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. 

Choosing practitioners to administer Australian MSME insolvencies

The Australian government is presently finalising its draft SME insolvency law reform proposals.  Apart from getting the law right, as significant a task is deciding who should administer it. 

The government has proposed a widening of the existing registered liquidator group and its now has submissions opposing or supporting that.  The history of professional groups vying for what can be an exclusive licence from government for the right to practise in a particular field goes back a long way, and how such groups manoeuvre and jostle for position is well researched – doctors and pharmacists, health professionals, lawyers and conveyancers – and insolvency practitioners are no different.[1]

This decision for the government is less about the law as the capacity and resources and training of the various groups in the market to best implement the new regime.  The government’s proposal is that it be left to the registration committees to allow the registration of liquidators under s 20-20 of the Insolvency Practice Schedule who, in certain doublespeak, would be able to decide to approve a person’s registration as a liquidator even if that person were not to satisfy the statutory criteria if that person would be suitable to be registered.  “This flexibility encourages a greater diversity of practitioners into the field, and greater resilience of the sector”.

Diversity and resilience

Those last words may prove significant.  From an overall perspective, the government might have been looking at the need to inject new and more general talent into the existing pool in order to administer a new regime in difficult circumstances, and in looking to the future more generally; for example in the use of technology and communications, and bringing in other learning and disciplines and perspectives.

As it happens, registered liquidators themselves have been the subject of at least three significant assessments in the period leading up to the virus which may have informed government thinking.  These are as to practitioners’

  • use of technology and artificial intelligence;[2]
  • professional standing and capability;[3] and
  • their financial capability and standing.[4]

The results from each were mixed,[5] whether better or worse than other comparable professions or groups is not dealt with but all professions have their issues.

As to liquidators,[6] there had been a decline in their numbers, expected given the fall away of work pre-virus, and also given the opportunities in less regulated restructuring work.  Financial write-offs for insolvency work seem to have remained high, including in bankruptcy, with the number of firms soon in financial difficulty in 2020 perhaps being of related concern.  ARITA’s submission refers to the fact that “some 55% of insolvency firms have been on JobKeeper (note most insolvency firms are actually SMEs and not major firms)”. And this is relevant in particular given that the financial returns for work done by practitioners under the proposed new law is perhaps uncertain.  Practitioner firms had lagged in technology applications, now exacerbated perhaps by the impact of the coronavirus.  On top of this, past views of the government about the profession have not been that supportive, unfairly in many respects, in particular given the 2017 regulatory outcome, being one of continued close regulation, by two regulators. This compares with, most recently, the professional co-regulation of New Zealand practitioners.[7]

Hammers and nails

That Australian liquidators are a group of experienced qualified practitioners may not quite fit what is presented under the Bill as more expedient and volume work.  As Professor Jason Harris has written,

‘asking highly specialist liquidators to do basic business viability assessments is not the best use of their skills and will render this new regime too expensive and unfit for purpose’.[8]

It was his further analogy – ‘if the only tool you have is a hammer, everything looks like a nail’ – about which the UK had concerns, that its ‘liquidators lacked the right skillset for restructuring, being weighted towards addressing balance sheet issues rather than dealing with a company’s economic problems and its underlying business model’.

Competition policy

The contenders could not have been defined by their professional member association, for competition policy reasons, Australia having so far rejected that co-regulatory approach adopted in NZ and the UK.  At one end of the spectrum is the registered liquidator as a legally defined term, at the other, there is the option of the ‘appropriately qualified entity’ in s 588GA adopted in relation to safe harbour. The government proposes a middle course, through changes to the s 20-20 registration criteria.

Registration committees

If that proceeds, despite various submissions to the contrary, we should anticipate many ad hoc registration committees being convened, given that they can only approve individuals as liquidators one by one, not by way of groups. It also means that committees should properly give prompt written reasons for their decision, and publicly, both to allow others to consider their merits in applying, and to ensure the transparency and integrity of the process. It also leave the whole process to the discretion of the committees, with no guidelines as yet, and with no external influence legally possible.

While the committees are to be independent, the only real perceived independence of sorts comes from the outside ministerial appointee. ARITA has always said that it only chooses a person for the committee from its own members, and ASIC may be seen to have an interest in appointees who are in its circle of competence.  An outsider applicant, such as an overseas appointee, or a lawyer, tertiary qualified restructuring expert, a financial adviser and so on might struggle to be accepted.  None of this is to say that the individual members of the committees, nor the nominating bodies, would act other than independently of mind, but, as we know, it is the perceptions that are important.

