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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.

 

Whistleblowing, as a means of professional regulation?

The use of whistleblowers in the regulation of tax and corporate law, and the bases for incentivizing and protecting them, are significant policy and legal issues. The potential for whistleblower abuse, or its uninformed use, is evident. A wider importance of reporting offences is apparent in a negative sense, given the various current inquiries where institutionalized criminal abuse of individuals was not reported or acted upon.

Whistleblower policy in corporate conduct is presently under review by Treasury. Statutory protections for whistleblower disclosures are contained in Part 9.4AAA of the Corporations Act. They confer statutory immunity on the whistleblower, seek to prohibit his or her victimization, confer a right to seek compensation, and prohibit revelation of the whistleblower’s identity or the information disclosed by them, with limited exceptions. To qualify for protection whistleblowers must disclose ‘in good faith’ and have reasonable grounds to suspect that either the company, or some of its officers or staff, have or might have breached the corporations legislation: s 1317AA. The disclosure cannot be made anonymously.

While there are other similar arrangements in other laws, there is no over-arching whistleblower regime.

Whistleblowing was an important focus of the recent Academy of Law debate, with a range of views expressed about its value, and whether it should be rewarded by financial incentives. The concept, as I have explained, goes well back to the hue and cry days.

Other than whistleblowing

That a law does not refer to whistleblowing should not disguise the fact that a legal obligation may be imposed, or a permission allowed, or an expectation given, that a person might refer a breach of the law to the authorities.

In the area of insolvency, the Insolvency Law Reform Act 2016 has created what appear to be novel whistleblower expectations, if not obligations, for the purpose of the co-regulation of insolvency practitioners, that is bankruptcy trustees and company liquidators (IPs). At the same time, those IPs have their own statutory and professional obligations to whistleblow, that is, to refer offences to the regulators.

We now have in Australia what seems to be a unique co-regulatory arrangement under the new law that may not, on the face of the provisions, be supported by what might be termed standard whistleblower protections and regulation.   

Prime obligation of an IP

The prime obligation of an IP is to report breaches of the law to the regulators. Despite the recent attempted harmonization of insolvency law, the types of offences to be referred are different. A liquidator must report to ASIC breaches of all laws in connection with the company that he or she is administering, under s 533 of the Corporations Act. A trustee in bankruptcy need only refer, to AFSA, breaches of the Bankruptcy Act (s 19).  Nevertheless, as a matter of principle, this broad obligation applies.

Parallel or above that is a requirement imposed on IPs as citizens to report serious offences to the police, at least in NSW, under s 316 of the Crimes Act 1900, in the nature of the old ‘misprision of felony’ offence. The investigation of insolvencies may sometime disclose serious breaches unconnected with the insolvent, for example, drug dealing of the directors.

Accountants’ Code of Ethics

A further whistleblowing obligation is the forthcoming requirement for “professional accountants” to report suspected or actual non-compliance with laws and regulations – NOCLAR – under the international Code of Ethics[1] aimed at governing the professional conduct of the global accounting profession. These provisions allow or require accountants to act in the public interest by reporting actual or suspected breaches of the law.[2] While this does not fully commence until July 2017, the APESB has sought from Treasury strong whistleblower protection to support this obligation.[3] 

In most cases, an IP will be a professional accountant.  While the NOCLAR obligations under the Code could not impinge upon statutory obligations of an IP, it could raise the obligations of trustees and liquidators as accountants, outside their statutory obligations. Nevertheless, given the duties and obligations of IPs, care might be needed in disclosing information that is otherwise protected.    

Insolvency Law Reform Act 2016

The next layer of reporting obligation has been introduced under the ILRA.

There is now a layer of cross-referral permissions, or obligations, in numerous potential permutations, whereby the national complement of professional accounting and legal bodies can each whistle blow to ASIC or AFSA about the conduct of an IP.  At the same time, ASIC and AFSA can pass on confidential practitioner information to those bodies.

Industry notices

Both the Bankruptcy Act and the Corporations Act now allow each of those professional bodies – termed “industry body” – to lodge with AFSA (the Inspector-General in Bankruptcy) or ASIC a statutory “industry notice”. It would state that the body reasonably suspects that there are grounds for action to be taken against an IP.[4] At a minimum, those grounds might be that the trustee has failed to meet a performance standard set under the Act. 

Those prescribed industry bodies are ARITA, CPA Australia, CAANZ, IPA, the NSW Bar Association and Law Society, the Victorian Legal Services Commissioner, and the Victorian Legal Services Board; the Bar Association of Queensland and the Queensland Law Society; the Legal Practice Board of WA; the Law Society of SA and its Legal Profession Conduct Commissioner; and the Law Societies of Tasmania, ACT and NT.[5]

ASIC or AFSA then have obligations to investigate and report back to the referring body. That may or may not lead to further action, one being to refer the matter to a discipline committee comprised of the regulator, an IP chosen by ARITA, and an independent ministerial nominee.

