The law has not been given much attention in the recent offerings on the new insolvency laws, with their limited focus on process and lodgements. The parts commencing imminently, on 1 March 2017, contain important but unexplained roles of various bodies in the regulation and discipline process.
There may be significant administrative law concerns (a practitioner’s registration may be suspended without an interview; a disciplinary committee is at large in what factors it takes into account), along with concerns about the use of confidential regulator information, the authority of ARITA, the Tasmanian Law Society and individual committee members, and their potential liabilities, and new court powers that can take into account “public confidence” in the profession. And on day one, lawyers may be interested in asking practitioners about purchasing their voidable transaction claims.
Without purporting to be comprehensive, here is a legal analysis from my reading around the new law.
Note, it is long.
Can experienced insolvency lawyers be trustees, or liquidators?
First up, the answer is no, even if they are experienced insolvency lawyers with accounting experience. The Judge in Moore v Inspector General in Bankruptcy  FCA 638 said that –
“Were it not for the strong emphasis on accounting qualifications that are to be found in [the law] I would have concluded that notwithstanding his lack of practical exposure to the work of a trustee in bankruptcy, he would have been capable of performing the duties of a trustee”.
That was the case under the law at that time, and it may not be much different under the new “but even if” exception which the committee can adopt under s 20-20(5) of the Bankruptcy Schedule.
However, in light of the over-regulatory and negative tone of this new law, I doubt that any lawyer would want to work as an insolvency practitioner.
Exam, no nutshells
If you persist, you could be required to sit an exam. The Senate Committee‘s 2010 recommendation was for a closed book exam, based on evidence from an eminent barrister that it should be closed book, so that examinees aren’t
Getting into more serious law, (though there is some humour left), the Insolvency Law Reform Act 2016 (ILRA) is law but its task of changing the Bankruptcy Act and the Corporations Act is past. Nevertheless, its Explanatory Memorandum of 2015 (EM) remains relevant.
We now have this legal and regulatory structure, with explanatory documents.
Corporations Act 2001
- Corporations Schedule 2016
- Explanatory Memorandum 2015
- Corporations Rules 2016
- Explanatory Statement – only on www.legislation.gov.au
- Corporations Regulations
Bankruptcy Act 1966
- Bankruptcy Schedule
- Explanatory Memorandum 2015
- Bankruptcy Rules 2016
- Explanatory Statement – only on www.legislation.gov.au
- Bankruptcy Regulations
In the principal Acts, the style remains section 49(2)(b). In both the Schedules and the Rules, the style is section 10-5(3).
There are new definitions in the Schedules and the Rules, along with existing definitions in the principal Acts.
The EM can be read in terms of s 15AB of the Acts Interpretation Act 1901. Explanatory Statements to the Rules come under s 15J of the Legislation Act 2003 which is less helpful in interpretation.
Under s 15AB, to determine the meaning of a provision that might otherwise lead to a result that is manifestly absurd or is unreasonable, and there may be a few, one can have regard to any relevant report of a committee of inquiry that was laid before the Parliament before the date of enactment, among other things.
The 2010 Senate Economics Committee report is such a report. Ariff is reported to have gone off
“to luxury resorts, hired limousines and paid his father … a retainer of $10,000 a month …”. He
“took false or non-existent fees and disbursements, over-serviced, prolonged settlements, charged excessively high fees, took fees not approved by creditors and arranged associate companies to circumvent creditor approval for payment of remuneration”.
Many of the sections in this law can be identified as “Ariff provisions”.
The new law adopts well defined terms such as “reasonably practicable” – requiring a balance of “the likelihood of the risk occurring against the cost, time and trouble necessary to avert that risk”: Slivak v Lurgi  HCA 6. See for example in what seems to be a contentious section, s 60-20, the phrase applied as to whether creditor’s approval or staff of the liquidator or trustee can be engaged, including those overseas. In many cases, this may not be reasonably practicable.
This term and status is being repealed. It has some history but does not exist in bankruptcy. ASIC’s RG 186 currently says that for a person to be an official liquidator, they must not refuse to consent to act as liquidator in a court winding up solely because the company has no assets or otherwise may not have sufficient funds to cover the anticipated professional costs of the liquidation. There appears to be no legal authority for that requirement, and never was.
Court rules and practice statements will need to be changed, including cross-border insolvency rules.
For interest, see What’s in a name is it Official?  ARITAJ 4, David Cowling.
Can anyone object to an application for registration?
The process of an application to be registered as a trustee or liquidator is not public. This contrasts with the old law, where applicants appeared before a judge in open court, and anyone could appear and raise objections, or give support, to the applicant.
