Although the government is trying to distance any connection between wrongdoing and a company going into liquidation or a person becoming bankrupt, the law and policy of insolvency requires a liquidator or trustee to investigate the insolvent’s conduct and refer any offences to the authorities. In contrast, absent the fact of insolvency, no citizen is liable to be investigated by any authority unless some information or suspicion suggests otherwise.
It seems that insolvency does so suggest.
A review of that threshold issue is needed, followed by an assessment of whether offence investigation and reporting is a proper role for an insolvency practitioner.
In the meantime there should be a rationalisation and alignment of the practitioner’s investigative obligations. These are now potentially impacted by new duties to report offences, imposed on trustees and liquidators as “professional accountants” under their international code of ethics. These sit alongside criminal laws that can sanction accountants, and others, who fail to report certain offences found in corporate misconduct.
———————————
Bankruptcy
Bankruptcy trustees are required to refer any breaches of the Bankruptcy Act to the Inspector-General in Bankruptcy (AFSA)[i], an assessment in which trustees will be well experienced, even if the elements of some offences can raise difficult questions of law.
For those more difficult issues, AFSA offers a useful pre-referral enquiry (PRE) process to assist trustees in determining whether an offence should be referred. The final decision then lies with AFSA and the Commonwealth DPP. The latest report of AFSA confirms the benefit of the process, instituted in July 2015, along with the prosecutions that AFSA then reports.[ii]
Corporate
Bankruptcy trustees’ obligations compare with a different one in corporate liquidation, to refer offences under Commonwealth or State or Territory law “in relation to the company”: s 533 Corporations Act.[iii] On its face this obligation is too broad. The offence need not have anything to do with the company’s demise. The term “offence” includes civil offences. And the width of the section leads to a plethora of offences being referred to ASIC, many of which would not come within ASIC’s charter, and most of which are not pursued.
One could reasonably say that all solvent companies – upwards of 2 million – would be found to have committed some offences if any assessment were done at a chosen time. Those which become insolvent – 10,000 – are subject to an intense scrutiny. Those companies which simply disappear, in the order of 100,000, receive no scrutiny.
Various inquiries have considered the referral of insolvency offences to ASIC, including in the context of ASIC’s resources to handle them. Rather than recommending a law change, a Senate Committee merely asked that ASIC conduct a review of liquidators’ reporting requirements and that ASIC’s resources be improved for this task.[iv] That does not appear to have occurred. The Senate might instead have looked at the bankruptcy practice and its efficient operation.
An opportunity to at least align the reporting requirements between bankruptcy and corporate was not taken up in the Insolvency Law Reform Act 2016. A practitioner working on a bankruptcy and a liquidation file in succession will continue to confront different reporting obligations, time limits and processes, and regulators.
New Zealand and the UK
The Senate could also have looked overseas, the test under New Zealand law being, for example, more usefully focused.[v] It imposes an obligation on a liquidator to report an offence “material to the liquidation” committed under the NZ Companies Act 1993 and related criminal and financial laws.
Apart from the terms of the reporting obligation, the process of referral and the regulatory response are important. A sophisticated offence referral process became operative in the UK this year – the Director Conduct Reporting Service, which is said to be a “more structured, quicker and easier to complete” on-line process.
Information provided by insolvency practitioners is “sifted” by means of a “rules engine” that itself is capable of making a decision based on two broad criteria – the public interest and available evidence, with a necessary cost proportionality factored in.[vi]
What appears to be an example of the application of artificial intelligence in the assessment of conduct is part of a broader development in the law,[vii] and in tax and business accounting. Its application to the financial position of businesses is already here, and its potential for the broader tasks of insolvency practitioners is coming.[viii]
International Code of Ethics for Professional Accountants
A further obligation exists. Given the accounting qualifications of practitioners in Australia, they may soon have a separate offence reporting obligation imposed on them under the International Code of Ethics for Professional Accountants, maintained by IESBA, the International Ethics Standards Board for Accountants. The Code will impose an obligation on “professional accountants”[ix] to refer “illegal conduct”, or “non-compliance with laws and regulations” (NOCLAR). New sections 225 and 360 of the Code of Ethics will come into effect in July 2017, although earlier adoption is permitted.[x] The new Code provisions require accountants to be familiar with their local laws – anti-money laundering, tax, public health and safety, fraud and bribery, and data protection – with view to their possible offence referral.
