Australia’s draft Insolvency Practice Rules 2016 – some issues

The draft Insolvency Practice Rules raise a few fundamental issues about due process – natural justice, professional body involvement, confidentiality and transparency, being covered by me at the Traill 4th National Bankruptcy Congress on 14 November 2016; and also about ordinary insolvency process – communications, service by post, time limits, and the telephone….. The rules are at present being finalized by government and will be released to support the commencement of the first phase of the Insolvency Law Reform Act 2016, commencing 1 March 2017. Only some issues are raised here.    

Bodies – industry, prescribed and prescribed professional bodies

There is now statutory authority given to a number of bodies – industry bodies, prescribed bodies, other prescribed bodies, and prescribed professional bodies, putting aside professional accounting bodies. Some are fully prescribed without restriction, others are qualified. They range in focus through accounting, insolvency and law.

It is assumed that the history and standing of these bodies has been enough to give them the responsibilities reposed in them under the Insolvency Law Reform Act 2016 (ILRA)– to nominate practitioners to disciplinary committees, to receive and properly secure and use confidential information, and to themselves decide, on certain conditions, to refer their members’ conduct to the regulators. The means of oversight of these bodies is not clear. While the English situation is different, in that its professional bodies can license practitioners, the regulatory and disciplinary conduct of those bodies are overseen by the Insolvency Service. Indeed a sunset term exists in the law that would terminate their role if those bodies do not perform.  

One provision introduced by the ILRA, not qualified by the draft rules, allows an ARITA nominee on a disciplinary committee to take away confidential information obtained about a practitioner from that committee process, and give it to their industry body for its own disciplinary processes: s 50-35. It does not appear that this need be known by or supported or authorised by the committee.

Reasons for decision

ALRC 129 – Traditional Rights and Freedoms[1] – provides guidance and standards expected of any hearing processes, and provides a useful guide for assessment of the relevant parts of the draft rules – the need for separation of investigative and hearing functions, and of determination of breach and of penalty.

Published reasons for decision of committees and other decisions, for example in assessment of remuneration, are not guaranteed under the ILRA or draft rules. ALRC 129 explains the benefits of published reasons, including to ensure a high quality of decision making, to ensure transparency of the regulator’s actions, and importantly, as an educative function for the profession.

The publication by the CALDB of its reasons has provided a useful educative function for the profession, and ensured transparency of the disciplinary process conducted by ASIC as the regulator.

It is expected that both ASIC and AFSA will exercise their discretion to ensure reasons are published, and the professional bodies.

Co-operative regulation

The ILRA requires ASIC and AFSA to “co-operate” in relation to the regulation of practitioners who are both trustees and liquidators: s 10-5.  This should see some harmonisation of their approaches to insolvency practitioner regulation.  Given corporate insolvency’s adoption of many of the bankruptcy processes in the ILRA, both regulators might agree to regulate on AFSA’s priorities.  AFSA’s regulatory approach – set out in IGPS 8 – lists a graded approach to regulation of misconduct from guidance, individual counselling (“by far the most effective means”), upgrading the practitioner’s risk profile, through to formal discipline processes as a last resort.   ASIC may well adopt this approach also.  

Enforceable undertakings

As to that, it seems that ASIC retains its power to offer and accept enforceable undertaking under s 93AA of the ASIC Act.  Although the authority of the CALDB over liquidators is being removed from the ASIC Act (being Part 11) ASIC’s reach under s 11 is expressed to include such functions and powers as are conferred on it by or under the ASIC Act and the Corporations Act.  It would be unsatisfactory if ASIC continued to use its enforceable undertaking power in respect of liquidators, while AFSA had no such power over trustees.

Timing

Much of insolvency law and practice relies upon timing of service of documents or giving of notices etc. It is an unhelpful and costly distraction for disputes to arise about timing and to have to resort to court proceedings to resolve them.

