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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Insolvency reforms – what to expect in the first few weeks

This explains what insolvency practitioners, and lawyers, may immediately confront in the first weeks or so of the new law, under those new or amended sections of the Bankruptcy Act and the Corporations Act that apply from Wednesday 1 March 2017. Read on if you are interested, avoid if not.

There are two tranches starting on that date:

Parts 1 and 2 of the Insolvency Practice Schedules (Bankruptcy) and (Corporations) – sections 1-1 to 50-35, pp 1-47 and 146-190.

Registration and discipline and insurance. Registration and discipline are explained by reference to the different circumstances of practitioners – as applicants for registration, as practitioners subject to discipline proceedings, and as practitioners sitting on committees.  New insurance requirements also apply to all registered practitioners.

Schedule 3 – Other amendments of the Insolvency Law Reform Act 2016 – pp 369-389.

Then there are some fairly minor practice reforms that impact all practitioners, mainly in corporate. The removal of the official liquidator title applies from 1 March; you may see it as important.  The sale of voidable transactions is important – s 100-5.

Parts 1 and 2 of the Insolvency Practice Schedules (Bankruptcy) and (Corporations) – sections 1-1 to 50-35

REGISTRATION, DISCIPLINE AND INSURANCE

Registers of practitioners – Division 15

New registers of trustees and liquidators will be set up and registered practitioners will need to ensure your details are up to date and correct: s 15-1. 

Your existing registrations are automatically transferred.

Registration as a trustee or liquidator – Division 20

Applications for registration

Those applying

Those applying to be registered should have regard to what the new law says in the Schedules and the Rules, and the soon to be issued guidance issued by both ASIC and AFSA: see ss 20-5 and following in the Schedules and ASIC’s draft RG (comments on this closing on 9 February 2017).

ASIC has announced that it is taking no more applications for registration under the old (current) system.

The application is not public, nor is anyone entitled to object. You may wish to ask ASIC not to apply its current practice, if continued, of putting up applicants’ names on its website and inviting objections.

ASIC’s draft RG says that commercial law includes the law of contract, torts, business, corporations, and tax. Questions on those areas of law may be asked at interview, along with the accounting areas of study required; this might include international standards and codes.   

The insolvency study requirements are at the bachelor honours level.  The UTS/ARITA course is said to qualify and there is a new course at the University of Adelaide.

You can apply to work as a receiver only, being a registered liquidator subject to conditions: Corporations Rules: s 20-1(2)(d).

There will be an interview (s 20-20). One thing to check is whether the ARITA nominee has any connection with you, adverse or not. You should be given the names of the members of the committee in advance.

Applicants will need to carefully go through the requirements for registration, including a police check and references, and details of qualifications, including postgraduate. Being an employee is not an impediment as long as your independence is not compromised.

At the interview, you may be given a number of fact scenarios about which you will be asked, with some time given to read and understand these.  Typical questions are explained here.

You could be asked to sit an exam but that is unlikely unless the interview does not go well: s 20-20(2).

Conditions on registration may be imposed, for example as to the type of administration you can take on, or as to only taking appointments jointly. 

CPD is to be a 40 hour per year requirement: s 20-5 Rules.

Insurance cover is important, about which the regulators are issuing guidance: s 25-1.  There is a high penalty for breach

Those interviewing – experienced trustees and liquidato

For trustees and liquidators with over 5 years of experience, you could be contacted by ARITA to sit on a registration interview committee: s 20-10. This could happen from day one.

If you accept, you should be aware of the rules of natural justice, and objective decision making, and the elements of each of knowledge, experience, qualifications and ability, and the concept of fit and proper. The test is not whether the applicant is as good as you but whether they would be suitable in terms of the requirements in s 20-20 of the Schedule and s 20-1 of the Rules: Growden [2008] AATA 604. ARITA may issue guidance on the role.

Insurance – Division 25

You must have adequate professional indemnity and fidelity insurance: s 25-1.  The penalty for not having this is $180,000.

You must notify ASIC/AFSA if certain events occur, you go bankrupt, are convicted of a fraud or dishonesty office, etc: s 35-1, or information in your annual return becomes inaccurate: s 35-5.

