PIR Newsletter – September 2023

In his latest column, AFSA Chief Executive Tim Beresford has outlined the agency's role as the regulatory authority in supporting a strong credit system.

‘Our role as the regulatory authority, is to support a strong credit system,’ said Mr Beresford.

‘Personal insolvency plays an important role in Australia’s $3.5 trillion credit system. It supports the flow of credit in the economy by allowing people in financial distress to get a fresh start, while providing a remedy for those who are owed money,’ he said.

Read more: Regulatory stewardship and AFSA’s value to the economy.

Personal insolvencies across Australia have increased in the June quarter 2023, according to AFSA statistics released last month.

There were 2,705 new personal insolvencies in the 3-month period to June 2023 – up from 2,301 in June 2022.

National data shows personal insolvencies rose in all states and territories, except for South Australia and Western Australia where numbers remained steady.

Of the June quarter 2023 personal insolvencies, just over a quarter were business-related (730).

There was a total of 9,930 personal insolvencies in the 2022–-23 financial year – around 4% higher than the 2021-22 annual figure of 9,545.

Summary of national figures:

June quarter 2023:

• 1,569 were bankruptcies
• 1,099 were debt agreements
• 35 were personal insolvency agreements
• 2 insolvent deceased estates
• 730 personal insolvencies were business-related – up from 558 from June 2022.

2022-23 financial year figures:

• 5,844 were bankruptcies
• 3,942 were debt agreements
• 121 were personal insolvency agreements
• 23 insolvent deceased estates
• 2,435 personal insolvencies were business-related – up from 2,327 from 2021-22.

For more information, visit Statistics.

A South Australian man has been sentenced after pleading guilty to multiple charges of fraud and dishonesty following an investigation by the Australian Financial Security Authority (AFSA).

Mr Gojko Ugrica was sentenced to more than 3 years imprisonment, with a non-parole period of 12 months.

As the personal insolvency regulator, AFSA investigated Mr Ugrica following a referral from the trustees administering his bankrupt estate, who discovered he had made large cash transfers to Serbia.

Mr Ugrica, who was made bankrupt by sequestration order on 10 August 2015, fraudulently incurred debts totalling $220,000 to 3 separate individuals.

He claimed he required capital to deliver a building redevelopment project at the Royal Adelaide Hospital. Mr Ugrica admitted that the funds were in fact taken overseas to repay ‘loan sharks’ in Serbia.

He made a false declaration in his Statement of Affairs by not including details of the $220,000 owed to his unsecured creditors. He also produced a false loan document to justify transferring over $1 million dollars to Serbia, providing a financial alibi for the recipient.

AFSA National Manager Enforcement & Practitioner Surveillance, Sarah Marshall, said this case highlighted the severity of the punishment for blatantly misusing the system.

‘A strong credit system relies on a strong personal insolvency system,’ Ms Marshall said.

‘AFSA will thoroughly investigate and refer for prosecution anyone who deliberately commits fraud, misleads their trustees and fails to comply with their legal obligations.’

‘As a visible, modern and contemporary regulator AFSA uses the levers of education, compliance and enforcement to maximise our impact.’

‘This matter is a clear example of the strong action we take to address harms.’ 

In sentencing, His Honour Judge Slattery noted the importance of general deterrence in this type of offence.

‘This court has a significant responsibility to protect the members of the community by imposing punishments for deliberate and sustained fraud,’ Judge Slattery said.

‘Those involving themselves in this type of offending can expect severe punishment.’

Mr Ugrica appeared before the District Court of South Australia where he pled guilty to 4 offences under the Bankruptcy Act 1966; 3 counts of incurring debt by fraud and 1 count of knowingly making a false declaration. Mr Ugrica also pled guilty to one count of producing a false or misleading document under the Commonwealth Criminal Code Act.

In addition to the jail sentence, Mr Ugrica was ordered to pay reparations of $220,000.

The matter was prosecuted by the Commonwealth Director of Public Prosecutions on behalf of AFSA.

Suspected wrongdoing, criminal misconduct, dishonesty, or fraud in a personal insolvency can be reported to AFSA at afsa.gov.au. Tip-offs can be made anonymously.

Sentencing information:

Mr Ugrica was sentenced on 28 August 2023 to total sentence of 3 years, 3 months, and 17 days imprisonment with a non-parole period of 12 months:

• Counts 1 – 3 265 (5) (b): 2 years, 8 months and 10 days imprisonment
• Count 4 – 267 (2) and Count 5 – 137.2: 7 months and 7 days imprisonment
  • The sentence for Count 4 and 5 was cumulative on the sentence imposed for Counts 1-3

A trustee’s requirement to provide documents to creditors regarding a proposal of the regulated debtor pursuant to section 73 of the Bankruptcy Act 1966 (the Act) or Part X of the Act, are contained in relevant sections of the Insolvency Practice Rules (Bankruptcy) 2016 (the Rules):

• Section 75-27 of the Rules, among other documents, lists a regulated debtor’s statement of affairs (SOA) to be provided by the controlling trustee along with their reports under section 189A and 189B of the Act.
• Section 75-175 of the Rules, among other documents, lists a regulated debtor’s SOA to be provided by the trustee provides along with their report under section 73 of the Act.

