Regulations 5.6.06 and 5.6.09
86 For ease of reference, Regulation 5.6.06(1) is again set out:
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 7 days after it has been received.
[emphasis added]
87 Regulation 5.6.09 is in these terms:
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.
88 A number of preliminary observations ought to be made concerning the scope and operation of these regulations. First, they concern the conduct of a liquidator engaged in the winding‑up of a corporation. They are regulations made for the purposes of Pt 5.6 of the Act consistent with s 538 of the Act. They have nothing to do with the conduct of controllers, managing controllers under Pt 5.2 of the Act or administrators discharging a role under Pt 5.3A of the Act. The Regulations are concerned with obligations cast upon a liquidator. It follows that neither regulation relied upon by the applicants as the source of the relief claimed in the alternative so far as it relates to receivers, controllers, managing controllers or administrators, provides a basis for the relief claimed.
89 Secondly, these regulations made under s 538 of the Act as an elaboration of s 531 of the Act or otherwise, do not operate prospectively in the sense that they do not provide a basis upon which the Court can make an order concerning the establishment of a compound account or a special bank account in respect of appointments not yet made. The regulations in question are confined in their operation to orders which might be made in a particular liquidation of an identified corporation and normally where the discretion is to be exercised, the particular order required in all the circumstances concerning the accounts would be made as part of the winding‑up order.
90 The only question that properly arises is whether in relation to liquidations in which any one or more of the applicants hold, a current appointment, orders ought to be made under Reg 5.6.06(1) by which the Court "otherwise directs" that separate accounts need not be opened for those existing appointments which are currently transacted through the compound account; or whether an order ought to be made under Reg 5.6.09 giving directions for the establishment of a "special bank account" in the form of a compound account the subject of Mr Worrell's evidence for each of the offices in which the applicants operate a compound account for and in relation to current appointments as liquidators.
91 The further question that arises is whether s 1322(4)(c) of the Act provides a basis upon which orders ought to be made relieving the applicants from the consequences of a contravention of Reg 5.6.06 in failing to open a separate account for each appointment as liquidator of the relevant company.
92 These questions involve further questions of fact.
93 As to those matters, the functions of the Workbench system and method of operation of the compound account have been set out in these reasons. That description is based upon the evidence of Mr Worrell. It is also informed by the evidence of Mr Bettles. Mr Ponsonby has also given evidence in connection with a report in evidence he prepared entitled "Review of Workbench and the Compound Bank Account". As to Mr Worrell's evidence, I accept his evidence concerning the structure and operation of the compound account. I accept that the compound account has the advantages and disadvantages in terms of the functionality of its modules, reporting and reconciliation processes and the procedures surrounding the operation of the compound account. I also accept the evidence of Mr Darmanin concerning the procedures adopted by the National Australia Bank in relation to the opening and closing of accounts and related matters. To the extent that there is disagreement between Mr Worrell and Mr Darmanin about the matters Mr Darmanin addresses, I accept the evidence of Mr Darmanin, not based upon any question of credit or recollection concerning Mr Worrell, but simply on the footing that Mr Darmanin is in a position to give immediate and contemporary evidence of the matters about which he spoke whereas Mr Worrell was giving evidence of costs, bank fees and other expenses which may not have been the up‑to‑the‑minute position, as he conceded. I accept entirely that Mr Worrell is an experienced professional insolvency practitioner. I also accept that he and his colleagues as applicants have taken extensive steps and invested significant capital in seeking to establish an electronic method of conducting administrations in various forms. I also accept that they have approached the question of establishing a compound account on the footing that it provides efficiencies in the external administration of insolvent entities (and individuals).
94 However, it is also clear that the applicants have not had proper regard to legal advice in establishing the scope and operation of the regulatory arrangements concerning the compound account especially having regard to s 421 of the Act and Reg 5.6.06 which casts an obligation upon a liquidator to establish separate accounts.
95 Although the compound account provides a number of advantages identified by Mr Worrell, some of the disadvantages of separate accounts are not as burdensome as may be thought to be the case.
96 Mr Darmanin is employed as "Head of Product Development & Strategy, Deposits, Liquidity Management and Channels" by NAB. He has held that position since 2009. In this role he oversees the operation of and assists customers with banking services including the "suite of business deposit accounts that NAB offers insolvency practitioners". He says that NAB has a number of customers who are insolvency practitioners and who have specialised banking requirements. He says that NAB offers a full suite of business deposit accounts to insolvency practitioners including full access transaction accounts, high interest at‑call investment accounts and term deposits. There is no particular type of account targeted at or used by insolvency practitioners but they generally utilise a business cheque account, business management account or corporate cheque account. Mr Darmanin says that NAB negotiates and tailors fees and interest rates for insolvency practitioners on an account‑by‑account or client‑by‑client basis. Either monthly account fees or transaction fees may be negotiated with insolvency practitioners on a case‑by‑case basis. He says that NAB does not currently charge a fee to open or close an account (although other fees, for example any fee incurred if a business/company search is undertaken, will still apply). The NAB publishes a Guide to Business Banking Fees and Charges on its website.
