While Australia is currently focusing on the standards of conduct of accounting firms, and their partners – see Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry – Parliament of Australia (aph.gov.au) – it is pertinent to note that England is looking at extending the regulation of insolvency practitioners (IPs) to insolvency firms as well.[1]
In England, and Australia, IPs are regulated solely as individuals, with no specific regulation of the accounting firms within which they operate. England sees this as a gap in the regulatory framework which causes problems, in particular in relation to those insolvency firms dealing with ‘volume insolvencies’ and, more generally, in relation to conflicts of interest where there is a tension between the statutory duties of the practitioner and the commercial interests of the firm that employs them.
This English focus on insolvency firm regulation is but part of the UK Insolvency Service’s wider review of IP regulation generally that may see England adopt more of an Australian regulatory model, of having an independent government regulator to regulate IPs, and their firms. England presently has a co-regulatory model, with its 4 recognised professional bodies (RPBs) being the front-line regulators under the oversight of the government Insolvency Service. This has been the model since 1986 when IPs first came under regulation with the Insolvency Act of that year although reforms under the Small Business, Enterprise and Employment Act 2015 imposed a more structured and formal regulatory model.
The Insolvency Service claims that in the 35+ years since then “there has been a shift in the way the insolvency market operates, with an increase in Insolvency Practitioners being employed by larger firms, rather than practitioners working for themselves or within small practices”.
The UK insolvency profession at under 1,600 IPs is relatively small. There are about 600 firms with an estimated 20% of firms offering insolvency services being classified as medium or large. Only 3 firms have more than 40 Insolvency Practitioners.
The regulation of firms would run alongside regulation of individual Insolvency Practitioners. While the statutory regulation of firms could result in additional administrative burdens and costs, “the regulator would take an intelligence-led, proportionate approach to firm regulation to avoid creating an unnecessary regulatory burden on businesses”.
Volume providers
As to the first of the two main areas of concern – volume providers exist in administering Individual Voluntary Arrangements (IVAs) with four firms accounting for more than half of new IVAs registered in 2022;[2] and in administering protected trust deeds (PTDs). The firms’ business model
“appears to regard IVAs and PTDs as a commodity, with the aim of selling as many as possible, rather than providing a professional service to help someone find the appropriate solution to their financial difficulties”.
The Service warns that
“the high volume of cases means that each Insolvency Practitioner will be dealing with a much higher number of appointments than a traditional insolvency practice and may be an employee of the firm no formal role in relation to its governance. Nevertheless, the Insolvency Practitioner as supervisor remains responsible …”.[3]
Conflicts
As to conflicts generally,
“(t)he type of business models where an Insolvency Practitioner is employed by the firm, with little or no control over the decisions made by its senior management, can lead to tensions between the regulatory requirements placed on the Insolvency Practitioner and the culture of the firm that employs them”.
That has led to concerns about a perception of a lack of objectivity and integrity generally by IPs working in the high-end corporate sector and the firms that employ them, including that IPs have little or no direct say in the corporate governance or operating procedures of the business.
Drawing on the regulation of firms existing in other industries – surveyors, auditors and lawyers – the UK proposal is that all firms that offer insolvency services should be authorised and meet certain minimum requirements. As well,
“additional regulatory requirements and monitoring would be targeted at firms that have the potential to cause the most damage to the insolvency market. This would ensure that regulation is proportionate and avoid unnecessary burdens on low-risk businesses”.
Certain additional requirements might be imposed on certain firms according to criteria such as the size of the firm and the level of turnover or the number of appointments held by insolvency practitioners employed by the firm.
Those additional requirements could include the need to appoint a senior responsible person; that the firm demonstrate its suitability to conduct business, including an appropriate business model; that appropriate controls and governance processes are in place to ensure that there are no conflicts of interest between the aims and policies of the firm and the duties and responsibilities of its insolvency practitioners; and a process for enhanced monitoring.
Comment
All this does not seem to diminish the reality that an insolvency appointment is personal to the appointee, answerable for the conduct of the administration.[4] Rather it seeks to reinforce that responsibility by ensuring that the IP’s inevitable need for resourcing and other support is available and appropriate.
Even before this inquiry, firm regulation was seen as a valid support option for IP regulation. The IP uses the resources of the firm and the efficiency or otherwise of the insolvency work done was said to depend as much on the general professional performance of the firm and its employees as on the activities of the relevant individual. The firm itself would have an incentive to ensure this. Also, clients tend to see themselves as dealing with firms, not individuals, and to see responsibility for good or poor performance as attaching to the firm. Thus, it was said, a move to regulate at firm level would improve scrutiny of the context within which IPs operate and would do so without removing responsibility from the individual IP.[5]
Australia
The regulation of insolvency firms has not been raised in Australia, though there are some relevant issues in the law and policy concerning the required standards of IPs that do not appear to be raised in the English review. These include concerns about the financial viability of firms and the resourcing of the work required by an IP.
