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Discipline process in insolvency — from 1 March 2017 – corporate

[a more detailed coverage]

Replaces CALDB

A discipline committee convened by ASIC under s 40-45 of the Corporations Schedule replaces the role of the CALDB. The new regime commences on 1 March 2017. The ILRA removes the role of the Board in relation to liquidators in favour of the ad hoc committee approach that presently applies in bankruptcy.

Under the transitional provisions of the ILRA, any matter not dealt with by the Board by 1 March 2017 cannot be continued: s 1565–1568 ILRA. ASIC will have to recommence action under the new committee system. But s 1569 allows a committee to obtain information from the Board in relation to any discipline matter not completed.

Section 1292 will no longer apply.

More confined criteria

New section 40-40 of the Corporations Schedule contains the more confined criteria by which ASIC can act. The extraterritorial coverage is removed.

But new section 90-15 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 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 [2012] NZHC 3037, [2013] NZLR 674.

Reasons for change

In making that policy decision to have discipline matters dealt with by a committee, the government has said that, in light of the more informal structure of the committee regime, 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 [2014] 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. While court proceedings can be expeditious, that is not always the case. 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 [2016] FCA 1186.

Committees

The chair of a Part 2 committee is ASIC’s delegate. A committee member may resign. If the chair considers that the ARITA or Ministerial nominee is unable to perform their duties (illness, neglect, or because they have a ‘material personal interest’ in a matter before the committee, or they have been convicted of an offence involving fraud or dishonesty) the chair must give notice to ARITA and ASIC and the person thereupon ceases to be on the committee. Under s 50‑35, the committee may be reconstituted and ARITA and the Minister must choose a replacement. Notice of the replacement must be given to the person before the committee. This is a natural justice requirement.

Under s 50‑45, the chair can decide that a matter could more efficiently or fairly be dealt with by referring a committee matter to another committee, which then deals with the matter ‘afresh’.

A member of a Part 2 committee must disclose the details of any ‘material personal interest’ to the chair.  However, that interest should properly have been conveyed to ARITA when ARITA first chose the person, unless it was not known at that time; the same with the Ministerial appointee.

A member of the committee has a material personal interest that relates to a matter if the matter relates to a related entity of the member.  ‘Related entity’ is defined in s 5 of the Bankruptcy Act as including a ‘relative’, itself defined as including a spouse, child, parent and many more remote connections.

Section 5‑15 Corporations Rules: Meaning of material personal interestWithout limiting the circumstances in which a member of a Part 2 committee has a material personal interest that relates to a matter, a member of a Part 2 committee has a material personal interest that relates to a matter if the matter relates to a related entity of the member.

The 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.

Bankruptcy Act pre-1 March 2017

Corporations Act pre 1 March 2017 ILRA structure for both bankruptcy and corporate from 1 March 2017 Comment
 

S 155H(1) – show cause, and must convene a committee

S 1292(2) – on application to the CALDB by ASIC

S 40-40- show cause and may convene and refer to a committee – s 40-45/50

 

S 155H(4) – in considering whether the trustee should continue to be registered the committee must take into account the matter in s 155H(1)(a)-(g)

S 1292(2) – CALDB may cancel or suspend if satisfied that the person has failed to perform the duties of liquidator etc 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

In the ILRA structure, there is no step whereby the committee must decide that the liquidator has failed to meet any standard or breached the law

How the matter is presented by ASIC is therefore important and deserves to come under scrutiny.  It is not enough that ASIC gives a bundle of documents containing “information” and asks the committee to decide on a penalty: see generally, Disciplinary Tribunals, JRS Forbes, 2nd ed, 1996 – Ch 10 Notice of the Hearing.  

Penalties

The range of ‘penalties’ — from cancellation of registration through to a reprimand — are contained in s 40-55.