97 As to the processes for opening a bank account, Mr Darmanin says that an account is opened by an insolvency practitioner by sending a request for a new account to the practitioner's business bank manager at NAB either by facsimile or mail. The request for a new account is processed as soon as the signed account authority information is received from the practitioner. Generally, accounts are opened on the same day as the documentation is received and banking can commence immediately. A new practitioner client will need to complete a 100‑point identification check and satisfy what is called the "AUSTRAC requirements". Once that has occurred, the practitioner can proceed to open new accounts as required. The practitioner does not need to complete the 100‑point check each time a subsequent bank account is opened. Once the practitioner is an existing customer whose identity has been verified, banking can commence immediately. When opening an external administration bank account, an insolvency practitioner must supply supporting documentation to show that they are authorised to open an insolvency account. If the insolvency practitioner wishes to operate a cheque facility for an account, NAB can either issue a standard cheque book in approximately five days or the account can operate in conjunction with the practitioner's own cheque printing facility. If practitioners wish to use their own cheque printing facility, they are required, when setting up the facility, to send a sample cheque to NAB so that the bank may verify that the cheque is printed on approved paper stock and the format of the numbers at the bottom of the cheque is in the approved form (eg. positioning of the numbers, number and digits etc) to ensure compliance with NAB and industry requirements. This approval process would usually be completed within one banking day of NAB receiving the request. Once this has occurred, the practitioner can commence printing cheques immediately in relation to any new account. The practitioner is required to send a sample cheque to NAB approximately once a year to ensure continued compliance with NAB and industry requirements.
98 Mr Darmanin says that NAB is currently trialling a new process to further streamline the account opening process, specifically for insolvency practitioners which is expected to be launched soon. Beyond any applicable account fees, there is no additional cost to use the new service. The new service will be centralised in nature and will reduce overall paperwork through the provision of a Master Account Authority. The practitioner will sign the Master Account Authority once and then subsequent accounts that a practitioner opens are opened under that Master Authority.
99 I accept the evidence of Mr Darmanin. It seems to me that the processes surrounding establishing separate accounts are not complicated and the best evidence is that the fees associated with opening and closing accounts are not substantial (if there be any fees for those steps at all). The monthly fee charged by NAB to maintain a Business Management Account for an insolvency practitioner is $20.
100 Another feature of opening separate accounts is said to be the difficulty associated with receiving and allocating bank statements and information. Mr Worrell accepted in cross‑examination that it is not an enormous job to file bank statements. Fundamentally, it is an administrative function to be performed at the level of a junior support staff person.
101 A particular advantage of the compound account is the aggregation of funds from a range of administrations in one account which means that the practitioner operating such an account can achieve a higher rate of interest on funds than would otherwise be the case. Mr Worrell says that in his experience the applicants have been able to obtain an average of an extra 3% per annum than would otherwise be the case and that margin is ultimately reflected in benefits passed on to creditors in each administration. I accept Mr Worrell's "best judgment" that by reason of the compound account the relevant applicants are able to extract a higher average rate of interest on funds and that the benefit of that margin is, according to the documents exhibited to Mr Worrell's affidavit, passed on to each company under external administration. The precise measure of the margin derived by reason of aggregation as compared with what would otherwise be available on separate accounts, is not clear or precise. For present purposes, however, I accept Mr Worrell's best estimate that the margin has been on average a 3% margin.
102 These matters are mentioned in the context of the exercise of the discretion conferred under each regulation upon which the applicants rely so far as the Court is asked to make an order "otherwise directing" the establishment of separate accounts or the establishment of a "special bank account" in relation to companies presently under administration by the applicants as liquidators. There are two other matters which influence the exercise of the discretion apart from the consideration that the question arises in the context of a contravention of Reg 5.6.06 in the failure to open separate accounts at the outset. Those other matters are these. First, the Workbench system undoubtedly incorporates a series of internal controls, checks and balances designed to enable all reconciliations, auditing and funds control to be managed as securely as a compound account might provide. ASIC contends that whilst this is true, separate accounts also give rise to benefits which do not exist once a compound account is adopted. Particular emphasis is given to Mr Furby's affidavit and oral evidence. Mr Furby believed that a series of separate accounts provided a level of risk management and risk control which was to be preferred to the operation of a compound account notwithstanding the protective protocols surrounding the administration of the account. Mr Ponsonby in his report observed that any computerised accounting system which operates as either a single bank account system or a compound system has the potential to be misappropriated and that the system adopted is only as effective as the internal controls and procedures in place and which operate effectively. In his report, Mr Ponsonby observes
7.6 Whilst, in theory should an internal control be circumvented, and given the nature of the account being a compound account, then the perpetrator of the fraud would in theory be able to defraud or defalcate a larger amount of funds, as opposed to a smaller amount being misappropriated through multiple single accounts. … [My] experience has shown that it is more likely that the perpetrator would misappropriate an amount of money from a multiple number of smaller single accounts.
