What is the ROCAP and what does it have to do with ‘phoenix activity’?

In article:

• When a company goes into insolvent liquidation, the directors are required to complete a Report on Company Activities and Property (ROCAP) which replaces the previous Report as to Affairs (RATA)
• The ROCAP is more comprehensive than the RATA – amazingly, the RATA was largely unchanged for 100 years
• The ROCAP contains specific questions to target phoenix activity (B17 & B18) that are designed to help liquidators start their investigations

Summary: the ROCAP targets phoenix activity

Starting in 2018, there have been new reporting requirements in place for companies that are going through an ‘external administration’ process (i.e. where a receiver or liquidator has been appointed). Directors and liquidators are now required to complete a Report on Company Activities and Property (ROCAP) which replaces the earlier Report as to Affairs (RATA) when a company goes into insolvent liquidation.

In this post, we summarise the new reporting requirements, explain what has changed, describe the potential impact on phoenix activity and set out what directors need to do to ensure compliance.  Directors should be aware that a ROCAP now represents the first stage in the investigation of pre-liquidation transactions by the liquidator.

Background: What do Directors need to do?

External administration occurs in failed companies or companies that are about to fail. It can include the appointment of:

• liquidators;
• voluntary administrators;
• receivers;
• receivers and managers and controllers (this includes a person who has control of property of the Company to enforce a debt owed by the Company)

External administrators are crucial in determining what should be done with the company including (in some cases) winding up. In order to carry out their job, external administrators seek a range of information to ascertain the assets and liabilities of the company and determine who may get priority over any remaining assets. Liquidators are also looking for evidence to assist them to claw back assets from creditors or directors.

Liquidators cannot do this alone. They need help from directors of companies and their staff – and directors and staff are legally obligated to provide that assistance. Key information that must be supplied to the Australian Securities and Investments Commission (ASIC) consists of (financial) books, records, and other financial and operating information. One of the most important sets of information that the Directors must provide is through the ROCAP.

What is the ROCAP?

The ROCAP consists of three components:

• Part A: Form 507. This asks for a range of information that goes on the public record and must be submitted to ASIC includes questions and declarations relating to identifying particulars, the Company’s assets and liabilities, and property held by the Company. It can be submitted through ASIC’s liquidator portal.
• Part B: This is a ‘questionnaire-style’ form that Directors must submit directly to liquidators. Note, this report is not lodged with ASIC. In Part B, Directors are required to provide information relating to:
  • their role in the Company, including any payments made to them;
  • operational matters including (but not limited to) when the Company was established, who managed it on a day-to-day basis and whether it leased any premises,
  • financial transactions, such as transfers of property to related parties;
  • status of repayment to any creditors;
  • tax matters;
  • engagement of external advisors.
• Part C: Instructions guiding Directors in how to comply with ROCAP

How is the ROCAP different from the old RATA?

Prior to 2018, instead of submitting a ROCAP, a Report as to Affairs (RATA) was required. The RATA, like the ROCAP, had sections to be filled in by directors and liquidators alike and sought information relating to the financial position of the Company. The RATA did not require financial statements to be provided but instead simple statements about asset and debt positions of the insolvent company.

Rather than a questionnaire about the activities of the Company, the RATA was primarily a ‘numbers’ form, to be filled in with financial data summarising assets and liabilities, including priority under insolvency rules for any creditors. The form was not considered very user-friendly and had remained largely unchanged since the 1890s. For more information, see Peter Keenan’s ‘Appraisal of the Report as to Affairs’.

Engagement with liquidators about the RATA revealed that, overall, they did not find that the RATA provided them with timely or accurate information and that an unacceptable number of directors were failing to submit reports at all. Their key concerns could be summarised as:

• Directors being more focused on providing the full particulars of identifying information, assets and liabilities, rather than focusing on a correct account of that information. It might be said that some Directors were treating submission of RATA as ‘paper shuffling’, rather than a serious legal and compliance obligation;
• The form itself was complex and interpreting it could pose a challenge, particularly for fields requiring an understanding of insolvency priority rules (e.g., working out which assets are the priority of secured creditors);
• The form-style was not user-friendly. In other jurisdictions, and in Australia with respect to personal bankruptcy, the form is ‘questionnaire-style’ and easier to fill in;
• There existed insufficient official guidance as to how Directors should fill out the form.

The ROCAP seeks to resolve some of the challenges outlined above via:

• Permitting the attachment of accounting software outputs. This is intended to reduce the form-filling time for Directors;
• The more user-friendly ‘questionnaire-style’ in the form of yes/no tick boxes and requests for additional information to be attached. The intention is that Directors focus on the most relevant information for Administrators rather than getting bogged down in the minutiae. It is also hoped that these ‘behavioural design principles’ will result in a higher completion rate.
• a significant non-published component of the ROCAP. It is hoped this will result in a higher rate of completion and candour from Directors who may otherwise be worried about the release of this information.