That section provides that if a registered liquidator is referred to a committee under s 40-50, the committee must decide one or more of the following:

  • (a) that the liquidator should continue to be registered
  • (b) that the liquidator’s registration should be suspended for a period, or until the occurrence of an event, specified in the decision
  • (c) that the liquidator’s registration should be cancelled
  • (d) that ASIC should direct the liquidator not to accept any further appointments as liquidator, or not to accept any further appointments as liquidator during the period specified in the decision
  • (e) that the liquidator should be publicly admonished or reprimanded
  • (f) that a condition specified in the decision should be imposed on the liquidator
  • (g) that a condition should be imposed on all other registered liquidators that they must not allow the liquidator to carry out any of the functions or duties, or exercise any of the powers, of a registered liquidator on their behalf (whether as employee, agent, consultant or otherwise) for a period specified in the decision of no more than 10 years
  • (h) that ASIC should publish specified information in relation to the committee’s decision and the reasons for that decision.

Under s 40-55(1)(f), conditions imposed may include one or more of the following, that the liquidator:

  • (a) engage in, or refrain from engaging in, specified conduct
  • (b) engage in, or refrain from engaging in, specified conduct except in specified circumstances
  • (c) publish specified information
  • (d) notify a specified person or class of persons of specified information
  • (e) publish a specified statement
  • (f) make a specified statement to a specified person or class of persons.

In making its decision, the committee may have regard to any information provided to the committee by ASIC; any explanation given by the liquidator; any other information given by the liquidator to the committee; if the liquidator is or was also a registered bankruptcy trustee, any information given to the committee by the Inspector-General in Bankruptcy or a bankruptcy discipline committee; and any other matter that the committee considers relevant: s 40-55(3).

See above table.

Impact on all other liquidators and their firms

If a decision is made that the disciplined liquidator must not be allowed to work for other liquidators, those other liquidators must ensure that this occurs in any capacity.

This is quite an obligation, and a severe penalty.

Livelihood cases

In these administrative law cases, the courts take a strict view of the conduct of the proceedings, given the consequences for the person whose livelihood – income, standing etc – is at stake.  So too should the committee, and the regulators.

The two regulators are bound by model litigant principles and other ethical standards under their governing legislation.

Interpretation

For the lawyers, the ‘frozen’ Acts Interpretation Act 1901 will apply to the Corporations Schedule but the current Acts Interpretation Act 1901 applies to the Bankruptcy Act; in particular s 15AB which would allow consideration for example of the 2010 Senate Committee Report, in cases where the drafting may lead to a result that is manifestly absurd or is unreasonable.

The Legislation Act 2003 (Cth) applies to the explanatory statements, s 15J.

Publication

ASIC has a discretion to publish specified information in relation to the committee’s decision and the reasons for that decision. It is expected that ASIC will generally publicise decisions and their reasons in order that the discipline process will provide both a deterrent and an educative purpose, and to ensure that the reasoning of the committee is open to public scrutiny

Appeal rights

A liquidator may apply to the Administrative Appeals Tribunal to review a decision of the committee: see s 1317B of the Corporations Act. The Tribunal may stay a decision of the committee under s 41(2) of the Administrative Appeals Tribunal Act 1975.

A liquidator or auditor may also apply to the Federal Court to review the committee’s decision on certain grounds under the Administrative Decisions (Judicial Review) Act 1977.

Administrative law principles that apply

The three-person committee must consist of a nominee of ARITA, a representative of ASIC and an appointee of the Minister. The chair of the committee must be the ASIC delegate.

Natural justice

According to the Explanatory Statement to the Rules, 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”.

Hence, it

“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. Legislative provisions to ensure that the decision making of a committee adequately takes into account natural justice considerations will be made as part of rules made under the ILRA, while administrative processes within ASIC will similarly address these concerns in the same way as they are satisfied with respect to registered trustees”.

This important aspect of natural justice should be considered in light of the High Court’s decision in Isbester v Knox City Council [2015] HCA 20, that a prosecutor of misconduct cannot also be a part of the decision-making 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 [46].

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.

Rules of evidence

The Explanatory Statement notes that committee proceedings are inquisitorial

“where members are not restrained by judicial rules of evidence” (or also statutory rules of evidence presumably). It is said that the committee “will not hear submissions on whether information provided is admissible”.

That is not the law, indeed, 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 under the relevant Evidence Act or by the common law principles,

“(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”: Kyriackou v Law Institute of Victoria Limited [2014] VSCA 322, citing Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66.

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