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WHAT ARE THE REASONS DUE TO WHICH REJECTION OF INDEMNITY MAY OCCUR?

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24
May

When an indemnity request fails to meet the minimum standards then the Deputy Commissioner of Taxation (DCT) will notify to the insolvency practitioner stating that the indemnity has been rejected.

The reasons behind this rejection are not reviewable decisions and the DCT does not have any obligation to offer grounds for rejection. Nevertheless, DCT needs to provide reasons for the rejection, unless the

DCT believes that giving reasons could lead to breach of privacy or secrecy laws or if the Commonwealth states not to provide the reasons.

Where an insolvency practitioner considers that the proposed activity has great legitimacy and prospects of success and recovery, in this situation DCT may reject an indemnity. Such situations may come up from time to time for reasons which include:

  • The DCT cannot invest or take risks on Commonwealth assets even though the prospect is strong and there are high chances of recovery as ATO is required to operate under tight spending plans;
  • The DCT may have another plausible method for recovery, which are more efficient and cost-effective. For example, an indemnity might be attempting to start a case against a company director who may be liable to pay director’s penalties to the DCT. In such cases, the DCT may seek recovery of this payment instead of risking Commonwealth assets in the readiness of an indemnity;
  • The DCT normally needs to satisfy that when all the proceedings are successful, the defendant will have enough recoverable assets to enable the insolvency practitioner to repay the indemnity expenses in full and also pay a reasonable dividend on the DCT's proof of the debt. The DCT will usually have no choice but to reject the indemnity if there is not enough recoverable assets to repay 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 protect Commonwealth assets.

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