The industry body has a ‘whistleblower protection’, if its acts in good faith and on reasonable suspicion, comparable to s 1317AA.

Use of confidential discipline committee information

Further, under s 50-35, a discipline committee member can refer internal misconduct committee information about an IP to their own or another industry body, apparently without notice to the committee.[6]

The same regime applies in relation to liquidators and ASIC.[7] 

Practical instances

A lawyer acting for a creditor defending a preference claim by a liquidator in SA may consider that the liquidator’s case was an abuse, or there may be judicial criticism of the liquidator’s conduct. The lawyer may complain to their SA Law Society.  The Society may lodge an industry notice with ASIC. 

An ARITA nominee on a discipline committee might obtain information about the IP showing that the IP has contravened the ARITA Constitution, which information is not otherwise of concern to the committee.  The nominee may refer the information to ARITA.

Confidential information

The industry bodies may also now receive confidential information from ASIC if ASIC is satisfied that the disclosure would enable or assist the body to perform one of its functions. The same applies to confidential information from the Inspector-General in Bankruptcy.[8] 

Use of that information may lead to an industry body then lodging an industry notice with ASIC or AFSA. 

And so it goes on.

The policy?

These are significant and novel changes involving the enlistment of professional and state professional bodies in the Commonwealth regulation of insolvency practitioners. The policy reason for this is not stated in the Explanatory Memorandum.

Anecdotally, when Mr Ariff was dealt with, there were many who said they had suspected his conduct for some time, but who did not report it.  In fact, one judge commented adversely enough in 2007 for the CAANZ to discipline Mr Ariff, but nothing further appeared to flow from that.[9]

Such cases are a general prompt for whistleblowing and other regulatory reforms, where hindsight assessment will often show that ‘people’ knew of the misconduct but no referral action was taken. That raises in itself a fundamental issue about whistleblowing, that it is all very well to observe and think that misconduct might be occurring, but there is in fact no issue of concern.

This new arrangement in insolvency co-regulation seems like an overkill response to the example of Ariff.   Nevertheless, if this regime works successfully, it might also be extrapolated to other professions – lawyers, engineers, doctors, and politicians.

The bodies

With this array of new co-regulatory bodies out there, one can assume that some regulatory vetting of their ability and willingness to take on these roles was done by the government.

That would have included an assessment of the bodies’ own discipline and regulatory process, and its transparency and procedural fairness, to ensure they meet accepted legal standards. The bodies’ ability to properly hold and use confidential information should also have been assessed.  None of this is evident from the EM.

It is also not clear whether these use of these co-regulatory powers are at the complete discretion of the bodies, or impose an obligation, or at least an expectation, that the bodies will use them. This would necessitate the issue of policies on how the powers will be exercised, and other guidance and information. For example, an important question would be whether the member the subject of an industry notice is invited to respond to the body’s concern, or at least know of its lodgment of the notice with a regulator. It may be that the lodgment of an industry notice is required to be notified on the register of trustees, under s 15-1.  

UK

A comparison of the Australian and English models of IP regulation was the subject of a paper at INSOL Academics, on 19 March 2017. The English system of regulation is different, in that the Insolvency Service regulates the recognised professional bodies (RPBs) who then each regulate their members. Nevertheless, the industry bodies in Australia now bear some comparison with the RPBs in the UK. 

A review of those RPBs is presently being undertaken in the UK. The Insolvency Service is in particular looking at their internal structures and the extent to which independence is maintained between their membership and regulatory functions, an important issue in the necessary perception of independence and separation in any discipline process. A report is due later this year. 

Consideration of such a review is being considered here.

Many more issues

There are many other issues about whistleblowing, and IP regulation, not covered here, for example whether there is professional body assistance to or protection of a staff member of an IP who blows the whistle on their misconduct. Also, as is common, there is the potential for abuse by practitioners reporting the alleged misconduct of another IP colleague. The source and reliability of information on which the bodies rely may be open to question, including on judicial review by the courts.

WIP

This commentary is a work in progress, on which any response is invited. 

Michael Murray

 

[1] The International Ethics Standards Board for Accountants

[2] APESB has commenced the process to implement these reforms in Australia. An exposure draft issued in December 2016 would amend APES 110 Code of Ethics for Professional Accountants to incorporate these provisions in the Australian Code.

 

[3] APESB submission to Treasury 17 February 2017

[4] Section 40‑100 of the Insolvency Practice Schedule (Bankruptcy) to the Bankruptcy Act 1966. 

[5] Section 40‑1, Insolvency Practice Rules (Bankruptcy). 

[6] Section 50-100, Insolvency Practice Rules (Bankruptcy). 

 

[7] See the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001, and the Insolvency Practice Rules (Corporations).

[8] ASIC Act, s 127(4)(d)(i); ASIC Regulations, reg 8AA; Bankruptcy Act, s 12(4); Bankruptcy Regulations, reg 2.05.

 

[9] Wambo Coal Pty Ltd v Stuart Karim Ariff [2007] NSWSC 589. He was fined $20,000 by CAANZ and reprimanded.

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