The Code of Ethics obligations are broader than those imposed on accountants who are insolvency practitioners. The obligations may simply operate alongside each other although the statutory protections under the bankruptcy and corporations legislation would only extend to conduct under those laws. They have been raised in the context of current insolvency law reform.
Criminal liability
In that context, NSW accountants (and all citizens) should be aware of their other obligations to report offences. It is an offence under s 316 of the NSW Crimes Act if a person who knows of and has information about the commission of a serious indictable offence[xi] fails without reasonable excuse to report it. Two years jail is the penalty.
Lawyers, doctors, clergy and teachers have some protection for not reporting, but not accountants.[xii] Such offences include destroying or concealing accounting records, or making a false or misleading statement, with an intention to defraud ( s 192F, 192G); or making a false statement on oath not amounting to perjury (s 330).
This is quite separate from any accessorial liability of professional advisers existing under criminal and other laws.
Suffice to mention the various other reporting obligations of insolvency practitioners, and others, under anti-money laundering, tax, migration and bribery laws.
The end result
The end result for insolvency practitioners, and lawyers, looks like this:
| Role |
Insolvency practitioner reporting obligation |
International Code of Ethics |
Criminal and related law |
| Bankruptcy trustees |
Offences under the Bankruptcy Act |
NOCLAR |
Crimes Act |
| Company liquidators |
Offences in relation to the company under all laws, including the Bankruptcy Act |
NOCLAR |
Crimes Act |
| Professional accountants |
x |
NOCLAR |
Crimes Act |
| Lawyers |
x |
x |
Crimes Act (limited) |
Necessary and proper work?
Although the remuneration of an insolvency practitioner for investigating and reporting offences might seem secondary, an analysis of the right to remuneration does reveal some fine points of distinction of the obligation.
A bankruptcy trustee can claim remuneration for necessary and proper work done in investigating and referring bankruptcy offences. However, if there are no or insufficient assets, the work must still be done. Although the Insolvency Practice Rules make some allowance for indigent estates, they make no concession for this work.
A liquidator’s investigation and referral of offences is also work for which remuneration can be claimed. Similarly, if there are no or insufficient assets, the work will still need to be done, s 545 of the Corporations Act notwithstanding. But there may be some limit imposed on liquidators’ remuneration entitlements. Bribery by a director, although “in relation to the company”, may not impact on the financial collapse of the business, and may not be regarded as sufficiently connected with the administration of the winding up for remuneration to be validly claimed.
It could be argued that the liquidator has an obligation to investigate and report bribery under the broad scope of section 533. However in one (extreme) case,[xiii] where a receiver was a witness to the homicide of a director during the receiver’s inspection of the secured property, his time in reporting and attending upon the police and the prosecutors was not chargeable to the administration. The Judge considered that “assisting police with any enquiry falls into a greater civic duty that surpasses all professional duties”. As to any connection with the statutory obligation to report, the Judge thought that the value to the receivership through the receiver assisting the police with their homicide inquires “must be close to nil”.
In another context, the liquidator’s right to remuneration in responding to on-going queries from ASIC about the progress of the winding up of an unregistered managed investment scheme was firmly endorsed by the court. There was no requirement that the liquidator’s work had to also “add value” to the liquidation.[xiv]
In summary, in most cases remuneration can be claimed for investigating and reporting offences, but not for offences committed on the edges of the insolvency.
Assumptions and suggestions
Policy issues exist concerning the extent of the responsibilities of liquidators and whether they should be tasked with being what ASIC describes as being its “front-line investigators of insolvency companies”. That public interest role, and the lack of understanding of it, creates a tension with the responsibilities that a liquidator has to creditors. Debate about the right of a liquidator to be remunerated for that work highlights this issue. That in itself warrants a separate commentary.[xv] For present purposes, it is assumed that the responsibilities are valid.
On that basis, some initial law reform suggestions are that:
- section 533 and related sections of the Corporations Act should be amended to more closely focus, and limit, the obligation to investigate misconduct, perhaps along the lines of New Zealand law.
- more sophisticated processes for assessing and sifting evidence of misconduct should be engaged; perhaps along the lines of the UK Insolvency Service. This should be done before, or rather than, considering any increase in the resources of ASIC.
- there should be an alignment of the processes for bankruptcy and corporate, to address this omission in the Insolvency Law Reform Act.