The draft Rules, and the new law itself, still leave areas of uncertainty and inconsistency of timing, including their consistency with the relevant and equivalent Corporations Act and Bankruptcy Act provisions, and Part 6 and Part 8 of the Acts Interpretation Act 1901. While bankruptcy has properly moved from working days to business days, in some sections – – section 70-24 – both business days and days are referred to.

The rules need to take account of existing case law. The Federal Court in Yates, in the matter of G Retail Ltd held that the correct construction of s 439A(3)(a) of the Corporations Act is that written notice of a meeting is ‘given’ to creditors when put in the post as required by Regulation 5.6.12(2)(b).[2] The court agreed with earlier authority that the section could not operate feasibly otherwise. Section 439A(3) is now repealed but s 75-225 uses the same terms – “by written notice given”, the notice “must be given within …”.

Communication

Telephone

It is interesting to contrast the tentative approach taken in Australia in relation to ‘modern’ means of communication, like a telephone, with that taken in England and many other jurisdictions.

Section 75-75 allows meetings to be held by phone but only if “facilities for participating …by electronic means will be available for the meeting”. It might be assumed that phones are commonly available. The insolvency practitioner must, personally it seems, ensure that the phone is “available and operating”.

In England, s 246A of the Insolvency Act 1986 and the new rules allow the practitioner a discretion for the meeting to be conducted and held so that those who cannot attend in person may nevertheless have full access. The practitioner is required simply to “make whatever arrangements [he or she]considers appropriate …”.

And section 246B allows communication via a website.

Section 75-75 is but one example of this new Australian law being overly prescriptive and conservative and bound with bright red tape.  

Post

As to service by post, which remains, for the moment, as means of service, English law addresses its two standards of postal services – first and second class. In some cases first class post must be used, a letter being assumed to be delivered on the second business day after posting, and second class on the fourth business day.

The law in relation to what is now Australia’s now and comparable two-tiered postage standards does not yet appear to have been addressed.

Remuneration

It is again useful to compare the English provisions.

Section 18.16 of the English law sets out certain remuneration principles, not unlike those that apply here, but with more flexibility. For example time billing is appropriate “by reference to the time properly given by the office-holder and the office-holder’s staff in attending to matters arising in the administration, winding up or bankruptcy”. Other bases of billing are listed. The overall basis of remuneration may be one or a combination of these and they may each be applied in respect of different things done by the practitioner.

When creditors fail to fix the remuneration, the liquidator or trustee is entitled to an amount calculated according to a percentage scale on moneys received from asset realisations plus a sum calculated on the value of funds distributed.

The Australian draft rules offer a – very generous – percentage scale on assets realised, but only in bankruptcy: s 60-20.

Costs and expenses

The phrase “costs or expenses” – such as is in s 90-7 – is loosely bandied about by judges, regulators and practitioners but its meaning is in fact not defined or clear. It is presently used only once in the Bankruptcy Act (s 163A), and once in the Corporations Act (s 586). In the ILRA 2016, the words “remuneration”, “costs” and “expenses” are used in different ways.

Given the importance of the distinction in insolvency between:

• “legal costs”, incurred by a trustee, or ordered to be paid by a court;
• “remuneration” of the trustee; and
• “disbursements” [or “expenses”] and their respective approval requirements,  

uncertainty may continue where the words used are not clear.

On-going review

English law provides for a committee to monitor and offer advice on the rules. The Insolvency Rules Committee comprises judges, registrars, as well as practising barristers, solicitors and accountants. Such a body would be useful here.

What next

The rules will no doubt be released in final form and put into law in the near future. One benefit of much of this law being set out in the rules is that they can be more readily amended. That is where a committee to monitor and offer advice on the rules would assist.

Stay tuned.

[1] Traditional Rights and Freedoms—Encroachments by Commonwealth Laws (ALRC Report 129). See in particular chapter 14, Procedural Fairness.

[2] In the matter of G Retail Ltd (Adm App’d) [2006] FCA 370, citing Re Vouris; Epromotions Australia Pty Limited v Relectronic-Remech Pty Limited (in liquidation) [2003] NSWSC 702.