Compound Accounts - Re:Worrells (2010) FCA

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Readers may be aware of the decision in Re Worrell (2010) FCA handed down by Greenwood J on the 30 of August 2010 concerning the use of "compound accounts" in relation to corporate insolvencies. This arose from an application that the firm made for clarification on whether the compound account system for holding estate monies complied with the provisions and regulations of the Corporations Act.

Needless-to-say we believed that the system complied, but ASIC expressed doubts. The application was made to resolve that position.

We believed that the wording of the regulation was sufficiently wide to legally justify the interpretation which we put on it. His Honour found otherwise, and stated that we must maintain separate bank accounts for all corporate files.

From a practical view point, our experience has shown that the operation of compound accounts is very much in the interest of creditors and, provided the systems are properly designed and operated, provides better internal controls over creditor’s funds than a system of many individual accounts.

This view is based upon:

1. The prohibition of compound accounts in corporate insolvencies is contrasted with the position in personal insolvency administrations, where the use of compound accounts for bankruptcy and Part X matters is allowed and even encouraged, and where the use of a compound account is in fact mandatory for Part IX matters.

We can see no reason why compound accounts may be operated by insolvency practitioners wearing their bankruptcy trustee hats but are prohibited when the same insolvency practitioner wears his liquidators/administrator hat.

In relation to the control of funds, and the reporting to creditors, there is no fundamental distinction between the two forms of insolvency administration such as would support the two differing regulatory approaches.

2. It is mandatory that Debt Agreement Administrators use the compound account. The terminology used in the Bankruptcy legislation to describe the account is "Debt Agreement Administrators Trust Account", but in practice the operation of the two accounts are identical.

We thus have the very odd position that Debt Agreement Administrators, who do not need to be qualified accountants and who often have very significantly less resources and experience than most members of the IPA, are required to operate what is in effect a compound account, but IPA members when acting as liquidators or administrators may not.

The following is an extract from the Inspector General Practice Direction 15:1 issued on 12 February 2010.

All monies received will be banked to a single interest-bearing bank administration bank account that bears the administrator’s name and the words "Debt Agreement Administration Trust Account" (s185LD). This account is to be maintained for the sole purpose of depositing debt agreement monies and paying realisation and interest charges, fees and dividends.

3. Apart from the wording of the regulation itself the main concern raised was that the funds become "mixed". Our submission, which was supported by an independent expert who had reviewed our system, was that mixing could only occur when there was inadequate accounting.

With adequate accounting and internal controls, which our system most certainly has, there is no more mixing of funds than there is in any properly operated trust account or a properly operated Debt Agreement Administrators Account, or any other trust account operated by a range of other professionals - including our firm.

4. The five Worrells offices have used the compound account approach for both corporate and personal insolvency matters since May of 2006. Whilst we would never claim perfection, we do say that over that period neither the ASIC nor ITSA (who regularly review our accounting and the use of the compound accounts) have found any material or systemic problem with the operation of the accounts.

That the accounts are well operated and safe appears to have been accepted by his Honour who has indicated that he will approve the past use of the corporate insolvency accounts and will further approve their continued used for current matters.

It is interesting to note that all the reported cases of misuse of funds by insolvency practitioners or their staff have concerned the use of separate account approach, which indicates that such accounts are far from immune to manipulation. By using the compound account approach we have managed a separation of duties and the insertion of controls which greatly reduces the risk of such misuse.

All of the foregoing relates to the efficiency and effectiveness of the compound account approach, but none of that would matter at all if the operation of the accounts was not in the interest of creditors. Our submission to the court, which was supported by our independent expert is that such accounts overwhelmingly favour creditors. The following points summarise the position:

a. It is clearly more efficient and therefore cost saving for one bank account to be used rather than have staff spend time opening, closing accounts and reconciling many accounts.

b. Bank charges are minimised. Depending on which bank is used this can lead to savings of very many thousands of dollars each year.

c. Interest is maximized. The extra amount of interest earned would obviously depend on the funds held, but in the circumstances of the various Worrells corporate compound accounts we were able to show the court that the creditors were advantaged by not less than $400,000 per annum.

d. The use of one account promotes more and better internal controls. Again this conclusion was supported by our independent expert and was not disputed.

We think that it would be in the interest of creditors for regulation 5.6.06 to be amended so as to allow the use of compound accounts. This would bring the regulation into line with the bankruptcy legislation, and into line with normal commercial usage, and would provide for lower costs and higher interest returns for creditors.

We believe that the IPA is best placed to promote the change and we have written to the IPA to encourage them to do so. We shall keep you informed of any developments.

Last Updated: 01.10.2010

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