Overall, the privatisation of the function of conducting investigations and reporting offences should be examined. While liquidators are well experienced and trained in this role, and a connection between offences and the recovery of assets often exists, some refinement should be considered with a purpose of promoting the efficiency of the task and effectiveness of the outcomes. For example, the UK Official Receiver undertakes the initial investigations into an insolvent estate; another example is the shared or collegiate role offered under the Bankruptcy Act, where AFSA pursues the bankrupt for their statement of affairs (s 77CA), or assists trustees with obtaining information or records or access to premises (ss 77AA, 77A, 77C); or the regulator or a separate body might take the responsibility for the full investigation, based on on-line access to estate data.
The alternative is to have the issue continue to go back and forth between the profession and the regulators, each using it for their own purposes, under the frustrated watch of the government and the community.
As to the professional accountants, their approach will be watched with interest.
Any comment?
==========================================
[i] Australian Financial Security Authority.
[ii] (2016)14(3) Personal Insolvency Regulator.
[iii] The obligation is in fact wider: see s 533
[iv] Insolvency in the Australian construction industry, 3 December 2015
[v] Companies Act 1993 s 258A
[vi] ‘The engine that drives director conduct reporting’, Recovery – R3, Autumn 2016 p 13, Mark Danks, The Insolvency Service, UK.
[vii] Lyria Bennett Moses and Janet Chan Using Big Data for Legal and Law Enforcement Decisions: Testing the New Tools [2014] UNSWLawJl 25; (2014) 37(2) University of New South Wales Law Journal 643
[viii] “Ross, the world’s first artificially intelligent attorney, has its first official law firm. Baker & Hostetler announced that they will be employing Ross for its bankruptcy practice, currently comprised of almost 50 lawyers” – http://futurism.com/artificially-intelligent-lawyer-ross-hired-first-official-law-firm/. Bankruptcy Prediction through Artificial Intelligence, Goletsis et al, Encyclopaedia of Information Science and Technology, 2nd ed, 2009.
[ix] In Australia, members of CAANZ, CPA Australia and the IPA.
[x] The 2016 IESBA Handbook contains the entire Code of Ethics for Professional Accountants including sections 225 and 360, and conforming amendments to other sections.
[xi] Defined in s 4 as an indictable offence that is punishable by imprisonment for life or for a term of 5 years or more.
[xii] Crimes Regulations, reg 4
[xiii] Ide v Ide [2004] NSWSC 751; (2004) 184 FLR 44; (2004) 50 ACSR 324
[xiv] ASIC v Piggott Wood & Baker [2006] FCA 1774
[xv] See Keay’s Insolvency, Thomson Reuters, Murray & Harris, 2016, at [21.40] and Chapter 21, generally.
Insolvency practitioners’ offence reporting
Although the government is trying to distance any connection between wrongdoing and a company going into liquidation or a person becoming bankrupt, the law and policy of insolvency requires a liquidator or trustee to investigate the insolvent’s conduct and refer any offences to the authorities. In contrast, absent the fact of insolvency, no citizen is liable to be investigated by any authority unless some information or suspicion suggests otherwise.
It seems that insolvency does so suggest.
A review of that threshold issue is needed, followed by an assessment of whether offence investigation and reporting is a proper role for an insolvency practitioner.
In the meantime there should be a rationalisation and alignment of the practitioner’s investigative obligations. These are now potentially impacted by new duties to report offences, imposed on trustees and liquidators as “professional accountants” under their international code of ethics. These sit alongside criminal laws that can sanction accountants, and others, who fail to report certain offences found in corporate misconduct.
———————————
Bankruptcy
Bankruptcy trustees are required to refer any breaches of the Bankruptcy Act to the Inspector-General in Bankruptcy (AFSA)[i], an assessment in which trustees will be well experienced, even if the elements of some offences can raise difficult questions of law.
For those more difficult issues, AFSA offers a useful pre-referral enquiry (PRE) process to assist trustees in determining whether an offence should be referred. The final decision then lies with AFSA and the Commonwealth DPP. The latest report of AFSA confirms the benefit of the process, instituted in July 2015, along with the prosecutions that AFSA then reports.[ii]
Corporate
Bankruptcy trustees’ obligations compare with a different one in corporate liquidation, to refer offences under Commonwealth or State or Territory law “in relation to the company”: s 533 Corporations Act.[iii] On its face this obligation is too broad. The offence need not have anything to do with the company’s demise. The term “offence” includes civil offences. And the width of the section leads to a plethora of offences being referred to ASIC, many of which would not come within ASIC’s charter, and most of which are not pursued.
