Revised draft of Australia’s 2014 insolvency code of practice

ARITA has released a consultation draft of its Code of Professional Practice for Insolvency Practitioners. This will be the 4th edition, it being over 10 years since the 1st edition appeared in 2008. ARITA asks for comments by 18 February 2019, with a view to the new version of the Code starting on 1 July 2019.

The proposed format of the Code differs from previous editions. It is now split into an overarching Code of Ethics applicable to all and is then split into two separate items:

  • Insolvency Services – applying only to those working on formal insolvency appointments, with more detailed guidance now in “non-binding Practice Statements”. These are to be issued for separate consultation; and
  • Advisory Services, in the nature of pre-insolvency work, safe harbour advising etc.

ARITA says it has tried to align the Insolvency Services code with the proposed draft APES 330, which is also out for consultation. The drafting style also seems to be aligned.

The history of the Code

The ARITA Code had an inauspicious beginning when, in 2006, Dr Robert Austin (then Justice Austin of the NSW Supreme Court) spoke critically at an IPAA conference of the then statements of best practice of the IPA,[1] saying in particular that “much of the content is prescriptive, purporting to lay down what must or must not occur”. He suggested that if the purpose was to assist members to comply with their professional responsibilities, the answer lay in “combining general statements of principle or standards, not expressed as mandatory propositions to be construed as if they were Acts of Parliament…”.

He also warned of a regulatory trend that emerges when a profession inadequately self-regulates, saying that “insolvency practitioners could well be initiated into a downward spiral of greater and greater technicality, and higher and higher compliance costs”. This criticism appeared at the same time as a significant court decision that accepted that codes could represent good standards of conduct upon which disciplinary decisions could be made.[2]

Austin’s speech prompted the drafting of what became the IPAA Code of Conduct, under the leadership of the then CEO of the IPAA, a lawyer, Mike Lotzof.

The draft took account of Dr Austin’s views, and when the Code was launched by him, in 2008, he was more complimentary.[3] Dr Austin commended its qualities of simplicity and clarity and its principles based approach but again warned that if the then IPAA were not to ensure that its standards were being faithfully observed by its members,

“it would be inevitable that additional standards would be enacted by law, probably highly prescriptive, detailed and complex standards which would not necessarily take into account the practicalities of daily insolvency work”.

There then followed the 2010 Senate Committee inquiry into liquidators and its report,[4] which was critical of the standards of ASICs’ regulation and it commended that of the bankruptcy regulator ITSA and its oversight of trustees. The Committee recommended a single regulator in the style of ITSA. The report did endorse the remuneration report in the IPAA Code.

Whether this background of regulation and the Senate Committee report led to the regulatory changes implemented by the Insolvency Law Reform Act 2016 (ILRA) is for others to assess.  Suffice to say that many would see those law and practice changes as “highly prescriptive, detailed and complex”.

The proposed 4th edition of the Code

The 4th edition is now prepared in the context of these major ILRA changes, although with little need to reference them.

Prescription

What is now a prescriptive legal insolvency regime in Australia might be said to leave little room for a code, or to leave to it only the routine obligations of any professional. When the law requires, for example, that a practitioner ‘introduce themselves’ to a meeting of creditors, there may not be much left for a code.

At the same time, when a code offers many prescriptive words on independence, there may not be much room for the law. Or, the law might move on regardless, without reference to the code, perhaps as a sign of confidence in the ethics of insolvency practitioners to manage conflicts.

While independence is important, and bears some prescription, the draft ARITA Code might also be seen as too prescriptive elsewhere, for example in telling members not only to not break the law in relation to discrimination on the basis of factors including religion, age, gender identity, lawful sexual activity, sexual orientation, physical features, pregnancy, breastfeeding or sex; but also not to engage in anti-competitive behaviour including cartels, collective bargaining and boycotts, exclusive dealing, misuse of market power, and other anti-competitive and unconscionable conduct.

Restructuring?

The Code will have separate practice statements on various issues. At the moment, it offers little if any guidance on safe harbour, and restructuring generally, with that law now having been in operation well over a year.[5]

When the IPAA changed its name to ARITA, indicating a broader focus on the work of its members, Dr Austin spoke yet again,[6] recommending that the Code be extended into the R&T area of work, and to offer guidance to lawyers and practitioners in an area where there were few consolidated legal principles and a need for ethical standards.[7] Apart from the need for guidance, he might have had in mind his earlier speech,[8] before safe harbour, where he spoke of the potential liability of advisers when they become involved in assisting or guiding a company through a period of financial difficulty.[9]

Regulatory roles?

The Code does not (yet) address the new ILRA duties and obligations of insolvency practitioners and others in their role on registration or discipline committees, or in referring misconduct; nor the duties and responsibilities of ARITA itself in nominating committee members, dealing with confidential information or referring matters to the regulators.

For example, a new provision in the draft Code is that members should report any unethical behaviour of insolvency professionals to ARITA and/or to the relevant regulator. Presumably this reporting would allow ARITA to exercise its authority under s 40-100 to lodge an industry notice with a regulator; thereby giving the referrer protection from liability under s 40-105, assuming good faith all round.

International comparisons

The Code should also be informed by international experience, from ARITA’s international memberships of INSOL and other bodies, and the cross-border experience of its members.  Although we do not have insolvency co-regulation to the level of the UK, and as proposed in New Zealand, it is worthwhile noting that RITANZ is in the process of devising its new Code, and the UK Insolvency Service and others have been deliberating on an expansion of its insolvency code in relation to, for example, referral fees and commissions; and the UK is also re-examining pre-packs.

Compliance and review

Then there is the monitoring of compliance with a code, and evidencing and reporting that; another topic in professional regulation for another day.

Next step

Information of the progress of the 4th edition will no doubt be issued by ARITA.

 

[1] The Legal Standard of Loyalty and Professional Guidelines, IPAA Conference 2006, Justice RP Austin.

[2] Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board [2006] FCA 1438

[3] Some Remarks on the Launching of the Code of Professional Practice, Justice Austin, May 2008.

[4] The registration, regulation and remuneration of insolvency practitioners, September 2010.

[5] See Keay’s Insolvency, Ch 21. Professional Liability in Australia, Walmsley et al, 2016, ch 1.

[6] 2014, not recorded.

[7] See for example, Ethical issues in turnaround engagements can affect results, The Secured Lender 2012; Ethical Challenges in Turnaround Engagements, T Natale.

[8] Hip-pocket injuries in workouts: Accessory liability for bankers and advisers, 23rd BFSLA Conference, August 2006, Justice Austin.

 

[9] See Good Practice (2015) 27(2) A Insol J 43

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