 Annual liquidator and trustee returns – Division 30

You will need to lodge annual liquidator and trustee returns, transitioned so that if you are due to lodge in November 2017, you use the existing old form, but thereafter the new: s 30-1.

Your period of registration now lasts for 3 years, and then must be renewed in writing: s 20-70 – 20-75 Schedules.

ASIC and AFSA will be in contact about these and your fees. 

ASIC’s fees have increased – Corporations (Fees) Amendment Regulation 2016.

The new discipline regime – Division 40

Practitioners subject to misconduct action

For those trustees and liquidators who may be subject to this, there are processes in the Schedules, including:

  • directions to comply with certain obligations: s 40-5;
  • to correct inaccuracies – s 40-10
  • directions not to accept appointments: s 40-15;
  • notices served by the regulators for cancellation or suspension s 40-25, s 40-30;
  • show cause notices in respect of a nominated default: s 40-40; and
  • a discipline committee hearing s 40-50.

It is suggested you obtain legal advice if a s 40-50 hearing eventuates.   

Disciplinary action by committee – ss 40-40 to 40-111

There are significant obligations imposed on the regulators and the committee to conduct the process fairly. This includes as to the composition of the discipline panel. Again, the ARITA nominee should be independent, and the ASIC and AFSA representatives should not have been involved in the investigation process. 

Some more detail is here.

You can provide information and documents to the committee.  You can have a lawyer with you.

The reasons of the committee’s decision will be provided to you. You and your lawyer should assess whether the reasons are adequate, including as to penalty. 

The committee’s reasons may be published: s 40-55.  You may choose to release them yourself if they are not made public, and are in your favour, or if you disagree with them and wish to say why.

Note that ARITA, CPA, CAANZ, IPA etc can share misconduct information about you with ASIC and AFSA, including confidential information from a discipline committee: s 50-35(2). Is this good? – see here.

ASIC and AFSA

Both ASIC and AFSA must co-operate with each other in relation to practitioners who are both trustees and liquidators: s 10-5.  You may be able to use your good record with AFSA as a response to any application by ASIC, and vice versa. 

Both regulators have ethical and model litigant obligations in the way they pursue the discipline process under their own legislation. 

 Senior practitioners who are asked to sit on a discipline committee

For those 5 year or more experienced liquidators and trustees, you may be asked by ARITA to sit on a discipline committee, the criteria being that you have the “knowledge and experience necessary to carry out your functions as a member of the committee”: s 50-5.  This is a broader expectation that for a registration committee member.

It is a serious task and you can decline ARITA’s request.  If you accept you should be particularly aware of natural justice obligations, the need not to pre-judge or take a hindsight view, and have some flexibility in your assessment of conduct. You should be aware of recent disciplinary decisions and commentaries about them. 

You do not represent ARITA, and you need not be an ARITA member. You are there as person who has expert knowledge of the practice of bankruptcy or liquidation.

There are also issues for ARITA in how it chooses the practitioner – see here.

Conflicts check

You should closely check any issues real or perceived about your independence from the applicant and their firm.  It would be unsatisfactory if an issue were raised by the applicant, and you had to resign, putting all to cost and time.  See the term ‘material person interest’ in s 5-5 of the Rules.

You should obtain a time estimate for the matter to ensure you are available as required. 

You are entitled to be paid, usually a daily rate: s 50-30.

Penalties

You will have to decide what outcome by way of penalty is imposed on the practitioner. There are a variety of penalties from admonishment through to termination: s 40-55.  You should have some appreciation of parity in penalties for professional misconduct.  If you were to recommend suspension, you would have to consider the disruption to estates and administrations, and the need for replacement appointees. Cancellation of registration is a severe outcome for serious misconduct, in particular because livelihood and income is at stake. 

Reasons for decision

The committee must give written reasons to the practitioner – s 40-60.  The committee may have to decide whether its reasons should be published. You should think independently and must yourself be satisfied with the reasons. You can dissent if you feel that is the right decision: s 50-95(3) Rules.

