Insolvency practitioners are to be the subject to the same tenure arrangements as federal politicians, with creditors being able to vote out “underperforming practitioners”, but, unlike federal politicians, practitioners are also to be subject to ICAC type oversight. Minister Kelly O’Dwyer, in referring to the Insolvency Law Reform Act 2016, says that creditors’ right to remove a practitioner, for no stated reason, is the most important provision in the Act. In fact, protections under the Act against creditors abusing that right are limited and the new law is unsatisfactory.
Bankruptcy law
For over a century creditors have had the right to vote out a bankruptcy trustee, under-performing or otherwise, but the law has been little used. Belatedly, it is now to be applied to corporate liquidators and administrators. It applies generally in England: ss 171, 172 Insolvency Act 1986.
This reform, with the parallel bankruptcy provision also changed in the Bankruptcy Schedule, is examined in the context of the broader scheme of the authority of creditors in insolvency law and the role of insolvency practitioners.
The new regime under the ILRA 2016
Directions to the liquidator – s 85-1
New section 85-1 of the Corporations Schedule allows creditors to give directions to the liquidator as to what the liquidator should do; for example to sell an asset, or to take legal proceedings. The liquidator must have regard to any directions but is not required to comply with them. This repeats existing law: s 479(1) Corporations Act.
If the liquidator decides not to comply, for example, the direction may be unlawful, or not a good use of funds, the liquidator must record that decision and give reasons.
The legal principles
All this accords with the existing legal principles, that it is the appointed liquidator who remains in control, and takes responsibility for that. As Justice Burchett said in the bankruptcy context, in Re Weiss [1986] FCA 287, a proposition that a
“trustee’s only function is to protect the interests of the creditors is contrary both to the Act and to authority”.
Both the Bankruptcy Act and the Corporations Act make it clear that practitioners have statutory duties to ascertain the assets and liabilities, and examine conduct, dealings and transactions and report offences.
The Judge referred to the then equivalent of s 85 saying it was “carefully limited” in its terms. In the context of the Court itself, he said that even a compromise approved by all the creditors does not bind the court.
“It has been repeatedly laid down that the Court, in exercising discretions reposed in it in respect of matters of bankruptcy, generally has regard to the interests of commercial morality and the public interest”.
Justice Burchett cited older English authority, that it is
“an idle notion that the Court is bound by the consents of the creditors. The Court has far larger and more important duties to perform [and must] take a wider view. We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country”: Re Hester (1889) 22 QBD 632.
How that established law of the authority of the practitioner is then maintained under the ILRA 2016 regime is problematic.
Right to vote out a liquidator – s 90-35
Under new s 90-35, the creditors may “resolve” to remove a liquidator and appoint a replacement.
Section 90(4) allows the former liquidator to apply to the Court to be reappointed. But in doing so they must record all their “costs incurred” in relation to the court application – court filing and hearing fees, legal costs – separate from their “costs” in relation to other matters, if any.
The Court may then order that the former liquidator be reappointed if it is satisfied that the removal was an “improper use of the powers of one or more creditors”.
What threshold is to be required for a resolution, under s 75-50, is yet to be announced. But at present it is a simple majority in value and numbers.
Justice Burchett referred to this inherent power of the court in Re Weiss, to reject creditors’ attempts to remove a trustee under the long standing bankruptcy law provision, citing the old Bankruptcy Court decision in Re Crawford (Dec’d) (1943) 13 ABC 201.
How a liquidator might be removed
Here are some examples of how s 85 might be used, or abused, whether improperly or not is not clear.
- At the hearing of a winding up application, two liquidators file consents to act as liquidator, on behalf of competing creditors. The Court makes a decision in favour of one liquidator, based on a number of factors, and gives its reasons. At a meeting of creditors soon after, that liquidator appointed by the Court is removed and replaced by the other.