One could reasonably say that all solvent companies – upwards of 2 million – would be found to have committed some offences if any assessment were done at a chosen time. Those which become insolvent – 10,000 – are subject to an intense scrutiny. Those companies which simply disappear, in the order of 100,000, receive no scrutiny.
Various inquiries have considered the referral of insolvency offences to ASIC, including in the context of ASIC’s resources to handle them. Rather than recommending a law change, a Senate Committee merely asked that ASIC conduct a review of liquidators’ reporting requirements and that ASIC’s resources be improved for this task.[iv] That does not appear to have occurred. The Senate might instead have looked at the bankruptcy practice and its efficient operation.
An opportunity to at least align the reporting requirements between bankruptcy and corporate was not taken up in the Insolvency Law Reform Act 2016. A practitioner working on a bankruptcy and a liquidation file in succession will continue to confront different reporting obligations, time limits and processes, and regulators.
New Zealand and the UK
The Senate could also have looked overseas, the test under New Zealand law being, for example, more usefully focused.[v] It imposes an obligation on a liquidator to report an offence “material to the liquidation” committed under the NZ Companies Act 1993 and related criminal and financial laws.
Apart from the terms of the reporting obligation, the process of referral and the regulatory response are important. A sophisticated offence referral process became operative in the UK this year – the Director Conduct Reporting Service, which is said to be a “more structured, quicker and easier to complete” on-line process.
Information provided by insolvency practitioners is “sifted” by means of a “rules engine” that itself is capable of making a decision based on two broad criteria – the public interest and available evidence, with a necessary cost proportionality factored in.[vi]
What appears to be an example of the application of artificial intelligence in the assessment of conduct is part of a broader development in the law,[vii] and in tax and business accounting. Its application to the financial position of businesses is already here, and its potential for the broader tasks of insolvency practitioners is coming.[viii]
International Code of Ethics for Professional Accountants
A further obligation exists. Given the accounting qualifications of practitioners in Australia, they may soon have a separate offence reporting obligation imposed on them under the International Code of Ethics for Professional Accountants, maintained by IESBA, the International Ethics Standards Board for Accountants. The Code will impose an obligation on “professional accountants”[ix] to refer “illegal conduct”, or “non-compliance with laws and regulations” (NOCLAR). New sections 225 and 360 of the Code of Ethics will come into effect in July 2017, although earlier adoption is permitted.[x] The new Code provisions require accountants to be familiar with their local laws – anti-money laundering, tax, public health and safety, fraud and bribery, and data protection – with view to their possible offence referral.
The Code of Ethics obligations are broader than those imposed on accountants who are insolvency practitioners. The obligations may simply operate alongside each other although the statutory protections under the bankruptcy and corporations legislation would only extend to conduct under those laws. They have been raised in the context of current insolvency law reform.
Criminal liability
In that context, NSW accountants (and all citizens) should be aware of their other obligations to report offences. It is an offence under s 316 of the NSW Crimes Act if a person who knows of and has information about the commission of a serious indictable offence[xi] fails without reasonable excuse to report it. Two years jail is the penalty.
Lawyers, doctors, clergy and teachers have some protection for not reporting, but not accountants.[xii] Such offences include destroying or concealing accounting records, or making a false or misleading statement, with an intention to defraud ( s 192F, 192G); or making a false statement on oath not amounting to perjury (s 330).
This is quite separate from any accessorial liability of professional advisers existing under criminal and other laws.
Suffice to mention the various other reporting obligations of insolvency practitioners, and others, under anti-money laundering, tax, migration and bribery laws.
The end result
The end result for insolvency practitioners, and lawyers, looks like this:
Necessary and proper work?
Although the remuneration of an insolvency practitioner for investigating and reporting offences might seem secondary, an analysis of the right to remuneration does reveal some fine points of distinction of the obligation.
A bankruptcy trustee can claim remuneration for necessary and proper work done in investigating and referring bankruptcy offences. However, if there are no or insufficient assets, the work must still be done. Although the Insolvency Practice Rules make some allowance for indigent estates, they make no concession for this work.