Confidentiality

You as a member of a committee are bound by confidentiality obligations: s 50-35(1) with a $9,000 penalty for breach.  But you can refer confidential misconduct information to a professional body, yours or another – ARITA, CAANZ, law societies etc: s 50-35(2). 

Those bodies may be issuing guidance about this. 

You should obtain legal advice about this in any event given the potential penalties involved.

Application to the Administrative Appeals Tribunal (AAT)

If there is an application to review the discipline committee’s decision, you then become a named party to AAT proceedings, but that should be nominal only.  There may be some work in assisting in that hearing process.

Creditors and others

Creditors or others have no role in this process.  The hearings are in private. But a creditor may be a complainant against you and therefore may be someone whose statement you need to respond to.

Schedule 3 – Other amendments of the Insolvency Law Reform Act 2016 – pp 369-389

PRACTICE REFORMS

New matters of Practice – for corporate practitioners

This is a list of things that may occur in your practices that will be different from 1 March 2017.

These are contained in Schedule 3 – Other Amendments to the Corporations Schedule [pp 369-389]. They are a miscellany of changes that were considered to be able to start now, which the profession could manage in the time available. They arise under various new or amended sections of the Corporations Act.

  • Some changes will have immediate impact – lodging DIRRIs with ASIC, although ASIC has not yet released the DIRRI form. The status of official liquidator is removed, as of 1 March 2017.
  • Some changes apply only to new post 1 March 2017 administrations, others to on-going administrations.

The definition of “official liquidator” – s 9

This is removed from s 9, and elsewhere in the Corporations Act.  A registered liquidator can be appointed by the court. 

Notice of the non-exercise of rights in relation to property issued by a voluntary administrator – s 443B(3)

New subsection 443B(3) simply requires a voluntary administrator to specify the location of property referred to in a notice given to an owner/lessor, if the administrator knows (or could reasonably find out) the location of the property.

This requirement only arises for new administrations commencing 1 March or after: Part 7, Schedule 3.

Contravention of a deed – s 445HA

There is a new Division 11AA containing new section 445HA – Notification of contravention of deed of company arrangement – which requires directors to notify the deed administrator – and deed administrators to notify creditors – of any material contravention of a deed, or likelihood of it, of which the director or the deed administrator becomes aware.

This change applies to existing and new deeds but only in relation to contraventions that occur on or after 1 March 2017.

The Explanatory Memorandum says this is included because “there is no statutory requirement for a deed administrator or for the directors to inform creditors that a breach of the deed has occurred”.

There is a consequential change to s 482, s 482(2A)(da) being an additional factor the court can take into account in deciding whether to stay a liquidation when a company enters a deed.

This applies to both pre-existing deeds as at 1 March 2017 and new deeds.

Company’s former name – s 161A

Section 161A of the Corporations Act is amended to remedy a gap in its coverage. It extends the range of circumstances whereby an external administrator can obtain court leave to dispense with the requirement to set out a company’s former name on public documents and negotiable instruments. 

Previously only deed administrators could apply to the court for such dispensation, but now the court may grant leave on the application of either a liquidator, administrator, deed administrator, managing controller or receiver.

The EM explains this change as being to remedy “a number of incorrect cross-references in section 161A which relates to the use of a company’s former name are corrected”.

It may remain deficient in circumstances where there have been two or more changes in name before insolvency.

This applies on and from 1 March 2017.

Termination of deed and then liquidation – s 446AA and amended section 499

New section 446AA and amended section 499 are said to remedy a problem where the court makes an order for, or a deed provides for, the termination of a deed. The new sections are said to remedy this by allowing a liquidator to be appointed to a subsequent liquidation where the deed terminates.  

This change applies in relation to deeds that are terminated on or after 1 March 2017.

New definition of ‘relation-back day’

There is a new section 91 (10 pages) which defines ‘relation-back day’.  It replaces the short existing definition in s 9.

It is not as bad as it looks; it does fix a gap under the old law: see Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd (In Liq) [2008] NSWSC 452 where the Judge found a gap in cases where administrators were appointed after the winding up application had been filed. The relation-back day was determined by the date of appointment of administrators rather than the date of filing of the winding up proceedings.

Under the new s 91 definition, the ‘relation-back day’ is therefore earlier, being the day the winding-up application was filed. 

