad companies he gouged while charged with trying to salvage them.
But the ordeal for the victims continues. Ariff has since been declared bankrupt and BusinessDay can reveal that his professional indemnity and fidelity insurance was cancelled in September 2008, which will make it difficult to claim from this policy.
If ASIC had been more vigilant when working on its case against Ariff last year, it would have discovered this and acted to cancel his registration. The Corporations Act requires practitioners to maintain adequate and appropriate insurance. If they do not, ASIC has the power to cancel a registered liquidator's registration. They might also have been able to keep track of Ariff's files and company records on administrations he conducted. It is understood some of these were destroyed on August 21, 2009 - three days after he was banned as a liquidator.