Accountants: What to Do When You Lose a Client to Insolvency
We often get calls from accountants asking what books and records they need to hand over to a Liquidator or bankruptcy Trustee.
Unfortunately, accountants don’t have the same right to claim privilege to documents or information as solicitors.
Once an Insolvency Practitioner is appointed to a matter, an accountant’s role can change depending on their level of involvement in the client’s operation.
This means the external accountant will need to help the Insolvency Practitioners with access to the company’s books and records and/or advice and information on things such as:
- business structures
- major customers
- key suppliers
- any changes to these leading up to appointment.
In most circumstances an Insolvency Practitioner would write to an accountant and formally request the books and records—a task most accountants are more than happy to complete.
But if the accountant is reluctant to part with their client’s records, the Insolvency Practitioner may serve the accountant with a notice to enforce compliance with the request. These enforcement notices are provided for in both:
- Section 129(3) of the Bankruptcy Act 1966:
A person is not entitled, as against the trustee, to withhold possession of the books of account or any papers or documents of the bankrupt relating to the accounts or to any of the examinable affairs of the bankrupt or to claim any lien on any such papers or documents.
- Section 530B(1)A & B of the Corporations Act 2001:
A person is not entitled, as against the liquidator of a company:
(a) to retain possession of books of the company
(b) to claim or enforce a lien on such books; but such a lien is not otherwise prejudiced.
That being said, these forms are rarely used by Insolvency Practitioners as most accountants are happy to provide the requested documents.
Accountants are sometimes hesitant about providing information to Insolvency Practitioners for fear of breaching the limits of their confidentiality obligations. Or they’re often not paid to provide the records, and are probably creditors for work previously completed for the client.
Tip: To get paid and avoid receiving an unfair preference, get paid upfront. It avoids the issue of getting paid for an existing debt for past service provided. Feel free to get in touch with us if you need more information.
These uncertainties are usually resolved with the understanding that:
- the client is now effectively the practitioner controlling the insolvent entity
- if the client was entitled to receive this information, the accountant would be obligated to provide it to the Insolvency Practitioner.
This understanding would also apply to information relating to the insolvent and another party. In this case, the Practitioner would have a right to any joint information the client could have received.
Requests for assistance by the insolvent
There’s no issue with helping an insolvency client fill out a Report as to Affairs to lodge with ASIC. But not all accountants know they may be able to seek payment from the insolvent company for their time and assistance. According to Section 475(8) of the Corporations Act 2001:
A person making or concurring in making a report required by this section and verifying it as required by this section must, subject to the rules, be allowed, and must be paid by the liquidator out of the property of the company, such costs and expenses incurred in and about the preparation and making of the report and the verification of that report as the liquidator considers reasonable.
An accountant can ask for payment for their help by invoicing the Director, who can then seek payment of these expenses as a cost of the Liquidation.
Note: There are no similar provisions in the Bankruptcy Act.
Our recommendation to accountants
If we could recommend one thing to accountants with insolvent clients, it would be to simply provide the information requested. It will stop the Liquidator chasing you for the company’s records, and probably save you time and money in the long run.