This prevents the potential abuse of appointing an administrator well after a winding-up application is filed but before the winding-up order or members’ resolution is made.

The new definition applies to the winding up of a company ‘starting’ on or after 1 March 2017: s 1635(4). 

I have (by email) some examples of how the definition applies – see what you think.

Amendment to Corporations Act – s 588FGA

The text of this provision is amended to change ‘Court’ to ‘court’ (see s 58AA) so that lower courts can deal with small s 588FGA preference indemnity claims against directors by the ATO [say $200,000].

This applies regardless of whether the preference payment was made before or after 1 March 2017.

Lodgment of declarations

You are required to lodge with ASIC any ‘DIRRI’ made on and after 1 March, including replacement DIRRIs, if you are:

  • A voluntary administrator – s 436DA(4) (6);
  • A replacement administrator: s 449CA(4) (6)
  • A creditors voluntary liquidator: s 506A(2) (5).

The timeframe is ’as soon as practicable after making the declaration’.

The form of the declaration is yet to be advised by ASIC.

“Printed copy” – s 491

This term is antiquated. Under s 491(2)(a), instead of lodging a printed copy of the members’ voluntary winding up resolution the company must lodge, in the prescribed form, a notice setting out the text of the resolution.

This applies to resolutions made on or after 1 March 2017.

Pooling

“The text of” any pooling orders made by a court under s 579A, 579B and 579C must be lodged by the person obtaining the orders with ASIC within two business days after the making of the order and in a prescribed form.

This applies to orders made on or after 1 March 2017.

Sale of voidable transaction claims – s 100-5

Sections 100-5 of the Bankruptcy Schedule and the Corporations Schedule permit a practitioner to sell a right to bring a voidable transaction claim – that is a claim, only exercisable by the trustee to recover assets transferred before bankruptcy, or preference payments made.

While trustees and liquidators have been able to sell the bankrupt’s/company’s right of action, it has not been possible to sell a claim which only the trustee/liquidator could bring.

The new law is qualified by these conditions, that:

  • if the trustee/liquidator has already commenced the claim, the approval of the court is required; and,
  • before assigning any right the trustee/liquidator must give written notice to the creditors of the proposed assignment.

If a right is assigned, section 100-5(4) provides that a reference in the Corporations Act/Bankruptcy Act to the liquidator/trustee in relation to the action is taken to be a reference to the person to whom the right has been assigned.  

There are some issues about this; email if you want more.

Matters of Practice – for bankruptcy practitioners

There is not much in bankruptcy that starts on 1 March except for the registration and discipline processes, much of which has always applied in any event; and the s 100-5 sales.

The new term through bankruptcy is now “business days”, not working days, with the same meaning.  There is awkward new terminology to be used – a “regulated debtor’s estate”.  

iii.             SOME LEGAL AND REGULATORY ISSUES

The Law

We now have this legal structure.

  • Corporations Act 2001,
  • Corporations Schedule 2016,
  • Corporations Rules 2016,
  • Corporations Regulations 2011
  • Bankruptcy Act 1966,
  • Bankruptcy Schedule 2016,
  • Bankruptcy Rules 2016,
  • Bankruptcy Regulations 1996. 

Regulator guidance and forms

There will be new regulator guidance and forms, yet to be issued by both AFSA and ASIC.  These may be joint, or at least consistent, under their 2014 MOU. 

ASIC has released for comment a draft RG on registration, discipline and insurance.  Submissions are due by 9 February 2017. 

There should be a revised ARITA Code and an APES 330, without too much change.

Interpretation

There are new definitions in the Schedules and the Rules, along with existing definitions in the principal Acts.

WHAT TO EXPECT ON 1 SEPTEMBER 2017

The regulators will be issuing guidance about the current changes that have commenced, and about the ones coming in on 1 September 2017. 

These include annual lodgments, funds handling, rights of creditors, meetings and committees, reviewing liquidators, remuneration, votes to replace practitioners at meetings, court powers, and more.  All quite manageable. 

This is just my view and explanation of the new regime.  It is not legal advice.  See a lawyer if you need, who may tell you otherwise.

More to come.

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