The SOA form comprises two distinct parts:

• Part A –includes the confidential information about the debtor’s personal information:
• Part B – includes the public information about the debtor’s financial affairs.

AFSA’s Bankruptcy Form incorporates the Debtor’s Petition (questions 1-17 and Sections L and M along with Section N for non-online lodgements only) and the statement of affairs (questions 1-13, 17-59 and Sections L and M along with Section N for non-online lodgements only) as approved under the Act. The public extract of this form is provided to the trustee by AFSA’s service centre upon the registration of the matter.

Relevantly, subsection 75-27(2A) and subsection 75-175(2A) of the Rules forbids a trustee in making Part A of the statement of affairs and the confidential parts of the Bankruptcy Form available to the public (and creditors).

Accordingly, a trustee who is required to provide the regulated debtor’s statement of affairs to the creditors for the purpose of section 73 of the Act and/or the Part X of the Act, should ensure it does not include the Part A of the regulated debtor’s statement of affairs or the confidential parts of the Bankruptcy Form.

To access these forms, see AFSA Forms.

A key role that AFSA plays in protecting the broader credit system is in the investigation of potential offences against the Bankruptcy Act 1966.

Deterring intentional misuse of the personal insolvency system, is a crucial step to creating a strong credit system for Australia.

It all starts with high quality referrals.

A 10-minute call with us when you first become aware of concerns is time well spent if you are unsure if you have sufficient evidence.

When you reach out, we will work with you to listen to your concerns and offer guidance as to whether a referral should be made.

To make initial contact, practitioners can send a short email to enforcement@afsa.gov.au. You will receive a call back within 2 business days.

More information about referrals is available in practice guidance published in the AFSA Resource Hub.

If you feel you have more than enough evidence to proceed with a referral, proceed in the usual manner by using the online form: AFSA Referral.

If you, or your staff, would like to know more about AFSA Enforcement, and the tips, and traps to avoid ensuring that you provide the highest quality offence referrals, information sessions are available. To make a booking please e-mail enforcement@afsa.gov.au.

Every year AFSA makes enquiries of practitioners, known as compliance information requests (CIRs), as part of its risk-based regulation of the industry. In 2023, the Practitioner Surveillance team surveyed registered personal insolvency practitioners about their cyber security practices.

The survey’s purpose was to understand the baseline of current practices, particularly considering recent high profile cyber security breaches in other sectors. The survey was completed by 97% of practitioners and all had some form of cyber security in place.

The results of the cyber security survey demonstrated that overall, practitioners had good systems in place to prevent or mitigate a potential cyber-attack.

The survey identified a gap in some practitioners understanding of this important reporting requirement. Practitioner Surveillance contacted these practitioners directly and has given further guidance.

The survey also showed that most practitioners use third party service providers to assist them with their cyber security needs. Several of the larger firms use that service provider or an independent third party to audit their computer systems to test their cyber security.

Lack of training was the area with the most potential for risk, with 20 practitioners reporting they do not provide training to their staff or themselves on cyber security. Human error is one of the most common ways for a breach to occur; a simple action such as clicking on a link when staff are busy working can compromise a whole system of protection. Staff training is therefore an important component of cyber security.

While we acknowledge the cost for smaller practitioners in undertaking staff training may be a cause for concern, we strongly encourage all practitioners to provide training to their staff, and to themselves if they are sole practitioners. The cost of a breach, in both financial terms, business disruption and reputational damage, may be significantly greater than the cost of the training.

Inspector-General Practice Guideline 2 (IGPG 2) sets out AFSA’s expectations about the security of sensitive information held by practitioners and provides links to additional resources. We recommend practitioners review the guide, particularly the requirement to report a cyber breach to the Inspector-General: Security of information for personal insolvency practitioners.

AFSA will continue to undertake inspections and CIRs to gain assurance that practitioners are meeting the expectations of IGPG 2 and are taking adequate steps to protect against cyber security threats.

Not if but when…

The number of cyber-attacks is increasing globally, and that trend will likely continue. It is not now a question of ‘if’ you will experience a cyber security threat, but ‘when’.

It is the responsibility of the individual practitioner/firm to comply with privacy legislation and take reasonable care with the information held by them and adhere to best practice standards for cyber security.

Implementation of digital security standards by practitioners will assist in maintaining confidence in the insolvency profession and the integrity of the personal insolvency system.

We are not able to provide advice on cyber security. Our role is to raise:

• awareness of the risks of cyber-threats to digital assets and data holdings
• the importance of cyber security to our regulated population
• to obtain assurance that practitioners have appropriate practices in place.

The Australian Cyber Security Centre (ACSC) leads the government’s efforts to improve cyber security for Australia and provides information and best practice guides to assist. Practitioners should review the resources available at its website: Resources for business and government | Cyber.gov.au, in particular their 8 recommended essential mitigation strategies against cyber-threats.

