Apart from its interest to Australian liquidators and bankruptcy trustees, the latest Corporate Insolvency Update[1] of the corporate insolvency regulator, ASIC, will be of interest internationally given the common COVID-19 issues we are all facing.
To initially explain the tone and content of ASIC’s bulletin, Australia has a bifurcated insolvency system,[2] with the Corporations Act and ASIC governing corporate insolvency and its liquidators, and the Bankruptcy Act and AFSA regulating personal insolvency and its trustees. However, 95% of trustees are also registered as liquidators. Debtors and creditors invariably make no distinction. A major difference from the UK, and NZ, is that IPs are directly regulated by the government regulators, ASIC and AFSA; there is no real co-regulation in Australia.
Some comments on ASIC’s corporate insolvency bulletin
Concessions to the crisis
ASIC properly acknowledges that the COVID-19 pandemic has created challenges for liquidators which ‘will likely affect their ability to perform all their duties and functions and comply with all their legal statutory requirements’, some being ‘difficult or even impossible’ to perform, holding meetings of creditors for one.
ASIC’s useful advice is to identify and make contemporaneous notes on files about how the pandemic has affected an IP’s ability to comply with their statutory requirements and the practical steps taken to address this.
Similarly, ASIC acknowledges the disruption may make it difficult to comply with continuing professional education requirements, in Australia, these are 40 hours per annum, for both liquidators and trustees.
In regulating liquidators’ conduct, ASIC says it will ‘take these circumstances into account’ and ‘where appropriate it will consider giving a ‘no-action letter’.
These ‘exceptional circumstances’ also prompt ASIC to say it will waive late fees but IPs must still apply for fee waiver in the normal way, with pandemic impact evidence.
Firms’ arrangements
ASIC asks firms to assess their capacity to take new appointments including whether to take joint appointments with a liquidator from another firm, or whether aspects of work should be outsourced because of lack of capacity due to staffing issues.
ASIC does not mention this but such an arrangement may necessitate a conflict review.
Creditor replacement of IPs
ASIC explains that in 2017, ‘new laws’ were introduced allowing creditors to replace liquidators by resolution passed at a creditors meeting. To clarify, Australian bankruptcy law has in fact, like the UK, allowed creditors to replace trustees for over 100 years, providing much relevant case law and practice.
In that respect, it is odd that ASIC says that its regulatory focus has been on liquidators being replaced for some claimed misconduct, of which it found no evidence, but with no focus on creditor misconduct. The history of the law of the replacement of trustees in Australia at least, relates to creditor abuse of the process, for example by the attempted replacement of a trustee by a creditor/s concerned for their own position.
In Re Crawford,[3] the Bankruptcy Court said that:
‘There is probably no reason why, when a trustee who is honestly and properly carrying out his duties, should not be removed from his office if the creditors so desire, but, when creditors make improper and unfounded allegations against a trustee to secure or justify his removal, and the conduct of these same creditors leads to the strongest suspicions that their reason for having the trustee removed is a desire to help an important shareholder of the company which is a creditor, the Court should interfere’.
The difficulty under Australian law is that, consistent with many of the insolvency reforms introduced in 2017, the relevant section – s 90-35 – is slanted against a trustee and in fact impedes concerns being raised by the outgoing trustee about abuse of process.[4]
Remuneration
ASIC identifies when resolutions need to approve remuneration have failed, ranging from remuneration reports being generic and uninformative, to creditors lacking interest or motivation to vote.
ASIC lists the serious consequences of failed remuneration proposals.
However, in Australia, again, while the bankruptcy regulator AFSA has usefully been given the default role of determining trustees’ remuneration, ASIC does not have that power. Hence, in Australia, the courts’ time is taken up with judicial determinations of liquidators’ remuneration.
Institutional creditors
ASIC notes that some ‘institutional’ creditors have ‘a remuneration voting policy to either not vote on remuneration at all, or only for past remuneration but not future remuneration’. In so far as this applies to government creditors, for example the Australian Taxation Office, the Fair Entitlements Guarantee body, ASIC should be taking some particular action.