...
7.8 In a multiple single account system, the identifier would be the relevant bank account number, whereas in the compound account, the identifier is the client number which is a unique identifier. Therefore, I am of the opinion that the risk of funds being attributed to the incorrect company are no greater or lesser under the compound account than being incorrectly deposited into the incorrect single account of the relevant administration account.
7.9 Because of the internal controls embodied within Workbench I am of the opinion that the risk of misallocation of funds is significantly reduced. An example of this is that the compound account is reconciled daily together with each sub ledger account.
7.10 The operation of the compound account has an inherent control built into it in that all insolvency staff only have to deal with one account when conveying the relevant details to creditors and other stakeholders.
103 As to Mr Furby's observations, Mr Ponsonby said this:
7.11 I note in the affidavit of Mr Furby that he comments in respect to the theoretical possibility of Worrells being able to overdraw a particular administration account due to a lack of cleared funds being available. The account because of its compound nature would not likely be overdrawn, however, in the short term, the cheque paid or electronic funds transfer would actually have been funded by the funds belonging to other administrations.
7.12 From my review, it would appear that Mr Furby's concerns are valid in this regard. Whilst, I acknowledge Mr Worrell's comments in his affidavit dated 6 November 2009 in respect to liquidators and their managers being qualified accountants with a high degree of business acumen, notwithstanding this, I consider that this is a weakness in the internal control of Workbench that requires rectifying.
104 Mr Ponsonby in his report identifies a series of benefits derived from operating a compound account (8.1.1 to 8.1.13). He also identifies at 8.2.1 to 8.2.4 a number of inadequacies in the system. I accept Mr Ponsonby's evidence on these issues.
105 I accept that there are a range of advantages to be derived by operating the compound account. They are largely those identified by Mr Ponsonby. Mr Worrell has identified the advantages he perceives to be derived from using a single compound account and, in particular, the interest advantage available to the applicants as liquidators in aggregating funds and securing a commercial margin on those funds beyond the rate that might apply to a suite of individual accounts.
106 However, I am not persuaded that special circumstances have been made out which would warrant, as an exercise of discretion under Reg 5.6.06, a departure from the regime established by the Act. The Companies Act and Regulations expressly addresses this question and provides as a starting point that a liquidator appointed to administer the affairs of a corporation in winding‑up must open a separate bank account for each administration. The regulation is quite clear. The question of weighing the advantages and disadvantages of a compound account and its utility as an instrument of administration or something of advantage to the creditors, case by case, is something which might be considered by practitioners through their professional bodies with a view to establishing a statutory framework which accommodates a compound account for use in liquidations perhaps in the same manner in which a compound account can be used in the administration of insolvencies under the Bankruptcy Act (or perhaps a different model might be formulated and put to government). Although a power is conferred upon the Court to "order otherwise" under Reg 5.6.06, I am not satisfied that as a general proposition that regulation provides power to depart from a mandatory obligation across a portfolio of liquidations. If there were circumstances directly relevant to a particular liquidation that warranted departure from the general proposition that a liquidator must open a separate account specific to that appointment, the question of the exercise of the discretion would properly arise.
107 Regulation 5.6.09, however, contemplates that the Court may authorise the liquidator of a particular company to make payments into and out of a special bank account. Having regard to all of the evidence and the practical position that the applicants in good faith have embarked upon establishing a compound account for the conduct of these liquidations which failed at the outset to take account of the specific requirements of the Corporations Act, it seems to me that steps ought to be taken to provide proper authority for the conduct of the compound account in each office, in each liquidation, to enable the administration of each liquidation to be progressed to a conclusion, within the law rather than in contravention of it.
108 Accordingly, an order ought to be made authorising each of the applicants in their capacity as liquidators of a schedule of identified companies (to be attached to the order) to make payments into and out of a special bank account established for the purpose of completing the winding‑up of each entity presently under insolvent administration by any one of the applicants as liquidators. That order ought to be made upon the undertakings proposed. The "special bank account" might properly be styled according to the present description adopted in each office for the compound account. The authority to make the payments is to be limited to the completion of the winding‑up of each company in liquidation. The declarations sought by the applicants will not be made.
109 Having regard to all of the evidence I have described and the findings made, and having regard to the finding that the applicants have embarked upon establishing the compound account in good faith and in the best interests of professional practice, I am satisfied that an order ought to be made under s 1322(4)(c) of the Act relieving the applicants from any liability to date, under the Act, in respect of a failure to comply with Reg 5.6.06.
110 The form of the orders is to be the subject of further submissions. Each of the parties is directed to file and serve submissions as to the form of the orders within 28 days.
111 The costs will be reserved for later determination.
I certify that the preceding one hundred and eleven (111) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.