Insolvent insolvency practitioners?

An Australian insolvency industry body – ARITA – has suggested that the law should be changed to allow insolvency practitioners (IPs) who themselves become insolvent, or their company, to nevertheless be permitted to remain registered to practice: Members facing financial distress, December 2021, version 1.0 This is in the context of advice given by ARITA on what is said to be a severe impact on the work of IPs caused by the government’s financial support for business and by creditor restrictions imposed under insolvency law prompted by the impact of COVID-19.

To offer advice on IPs’ declining work levels is one thing; but to go further and suggest that this might lead to the personal insolvency of IPs is a large step; to then say that an IP in that position should then be permitted some unique concession under bankruptcy law is rather a leap.

ARITA sees that concession as a need for “legislative change to allow flexibility where a registered liquidator or trustee’s personal insolvency can clearly be tied to the broader economic and structural issues that have impacted businesses on a macro level throughout COVID-19“. That is so even if that concession would only be available where the IP can show that their financial distress does not “in any way reflect [their] integrity or character and [their] ability to discharge [their] duties …”.

New directions in bankruptcy?

How any such submission to government is framed will be interesting to see.  It may also serve a useful purpose of further prompting what some say is the need for a ‘root and branch’ review of insolvency law, in this context, the undue on-going restrictions often placed on those who have been through an insolvency.

Insolvency is a great leveler and it makes no concession to integrity or even how the insolvency arose.  A small business proprietor whose viable travel business collapses in the wake of COVID-19 will still remain bankrupt for 3 years and be subject to many restrictions over that time.  ARITA has supported that system. But the idea seems to be that the law should be different for IPs. The better law reform idea would be to strictly limit the period of bankruptcy restrictions and their nature, for all, including bankrupt IPs.  This would at least put bankruptcy on a parallel with company directors, where, even despite ineptitude or carelessness, their company business failure leads to no direct personal consequence for the director.

And beyond that issue, there may be the reality that insolvency practice is changing.

The government is yet to respond to the January 2021 inquiry into Australia’s bankruptcy laws, including in relation to the impact of COVID-19 on small business. The Assistant Attorney Amanda Stoker tells us that the “massive rise in bankruptcies that people rightly feared has been suppressed” by government action. This may continue, and with company insolvencies.

It may also be that post-COVID-19 the value of the insolvency system itself is under government review in the broader context of other government policy considerations.  As Ms Stoker says, these “unusual times” are allowing the government to “test new ideas and reflect on whether our policy settings get the balance right”.

For example, increased basic income support would have a dramatic impact on bankruptcy numbers. The severity of bankruptcy might also need to be reconsidered in light of the government’s major 2021 Intergenerational Report touting the government’s bankruptcy reforms as contributing to a “more dynamic and productive” economy by encouraging firms to “innovate and experiment”. The recent UNCITRAL report on international practice for MSE insolvencies might have also provided new insights, for example by way of consolidating MSE corporate and personal insolvency.

As to the “right balance”, the value of bankruptcy to creditors is often minimal.  Creditors were paid a derisory average dividend return in 2020-21 of 1.6c/$.  That has not much changed over time and seems unlikely to.  Corporate figures are also minimal.

Other factors are at play, like the prevalence of trusts. While the government is looking at the reform of the law of corporate insolvent trading trusts, it is not examining trusts in general, including the negative impact on bankruptcy recoveries of the increased use of trust law to protect personal assets.  Family law claims are another factor.

Conclusion?

Many small businesses are impacted by the economic impact of the virus.  The extent to which formal insolvency of its owners might occur much depends on the nature of the business and those running it.

Going back to the beginning of this discursion, one would think that an IP would hardly be likely to become insolvent through declining work in their practice; rather, an IP would be more likely to face insolvency from a personal liability imposed by the law in the course of their work, or external factors.

As to law reform, ARITA usefully prompts some root and branch ideas which should lead to a refocus on what may be insolvency’s new trends and directions, for this and the next generation of IPs.

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