This brings the process of finding small business restructuring practitioners down to a series of on-going individual decisions in relation to potential applicants who might be tertiary qualified in law, finance, accounting, economics, engineering, business and the social sciences, with other relevant experience and capability.

The submissions

Meanwhile, the various groups’ submissions understandably extol their own members’ merits.

ARITA also does that and now says it expects that the increase in insolvencies due to the COVID-19 crisis to be temporary and that its members can deal with them, hence there should be no need for further hands-on-deck, which might lower standards.

 “It is important to ensure that a temporary increase in insolvencies does not see a permanent reduction in standards, which may impact the quality of the profession for decades to come. … a limited increase in insolvencies does not warrant any substantial increase in the number of persons registered to manage insolvent entities”.

Other submissions obliquely or overtly make comparisons. While ARITA would have only registered liquidators take on the roles, including those not its members, TMA distinguishes its proposed “restructuring practitioners” who “oversee a restructuring process with a view to saving a company”.  But “liquidators, on the other hand, liquidate a company and bring an end to its life”.  And

“while there has been commentary around an amorphous group called pre-insolvency advisors who promote phoenixing, no evidence has been put forward as to precisely who these people are. Tellingly, the only way to effect a phoenix transaction is via liquidation and the engagement of a registered liquidator”.

Its one perhaps backhand concession is that only registered liquidators should be able to undertake the new simplified liquidation process if a restructuring plan fails.[9]

As to lawyers, while they walked away from insolvency practice decades ago, many lawyers nowadays have broader qualifications and skills and some perhaps renewed interest. Just as accountants call in the lawyers, so too can lawyers call in specialist accounting talent.

The government’s decision

From a competition policy perspective, any restriction on a right to practise to a particular group needs justification. As explained, the government would not confine a safe-harbour adviser role to registered liquidators and its decision here may well confirm that approach.

On the other hand, the UK government backtracked from widening the field, for the moment,[10] and that is an option here, to continue with a regulated and well trained group of registered liquidators, though needing training[11] and additional time to prepare.[12]  This is also a new and untested regime and it is being introduced in circumstances that may be demanding.

In the meantime

In the meantime, the jostling for position continues.  While the various groups are waiting for the government’s decision,  some submissions about the substance of the Bill suggest that groups should be careful what they wish for.

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[1] See Rescuing Business, Carruthers and Halliday, 1998.

[2] See ‘AI and the Insolvency Profession: The State of Play’, Jennifer Dickfos (2018) 24(4) Insolv LJ 179. See also ‘Artificial Intelligence in insolvency work: Transforming critical care’ (2018) 73 Eurofenix 9, Joanna Goodman; and ‘INSOL International: The Role of Artificial Intelligence (AI) and Technology in Global Bankruptcy and Restructuring Practices’ (INSOL International, 7 August 2019), 188 Jane Colston and Christian Toms

[3] [Insolvency] Practitioners Perspectives: Experiences Adhering to Legal and Ethical Regulatory Standards, Dr E Streten, 2019. Also Selfies of Australian insolvency practitioners – not looking good …?

 

[4] Positioning your firm for future growth 2020Macquarie Insolvency industry pulse check.

[5] www.murrayslegal.com.au

[6] For some reason trustees aren’t generally included.

[7] Insolvency Practitioners Regulation Act (Prescribed Minimum Standards, Conditions, and Requirements for Ongoing Competence, for Licensed Insolvency Practitioners) Notice 2020

 

[8] A new system for SME restructuring: is there a doctor in the house? 9 October 2020

[9] TMA Submission on Small Business Law Reforms. TMA’s proposal in fact goes further, to that of a co-regulatory structure similar to those in the UK and New Zealand; but, in light of past history in Australia, this is unlikely to be considered.  Its one perhaps backhand concession is that only registered liquidators should be able to undertake the new simplified liquidation process if a restructuring plan fails.

[10] Who wants to be an SME insolvency practitioner? Australia’s proposed reforms, Murrays Legal

 

[11] ARITA submission

[12] Law Council of Australia submission

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