In Re J (1928) 1 ABC 15, while the applicant had 50 affidavits supporting his application, a large number of people turned up to object and his application was refused.
ASIC currently not only lists pending applications for registration on its website, but also invites any objections. There appears no legal authority for either.
Employee trustees and liquidators
Both AFSA and ASIC (draft Regulatory Guide, January 2017) say that liquidators and trustees may have difficulty with maintaining their independence if they are employees, as opposed to partners of their firm: see Re Hurt (1988) 80 ALR 236 and Re Dare  FCA 509; (1992) 38 FCR 356; in corporate insolvency, ACN 079 638 501 Pty Ltd (in liq, R&M) v Pattison  VSC 445.
However, when reforms were made to the criteria for the registration of trustees in the Bankruptcy Legislation Amendment Act 1996, the Explanatory Memorandum said that while the government was aware of the case law it did not consider that any criterion based on whether the applicant was an employee or not was needed.
Discipline – Division 40
How the discipline committees should operate
In making the policy decision to have corporate discipline matters dealt with by a committee, rather than the CALDB, the government has said that, in light of the more informal structure of committees, ASIC may have to revisit its approach of bringing large and factually complex matters against liquidators, often in relation to conduct over long periods of time. A 2011 government paper explained that the proposed procedures
“would reflect an expectation that more legally complex matters; matters where extensive use of coercive examination powers are required; and matters where disciplinary remedies alone are insufficient (for example, where compensation orders should be sought), are matters that should not be referred to Committees but should instead proceed directly to court.”
In contrast, see the comments of the Federal Court about the Board proceedings before it on review: Fiorentino v CALDB  FCA 641.
Such a matter should properly be dealt with by a committee under the new law and the more limited s 40-40 serves to support that.
The alternative remains for ASIC to bring proceedings before a court, which can be a longer process. The Federal Court in Fiorentino referred to the need for prompt resolution of conduct proceedings, and the public interest in the expeditious hearing of complaints against insolvency practitioners.
ASIC will need to assess discipline matters in terms of the seriousness of the allegations and the factual and legal complexities involved, as to whether ASIC takes a matter to a committee or to the Federal Court or the Supreme Courts. As to an example of the latter, see ASIC v McDermott  FCA 1186.
The litigation strategies of ASIC are sometimes called into question.
ASIC, AFSA and Court powers
Section 1292 will no longer apply to liquidators. New section 40-40 of the Corporations Schedule contains the more confined criteria by which ASIC can act. The extraterritorial coverage in s 1292 is removed.
But new section 45-1 allows the court to make orders based on similar but still confined criteria, including whether the liquidator has or is faithfully performing their duties. It does not appear that the extra-territorial coverage in s 1292 is restored; for example, if an Australian liquidator is conducting the external administration as a recognised proceeding in another jurisdiction under the UNCITRAL Model Law: see ANZ v Sheahan  NZHC 3037,  NZLR 674.
Note that the court can take into account the effect of the misconduct “on public confidence in registered trustees/liquidators as a group”: s 45-1(4)(e), Bankruptcy Schedule, s 90-15(4)(e) Corporations Schedule. Then there is Division 90, starting on 1 September, giving the court similar powers.
Some administrative law principles that apply in discipline matters
Natural justice – discipline committees
According to the Explanatory Statement, the requirement in the Rules to observe natural justice imposes “an obligation to provide a practitioner with procedural fairness and to ensure that the decision is free from actual or apprehended bias”.
“will not be acceptable for a member of the Committee to play dual roles of accuser, witness or prosecutor and decision-maker. For that reason, ASIC’s delegate would be expected to not have played a role in the investigation of the practitioner or the preparation of the case being considered”.
Although there may be an appearance of bias, the bankruptcy system has operated that way
“without any substantive concern being raised regarding the independence of those committees from AFSA”.
This important aspect of natural justice should be considered in light of the High Court’s recent decision in Isbester v Knox City Council  HCA 20, that a prosecutor of misconduct cannot also be a part of the decision-making panel about that misconduct.
“The interest of a prosecutor may be in the vindication of their opinion that an offence has occurred or that a particular penalty should be imposed, or in obtaining an outcome consonant with the prosecutor’s view of guilt or punishment. … It is well accepted … that it might reasonably be thought that the person’s involvement in the capacity of prosecutor will not enable them to bring the requisite impartiality to decision-making” at .
In the same way that insolvency practitioners are themselves subject to strict independence requirements, so too are the regulators in relation to their conduct of disciplinary proceedings.