The current Australian parliamentary joint committee (PJC) inquiry into corporate insolvency, due to report on 12 July 2023, has raised the issue of “the role, remuneration, financial viability, and conduct” of IPs, which has involved discussion of the business models of IP firms, including the financial viability of firms in relation to the extent of unfunded work of IPs, and imposition of government levies.[6]
The financial viability of firms was earlier under scrutiny during the 2020 pandemic, in particular because the government’s economic measures served to prevent many otherwise insolvent businesses from needing to enter insolvency and also because the government imposed a moratorium on director liability for insolvent trading. In July 2020, the main industry body ARITA reported on the significant extent to which insolvency engagements were down on the same period in 2019, resulting in over half of the firms reporting that they had accessed government employment assistance for their own staff.[7]
There was also regulatory concern expressed about firm governance and controls, with warnings about the increased risk of internal fraud;[8] and about lax compliance with rules concerning independence when appointments were scarce.
More generally, the law in Australia gives some scrutiny to the role and significance of IP firms. For example, there has always been a requirement that employee bankruptcy trustees have an agreement with their employer firm ensuring their independence when discharging their duties as a trustee.[9]
Also, when taking an appointment, an IP is required to assess whether his or her firm’s resources and geographic spread are adequate for the nature of the insolvent business.[10] In one case. a sole practitioner was replaced as the administrator of complex forestry investment schemes, the Judge noting that any IP appointed should have the staff and financial resources to carry out the necessary investigations to be able to report to creditors, the financial capacity to carry work-in-progress and the staff to deal with the day-to-day issues that would arise in the management of the schemes.[11]
Code and legal requirements of firms also apply in relation to remuneration, co-appointees, independence declarations and the purchasing of assets.[12] These may be regulated through the power of the corporate insolvency regulator to require a liquidator to produce their policies and procedures in relation to how they administer their insolvencies.[13]
There has been some focus on volume providers, but mainly on debt agreement administrator firms operating under Part IX of the Bankruptcy Act. However, AFSA recently reported that of the 250-260 bankruptcy trustees and debt agreement administrators, twelve individuals only account for 75% of the work in personal insolvency. In corporate insolvency, there are around 650 registered liquidators and 200 firms, with over half being sole practice firms, and with seven firms having 20 liquidators or more.[14] No issue of the regulation of firms came with those figures.
Next?
The proposed UK reforms have been under consideration for some long period of time, since December 2021. The threshold question is whether there should be a government regulator, which seems likely to be accepted, even if the RPBs retain some regulatory role. Parallel regulation of firms also seems likely.
As to government regulation, Australia’s model is not one to be followed in so far as it has two regulators, one each for personal and corporate insolvency, and minimal industry input.[15] The PJC inquiry report may have some views on that model and on the business models of insolvency firms generally. Neatly in the middle is New Zealand which, when deciding upon its regulatory model for its corporate IPs, adopted that of the UK over Australia, but with no mention of the need to regulate firms themselves.
The issues raised in the UK, as to direct government regulation of IPs and of firms, are seen as pressing, despite the long delay. While Australia’s IP regulation regime is due for review, any change in the two-regulator model is unlikely. Nor is any attention likely to be given to the regulation of firms, given the focus already existing under various laws and codes. The more immediate issues for reform are the insolvency laws themselves and operational structure within which IPs must apply those laws. In that respect, the PJC corporate insolvency inquiry report, due by 12 July 2023, should be of interest.
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[1] The future of insolvency regulation – GOV.UK (www.gov.uk)
[2] Commentary – Individual Voluntary Arrangements Outcomes and Providers 2022 – GOV.UK (www.gov.uk) IVAs comprised 65% of total individual insolvencies in England and Wales in 2020/21, totaling 82,199 individuals.
[3] Monitoring Volume Individual Voluntary Arrangement and Protected Trust Deed providers – GOV.UK (www.gov.uk)
[4] “When a trustee is appointed to administer a bankruptcy or for other purposes contemplated by the Act, he is appointed in his own right, not as an agent for his employer. It is the trustee not his employer who is accountable to the creditors and to the Court for the work he does”: Re David Hurt [1988] FCA 85 at [17]. See also IAIR Principles – Version 1.2 – www.insolvencyreg.org “2.1. Only natural persons should be eligible to seek authorisation. In order to meet its fundamental objectives, the regulatory regime imposes academic, professional, and character requirements that may only be fulfilled by natural persons, and only such persons may be held duly accountable under it”.
[5] Finch and Milman, Corporate Insolvency Law, Perspectives and Principles, 3rd ed, 2017, p 226.
[6] Corporate Insolvency in Australia – Parliament of Australia (aph.gov.au)
[7] ARITA members COVID-19 issues – second survey (June 2020)
[8] PIR Newsletter – June 2020 | Australian Financial Security (afsa.gov.au)
[9] Processes for registration of trustees | Australian (afsa.gov.au)
[10] 2. Code of Ethics.pdf
[11] Commonwealth Bank of Australia v Fernandez [2010] FCA 1487 (24 December 2010) (austlii.edu.au)
[12] 5. PSI 1 Independence.pdf
[13] Section 30B ASIC Act 2001.
[14] Submissions – Parliament of Australia (aph.gov.au)
