Some fundamental issues about the operation of insolvency law and practice are being raised in the joint parliamentary committee inquiry into corporate insolvency,[1] more so than in any other insolvency inquiry in recent times. This is despite the fairly orthodox list of legal issues in the terms of reference.
A particular issue in focus is the business model of insolvency practitioners’ firms. Insolvency practice is such that IPs inevitably suffer losses on unfunded jobs and must from a business perspective recoup those losses in some way. This was the subject of comment in my recent article on Rethinking Insolvency Practitioner Remuneration [2] and it is addressed along with other such issues, in Keay’s Insolvency. [3]
As there explained, in so far as the issue is acknowledged by the courts and the regulators, it is that IP charge out rates may be set to accommodate the loss on unfunded work. However, that “cross-subsidisation” was the subject of critical comment by the government in 2016 when the role of official liquidator was removed under the Insolvency Law Reform Act 2016. The government’s then response was that insolvency practitioners did not need to work for free; rather creditors should fund the administration of assetless liquidations. Cross-subsidisation was therefore unnecessary. If creditors would not fund, then those companies, unless dealt with in other respects, might simply be deregistered by default. The then prediction that the number of such deregistered companies would increase has been realised as shown in the latest ASIC figures. The concerns about conceding such a default process are explained in international guidance in that article and have been the subject of submissions to government in relation to the director identity number.
Putting that issue aside, a response from the committee suggests creditor or “ordinary Australians” dissatisfaction with the broader public interest concepts in insolvency. As to recoupment of a firms trading losses through charge out rates or director demands or litigation, that would be unfair in several respects. For one thing it is unfair that liquidators are in effect charging private creditors for work done on behalf of the government in investigating misconduct. Given there is no government liquidator in Australia, unfunded work is done by liquidators in assetless estates for the public good and it is inevitable that this be recouped through cross-subsidisation or other legitimate ways. If that involves charging higher rates to the disadvantage of creditors in large estates, then that is a consequence of government policy.
Any suggestion that rates should not reflect inherent losses would appear to amount to price control. Some years ago charge out rates recommended by industry bodies were done away with, the then Trade Practices Commission finding them anti-competitive. The market is to set the rates.
How those rates are in fact set may be the subject of some explanation in view of requests made by the Committee for information on practitioners’ business models.[4] That is a useful query and the response will be instructive. The information provided has the potential to clarify much of how the system works which is the subject of rather opaque and only anecdotal explanation. While some may see this information as commercial in confidence, it could not be so if gathered and presented globally. Also, given the public interest work done by IPs, for the government, disclosure itself is in the public interest. It is that sort of data held by the industry that I consider the industry has the ability and responsibility to reveal.
A particular issue I have raised is in relation to voidable transaction or preference proceedings brought by the IP in order to recoup their fees, this being a legitimate process under the law; ASIC refers to it in its submission. The fact that practitioners must do this from a commercial perspective does say something about the way that the whole system is funded and operates.
Then there are those firms who rely upon demands made on directors to fund, through threatened claims being made for insolvent trading breaches and more. How far down the inquiry wants to go will be tested in those insolvency models.
As the chair commented, “it sounds like there’s a fair bit of cost-shifting from public entities to a profession that’s providing a public good and cross-subsidising that public good with a business model” that might be effective but “perhaps is not so stable”.[5]
That may lead to recommendations for a better recognition of the role of the state in insolvency practice, in whatever form. That might serve to bring some transparency to the industry, among other benefits.
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[1] Corporate Insolvency in Australia – Parliament of Australia (aph.gov.au)
[2] (2022) 22(3&4) INSLB 33
[3] 11th ed, Thomson Reuters, Ch 1
[4] “Can I ask you to take on notice, in providing the committee with a really in-depth understanding of how a business model that you’re operating actually works, what the costs are, what the benefits are and what changes could occur. …”: transcript, Chair, 14 December 2022.
[5] Transcript, 14 December 2022, page 14.
