Michael.1
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. 

Who wants to be an SME insolvency practitioner? Australia’s proposed reforms

Australia proposes to follow England’s lead in giving insolvency practitioners the initial role in new debtor in possession insolvency reforms, but in rather different ways.[1] 

In the UK, the ‘monitor’ role introduced by the Corporate Insolvency and Governance Act 2020 is designated for licensed insolvency practitioners (corporate and personal) but there is power in the regulations for others to be authorised to take that role.

In Australia, as proposed, a small business restructuring practitioner (RP) role is created under the draft Corporations Amendment (Corporate Insolvency Reforms) Bill 2020.[2] That role is designated for registered liquidators only, but the definition of registered liquidator is to be broadened.

Australia’s approach therefore is more geared toward allowing others to take on the RP role.  With submissions due on this approach by 12 October, it will be interesting to see the response to this in light of the UK’s experience.

The UK experience

The UK government had initially proposed that solicitors or accountants with relevant expertise would be allowed to act as a monitor, along with insolvency practitioners, but strong opinions came out against that.

There were reasons in favour:

  • It was recognised that a range of professionals were involved in supporting business rescue upstream of formal insolvency, and they would ensure there was both capacity and competition in the restructuring sector.
  • Comments were made that insolvency practitioners did not possess the right skillset for restructuring, with some suggesting that their strengths were weighted towards addressing balance sheet issues rather than dealing with a company’s economic problems including those related to its underlying business model.
  • Given that the UK moratorium is not necessarily a pre-cursor to insolvency, some saw that allowing only insolvency practitioners to act as monitors ‘would affirm in suppliers’ minds that a moratorium was an insolvency event, rather than a pre-insolvency event’ as intended.

However the government bowed to the views of those against and UK law now provides that a monitor must be qualified to act as an insolvency practitioner.[3]

But in setting this by regulation, the government can readily amend the list of qualified persons at any time, without the need for primary legislation, thereby leaving open

“the possibility for other professions to develop regulatory frameworks that meet market expectations, with the aim of increasing competition in this sector”.

These might be experienced lawyers, accountants, or turnaround professionals thereby widening the pool and skill sets of prospective office takers.[4]

A view for the UK government’s decision is that the experience and expertise of licensed UK insolvency practitioners is a known quantity with a ready-made co-regulatory structure conducted by their recognised professional bodies with professional and ethical standards.

While “it remains to be seen how far insolvency practitioners will embrace the new regime rather than their more familiar role as administrators”, the profession had been “calling for years for the UK to introduce a debtor-in-possession procedure”, suggesting that the DIP culture was already in place.[5]

Australia

Australia has separate registration and regulation for company liquidators and bankruptcy trustees. It is proposing to nominate only registered liquidators, and not registered trustees.[6]  Given that the tasks involved should be much less than those of a liquidator or administrator, the draft Bill would alter the criteria for registration as a liquidator by giving more discretion to the independent registration committee in its being able to register an applicant even if they do not meet the usual requirements, if they would otherwise be suitable.  Conditions may be placed on their registration.[7] This flexibility is intended to encourage ‘a greater diversity of practitioners into the field, and greater resilience of the sector’.

As in the UK, the Australian government may likewise be wanting to rely upon an established and regulated industry. The government may also have considered that the economic impact of COVID-19 has revealed the lack of resilience of the industry, with reports from ARITA of a high level of access to government relief programs by insolvency firms, and the government may be trying to support and broaden its base. But Australia has had a pre-insolvency safe harbour regime for over 3 years and the take-up of that is not evident at least among insolvency practitioners, certainly in the SME sector. Nor, unlike the UK, has there been much overt support for an Australian debtor in possession regime.

There are other players, a recent entrant being the Association for Business Restructuring & Turnaround, and the Association of Independent Insolvency Practitioners has a focus on SME insolvency.

At the larger end, other contenders will be the TMA which is enlisting director and business groups in its submissions on SME restructuring, and lawyer groups are also active.  Lawyers are said to have certain advantages over accountants as insolvency practitioners.[8]

And while a UK monitor may take a subsequent appointment as insolvency practitioner, the proposed Bill appears to prevent that in Australia, on independence grounds.

Given the history of the role of insolvency practitioners, a more cynical view is that the government is trying to promote competition for work between industry players adversely impacted as a result of COVID-19. That competition is increasingly evident between the various industry groups, and it has a long history, including between practitioners and pre-insolvency legal and business advisers, and between insolvency practitioners themselves.[9]  That competition may be needed to ensure a take-up of practitioners for the proposed new regime, despite what may be its shortcomings, including its remuneration.

This comment is provisional, in particular because the Australian government has only released a skeletal exposure draft of the proposed Act, with much of the detail to be settled before the new regime commences on 1 January 2021.  But there is enough detail at this stage to invite comparisons with the outcome of the UK’s recent insolvency law reform.

==========================

[1] Each is different, but sufficiently similar for the purpose of this comment

[2] An exposure draft only.

[3] A ‘qualified person’ is presently defined in new Part A1 section A52(1)17 as a person qualified to act as an insolvency practitioner: Insolvency Act 1986 (UK).

 

[4] The Role of the Monitor in a Rescue Moratorium, South Square Digest, June 2020, Glen Davis QC.

[5] The Role of the Monitor in a Rescue Moratorium, Glen Davis QC.

[6] Proposed s 456B

[7] Explanatory Materials

[8] Including in respect of privilege – see What is the role of solicitors in the formal restructuring of insolvent SMEs? Ben Sewell of Sewell & Kettle Lawyers, 14 April 2020.

[9] Apart from current 2020 tension, in late 19th century England, bankruptcy trustees were seen as “persons of a very shady description” in contrast to “official liquidators [who are] accountants of high standing and integrity”, according to the official liquidators: Edward Manson, Tinkering Company Law (1890) 6:4 Law Q Rev 428.

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2 Responses

  1. Interesting article Michael. With only two and a half months to have the detail sorted before commencement, it will be interesting to see the scheme in practice. The “certification” of an entity’s plan required to be given by Insolvency Practitioners isn’t defined and begs the question as to what our PI insurers will have to say about that. Stop and think for a moment about the work required (not to mention the cost) for a “certification” by external auditors when giving an unqualified opinion on annual financial statements or expressing opinions on a Prospectus. Also, to avail itself of the scheme/process, an entity will require all Income Tax Returns prepared and lodged, taxes to be paid together with employee entitlements (superannuation) met…. This could be time consuming and relatively expensive. A scheme born of good intent still leaving plenty of questions to be answered.

    1. Yes, draft s 453E – Functions, duties and powers of the restructuring practitioner – lists the functions of the restructuring practitioner as including “(c) to make a declaration to creditors in accordance with the regulations in relation to a restructuring plan proposed to the creditors; …”. I don’t imagine the regulations will say that the certification is that “maybe this proposal is a good idea, but don’t complain to me if it’s not”. The word “advice” is also used.
      But note that the regulations can also set out “the rights and liabilities” of the SBRP “arising out of the performance of the functions and duties, and the exercise of the powers, of the person as [SBRP]”.

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