Analysis of rejected indemnities made by insolvency practitioners
At the end of 2008-09, the Deputy Commissioner of Taxation (DCT) undertook a review of rejected indemnities for that year.
The DCT received 252 indemnity requests (which in some cases included multiple requests for the same case), of which 226 (90%) were rejected and 26 (10%) were approved. The main reasons for rejection were:
- the total costs will likely exceed the value of the DCT's proof of debt - 64 requests (28%)
- the merits, prospects of success and risk were unable to be determined to the satisfaction of the DCT – 33 requests (15%)
- the DCT was not a creditor – 33 requests (15%)
- the potential risks outweigh the potential benefits – 21 requests (9%)
- the proposed defendant (or defendants) had insufficient assets to pay a dividend if the action was successful – 20 requests (9%)
- the DCT's claim was minor (<$5,000) – 20 requests (9%)
- insufficient information was provided to enable the DCT to make a decision and no response was received when the DCT requested further information – 12 requests (5%).
Analysis also highlighted the following:
Information and examples of cases where an indemnity request was rejected.
- Numerous requests were included in general circulars to creditors at a time when the insolvency practitioner was winding down the liquidation or bankrupt estate. The circulars generally highlighted that the insolvency practitioner was without funds and that if any creditor wanted the insolvency practitioner to undertake further investigations an indemnity would need to be provided.
- The circulars to creditors referred to above generally did not highlight any specific cause of action or explain the benefits to creditors in providing an indemnity.
- The amount of the indemnity sought was often not specified, or where specified, was not particularised.
- Most approved indemnities were initiated by the DCT because of the DCT's interest in the matters prior to liquidation or bankruptcy. The DCT initiated contact with the insolvency practitioner, highlighted the potential recovery actions and provided relevant information to assist the insolvency practitioner in their investigations. This led to thorough indemnity requests being submitted and ultimately approved where all the DCT's legal and policy obligations were met.