Are there any potential downsides to the ROCAP?

While there is widespread agreement that the RATA was unsatisfactory in its existing form, some are of the view that the ROCAP is too long, being much longer than comparative documents in other jurisdictions. This could have a discouraging effect on some directors. However, in the view of ASIC and the liquidators, this argument is weak because of the paucity of information provided in the old RATA.

The key downside for directors is that if they have undertaken a phoenix transaction before the liquidation commenced, they will not be able to avoid disclosing it without dishonestly completing the form. The old RATA form did not seek any disclosures regarding phoenix activity and it created a ‘cat and mouse’ game with the liquidator. The new ROCAP requires upfront disclosure of phoenix activity to help the liquidator start the process of taking legal action against the directors.

What Directors need to know

Whatever the merits of the ROCAP, it is now a firm compliance requirement. Directors and Administrators should feel free, however, to continue to send their feedback to ASIC at ROCAP@asic.gov.au to inform future versions of the report. Once under liquidation, directors need to consider the following matters:

• ASIC views non-compliance/dishonesty in completing the ROCAP as a serious breach of the Corporations Act. If a ROCAP is not completed accurately or in time, the likely first step is that the liquidators will complain to ASIC about who will commence the liquidator assistance program. Continued breach may result in enforcement action or prosecution from ASIC;
• The format of the ROCAP makes it more difficult for directors to be evasive or dishonest than the RATA did. The more user-friendly format of the report means that there will be little tolerance for directors filling out the ROCAP incorrectly and subsequently pleading ignorance.
• Expect to see ROCAP, and ROCAP enforcement as an important tool in the Government’s battle against phoenix activity. More on this below.

What does any of this have to do with phoenix activity?

Illegal phoenix activity is a major enforcement focus of the Government and its agencies. Phoenix activity involves the “rebirthing of an enterprise by taking the assets from a Company that is insolvent and moving them into another entity.” Not only does this activity deprive the creditors of their entitlement, it also has significant broader economic effects. If an enterprise does not pay tax or pay its creditors what they are owed due to continual rebirthing, its tax-paying and solvent competitors are put at a distinct disadvantage. For more information on phoenix activity, watch our interview on the subject.

Keeping phoenix activity in mind, consider some of the new, more specific questions included in the ROCAP:

• B17: ‘In the last four years, has the Company disposed of, sold or otherwise transferred any property outside the normal course of business (including the business) other than disclosed at B3?’; or,
• B18 ‘In the last four years, has the Company entered into any financial transactions with a related party, including acquiring any property or businesses?’.

Any director attempting to ‘phoenix’ by transferring assets while insolvent will need to report the transfer and make a declaration as to the truth of the information submitted in their ROCAP. A failure to report those transfers is an offence which could result in prosecution and is another important avenue for liquidators and ASIC in revealing the existence of illegal phoenix activity.

What should Directors do?

First, as soon as a liquidator is appointed, a director should seek professional advice to ensure compliance. Advice will be needed on how to fill out the ROCAP to ensure that it is completed accurately and on time. If possible, as the ROCAP is a lengthy and important document, it would be advisable to seek advice even earlier. Directors should think about doing so as soon as they first become aware that the Company may become insolvent.

Second, directors should consider the impact of ROCAP on its broader Compliance Management System (CMS). All companies in Australia should have a CMS in place that complies with the requirements of Australian or International Standards. Consider, for example, the following statement in an iteration of the International Standard on compliance:

“While maintaining its independence, it is preferable if compliance management is integrated with the organization’s financial, risk, quality, environmental and health and safety management processes and its operational requirements and procedures.”

– Introduction, ISO 19600:2014.

Good compliance practice means that all financial and compliance reporting processes, including ROCAP, cannot be treated as distinct and severable activity from core business; they need to be integrated into the day-to-day running of the business. Of course, a business would hope that an Administrator will never need to be appointed; however, all Companies need to have processes in place to enable ROCAP reporting in case that day comes. These include:

• having software in place that will enable the production of all essential financial and compliance reporting, including the data that could be submitted as ROCAP attachments;
• ensuring that all relevant staff have had training and are familiar with ROCAP processes;
• ensuring that the Company’s governance, including the Directors themselves, are overseeing the overall CMS.

Final Thoughts

ROCAP is part of a trend on behalf of government regulators to make Company, Director and Officer reporting more meaningful. Reporting to liquidators cannot be treated as paper-shuffling and a ‘necessary evil.’ ASIC has been clear that they will treat ROCAP non-compliance seriously, so all Directors should consider themselves duly warned and seek out professional advice as a priority.

At the same time, Companies should also recognise the benefit that ROCAP presents. It provides an added disincentive for your debtors to escape their payment obligations to you through illegal phoenix activity. As such, it is an important and much-needed step forward in the Australian commercial compliance landscape.