Assetless liquidations
Australia has no government role in corporate insolvency with consequences for assetless businesses finding a liquidator willing to accept an appointment. One alternative is its Assetless Administration Fund (AAF) which gives funding to IPs to pursue investigations.
ASIC says that a ‘reinvigorated focus’ of the AAF is ‘funding to take action to recover assets where misconduct is suspected – including, but not limited to, possible fraudulent or unlawful phoenix activity’ with ASIC encouraging IPs ‘to embrace this opportunity to help us help you make recoveries – this will maximise returns for creditors and better regulate the industry and its stakeholders’.[5]
Assetless bankruptcies in Australia can be handled by the government Official Trustee in Bankruptcy.
Regulation of liquidators, by other liquidators
ASIC can appoint a ‘reviewing liquidator’ with power to review another liquidator’s handling of a liquidation about which ASIC has concerns, such as ‘illegal phoenix activity or other serious misconduct [by the liquidator, as ASIC clarifies], including, but not limited to common referrers and/or the existence of pre-insolvency advisers, shadow or replacement directors’ etc.
ASIC properly acknowledges that such an appointment is not an indication that the liquidator has failed in her or his duties. The reviewing liquidator’s role is to inquire, investigate and report their findings, objectively and independently. ASIC has a panel of reviewing liquidators from which it has appointed 10 in relation to 22 companies. We are yet to see the outcomes of these.
Again, that external assistance role is not required in bankruptcy, with the Inspector-General in Bankruptcy conducting his own investigations.
Attending creditor meetings
And while ASIC reports on its random attending of creditors’ meetings to assess their quality, AFSA has done this for a number of years in bankruptcy, in relation to trustees who are mostly also liquidators.
Phoenixing
Like comparable jurisdictions, Australia has ‘unlawful phoenixing.’ A recent law[6] now outlaws ‘creditor-defeating dispositions’, being transfers of company assets for consideration ‘less than the lesser’ of the market value of the assets or the ‘best price reasonably obtainable’ and which have the effect of preventing, hindering etc creditor recoveries.
ASIC notes its own powers to assess whether, in its ‘opinion’, it fairly represents the application of proceeds of property that was disposed of. There has been some doubt expressed as to its constitutional validity, on the basis of separation of powers.
AFSA has long had a similar but differently worded power under bankruptcy law which has worked relatively well, and has been found to be constitutionally valid.
Statistics
Finally, ASIC’s insolvency statistics for October-December 2019, released only now, show a continued decrease in companies entering insolvency administration – 8.9% compared with the previous quarter July-September. However, that quarterly total was 4.6% higher than the 2018–19 December quarter.
In personal insolvency, bankruptcies in the December quarter 2019 were at their lowest level since 1994. As I have recently reported, AFSA is now issuing fortnightly statistics, in order to monitor the impact of the ‘COVID-19’ changes in bankruptcy law, as well as maintains its regular quarterly reporting.
COVID-19 law changes
As I have separately reported, both personal and corporate insolvency law in Australia have been ‘temporarily’ changed to address the present crisis, corporate insolvency more so, with the ‘suspension’, in effect of Australia’s insolvent trading laws.
The statistical and other monitoring of these law changes is important.
The Australian courts are also grappling with the impact of the crisis, some of the many decisions of which I am reporting.
In relation to ASIC’s other corporate and markets roles, it has issued this COVID-19 guidance.
I can explain further as needed.
[1] ASIC Corporate Insolvency Update – Issue 15, April 2020.
[2] See generally Keay’s Insolvency, 10th ed, 2018, Murray & Harris.
[3] (1943) 3 ABC 201
[4] Section 90-35. Explained in Keay’s Insolvency at [2.325], [10.395].
[5] As I have said before, offering to ‘maximise returns to creditors’ may be misleading in most cases, unless ASIC has figures to show otherwise.
[6] Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020