A liquidator’s investigation and referral of offences is also work for which remuneration can be claimed. Similarly, if there are no or insufficient assets, the work will still need to be done, s 545 of the Corporations Act notwithstanding. But there may be some limit imposed on liquidators’ remuneration entitlements. Bribery by a director, although “in relation to the company”, may not impact on the financial collapse of the business, and may not be regarded as sufficiently connected with the administration of the winding up for remuneration to be validly claimed.
It could be argued that the liquidator has an obligation to investigate and report bribery under the broad scope of section 533. However in one (extreme) case,[xiii] where a receiver was a witness to the homicide of a director during the receiver’s inspection of the secured property, his time in reporting and attending upon the police and the prosecutors was not chargeable to the administration. The Judge considered that “assisting police with any enquiry falls into a greater civic duty that surpasses all professional duties”. As to any connection with the statutory obligation to report, the Judge thought that the value to the receivership through the receiver assisting the police with their homicide inquires “must be close to nil”.
In another context, the liquidator’s right to remuneration in responding to on-going queries from ASIC about the progress of the winding up of an unregistered managed investment scheme was firmly endorsed by the court. There was no requirement that the liquidator’s work had to also “add value” to the liquidation.[xiv]
In summary, in most cases remuneration can be claimed for investigating and reporting offences, but not for offences committed on the edges of the insolvency.
Assumptions and suggestions
Policy issues exist concerning the extent of the responsibilities of liquidators and whether they should be tasked with being what ASIC describes as being its “front-line investigators of insolvency companies”. That public interest role, and the lack of understanding of it, creates a tension with the responsibilities that a liquidator has to creditors. Debate about the right of a liquidator to be remunerated for that work highlights this issue. That in itself warrants a separate commentary.[xv] For present purposes, it is assumed that the responsibilities are valid.
On that basis, some initial law reform suggestions are that:
Overall, the privatisation of the function of conducting investigations and reporting offences should be examined. While liquidators are well experienced and trained in this role, and a connection between offences and the recovery of assets often exists, some refinement should be considered with a purpose of promoting the efficiency of the task and effectiveness of the outcomes. For example, the UK Official Receiver undertakes the initial investigations into an insolvent estate; another example is the shared or collegiate role offered under the Bankruptcy Act, where AFSA pursues the bankrupt for their statement of affairs (s 77CA), or assists trustees with obtaining information or records or access to premises (ss 77AA, 77A, 77C); or the regulator or a separate body might take the responsibility for the full investigation, based on on-line access to estate data.
The alternative is to have the issue continue to go back and forth between the profession and the regulators, each using it for their own purposes, under the frustrated watch of the government and the community.
As to the professional accountants, their approach will be watched with interest.
Any comment?
==========================================
[i] Australian Financial Security Authority.
[ii] (2016)14(3) Personal Insolvency Regulator.
[iii] The obligation is in fact wider: see s 533
[iv] Insolvency in the Australian construction industry, 3 December 2015
[v] Companies Act 1993 s 258A
[vi] ‘The engine that drives director conduct reporting’, Recovery – R3, Autumn 2016 p 13, Mark Danks, The Insolvency Service, UK.
[vii] Lyria Bennett Moses and Janet Chan Using Big Data for Legal and Law Enforcement Decisions: Testing the New Tools [2014] UNSWLawJl 25; (2014) 37(2) University of New South Wales Law Journal 643
[viii] “Ross, the world’s first artificially intelligent attorney, has its first official law firm. Baker & Hostetler announced that they will be employing Ross for its bankruptcy practice, currently comprised of almost 50 lawyers” – http://futurism.com/artificially-intelligent-lawyer-ross-hired-first-official-law-firm/. Bankruptcy Prediction through Artificial Intelligence, Goletsis et al, Encyclopaedia of Information Science and Technology, 2nd ed, 2009.
[ix] In Australia, members of CAANZ, CPA Australia and the IPA.
[x] The 2016 IESBA Handbook contains the entire Code of Ethics for Professional Accountants including sections 225 and 360, and conforming amendments to other sections.
[xi] Defined in s 4 as an indictable offence that is punishable by imprisonment for life or for a term of 5 years or more.
[xii] Crimes Regulations, reg 4
[xiii] Ide v Ide [2004] NSWSC 751; (2004) 184 FLR 44; (2004) 50 ACSR 324
[xiv] ASIC v Piggott Wood & Baker [2006] FCA 1774
[xv] See Keay’s Insolvency, Thomson Reuters, Murray & Harris, 2016, at [21.40] and Chapter 21, generally.
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