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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.

 

ARITA’s 8 (plus?) point plan for insolvency law reform

One of the main insolvency professional bodies in Australia – ARITA[1] – has released what it calls its “8 point plan” to comprehensively review and reform Australia’s insolvency laws to ensure they are ‘simple, efficient and effective’.

ARITA proposes a ‘Financial Recovery Law Reform Commission’ to be led by ‘eminent commissioners’ with a view to creating ‘a template for reform that will deliver a world’s best practice system’. ARITA members will primarily fund this, but ARITA is seeking the support of government to assist in properly resourcing it.

In the absence of a major review instigated by government, called for by many, such an approach is worthy in principle, though its impact will depend on the quality of the outcome. There are precedents in other jurisdictions.

8 plus?

While calling for a ‘root and branch’ review, ARITA’s own ‘8’ proposals are mostly matters of detail, and perhaps selective, in light of the constituents it represents.

Two insolvency regulators

A significant issue in Australia is that there are two insolvency regulators, with the corporate and markets regulator – ASIC – also regulating company liquidators and with AFSA regulating trustees in bankruptcy. ARITA correctly points out that in most other jurisdictions a single regulator oversees both personal and corporate insolvency, although this is often in co-regulation with the professional bodies, which take on the direct responsibility for regulating their members.  England and New Zealand are examples. ARITA does not go that far although the 4th edition of its regulatory Code is open for final consultation.

MSME insolvencies

ARITA correctly identifies the lesser relevance of Australia’s laws to micro and small to medium business insolvencies, and the overlap of small business insolvencies and any associated personal bankruptcy for the directors of those businesses. That is a live issue internationally in which, sadly, Australia is not participating.[2] The last government response was to the 2015 Productivity Commission’s recommendation for a streamlined liquidation process, the government saying it had done enough to improve Australia’s corporate insolvency regime. Hence, while ARITA says that insolvencies (can be) complex and “difficult to navigate”, many aren’t.

Regulator funding

ARITA rightly objects to the ‘industry funding model’ by which ASIC’s regulation of IPs is funded – a fee in the order of $10,000 per IP per year – simply saying it should be cut to zero.

It should be mentioned that in contrast AFSA’s regulatory costs in respect of personal insolvency trustees – not benchmarked against ASIC’s – are funded by a 7% levy on asset realisations. New Zealand proposes a levy on all company registrations – a figure of NZ$2.50 has been mentioned.

A government liquidator?

ARITA estimates that liquidators do $100 million of unpaid work on ASIC’s behalf each year, in unpaid remuneration, such that IPs are “effectively working as an extension of the regulator.” This figure, if accepted, perhaps supports the need for a government liquidator role in insolvencies. The Official Trustee takes the brunt of assetless personal bankruptcies. There is, apparently, no comparable figure on the unfunded trustee costs in personal insolvency but it is presumably much less.

$100m?

That A$100 million figure might also be queried. Research in 2013 produced a figure of $47m when there existed a requirement for ‘official liquidators’ to take on assetless jobs. Since then, the obligations of an official liquidator have been repealed and, strictly, there is no longer any obligation on a liquidator to take an insolvency appointment in which the fees are uncertain; or if they do, they are at their own risk.

As a matter of history, Australia long ago adopted the private official liquidator approach in preference to England’s public Official Receiver. Apart from the government’s own consideration of a government liquidator, its suggestion upon removal of the official liquidator requirements was that creditors had to fund the liquidator.[3]

Phoenix misconduct and pre-insolvency advisers

The language of ARITA’s comments on phoenix misconduct suggests the potential and reality of both being a threat to the work of IPs and their justified remuneration – “scourge”, “widespread swindle” by “dodgy directors” who “won’t be tolerated”.

ARITA shows similar concerns at the rise of the largely unregulated ‘pre-insolvency’ advice market – “ambulance chasers” – who are “not to be confused with qualified professionals giving lawful advice”. The lack of regulation may suggest a difficulty in defining the problem in sufficiently clear legal terms, certainly to the point of criminal conduct. ARITA might have mentioned the recent recommendation that AFCA take a role in this regulation given its apparent success to date.

Reporting

As to ARITA’s comments on liquidators’ reporting obligations, which are said to result in 10,000 reports to ASIC each year, the reality is that s 533 of the Corporations Act is a nonsense in requiring a liquidator to report all offences associated with the company under all laws, state, federal and territory. NZ’s restricted obligation is more sensible, as is bankruptcy’s.

Access to corporate information

ARITA’s complaint that a liquidator must pay ASIC for the database searches is valid; but is only part of the problem of the need for free public access to ASIC records.

Matters of detail

ARITA’s ‘8’ proposals are mostly matters of detail. While this accords with the government’s 2015 view that “Australia’s corporate insolvency framework is generally sound and reforms should focus on specific, not fundamental change”, many agree that is not enough.

The purposes of 21st century insolvency

Rather than detail, an initial task of ARITA’s Commission would be to examine some threshold questions and ask what insolvency law is meant to achieve nowadays. While ARITA correctly refers to the change from brick and mortar to service industries, other realities are that creditors – the central focus of insolvency law – are more informed and protected than before, if they so choose. In fact, whether creditors should remain so much a focus of insolvency might be questioned. The ASIC figures that around 97% of company insolvencies still produce no dividend and ARITA’s $100m don’t sit well together and should be examined more closely.

Data

As to that, over the years the government has shown a shameful neglect in gathering insolvency data that would allow the system to be properly assessed. This is despite recommendations from the 1988 Harmer Report through to the 2010 Senate Report’s unactioned proposal for a body to collect statistical data.

But the data held by the industry in its files and the experience of its members is considerable. Consistent with the proactive approach being taken by ARITA, and in the absence of government action, ARITA and its members might well have organised at least some basic data on how the system operates, or now do so.

Assistance

Given the pervasive impact of insolvency, there will be many issues to consider in this root and branch review and ARITA will no doubt secure as much assistance as it obviously needs.

[1] www.arita.com.au

[2] UNCITRAL Working Group V.

[3] [9.137] Petitioning creditors “will likely have to provide a guarantee of a minimum amount to the corporate insolvency practitioner in order for [them] to agree to the appointment. This may mean a reduction in the number of assetless companies liquidated as corporate insolvency practitioners would not be expected to commence such administrations without some form of guarantee or where they do not believe they are likely to be remunerated”: Explanatory Memorandum to the Insolvency Law Reform Bill 2015.

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