On 7 November 2014, the Treasury released the Insolvency Law Reform Bill 2014 (Bill) exposure draft for public consultation. There are a significant number of legislative changes (the exposure draft is 400 pages) proposed to be made to the Corporations Act 2001, the Bankruptcy Act 1966 and related laws. Submissions are currently sought.
The proposals aim to substantially change the way the insolvency profession is regulated, increase the rights of creditors, raise the authority of Australian Restructuring Insolvency and Turnaround Association (ARITA) and extend the educational requirements for practitioners. Rather than substantive changes to the law, the Bill is stated to focus on harmonisation and alignment of the industry.
The Government has indicated that the Bill intends to:
- remove unnecessary costs and increase efficiency in insolvency administrations;
- enhance communication and transparency between stakeholders;
- promote market competition on price and quality;
- boost confidence in the professionalism and competence of insolvency practitioners; and
- remove unnecessary costs from the insolvency industry resulting in around $55.4 million per annum in compliance cost savings.2
This article examines some of the key proposed changes and how these may affect the industry.
The Bill proposes a number of new requirements in a registration process for liquidators including:
- requiring liquidators to be registered, with the suggested fee for lodgment of an application being $2,000;
- to become registered, applicants will need to:
- have completed formal tertiary studies in insolvency administration of at least two course units or three months study;
- hold at least one degree representing three years full-time study in commercial law and accounting, with at least one year’s equivalent full-time study in either area;
- be employed on a full-time basis, for at least three of the previous five years (if the applicant wants an unlimited registration their experience must include assisting an external administrator in the performance of their duties in relation to a variety of external administrations, providing advice and having experience in insolvency administrations including outside corporate insolvency); and
- demonstrate a capacity to perform the duties of an insolvency practitioner adequately.
- prospective liquidators who met the requirements would be interviewed by a three-person panel, with one member of the panel being from ARITA, and accreditation requiring renewal every three years. The panel will determine if the applicant is a fit and proper person.
The changes aim to ensure that liquidators have an appropriate level of expertise, behave ethically and maintain sufficient insurance to cover their liabilities in practicing as a registered liquidator.3
The system proposed is a licensing scheme requiring liquidators to pay a fee to obtain a practising license. This will allow ASIC to access the funds received from licensing fees to conduct supervision of the industry more proactively.
It was recognised that in the existing regime ASIC mainly acts reactively after receiving complaints. This attracted criticism that significant misconduct was going unchecked. The criticism peaked following the investigation of Stuart Ariff. Ariff was reported to ASIC in 2005 but ASIC did not take action until October 2007. Four years after the original complaint, Ariff accepted 83 allegations of misconduct against him in relation to 16 companies and in 2011 was found guilty of criminal fraud and sentenced to six years imprisonment.4 This case highlighted the flaws in ASIC’s system for promptly dealing with complaints and lead to the 2010 Senate inquiry into insolvency practitioners and ASIC role in their regulation.
Additional changes include:
- a new obligation on administrators and directors to notify company’s creditors as soon as reasonably possible after becoming aware of a breach (or likely breach) of a Deed of Company Arrangement;
- providing creditors with powers in regards to the information to be provided by an insolvency practitioner and the power to remove liquidators by special resolution (rather than legal action);
- increasing ASIC’s investigation powers to examine suspect liquidators including enhanced disciplinary powers such as the power to suspend or cancel a liquidator’s registration in certain circumstances; and
- ongoing requirements where a liquidator must lodge an annual return with ASIC, including proof that the liquidator has the appropriate insurance and providing ASIC with notice if the liquidator’s circumstances change. Circumstances which must be disclosed include personal insolvency, if the individual becomes disqualified from managing a corporation and if the applicant has had their liquidation registration cancelled within the past 10 years.
Interested parties are currently invited to comment on the draft Bill, with submissions due by 19 December 2014. For a copy of the Bill and information with regards to submissions interested parties can visit the following website:
Insolvency practitioners should continue to monitor the progress of these proposed changes and once the amended legislation is in place (likely to be mid 2015) it may be prudent to seek advice with respect to how these changes will affect practice moving forward.