Insolvency practitioner regulation – an Australian story

With the UK government rethinking the regulation of its insolvency practitioners (IPs), moving away from co-regulation to a system more like Australia’s direct government regulation model, it will be interesting to see in which direction Australia heads with its IP regulation, if at all.  Its review of these processes was foreshadowed back in 2015, when its Insolvency Law Reform Bill was before parliament, slated to be 5 years after the date in 2017 that the law commenced.      

Australia’s divided approach to IP regulation cemented in place by the ILRA is not to be recommended and might charitably be excused as being based in Australia’s early history and its federal system rather than in any policy decision to have separate regulation of trustees and liquidators. 

The history from 1900

The late 19th century English model of a government Official Receiver and an insolvency regulator for both personal and corporate was well regarded which New Zealand followed. Similar moves were made by Australia early after federation for a bankruptcy act with an Official Trustee and an Inspector-General and a private profession.  That was being done in parallel with what the records show was a companies bill and an insolvency bill, both of 1908, being drafted.  That would have accorded with the powers under the Constitution for federal law to apply to bankruptcy and insolvency, and what was seen as power to legislate for companies.  However, the High Court decision in Huddart Parker was given in June 1909 and it seems that this put a stop to any idea of federal corporate law or federal corporate insolvency law. 

Federal bankruptcy law started in 1928 replacing the different colonial and state regimes and its regulation of trustees was strict, with applicants appearing before a Judge of the new Bankruptcy Court to be tested on their knowledge and capability.      

In corporate, the states continued on each in their own colonial way in regulating companies and their liquidators, with little consistency, or, it seems, rigour.  As late as 1988, the Harmer Report was referring to the problems of cross-frontier insolvency as still existing in Australia, being issues between different states’ corporate insolvency laws. As to IP regulation, the Report said that the separate registration systems for trustees and liquidators was “wasteful and serves no practical purpose”.

When corporate insolvency law then appeared in federal form, under the then ASC, it is no surprise that it was a little the worse for wear from a lack of cohesion in the preceding decades.  That was confirmed in 2010 when its laws and its IP registration and regulation processes were found to be wanting in a Senate Committee report, which sought to assist by again recommending a combined regulatory regime.

From 2000

That did not happen for a range of unsatisfactory reasons one being a continuing perceived poor image of IPs – the government relied upon an ASIC survey as substantiation – which then carried through into the highly regulatory ILRA 2016 reforms.  The government also found no worthy body to partner any co-regulatory arrangement.  (All this should be taken with a grain of salt coming from a government with a history of what some might see as inept inattention to the insolvency law regime).

In any event, since then, little substantial insolvency reform has occurred.  It will be interesting to see therefore what any review of ILRA would serve; rather, as many are suggesting, a broader law reform review is required, of which the regulatory approaches taken in the ILRA could be a part. 

Australia’s divided insolvency profession

One core issue is the division of the profession. While it dates back to 1908, the legal problems of 1908 have been largely resolved.  But it is not as simple as that, for several reasons.    

The professionals themselves tend to classify themselves as either corporate or personal, and an insolvent business is likewise dissected, with strict independence rules relied upon in defence.  Anecdotal comment continues to reveal resistance by corporate practitioners being associated with personal.

Then, to legislatively combine a century of separate law and culture is probably too difficult.

The third reason seems easier to implement and it would be effective but in reality it may be the hardest of all – because it involves politicians ceding power.  The idea is to at least have personal and corporate insolvency administered by the one department – put them on different floors if we must – but there is the inevitable cohesion of approach to be gained, under the proper focus of economics, supported by neighbours such as the Small Business Ombudsman and the ATO.  Far removed from the backwaters of money laundering and drug dealing and terrorism in the focus of AGD, and its ministers.

UK

This short comment does not do justice to my thoughts that may find their way to the UK, to assist in its review, though to what extent an Australian story sadly distracted by an unnecessary threshold issue of a divided profession will be of interest is another matter.

Any corrections or views are invited, or any from the floor.

References to comments are available.

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