Of laws and populism

Yesterday’s Crikey mail included a comment by Michael Pascoe about the seemingly endless stories about corporate shonks being able to retain profits from their dodgy dealings.   He writes:

One should always be wary of suggesting another legal penalty to Laura Norder-crazed politicians, but it looks like we could do with some of nice, broad catchall power to seize assets suspected of being the proceeds of shonkiness and scumbaggery.

Your simple mugger or drug pedlar seems to be caught up easily enough by proceeds of crime statutes, but white collar grubs like Westpoint’s Norm Carey and real estate spruiker Henry Kaye appear to delight in playing the legal system for mugs much the same way they did investors.

He referred in particular to this article  in the Age which reports that failed property developer, Henry Kaye had secretly shovelled $50million into a real estate development, Wyndham Waters, prior to his company (National Investment Institute) going into liquidation.   The article is interesting reading, if only for the apparent grand-standing of liquidator Andrew Hewitt who flags that he has the power to seek an order that Kaye be imprisoned if he doesn’t produce books and records of the company and assist with the investigation.   Unfortunately in reality there often isn’t nearly so much glamour in the high stakes of insolvency litigation.


Prominent insolvency administrations do tend to attract headlines, but  often only  because they involve flamboyant or prominent personalities.   Much of the focus on the One.Tel liquidation wasn’t out of a concern for mum and dad investors who had been fleeced, but because everyone wanted to know what Jodee Rich and, more importantly, James Packer were going to say in the witness box.

The Henry Kaye collapse is much like the Ansett administration in that it generates a great deal of interest because it is seen to have ruined ordinary aspirational Australians trying to get on in life.   I had the opportunity to attend a couple of the creditors’ meetings for National Investment Institute holding a proxy from a client.   It was a welcome change from creditors’ meetings ordinarily conducted at breakneck speed observed only by a couple of professional proxies who know that such meetings are often mundane perfunctory affairs.

The National Investment Institute meetings (and indeed the associated litigation) were a complete circus.   This was largely because a significant proportion (numerically) of the creditors were ordinary aspirationals who had stumped up their four or fifteen thousand dollars for seminars which had never materialised on how to get rich quick in property investment.   In dollar terms, they were hugely overshadowed by the institutional creditors, but the financial misfortunes of banks and financiers don’t tend to tug the heartstrings quite so much.   Hundreds of investors, consumer advocates, lawyers and media stooges attended the meetings, all clutching their proxy forms.   They took turns to make long speeches about the injustice of it all (Won’t somebody think of the children?).

That type of feeding frenzy where an insolvency administration begins to impact  “ordinary  Australians”  prompts the sort of calls above – for laws that would allow liquidators more room to claw back property which rumour says belongs to the shonky investment guru.   Often, however, these sorts of initiatives result in just the sort of populist Laura Norder response that sources like Crikey deplore.   I can point to at least two recent developments in insolvency law as examples.

The first is the introduction of section 588FDA  of the Corporations Act 2001 which provides that in certain circumstances, director related transactions (such as directors’ bonuses) can be void as against a liquidator if a reasonable person would not have entered into the transaction, having regard to the benefits to the company yada yada yada.   The section was brought in as a response to the One.Tel directors’ bonuses paid shortly before the company fell over.    It has been used incredibly infrequently (I could only find one decision), mainly because, as the linked case indicates, the test for this provision is exactly the same as the test for an uncommercial transaction, which was already available under the legislation.   The legislation served to placate the masses by introducing a completely redundant claim.

The second  example was  the campaign by the Australian Taxation Office to amend the Bankruptcy Act to avoid the effect of the decision that Ken discusses here  (later overturned by the High Court).   That was a case where a prominent NSW barrister didn’t file a tax return for decades.   He didn’t feature on the ATO’s radar until he decided to  lodge 6 years of tax returns and promptly file for bankruptcy.   The ATO campaigned to change the law broadening the ability of a trustee in bankruptcy to recover assets which the bankrupt may have contributed to the purchase of, almost within an unlimited time period preceding the bankruptcy.   It would have been great populist law-making, but for the fact that the proposed laws would have had the effect of jeopardising the asset protection arrangements of thousands of lawyers, doctors and accountants who are unable to incorporate their practices and therefore tend to keep their family home in their spouse’s name.   The proposal was, quite rightly, defeated, but was an ominous sign (if you can ever get ahold of the Senate committee transcripts considering the proposed legislation, they are a great read – Brownwyn Bishop laying into the ATO for being unable to identify that a prominent member of the NSW bar hadn’t paid tax.   Ever.)

There is a saying that hard cases make good law.   Whether or not this is true, it is certainly true to say that media interest often makes bad law.   It may be that liquidators need to be given more power to seize assets hidden by dealers like Henry Kaye.   But to date, nobody has established that the liquidators of NII are unable to recover those assets, or indeed whether those assets were ever NII’s to begin with.

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2 Responses to Of laws and populism

  1. derrida derider says:

    Why is it “legitimate” to put the house in the wife’s name to avoid creditors? Such an “asset protection arrangement” doesn’t seem to me to serve the public interest.

    Of course, people who put their assets in the wife’s name as an asset protection arrangement (as often for protection from the taxman as the creditor) are sometimes treated to the delightful sight of said wife running off with a toy boy and the assets.

  2. Danielle McCredden says:

    Well, you could equally ask why it is “legitimate” for a system of corporate limited liability to develop. Of course the answer is that it is in the public interest to encourage development of business and risk taking – something that might be hindered if people faced the prospects of putting their own personal assets on the line in the event that a business fails.

    The existing provisions do enable a broad ability to address asset protection regimes which are recent inventions or which are simply ruses for hiding assets of the company or business. The sorts of schemes we are talking about above are most applicable for professionals who we do not permit to carry on business behind the corporate veil and of whom we invariably require substantial professional indemnity insurance.

    And yes, many an asset protection scheme has gone awry when the relationship does…

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