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New insolvency laws commencing 1 March – Q&A

This series of questions and answers address many of the issues with which practitioners and lawyers will be confronted in the new insolvency laws, commencing tomorrow, 1 March 2017. 

Most issues have already been explained in other entries on this site.  Any comments, questions or corrections are welcome but nothing here constitutes legal advice on which you may rely. 

Good luck….

As a 5 years and more experienced liquidator, you are contacted by ARITA which has chosen you to sit on a registration committee: s 20-10 Corporations Schedule.

 

The experience criterion comes from Rule 50-15.

You need not be an ARITA member, in any event you do not represent ARITA.

If the applicant is applying to be registered as a liquidator but with a condition that they only work as a receiver, you would need to have receivership experience.

ARITA may explain your obligations under the new law or you will find them here: 

·         sections 20-5 to 20-35, and sections 50-1 to 50-35 of the Schedules;

·         sections 20-1 to 20-10 of the Rules;

·         the Explanatory Statements; and

·         any regulatory guidance issued by the regulators, as long as it accords with the law; and

·         case law.

Note that you may need to assess the applicant on their general accounting knowledge, including current Australian accounting and auditing standards, Australian financial and corporate accounting, cost and management accounting and corporate finance; and in commercial law, contracts, torts, trusts, and Australian business, corporations and taxation law (each at least at an introductory level). Pending changes to the international Code of Ethics, and its potential impact on insolvency practitioners, may also be tested. 

You would also want to know the law around ability and knowledge, 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 the new law: Growden [2008] AATA 604.

ARITA or the regulators may issue guidance on the role.

You are an experienced insolvency lawyer, with accounting experience, and want to become a liquidator.

You could qualify. Mr Moore didn’t in Moore v Inspector General in Bankruptcy [1997] FCA 638 but the judge did say he would have made a good trustee. That was the case under the law at that time, and it may be different under the new “but even if” exception which the committee can adopt under s 20-20(5) of the Schedules.

If an exam is set, who prepares it and marks it?

The committee. The 2010 Senate Report’s recommendation was for a closed book exam, based on evidence from a barrister, so that examinees aren’t “just parroting neat little answers that they have cribbed from one of those nutshell books …”: [7.23].

You are applying for registration as a relevantly experienced and qualified accountant.  What is the interview process expected to be like? 

See this website for comment on the process and questions asked by AFSA.

You were convicted of an offence of dishonesty 12 years ago.

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

If any conviction is well in the past, you should consider whether it is a spent conviction, and obtain legal advice.

 

As a practitioner, you may be served with a direction to comply with certain obligations: s 40-5; or to correct inaccuracies – s 40-10. What are your options?

You would generally comply.

As a practitioner, you may be served with a direction not to accept appointments: s 40-15; or a notice for cancellation or suspension s 40-25, s 40-30. What are your options?

You could apply to the AAT for review of ASIC’s or AFSA’s decision.

You are served with a show cause notice under s 40-40.

Depending on what is involved, you may want to have legal advice on your response.

Oddly, the issues in the show-cause become irrelevant in the final hearing: s 40-55.

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

Your practice review by ASIC is at odds with the recent review by AFSA

You can ask ASIC to communicate with AFSA and reconsider its assessment.  If the standards of conduct vary, ASIC and AFSA should align them: s 10-5.  You could take legal advice on whether you could apply to the court to have ASIC and AFSA co-operate.

You have a number of voidable transaction claims in your files, some already commenced, others at the investigation stage

You should immediately assess all of your voidable transaction claims as being potentially saleable under s 100-5, Bankruptcy Schedule and Corporations Schedule.

If you as the trustee/liquidator have already commenced proceedings, you will need to apply to the court for approval to assign.

Before assigning any right the trustee/liquidator must give written notice to the creditors of the proposed assignment.

You may usefully consider the law applicable to the sale of a bankrupt’s claim, Citicorp v Official Trustee (1996) 71 FCR 550, and to the question of any potential costs if the transfer is not absolute: Knight v FP Special Assets Ltd (1992) 174 CLR 178.

The court may need to know the basis of the claim, its value, and may require notification of the proposed defendants. It may also need to know how the price was determined and have a comparison with your right to pursue the claim yourself.

If a right is assigned, section 100-5(4) provides that a reference to the liquidator/trustee is taken to be a reference to the assignee, in which case you would need to consider a provision like section 588FF, and also s 477 Corporations Act.  See this website and consult a lawyer.  

