The Insolvency Law Reform Bill 2013 was released just before Christmas last year. The government is seeking a timely response from stakeholders to ensure that the first changes will take effect from this September.
The development of the reforms has taken place over the last two years.
The Bill will amend the Corporations, Australian Securities and Investments Commission and Bankruptcy Acts. It aims to:
- Align and modernise the registration and disciplinary frameworks that apply to registered liquidators and registered trustees.
- Align and modernise a range of specific rules relating to the handling of personal bankruptcies and corporate external administrations.
- Improve the powers available to the corporate regulator to regulate the corporate insolvency market and the ability for both regulators to communicate in relation to insolvency practitioners operating in both the personal and corporate insolvency markets.
Those who stand to benefit from these reforms are the public at large, Australian businesses that face insolvency challenges and creditors across the board.
In particular these draft laws stand to bolster creditors’ rights and enhance the commercial return in administrations. The power will be granted to allow creditors to remove insolvency practitioners and to curb excessive fees.
It is no secret that the industry has been under scrutiny in recent years with rogue practitioners misappropriating administration funds leaving creditors in the wake out of pocket. The regulators in the industry have also been under fire for the perceived lack of power to take action. We welcome the prospect of confidence being re-instilled in the industry by the Australian market.
In relation to insolvency and bankruptcy practitioners, some of the key points addressed by the Bill include:
- Currently there are two classes of liquidator – registered liquidators and official liquidators. Currently, only official liquidators may accept court appointments. The reforms seek to remove the designation of official liquidator and create a single class of practitioner capable of accepting all forms of corporate administrations (although registrations may be restricted or conditional in certain circumstances).
- Increased penalties on insolvency practitioners in the event that they do not maintain adequate and appropriate professional indemnity insurance. Penalties of up to $170,000 where the practitioner recklessly or intentionally fails to take out PI and fidelity insurance. This aims to increase protection of stakeholders in respect to actions of the insolvency practitioner.
- An insolvency practitioner must notify their respective regulator where prescribed events occur that would affect the ability of the practitioner to continue to practice. If they intentionally or recklessly fail to notify the relevant regulator within 5 business days after the person could reasonably be expected to be aware that the event has occurred, the person commits an offence.
- The regulators may direct a practitioner to lodge, or correct an inaccurate, practitioner or administration statement. There is no current corresponding law under either the bankruptcy or insolvency regimes. The aim is to ensure transparency in administrations.
- The registration of an insolvency practitioner that becomes an insolvent under administration, becomes a party as a debtor under a debt agreement, or dies is automatically cancelled. Currently ASIC has the discretion to cancel registration of an insolvency practitioner where the practitioner becomes an insolvent under administration. The amendments will ensure consistent treatment of practitioners who find themselves in these circumstances.
- Consistency in the manner and circumstances in which regulators may suspend or cancel the registration of an insolvency practitioner. Currently the bankruptcy law has no specific provisions in relation to these circumstances.
- Consistency in the manner and circumstances in which regulators may issue show cause notices to insolvency practitioners to answer questions in relation to conduct including a breach of duty. The Bill also clarifies the outcomes available at the conclusion of these investigations including deregistration or suspension of the practitioner or imposing certain conditions on the ability of the practitioner to accept new appointments.
In relation to conduct of administrations, the following key points have been dealt with by the Bill:
- Creditors will be able to request that an insolvency practitioner provide information. The request may be made through a resolution or on an ad hoc basis. These rights are in addition to the existing responsibilities of the practitioner to provide reports to creditors in certain types of administrations. Where the request is reasonable, the practitioner must comply with the request. However a request is not reasonable in circumstances where there are simply not enough funds to comply with the request. The amendments reflect a creditor’s rights to information whilst balancing against that the responsibility of a practitioner to not incur costs in circumstances where there are no reasonable grounds to believe these costs can be met from funds in the estate.
- The circumstances in which an insolvency practitioner must convene a meeting of creditors upon request are intended to be standardized across personal and insolvency administrations. In addition it is intended that a Committees of Inspections (COI) will now have the ability to direct the practitioner to convene meetings. However resolutions may be made via circular resolution without the need to physically hold the meeting
- The Bill seeks to standardize and clarify the formation and conduct of a COI in corporate and personal administrations. The Bill provides for the appointment of employees as well as a representative of a group of minority creditors to the committee. The Bill contemplates the function of the committee to extend to monitoring the conduct of the administration. A practitioner will be required to have regard to any direction of the committee although he is not required to comply with such directions. The Bill also prevents any member of the committee from making any arrangements whereby they may receive a benefit, profit or advantage or from purchasing an asset of the estate without leave of the court.
- The Bill provides for the review of external administrators remuneration, costs and expenses. The purpose of this review is to provide information to parties to exercise their rights in relation to the administration including, inter alia, the removal of the practitioner.
- Creditors will be able to remove an insolvency practitioner through a resolution and may resolve to appoint a replacement. Under existing legislation there are only limited circumstances in which practitioners may be removed (e.g. at the first meeting of a VA or by order of the court in a court liquidation).
Finally the Bill provides enhanced powers to the corporate regulator to regulate the corporate insolvency market and the ability for both regulators to communicate in relation to insolvency practitioners operating in both the personal and corporate insolvency markets. In particular:
- Under current insolvency legislation ASIC may require the production of the books regarding an external administration from a registered liquidator. However ASIC must not disclose information given to it in connection with the performance of its functions or exercise of its powers save that it may provide information regarding the conduct of an insolvency administration to a prescribed professional disciplinary body or to another government department or agency where that information will assist that department/agency in the performance of its functions.
- The Bill proposes that ASICS powers be extended such that:
o ASIC may by written notice require production of information or books regarding an external administration for a registered liquidator or any other person.
o Intentional or reckless failure to provide the requested information will be an offence.
o ASIC will be empowered to provide information obtained from a practitioner to a person with an interest in the administration of a company in certain circumstances (e.g. where ASIC has notified the practitioner that it will be providing this information to another party).
o ASIC will still have the ability to provide the information to a prescribed professional disciplinary body in this case, the IPA).
o ASIC will be required to report on its regulation of the insolvency industry in its annual report.
Submissions on the Bill close on 8 March 2013.