The Explanatory Statement says that it a committee is expected to allow legal representation.
Privilege and confidence
In the spirit of providing creditors more control in the insolvency process, the rules explain the detail of the obligations to attend to creditors’ requests. One exception is if it is “not reasonable” for the practitioner to comply and there is a list of routine issues defining that, but including that the information is subject to legal professional privilege, or disclosure would be in breach of confidence. If there are no funds or insufficient funds to meet the request, the person requesting the information can offer to pay. See also s 545.
Rules of evidence
The Explanatory Statement notes that committee proceedings are inquisitorial “where members are not restrained by judicial (sic) rules of evidence”. It is said that the committee
“will not hear submissions on whether information provided is admissible”.
In my view, this is incorrect. If a committee were to simply not hear a submission from a practitioner it could be a denial of the right of a fair hearing.
Even though a body not statutorily bound by the rules of evidence
“(n)evertheless, those principles reflect common sense notions of probability with respect to human conduct and it is entirely proper for (a body) to take them into account when considering allegations of serious misconduct”:
The flawed structure of the discipline process?
This new structure appears to be flawed, but in practice it may be remedied by the application of natural justice principles in the way the committee conducts its hearings.
This table illustrates what appears to be a gap in the new law, in both bankruptcy and corporate. The gap is the lack of statutory bases upon which the committee must decide on misconduct, compared with s 155H (the matters in s 155H(1)(a)-(g)) and s 1292(2) – failure to perform the duties of a liquidator).
|Bankruptcy Act pre-1 March 2017||Corporations Act pre 1 March 2017||ILRA structure for both bankruptcy and corporate from 1 March 2017|
|Commencement||S 155H(1) – show cause, and convene a committee||S 1292(2) – on application to the CALDB by ASIC||S 40-40- show cause and convene and refer to a committee – s 40-45/50|
|Charge, or factors to take into account||S 155H(4) – the committee must take into account the matters in s 155H(1)(a)-(g)||S 1292(2) – if satisfied that the person has failed to perform the duties of liquidator etc||
|Penalty||S 155H(4) – whether the trustee should continue to be registered||S 1292(2) – CALDB may cancel or suspend||S 40-55 – Committee may decide on a range of penalties, based upon any information provided by ASIC, any explanation from the liquidator and any other matter|
This is compounded by the direction to the committee to have regard to “any information provided by ASIC”, and “any other matter the committee considers relevant”. “(T)here must be a charge alleging some act or omission defined in the rules as misconduct …”: the broader the rule relied on the greater the particularity and clarity needed for notice and a fair hearing …”: Justice in Tribunals, JRS Forbes, 2014, Federation Press, Ch 10.
Is this natural justice?
Apart from the table, contemplate this:
- A liquidator is served with a show cause notice, responds inadequately and a discipline committee is convened.
- There is no requirement in the Act for the liquidator to be interviewed at all, except, if “the committee is proposing to decide … that the liquidator’s registration should be cancelled”: rule 50-85.
- That is, if the committee gets together and thinks, in pre-judgment on the papers, that this liquidator has to go, it will at least give her an interview.
- The liquidator will be notified, it is assumed, and told “we are thinking of cancelling your registration, come along and respond”.
- But, if the committee does not think it will come to that decision, it does not have to interview at all, for example if it just wants to suspend her for 12 months.
- In which case there is no requirement to notify the liquidator, except after the decision is made.
Thankfully, there is a natural justice requirement, which lawyers will know well.
The range of penalties — from cancellation of registration through to a reprimand — are contained in s 40-55. Note the decision that may be made that the disciplined liquidator must not be allowed to work for other liquidators, and those other liquidators must ensure that this occurs in any capacity.
The internal processes of AFSA and ARITA were laid out in Burke v Inspector-General in Bankruptcy  FMCA 2 and on appeal,  FCAFC 112. Note the definition of the word ‘convene’.
Note that although ARITA can choose a trustee or liquidator for a disciplinary panel, that person need not be an ARITA member and in some cases it may be desirable not to be.
Burden of proof
There is no burden of proof before a committee. “The concept of an “onus or burden of proof” is one derived from the practice and procedure and rules of evidence applicable in superior courts of law entrusted with resolving a litigious dispute between parties. As a general proposition such a concept has no application to decision-making by administrators and administrative tribunals”.
Confidential misconduct information
Passing on confidential information to the regulators
‘Industry bodies’ — IPA, ARITA, CAANZ, CPA and law societies and bar associations — are permitted to provide practitioner misconduct information to ASIC or AFSA. The purpose is said to be to “improve the timeliness of regulator action against poor conduct”, an Ariff provision. The law provides protection for the industry body from any adverse consequences as long as the information is provided in good faith and is reasonable: s 50-35. Are members of the body likewise protected?