ARITA contacts you asking if you would sit on a discipline committee

The criteria are 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. 

ARITA may offer guidance on the obligations imposed on the regulators and the committee to conduct the process fairly, including as to perceptions of a lack of independence. For example, what if the lawyer appearing for the liquidator before the committee is a lawyer you regularly use?

You would need to assess whether you understand the functions of the committee, including in applying natural justice, assessing matters of veracity and evidence, knowing of the range of outcomes and the considerations applying to each, and having knowledge of recent disciplinary decisions and their reasoning. 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 the practitioner’s livelihood and income is at stake. 

You would also know how to reject criticism of lack of independence of the regulator, assuming the regulator appointee meets the requirements of natural justice: see Isbester v Knox.

You may or may not be an ARITA member. In either case, you do not represent ARITA; you are there in your own right. 

You should closely check any issues real or perceived about your own independence from the practitioner and their firm.  It would be unsatisfactory if an issue were raised by the practitioner, and you had to resign, putting all to cost and time.  See the term ‘material person interest’ in s 5-5 of the Rules and the obligation to disclose under s 50-50.

You are entitled to be paid, and can ask the daily rate: s 50-30. Some matters have extended over a number of days: in Wong v Inspector-General [2008] AATA 487 the committee hearing proceeded over 4 days in all, with QC’s on both sides. so you need to consider your availability, including to write or take part in the preparation of reasons. 

You should also contemplate the possibility of an AAT application. 

After the committee is ‘convened’ you are sent documents. Two committee members call you and say that the matter obviously does not warrant cancellation, but only 2 years suspension. They suggest the matter be decided and reasons issued the following day: Rule 50-85.

You could do this but you could also consider whether this accords with natural justice: s 50-55.

If the other two members proceed, you could dissent and give reasons: section 50-95.

As a practitioner, your registration is suspended for 6 months.  Do you have legal responsibility to attend to your files?

No.  If they are bankruptcy files, the Official Trustee can take them over.  If they are company insolvency files, it is a matter for ASIC to find a replacement.

In sitting on a disciplinary committee, you inadvertently leave some confidential information in public view which then goes missing and appears in a scurrilous blog comment.

As a member of a committee, you are bound by confidentiality obligations: s 50-35(1).  You have committed an offence and could be prosecuted, with a penalty of 50 penalty units, or $9,000 increasing to $10,500 on 1 July 2017.

In sitting on a disciplinary committee, you see some confidential information that you think would be of interest to ARITA because it involves bring the profession into disrepute, which is not a legal basis for misconduct.

It seems that you can refer that confidential misconduct information to ARITA, without reference to the other committee members, and without reference to the practitioner: s 50-35(2).  ARITA and other bodies may be issuing guidance about this. 

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

What if in the co-regulatory process you neglectfully misuse or lose ASIC information?

The penalty for misuse of ASIC’s confidential information is 2 years jail: s 127(4EB) ASIC Act.   

You find out, by chance, that ARITA has lodged an industry notice about you with ASIC, based on a vexatious complaint: s 40-100. What are your options?

You could challenge any reliance on the notice.  If ARITA’s suspicion in lodging the notice was not reasonable, it could be liable for damages: s 40-105. 

You have been registered only as a registered liquidator.  You are asked to consent to a court appointment. 

You may consent, but given the often assetless nature of court appointments, you may wish to ask the creditor for an indemnity or payment up front.

You have a number of small section 588FGA claims in both the Federal and Supreme Courts.

Given the size of the claims, you may consider applying to the Court to have them transferred to a lower court, whether the preference payment was made before or after 1 March 2017.

For example, under rule 27.21 of the Federal Court Rules 2011, you may apply for an order that “a proceeding be transferred to another court”, for example a small “c” court, a local or district court. If the Federal Court so orders, the registrar sends all the documents filed to the other court. 

An alternative is to apply under rule 27.11, to have the matter transferred to the Federal Circuit Court of Australia. 

These applications involve cost and time, and you may prefer to stay where you are. 

But note that the Federal Court may transfer the matter of its own motion under rule 1.40 in any event.

As a bankruptcy trustee, you are subject to so many penalties. Are there any new ones from 1 March?

