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  • Rejection of indemnity

    Where an indemnity request that meets the minimum standards is rejected, the DCT will write to the insolvency practitioner notifying that the indemnity has been rejected.

    Decisions made by the DCT to reject an indemnity are not reviewable decisions and the DCT is under no obligation to provide reasons for rejection. However, it is the normal practice of the DCT to provide general reasons for rejection, unless the DCT determines that it is not in the interests of the Commonwealth to provide reasons, or unless the DCT is of the view that providing reasons could be in breach of privacy or secrecy laws or any other legal obligation that the DCT may be subject to.

    It should be noted that it is possible that the DCT may reject an indemnity in circumstances where an insolvency practitioner believes that the proposed action has very good merit and prospects of success and recovery. Such situations may arise from time to time for reasons which include:

    • Staff resource and/or budgetary constraints. The ATO is required to operate within tight budgetary and staff resource limits. There may be times where, no matter how strong the merits and prospects of success and recovery of a particular action, the DCT cannot afford to invest and risk the potentially significant amount of Commonwealth resources, both in terms of dollars committed and staff resources.
    • The DCT may have other viable means of recovery which are more cost-effective and efficient. For example, an indemnity may be sought to commence litigation against a company director who may also be liable to pay director's penalties to the DCT. In such cases, the DCT may choose to pursue recovery of the director's penalties rather than commit potentially significant Commonwealth resources into the provision of an indemnity.
    • The likely indemnity expenses will exceed the value of the DCT's proof of debt. Even if the likelihood of recovery is good, if the DCT's proof of debt is not significantly higher than the indemnity sought, the request is likely to be rejected on the basis the risk to the DCT is considered unacceptable. The DCT will generally not risk an amount of Commonwealth resources to recover the same or less than the amount risked unless there are exceptional circumstances which justify such a decision.
    • The DCT will generally need to be satisfied that in the event that proceedings are successful, the defendant (or defendants) will have sufficient recoverable assets to enable the insolvency practitioner to repay the indemnity expenses in full, plus pay a reasonable dividend on the DCT's proof of debt. If the DCT cannot be satisfied that a successful action is likely to result in the realisation of sufficient assets, then unless exceptional circumstances exist, the DCT will usually have no choice but to reject the indemnity. This is because the DCT may not be able to comply with legal and policy obligations which must be satisfied before a decision can be made to commit Commonwealth resources.
    Last modified: 31 Mar 2016QC 43965