On 14 September 2010, the Senate Economics References Committee (Committee) released a report recommending reforms to Australia’s current insolvency regime (Report) in the following key areas:
- the regulation of the insolvency regime
- the registration of insolvency practitioners, and
- the remuneration of insolvency practitioners.
If the recommendations contained in the Report are enacted in legislation, stakeholders may be affected in the following ways:
- insolvency practitioners will be subject to:
- a licensing regime which will involve a closed book examination prior to the granting of a license and continuing education requirements
- investigations into their conduct, which may be performed on a random basis or subject to risk profiling of the practitioner, and
- greater transparency regarding their fees and disciplinary action taken against insolvency practitioners
- commercial lawyers with at least five years experience and individuals who hold an MBA with at least five years commercial experience may be eligible to become corporate insolvency practitioners, and
- creditors will benefit from a single dedicated regulator to monitor insolvency and increased transparency with regards to insolvency practitioners fees.
In Australia, company insolvencies are currently regulated under the Corporations Act 2001 (Cth) (Corporations Act) by the Australian Securities and Investments Commission (ASIC), while personal bankruptcies are regulated under the Bankruptcy Act 1966 (Cth) by the Insolvency and Trustee Services Australia (ITSA).
The Report states that due to ASIC’s large portfolio, ASIC’s procedures for investigating the conduct of insolvency practitioners are neither proactive nor timely.
As a result, the Report recommends transferring the corporate insolvency arm of ASIC to a new body under ITSA, the Australian Insolvency Practitioners Authority (AIPA). If the recommendation is implemented, the Committee believes Australia’s insolvency regime will become more efficient as ITSA will be the sole regulator of the personal and corporate insolvency regime and Australia will be able to better identify opportunities to harmonise personal and corporate insolvency laws.
The Report also recommends the following additional changes to Australia’s current insolvency regulation framework:
- Ending the complaints-based approach to investigations currently utilised by ASIC.
- Establishing a sub-committee of the AIPA to be known as the ‘flying squad’. The role of the flying squad would be to perform pro-active investigations regarding conduct of insolvency practitioners either on a random basis or by risk profiling the practitioner.
- Increasing transparency regarding disciplinary action taken by the Companies Auditors and Liquidators Disciplinary Board (CALDB) against the practitioner.
In order to better protect the interests of creditors and insolvent companies, the Report recommends the implementation of a new licensing regime for insolvency practitioners. In order to be eligible for a license, an insolvency practitioner must have passed a closed book exam administered by the AIPA and will be subject to continuing professional education requirements.
To further improve creditor protection, the Committee has recommended that a practitioner’s license be suspended where a practitioner is not adequately insured or if a matter referred to the CALDB is of sufficient concern to warrant suspension.
The Committee has indicated that a number of complaints have been made about insolvency practitioners overcharging for their services. The Committee states that one reason insolvency practitioners are able to charge an excess fee is the lack of competition in the insolvency profession. In order to increase competition, the Committee has recommended that the Corporations Act be amended to expand the eligibility criteria for insolvency practitioners. The Committee proposes that Australian commercial lawyers with at least five years’ post-admission experience and individuals who hold a MBA and who have at least five years commercial experience will be eligible to be registered as a liquidator.
The Committee has stated that a further reason why insolvency practitioners are overcharging is the lack of transparency regarding their fees. In response, the Committee has recommended requiring insolvency practitioners to disclose their fees in compliance with the remuneration report template established by the Insolvency Practitioners Association of Australia’s Code of Professional Practice, and allowing the insolvency regulator to suspend the practitioners’ license if they believe overcharging has occurred.
The Committee has recommended significant reforms to Australia’s current insolvency framework, including replacing ASIC as the regulator of corporate insolvency and introducing both a new licensing regime and new disclosure requirements to practitioner’s fees. It is yet to be seen whether the Government will implement any of the recommendations contained in the Report.