- During the course of a liquidation, in which some funds have been recovered, creditors give a direction to the liquidator under s 85(1) to pay a 4c dividend rather than to use those funds to pursue a creditor for a substantial claim, involving unlawful phoenix misconduct. The liquidator considers that he can recover substantial funds if he pursues the matter, offering creditors 15c, and this is reinforced by what is a clear case of misappropriation of company property. He rejects the creditors’ direction, giving his reasons under s 85-5(3), and files court proceedings. The creditors resolve to replace the liquidator. The new liquidator is less familiar with the matter, and agrees to comply with the creditor’s direction. The Court is simply told that the ‘phoenix’ proceedings are discontinued.
- A liquidator is taking court proceedings against two major creditors for recovery of moneys, taking the action ‘on spec’ because there are no funds in the company. Those creditors have the controlling votes at the meeting of creditors. The meeting resolves to vote the liquidator out, over the objections of smaller creditors. The new liquidator is not willing to ‘spec’ the claim, and discontinues it.
Once removed, then what?
In any of those instances, on being removed, the former liquidator need not take any action, even if their removal was improper, in particular if they are without funds. The liquidator may also not have enough information at that stage to know what was the motivation behind the vote.
Even if funds are available in the company, the former liquidator has no access to them.
The replacement liquidator may be at some disadvantage in coming in afresh.
The Court has no regulatory role unless a matter is brought before it, except in some odd circumstance where it may inquire “on its own initiative”: s 90-5.
In the end result, the replaced liquidator may decide that the personal cost and uncertainty of outcome of investigating the matter, and obtaining evidence, and then bringing a court application to have their position restored is not worth it. The creditors can live with their decision. The liquidator might properly report the issue to ASIC, if he or she has enough to report.
ASIC
ASIC then has it rights under s 1330 the Corporations Act to take action, and it may be that the expectation in the new regime is that ASIC focus on this regulatory role. The role and responsibility of practitioners in enforcing breaches of the law, such as phoenix misconduct, is hazy. The Inspector-General in Bankruptcy might be said to have a similar responsibility even if not expressed in clear statutory terms.
Comment
The last decades have seen a questioning of professionals and service providers generally, and of increased consumer expectations and greater access to information. Medicine, law, science and other areas are seen as increasingly subject to patient, client and customer demands and expectations. There is value in that. But there is also a danger of populist lessening of what might be seen as the broader responsibilities owed to the public interest beyond commercial considerations.
The increased powers given to creditors under s 90 of the ILRA 2016, and the limited recourse of practitioners that is offered, are part of that trend. That is coupled with a number of provisions in the Act imposing close scrutiny and control over practitioners, with an inference of expected fault, often exceeding the tone and terms of anti-corruption laws.
The right of creditors to replace a practitioner, while perhaps not unreasonable, does not sit well with the stated government view, in the context of communications and remuneration, that creditors lack understanding of the insolvency process. Allowing what may be ill-informed and self-interested creditors, by simple resolution, to remove a practitioner, can operate to the detriment of the insolvency regime, and more so to “the commercial morality of the country”.
Hope yet
The ILRA could still, under s 75-50, impose a higher voting threshold for removal of a practitioner, when the Rules are drafted.
The law could also require notice to and meeting attendance by a regulator (an option still available under s 80-65).
And the Act could have given a specific power to the regulators, and the court, to intervene, but which, under other provisions, either may still do.
One Response
I must say that philosophically provisions in addition to those that are presently available under the Corporations Act 2001 and the Bankruptcy Act 1966 which permit removal of an external controller in appropriate circumstances, but in reality under the supervision of the court unless it is done in a voluntary way, in most instances is to be preferred over a situation where vested interests will be able to abuse the system. In effect they will be able to possibly thwart an insolvency practitioner being able to carry into effect the public duty that they are required to do under the Corporations Act and the Bankruptcy Act.
It seems to me that people forget that the practitioner has a dual function, one, the investigation into the affairs of the insolvent entity for the purposes of paying a dividend to the ordinary unsecured creditors; and two, to investigate and report breaches of the law as a matter of public policy to the relevant regulator.
Unless Parliament is going to adequately fund the regulators to take over this role there is a substantial risk that the insolvency practitioner will keep any public policy investigation and reporting to a bare minimum thereby substantially reducing the effectiveness of that external control, and defeating the very purpose – at least from a public policy perspective – of their appointment.