The regulators passing on confidential information to the industry bodies
ASIC Regulation 8AA is amended to increase the number of professional disciplinary bodies able to receive confidential information from ASIC under s 127(4)(d) of the ASIC Act, to assist:
(i) a prescribed professional disciplinary body to perform one of its functions; or
(ii) another prescribed body to perform a prescribed function in relation to registered liquidators.
(iii) a Part 2 committee.
Only ARITA is a prescribed body under (ii) in performing its prescribed function in relation to a member of the Association. To clarify, ARITA is therefore not prescribed in relation to non-members.
The penalty for breach of this provision is 2 years jail.
A similar change is made to s 12(4) of the Bankruptcy Act in respect of confidential information held by the Inspector-General. The jail time is less.
Committee member passing on confidential information to the industry bodies
A member of a committee is bound by confidentiality obligations: s 50-35(1) with a $9,000 penalty for breach.
But subsection 35(2) allows the member, individually, to refer confidential misconduct information to a professional body, without it seems, the agreement or knowledge of the other members of the committee: s 50-35(2).
Was this intended?
Professional bodies conduct
Professional bodies are entitled to accord some privacy and confidentiality to their members subject to disciplinary processes. At the same time, transparency of process is important.
ARITA has reported that on a certain date its Professional Conduct Committee determined that the ARITA membership of a named person – here called X – be terminated on the basis that the established contentions in a CALDB decision “reflect multiple failures by X to comply with his duties as a registered liquidator, including statutory duties and requirements of the ARITA Code of Professional Practice”. The source of the authority to terminate under the ARITA Constitution is not shown, nor the reasons. CAANZ and IPA both record with some particularity the bases upon which decisions are made and the reasons; law societies and bar associations also.
ASIC retains its power to accept enforceable undertakings, under s 93AA of the ASIC Act 2001, but it would be incompatible with a harmonised approach to insolvency regulation for such undertakings to be used given that AFSA has no similar power.
Service and timing
As to timing, when a document is required to be served, the expression “serve”, “give” or “send” or any other expression is used: s 28A.
“Business days” is now the correct term for both the Bankruptcy Act and the Corporations Act, with the same definition.
Schedule 4A to the Bankruptcy Regulations repealed
Schedule 4A to the Bankruptcy Act is being repealed on 1 March 2017 and Div 42 of the Rules (Bankruptcy) will provide new conduct standards for registered trustees. Failure to comply is a ground for the issue of a show cause notice under s 40-40(1)(p). There is no equivalent for liquidators.
A trustee’s registration could be cancelled for breach of a standard not required of liquidators.
Costs or expenses
The phrase “costs or expenses” is used once in the Bankruptcy Act s 163A, and once in the Corporations Act s 586. In the new law, the words “remuneration”, “costs” and “expenses” are used in different ways. Given the importance of the distinction between “legal costs”, incurred by a trustee, or ordered to be paid by a court, “remuneration” of the trustee, and “disbursements” [or “expenses”] and the respective grades of approval, it is not good that these are not defined. There is also ‘security for costs’.
Sale of voidable transactions – s 100-5
This reform commences on 1 March 2017.
Sections 100-5 of both the Bankruptcy Schedule and the Corporations Schedule permit a trustee in bankruptcy or a liquidator to sell their own right to bring a voidable transaction claim. If a right is assigned, a reference in this Act to the trustee/external administrator in relation to the action is taken to be a reference to the person to whom the right has been assigned. This is qualified by two conditions, that if the practitioner has already commenced the claim, court approval is required; and notice must be given to creditors of the proposed assignment.
The idea for this from a government proposals paper of December 2011 that “the inability to obtain funding is a major obstacle to the commencement of these actions. The taking of these actions may also delay the finalisation of administrations as a whole, ultimately to the detriment of creditors. The sale of rights of action may enable the value in such rights to be realised in the absence of funding being available and may result in the pursuit of matters which would not otherwise have been able to be pursued”.
Two queries. One, section 100-5 does not require the prospective or actual respondents to be notified but it would be wise or necessary to do so. Two, does court permission under s 477(2B) (approval of long term agreements) remain separately required, if such an agreement is entered into? though there are good reasons why not. Section 100-5 does not impact s 477(2A) (compromise of a claim of the company of over $100,000) because that subsection is concerned with company claims. There are no similar restrictions in bankruptcy.
Any comments, or corrections, welcome.