Nearly all business insolvencies, and many non-business insolvencies, come with a connection to an external accountant. In many cases the accountant’s role has simply been to prepare financial statements and lodge the relevant tax returns for their client, but sometimes business owners use their accountants to get actual business and accounting advice.
Having a client go into an insolvency administration will mean at least two things for external accountants:
1. The insolvency practitioner will want to get access to whatever books and records, advice and other documents and files that they hold; and
2. They may want to get further information, particularly if the accountant gave advice on business structures etc, and more particularly if that advice was given shortly before the appointment and affected the assets available.
In most cases an insolvency practitioner will write to an accountant and issue a formal demand for books and records. Keeping in mind that the ‘client’ is now effectively the practitioner controlling the insolvent, most accountants will gladly hand over whatever records they have – usually being happy to be rid of them.
Accountants who do not wish to part with their client’s records may be served with a notice to enforce compliance:
Section 129 of the Bankruptcy Act:
129 (3) A person is not entitled, as against the trustee, to withhold possession of the books of account or any papers or documents of the bankrupt relating to the accounts or to any of the examinable affairs of the bankrupt or to claim any lien on any such papers or documents.
Section 530B of the Corporations Act
530 (1) A person is not entitled, as against the liquidator of a company:
(a) to retain possession of books of the company; or
(b) to claim or enforce a lien on such books;
but such a lien is not otherwise prejudiced.
Practically, these forms are not used very often as most accountants are happy to comply with the requests of their new clients.
Occasionally an accountant will have questions about whether volunteering further information will possibly breach the bounds of any confidentiality obligations. The first test, that tends to resolve most of these questions, is whether the client (now the liquidated company or the bankrupt) would be entitled to receive this information, and would the accountant being entitled or obligated to provide that information to the client, had the appointment not been made.
If there would be no problems advising or discussing certain information with the ‘client’, there generally is no problem passing this information onto the insolvency practitioner, whether it has been requested or not.
Usually this test will also apply when the information or records jointly involves the insolvent client and another party. If the client would have been able to receive the information, the practitioner now generally has a right to that joint information too. Individual circumstances may alter this principle, but it will generally hold.
Requests for assistance by the insolvent
An accountant may be asked by the director of the insolvent client company to assist them in filling out the Report as to Affairs required to be lodged with Australian Securities and Investments Commissions (ASIC). Certainly there is no issue with directors seeking assistance to completing these forms fully and correctly. We wish that more would do so. What some accountants do not know is that they may be able to seek payment from the insolvent company for doing so.
The Corporations Act states:
475 (8) A person making or concurring in making a report required by this section and verifying it as required by this section must, subject to the rules, be allowed, and must be paid by the liquidator out of the property of the company, such costs and expenses incurred in and about the preparation and making of the report and the verification of that report as the liquidator considers reasonable.
The accountant can bill the director for doing so, and the director may seek payments of the costs and expenses as a cost of the liquidation. Unfortunately there is no corresponding provision in the Bankruptcy Act.
Involvement in Investigations
A large part of the insolvency practitioner’s role is to conduct investigations into the insolvent’s affairs. At times the practitioner will seek an interview with the external accountant to get further information, and sometimes those investigations will include a public examination of various parties. Public examinations can be held under both the Bankruptcy Act and the Corporations Act and can involve a wide range of witnesses. That list of witnesses may include the external accountant.
The reasons that an external accountant may be examined are varied. Sometimes the accountant has not and will not voluntarily provide the information sought by the practitioner, or has been involved in some form of ‘restructuring’ that is under investigation. Sometimes the accountant can provide information that is best made under oath in this manner so that the necessity to give evidence in a later action is reduced.
Does being summoned to appear as a witness in a public examination mean that the practitioner thinks you are lying or hiding something? No, or more correctly, very rarely. Sometimes it is just a necessary part of the investigation process and will always be handled by us with as much professional consideration as possible. Unfortunately at times the public examination of an accountant is just necessary in the investigation process.
One further consideration is that accountants do not have the same right to claim privilege to documents or information that solicitors may be able to maintain. Nothing in the accountant’s normal work product can be withheld and all questions must be answered (under oath) at an examination.
So what does an accountant have to worry about?
Ninety-nine percent of the time – nothing at all.
Occasionally there will be some issues that appear in the financial statements (usually directors’ loans disappearing) that will need to be explored. But unless these issues were done on the advice of the accountant, usually they will only be required to provide information on what happened and why.
On rare occasions, usually as the result of misguided loyalty, our investigations reveal that accountants may have conspired with clients to hide, wrongly transfer, and write off or otherwise disguise the existence of a material asset or liability. This may take the form of providing a business valuation which cannot be sustained or an unjustified entry in the insolvent’s books. In such case the accountant is, at the very least, likely to find him or herself being examined under oath by way of a public examination.
If there was one piece of advice we would give external accountants who receive requests from insolvency practitioners for records it is to hand them over along with any other information you may have. In most cases, this will be the last that you will hear from them.