The latest practitioner news from the Australian Taxation Office (ATO).

Request for documents

The ATO can generally provide copies of the following information to a bankruptcy trustee or a trustee of a personal insolvency agreement:

• statements of account
• notices of assessment (pre-insolvency)
• pre-insolvency BAS that has been lodged and processed
• pre-insolvency tax returns that have been lodged and processed
• director penalty notices
• individual payment summary or income statements
• relevant case notes (disclosure is assessed on a case-by-case basis. You will need to specify the event, transaction, or period you require case notes for, and detail the purpose they will serve in the liquidation or administration process).

Trustees of personal insolvency agreements are required to provide specific reasons for the request for information, including the purpose the information will serve in the administration process.

In some cases, the ATO may require a copy of the personal insolvency agreement before providing any information.

To request information, message the ATO online service for business by selecting “request for documents”, accessed in the mail option.

For general information refer to the insolvency practitioners’ section on the ATO website: ato.gov.au/insolvency.

NOTE: Case notes are necessarily incomplete. The only authoritative pronouncement of the Court's reasons and conclusions is that contained in the published reasons for judgment.

Dimitrovski v Boland [2023] FCAFC 86

BANKRUPTCY AND INSOLVENCY – where applicant a discharged bankrupt – where applicant sought leave to appeal and extension of time to appeal from decision of Supreme Court of New South Wales – where applicant included claim for damages for personal injuries – where primary judge held personal injury claims were not severable from the property claims – whether s 160(2)(g) of the Bankruptcy Act 1966 (Cth) was enlivened such that the claims had not vested in the trustee of the applicant’s bankrupt estate – where proposed grounds of appeal have no merit – application dismissed

Federal Court of Australia - Judgment of Markovic, Downes and Kennett JJ - 31 May 2023

Background

In 2004, George Dimitrovski invested $500,000 in Life Order Products Pty Ltd, a company associated with Brian and Helen Boland.

In June 2021, Mr Dimitrovski and his sister Susan Vasil commenced proceedings in the Supreme Court of New South Wales against Mr and Mrs Boland, their accountant and an associated company.

In their statement of claim, Mr Dimitrovski and Ms Vasil alleged, among other things, that Mr and Mrs Boland made false representations regarding Life Order Products and, in June 2009, passed company resolutions which had the effect of stripping the company of its assets, transferring its patents to related parties and destroying Mr Dimitrovski’s investment.

Mr Dimitrovski and Ms Vasil sought various orders for compensation, damages, declarations, and injunctions under Australian Consumer Law, the Corporations Act 2001 and the Australian Securities and Investments Commission Act as damages in tort on the grounds that the alleged conduct caused them to suffer ‘physical and psychiatric damage’ and ‘extreme trauma, disappointment and distress’.

At the time of commencing the proceedings, Mr Dimitrovski was a former bankrupt, having been declared bankrupt on 9 December 2013 and subsequently discharged from bankruptcy on 21 December 2016.

The proceedings in the Supreme Court were summarily dismissed on the basis that there was no reasonable cause of action to be brought by Mr Dimitrovski because any cause of action vested in his trustee in bankruptcy.

The proceedings included a claim in damages for personal injury, a cause of action that may remain with the bankrupt pursuant to s60(4)(a) of the Bankruptcy Act 1966 (the Act) and the damages from which may be indivisible to creditors pursuant to s116(2)(g) of the Act.

At first instance, Lindsay J commented that the personal injury claim in the circumstances was ‘inextricably interwoven with the financial matters’ such that any cause of action in respect of the personal injury also vests in Mr Dimitrovski’s trustee in bankruptcy.

Mr Dimitrovski sought leave to appeal and an extension of time to appeal the decision of the Supreme Court.

Appeal grounds

Among the five grounds of appeal, Mr Dimitrovski argued that the primary judge erred in construing s116 of the Act in that the claim for damages for alleged personal injury does not vest in his trustee in bankruptcy. The Court dismissed this argument as without merit.

In considering the relevant authorities, their Honours had regard to Allsop P’s discussion in Moss v Eaglestone (2011) 83 NSWLR 476, noting that a difficulty arises where property and personal damage arise from the same cause of action. The relevant point is whether the personal action is severable from, or directly related to, or consequential upon, the property claim [at 50].

In Mr Dimitrovski’s case, their Honours confirmed that the primary causes of action concerned the pecuniary loss to Mr Dimitrovski’s property, and that the personal injury claim was ‘inextricably linked to and/or consequential upon those claims’ [at 53].

On the remaining grounds of appeal, Mr Dimitrovski variously contended that the primary judge had insufficient regard to the causes of action pleaded and erred in his findings where there was no evidence or facts in support of those findings. These grounds were also dismissed on the basis that the primary judge did not make any findings as to the adequacy of evidence or draw any inferences based on facts in reaching his conclusions.

Their Honours reiterated that the proceedings were summarily dismissed because Mr Dimitrovski did not have standing to bring them.