Yes, AFSA has kindly listed the new offences and penalties to which trustees will be subject on and from 1 March 2017, in these sections:

·         25-1(3) trustee intentionally or recklessly fails to maintain adequate insurance 1,000 penalty units

·         25-1(4) trustee fails to maintain adequate insurance (no intent or recklessness) – strict liability 60 penalty units 

·         30-1(5) trustee fails to lodge annual trustee return with the Inspector-General (IG) 5 penalty units

·         35-1(2) trustee intentionally or recklessly fails to lodge notice of significant events with the IG 100 penalty units

·         35-5(2) trustee intentionally or recklessly fails to lodge notice of other events with the IG 5 penalty units

·         50-35(1) trustee as member of a registration or disciplinary committee uses or discloses information or a document (exceptions apply: see 50-35(2) 50 penalty units.

But if someone falsely represents that they are a registered trustee, the penalty is 30 penalty units: s 20-80.

A barrister complains to the Legal Practice Board of WA about your conduct. 

The LPB may lodge an industry notice with AFSA. There is no process whereby you are advised of that notice.

You wish to apply for directions from the court about your standing as trustee and consider using s 45-1 which allows the court to make such orders as it thinks fit.

Your lawyer may advise against this, given the range of negative orders the court may make, all adverse to you as the trustee, including as to costs.

You are appointed as voluntary administrator on or after 1 March.

You should add to your checklist the need to specify the location of property referred to in any notice given to an owner/lessor, if you as administrator know (or could reasonably find out) the location of the property: subsection 443B(3).  You may have been doing this in any event.

In a DOCA, there is a material contravention of a deed, or likelihood of it, of which the director or the deed administrator becomes aware.

Section 445HA now requires directors to notify the deed administrator – and deed administrators to notify creditors – of any such material contravention of a deed, or likelihood of it, of which the director or the deed administrator becomes aware.  You should add this to your checklist.

A court is hearing an application for termination or stay of the winding up based on the fact that the company has entered a deed.

New subsection 482(2A)(da) brings in any material contravention of the deed as an additional factor the court can take into account in deciding whether to stay a liquidation when a company enters a deed.

You are appointed to any type of external administration (not a receivership) on or after 1 March.

Section 161A of the Corporations Act 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. This leave is not often granted, there have to be good reasons

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

Company members resolve to wind up their company on or after 1 March 2017.

The company must lodge, in the prescribed form, a notice setting out the text of the resolution: s 491(2)(a). The concept of “printed copy” – s 491 – is old hat and is done away with.

A court makes a pooling order under s 579A, 579B and 579C of the Corporations Act on or after 1 March 2017. 

“The text of” any such orders must be lodged with ASIC by the person obtaining the orders within two business days after the making of the order and in a prescribed form.

Must you have adequate professional indemnity and fidelity insurance?

You must have adequate professional indemnity and fidelity insurance: s 25-1.

You have a new VA and a new CVL come in on 1 March. 

You are required to lodge with ASIC the declarations of relevant relationships and indemnities, including ones, if you are a:

·         voluntary administrator – s 436DA(4) (6);

·         replacement administrator: s 449CA(4) (6)

·         creditors voluntary liquidator: s 506A(2) (5).

The timeframe is ’as soon as practicable after making the declaration’. Given that the form of the declaration is yet to be advised by ASIC, it is not practicable to lodge anything for the moment.

You have new appointments coming in on 1 March, and after.

You should calculate the relation back day in terms of the new section 91 for each administration.  The new definition applies to the winding up of a company ‘starting’ on or after 1 March 2017: s 1635(4). 

For example, your new appointment comes from a winding up order made by the court under s 459B. Immediately before that order was made, a deed of company arrangement had been executed by the company and had not yet terminated, and the winding up order was made in response to an application filed by a creditor after the beginning of the administration that ended when the deed was executed.  In such a case, the relation back day is the s 513C day in relation to that administration, that is, the date of the voluntary administration appointment. 

A deed to which you are appointed is ordered to be terminated by a court, or the deed itself requires its termination because of some event. 

New section 446AA and amended section 499 apply by allowing you to be appointed to the subsequent liquidation.  

Does this new law apply to Aboriginal and Torres Strait Islander corporations? 

Yes, under the Corporations (Aboriginal and Torres Strait Islander) Act 2006.

What is the difference between working days and business days?

Nothing, but the new term throughout bankruptcy law is now “business days”, consistent with the Corporations Act where business day is defined in s 9 to mean “a day that is not a Saturday, a Sunday or a public holiday or bank holiday in the place concerned”. But note that the Acts Interpretation Act 1901 refines business day as a day that is not a Saturday, a Sunday or a public holiday in the place concerned”.

 

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