My preparation for a major banking and financial services conference[1] has prompted this quick review of where Australia is at with banking and insolvency related reforms, being a small but important subset of the long list of other insolvency law reforms and recommendations floating around.
While the term insolvent is usually used in describing a small number of bank customers, there is a significant focus, internationally, on how to handle an insolvent bank, or what might more gently be called a distressed bank, perhaps lurching towards a crisis, for it and many others. That is where the particular restructuring and insolvency powers of APRA under the Banking Act 1959 come into play.
The powers of APRA over banks and insurers and others was a focus of a 2012 Treasury paper – Strengthening APRA’s crisis management powers – which raised a number of problems with the law about which submissions were invited and made.
The Banking Act contains different insolvency concepts for triggering regulatory action by APRA. Insolvency is a trigger but only if the bank “could not be restored to solvency within a reasonable period”. Other action by APRA can be taken if there is a material risk to the security of the body corporate’s assets or a material deterioration in its financial condition, or if it is conducting its affairs in an improper or financially unsound way. APRA can issue directions, including to recapitalise, and can direct the appointment of an administrator. The administrator may act urgently even though their action is “likely to have a detrimental effect on financial system stability in Australia”.
The Banking Act “has effect despite any provision of the Corporations Act”, including as to the proof of debt provisions; serving a winding up demand on a bank can be an offence; the Act’s gold handling restrictions can be activated by administrative fiat; and a bank has no obligation to offer any services on a bank holiday, or a Sunday.
What is in fact a detailed and well-structured “pre-positioning” process in the Banking Act under the close direction of APRA, and the courts, is one aimed at controlling and assessing the bank’s instability so that if a formal insolvency follows, it is well ordered. The financial claims scheme also operates under the Act, with particular responsibilities of liquidators for its administration.
The pre-positioning process by the regulator under the Banking Act (and other prudential legislation), is one that offers some ideas for the management of the insolvency of large business enterprises.[2]
Outcome
The 2012 paper raised many issues about inconsistences in the law, including in relation to insurers life companies and other entities,[3] prompting many informed responses to it.
The government deferred consideration of it pending the outcome of the 2014 Financial System Inquiry, which recommended that the government should act. In 2015, the government responded, saying that ‘by mid-2016’ it would consult on measures to clarify and strengthen these regulatory powers. …..
Senate Committee report on “impaired loans”, 2016 – ASBFEO / Carnell recommendations, 2017, Ramsay Report 2017
Getting back to more current issues, these inquiries and their recommendations raise some fundamental issues about how insolvency practice operates.
Carnell’s recommendation 10 was that banks must implement procedures to “reduce the perceived conflict of interest of investigating accountants subsequently appointed as receivers. This can be achieved through a competitive process to source potential receivers and by instigating a policy of not appointing a receiver who has been the investigating accountant to the business”.
The Senate Committee report went further, recommending that banks provide to borrowers with “copies of investigative accountants’ reports and instructions to investigative accountants and receivers” and that a borrower could veto a receiver from the same firm as the investigating accountant.
Among other recommendations, ASIC would administer a penalty for a receiver’s breach of s 420A, opening up an interesting constitutional issue.
Whatever Murrays Legal’s views on this – saved for later – independence of insolvency practitioners is potentially going through a rethinking right now, and in any event a receiver’s appointment does not raise the difficult independence issues of a liquidator.
External dispute resolution (EDR) schemes
Recommendation 13 of Carnell was that EDR schemes be expanded to include disputes with third parties appointed by the bank, such as valuers, investigating accountants and receivers.
The Ramsay Report effectively disposed of this argument, saying while a receiver is an agent of the company and not of the bank, meaning that a bank cannot rely on an agency relationship to obtain information from a receiver to provide to the EDR scheme, there was no evidence of any difficulties in this arrangement.
AFCA
The government’s proposed Australian Financial Complaints Authority – AFCA, amalgamating CIO, FOS and SCT – remains a work in progress. It has some focus on the need for regulation of pre-insolvency advisers, debt repair services and such like, and other issues in relation to personal debt and SMEs.
Farm debt mediation (FDM)
Both the Senate Committee and ASBFEO recommend a nationally consistent approach to FDM. Ramsay noted that the federal Minister was consulting with his state and territory counterparts to assess ways to implement this. This has not stopped a review of the NSW laws, nor the introduction of the Farm Business Debt Mediation Act 2017 in Queensland. Bankruptcy law contains particular provisions regarding such debts: Part XIA Bankruptcy Act.
Insolvency Law Reform Act 2016
These insolvency law changes are more about regulation and process than substantive law, with the bulk commencing on 1 September 2017. From a bank’s perspective, as creditors they have increased authority; their position as secured creditors is not diminished, rather enhanced; and there is no change to their voting rights.
Safe harbour/ipso facto
As to the ‘safe harbour’ reforms, the banks will be central to the success of the new regime, and those with banking experience may be well qualified as advisers under the new law. The banks also did well to protect their position in relation to ipso facto clauses.
One year bankruptcy
The introduction of Australia’s one year bankruptcy remains long pending, but its impact in the UK offers some guidance on its flow through impact here, including on its promotion of an entrepreneurial culture.
CAANZ, CPA and IPA accountants – APES 110
An interesting issue will be the imposition of responsibility on bank accountants under the Code of Ethics[5] to report on their customer’s, and their own employer’s, breaches of the law. The Banking Act includes whistle blower provisions, including for protection and compensation.
Other issues
There are also issues with director identity numbers, beneficial ownership registers, the repeal of the bank price signaling prohibitions, the indeed whether we see an abolition of receiverships, often raised generally as a reform issue.[6] On the cross-border scene, banks have a protected position here, common among many countries, which is unlikely to change,[7] although this was also raised in the 2012 paper.
Then there is the bank levy, the regulation of shadow banking and whether there should be a royal commission into banks. All are beyond the scope of this commentary.
Whatever my focus in this commentary, Rising to the Challenge, the 2017 conference program for the Banking and Financial Services Law Association 31 August-2 September, in Brisbane, is here.
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[1] Banking and Financial Services Law Association 31 August-2 September 2017, in Brisbane.
[2] Crisis Management in the Banking Sector, 2015, Australian chapter, Mason and Murray; Australian Banks and Crisis Management: Recent Developments, in Banking and Financial Insolvencies: the European Regulatory Framework, INSOL Europe, 2016, Mason and Murray.
[3] Other issues included the adequacy of oversight, powers of direction and crisis management arrangements for market operators and clearing and settlement facilities.
[5] APES 110
[6] See The end of receivers and managers and the beginning of a more streamlined and collective VA procedure? (2010) 22(1) A Insol J 7 (now the ARITA journal), David Walter.
[7] The Model Law on Cross Border Insolvency: Exclusion of Australian Banks (2008) A Insol J 4, (now the ARITA journal), Murray and Mason.
