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Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

A liquidator disciplinary decision – some regulatory insights

A decision of a tribunal in Australia gives some insight into the insolvency practitioner discipline processes introduced in 2017, which replaced, in corporate insolvency, a more formal hearing type process.

A liquidator’s registration was cancelled by a discipline committee convened under the Corporations Act 2001 which then sought to have its reasons for decision published.[1]

The liquidator sought a review and a stay of the decision to the Administrative Appeal Tribunal, and the decision to publish it, and confidentiality orders.[2]

The AAT refused to stay the decision to cancel the applicant’s registration and to make confidentiality orders but stayed the publication of the decision.

 Background

As the AAT described, ASIC became aware of evidence raising concerns about the applicant’s performance as the external administrator of a number of named companies in the period 2009-2012, mainly directed to his competence and diligence, not to matters of dishonesty.

ASIC conducted ‘(what the applicant described as) “an extraordinarily lengthy investigation” which included compulsory examinations in 2014 and 2016’.

Three years later, in May 2019, ASIC referred the case to a discipline committee[3] which subsequently decided under s 40-55(1)(c) to cancel the registration. It also decided ASIC should publish its reasons.

The AAT decision

The AAT said that the committee’s reasons for decision included findings which were critical of the applicant’s performance and explained the committee’s conclusion that the applicant was not a fit and proper person to be a registered liquidator – either at the time of the identified failures, or more recently. The committee found the applicant had not since developed the knowledge and skill required, did not have current insight into his failures, and had not taken appropriate steps to remedy what occurred.

There was consideration by the AAT of the applicant’s prospects of success at the final hearing; of concerns about the length of the delay by ASIC in taking action and several other concerns about due process; and of his

‘significant reputational damage as a consequence of the way ASIC and the decision-maker [the committee] conducted themselves throughout the investigation’.

 The applicant gave evidence about the potential to lose his livelihood as a registered liquidator – ‘although it is accepted he is still able to work for a registered liquidator, so his skills still have economic value’; and his personal and financial circumstances; and his employees and the creditors and other stakeholders who would be disadvantaged, who might be ‘forced to deal with someone new who took over the entities in question’.

While the AAT said an ‘obvious way’ to address most of those difficulties would be to appoint the applicant’s partner to take his matters, even with the applicant continuing to be engaged in the work, this was not accepted by the applicant.

The AAT continued:

‘The public is presumed to have an interest in a well-regulated insolvency profession. Insolvency practitioners occupy a unique position in our commercial world. They are expected to clean up messes created by others. They are given wide latitude in doing so, and generally earn good money. But as any creditor or displaced officer can attest, complaints about the behaviour of external administrators are difficult to press even as any mistakes can occasion extraordinary cost. Accountability is a challenge, and the consequences of unsatisfactory behaviour are potentially more far reaching than those of, say, a tax practitioner. It follows the regulatory regime emphasises the importance of expert and ethical behaviour …’.

While he had not been accused of dishonesty or other intentional bad behavior, his claimed want of expertise went

‘to the heart of the regulatory concerns. In the context of an external administration, a liquidator is a relatively powerful individual. A want of competence and diligence is no small thing, even in the absence of dishonesty. A lot of damage can be done comparatively quickly by an honest-but-incompetent liquidator’.

And while the events in question mostly occurred a long time ago, the AAT was concerned he

‘may not be monitored sufficiently closely to detect unsatisfactory performance in the relatively short term. ASIC cannot be expected to expend extra resources in direct supervision; that is not the way the regulatory system works’.

The committee or ASIC would not be adversely impacted if the cancellation decision were stayed provided it was not also prevented from communicating news of what happened to the wider public.

‘There is no shame for a regulator in letting it be known that a reviewable decision is subject to a stay order pending review. But there might be an impact on the efficacy and credibility of the decision-making process if an applicant were able to buy time to continue in its trade or calling without news of the regulatory action (including the stay) being made known’.

In the end, the AAT said that the public interest particular weighed against staying the cancellation decision.

The ‘elegant decision’ remained that the applicant’s partner may yet be able to take over his appointments and ‘minimise the cost and inconvenience to all concerned, including the applicant’. To maximise the chances of reaching a negotiated outcome in relation to the partner’s appointment, the AAT continued the interim stay of the cancellation decision for 7 days.

The AAT did stay publication of the reasons for decision itself even though proceedings should usually be conducted in public.

 Comment

‘A more refined set of simpler cases’

This discipline process was introduced in 2017 based upon the existing committee process that had existed in bankruptcy for some years, and which continues. The discipline of corporate insolvency practitioners through the Companies Auditors and Liquidators Disciplinary Board (CALDB) had been seen as slow and expensive.

Cost effectiveness was also affected where respondents chose ‘to use senior counsel at hearings’, and ASIC then thought it should too.

Concern had been expressed that corporate insolvency matters were larger and may not suit a committee type hearing. The government considered that ASIC may still

‘take the most complex matters directly to Court. However, this may see the committee dealing with a more refined set of simpler cases allowing it to develop the expertise to be a more streamlined process than currently possible through the Tribunal structure’.[4]

This may be such a case.

A court does have more capacity for complex matters, as well as wider powers and discretions, including to take into account the impact of a liquidator’s conduct on the ‘public confidence in registered liquidators as a group’: s 45-1 IPSC.

 A three-member committee

A liquidator disciplinary committee comprises three people – a liquidator chosen by ARITA, a person from ASIC and a person appointed by the Minister: s 40-45.

Here, the committee members were nominally respondents but are not named. The AAT saw ASIC as ‘acting as the executive for the committee’. Compare Mansfield and A committee convened under section 20-10 of the Insolvency Practice Schedule (Corporations) [2018] AATA 1510.

Committees act independently of each of their constituent members, and of ASIC.

Confidentiality

A committee member is necessarily subject to confidentiality restrictions but he or she can disclose confidential information from the hearing to ARITA or other relevant industry bodies to assist them perform their own disciplinary functions in relation to their members: IPRS s 50-35; IPRC s 50-100.

Livelihood

Potential loss of livelihood in discipline proceedings do attract more focus by the courts, given the financial, reputational and social consequences for the individual and due process is important. At the same time, as the AAT said, breach in the standards of an insolvency practitioner can have more adverse consequences than some other comparable professionals.

No liquidators available

No external administration can be without a liquidator or administrator. In default of the ‘elegant decision’ sought by the AAT, Australian corporate insolvency law is defective in that if a liquidator’s registration is cancelled, or suspended, there may be no other liquidator willing to take on their administrations; or if they do, only upon a payment arrangement.

As the government acknowledged when removing the archaic official liquidator obligations, it is now up to creditors as applicants to fund insolvencies, or in that scenario, for ASIC to fund, as the applicant.

See Kukulovski and A Committee convened under s 40-45 Insolvency Practice Schedule (Corporations) [2020] AATA 40

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[1] Decision of 13 December 2019, the committee being convened under s 40-45 IPSC.

[2] A stay was sought under s 41(2) of the AAT Act 1975, and for confidentiality orders under s 35(2).

[3] Convened under s 40-45 of the IPSC.

[4] Explanatory Memorandum Insolvency Law Reform Bill 2015.

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