Updated on 5 March 2024 to refer to a 1996 Explanatory Memorandum in bankruptcy which says that, despite the case law, a person’s status as an employee, rather than a partner, should not preclude a person from obtaining registration as a trustee.
======
A liquidator disciplinary committee has decided that conditions should be imposed on a registered liquidator, arising from his use of money from one external administration bank account to pay the expenses of other related companies and, in some circumstances, without adequate supporting documentation.
While the committee found that he failed to act with the degree of due care and diligence required, it was not satisfied that he was not a “fit and proper person” under IPSC s 40-40 to remain as a registered liquidator.
Instead, conditions were imposed that he arrange for a peer review of six of his external administrations as selected by ASIC, and at his own cost; and that he not accept any further appointments until 30 April 2024: see Registered liquidator disciplinary decisions – Naidenov (asic.gov.au), 21 December 2023.
One issue mentioned by the committee was that the liquidator was an employee of his insolvency firm, not a director or partner, and was “more junior to his co-appointee”.
The committee considered that as an employee “he was able to exercise less control over the processes, practices and procedures that the firm had in place around the conduct of administrations”. He was obliged to comply with the legal requirements in IPSC Division 65 – Funds handling. However, on the facts, the committee said that issue of concern was not about the adequacy of the company records, but that “he failed to identify and consider the key issues, and therefore his records do not identify how those issues were dealt with”.
IPs as employees
While his employee status did not raise any issue in relation to his conduct, case law focuses on the reality that IP employees will generally have less control over the conduct of their matters as to resourcing, capacity and risk management, and remuneration.
Both regulators address this in their registration processes. To be registered as a liquidator, ASIC requires an employee applicant to provide a letter from their employer about the arrangements to ensure the applicant will have independence in the manner in which they work and have access to and control over staff and other resources to adequately and properly perform their duties and discharge their functions as a registered liquidator.[1]
AFSA has similar but more specific guidance, which refers to some older bankruptcy case law – Re Hurt [1988] FCA 85 and Re Dare [1992] FCA 509, and there is also Lamb v Registrar [1985] FCA 368 – cases that were decided when the courts were more involved in trustee registration.[2]
Generally, that case law required that the prospective trustee would not be subject to direction from their employer as to the performance of their work, including as to the manner in which the work would be done and decisions to be taken in the exercise of any discretion; and the law also raised issues about independence and remuneration.
In one case, in 1992, the firm gave an assurance that it would “allow the … trustee the use of the firm’s premises, equipment and other staff as necessary to enable the [trustee] to discharge [their] duties as a trustee. The employer firm will render to the [trustee] an account for use of these facilities and staff”.[3] The arrangements were also such that the employer firm would “receive no benefits from the provision of services to the trustee other than those the Bankruptcy Act allows”.
Whether these decisions about employee IPs and their remuneration accord with modern firm practice, let alone current statute law, in questionable. According to the Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996, as to new subsection 155(2) setting out the criteria for registration as a trustee (the predecessor of s 20-20 IPSB):
“Case law under the existing system has suggested that a person may not be able to be registered as a trustee unless he or she is a partner in an accounting firm or a sole practitioner, rather than an employee. However, it is considered that a person’s status as an employee, rather than a partner should not preclude a person from obtaining registration as a trustee provided he or she meets the other qualifications provided for under the Act and the new regulations. Such a requirement is therefore not included among the eligibility criteria”: [117.6].
Even the fact that an IP is a partner of a firm may not necessarily mean that under the partnership agreement the IP has complete control over the various issues of concern listed by the courts. For one thing, commercial considerations and risk will dictate the extent to which work will be performed by an IP in any particular estate; see for example s 19(1)(j)(k) Bankruptcy Act.
Firm regulation
In England, and Australia, IP firms are not regulated as such. IPs are regulated solely as individuals. However, as we have reported Regulation of firms offering insolvency services – Murrays Legal England sees this as a gap in the regulatory framework including where there is a tension between the statutory duties of the employee practitioner and the commercial interests of their firm. The issue is the more important, it is said, because over recent decades “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”.
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: The future of insolvency regulation – GOV.UK (www.gov.uk). This regulation would operate alongside the regulation of individual insolvency practitioners.
As to employees, in particular in larger firms
“(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 is said to have led to 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.
“Additional regulatory requirements and monitoring would be targeted at firms that have the potential to cause the most damage to the insolvency market”.
Those additional requirements might be imposed according to criteria such as the size of the firm, the level of turnover or the number of appointments, and could include the need to appoint a senior responsible person; 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
Regulation of firms does not seem to diminish the reality that an insolvency appointment is personal to the appointee, answerable for the conduct of the administration. Rather it seeks to reinforce that responsibility by ensuring that the IP’s inevitable need for resourcing and other support is available and appropriate.
The regulation of insolvency firms has not been directly raised in Australia, though the ILRA 2016 gave ASIC a new power to demand the insolvency policies and procedures adopted by a liquidator and their firm, but with only 3 such demands issued in 2022-2023, and 5 the year before, the power has not been much used: s 30B ASIC Act 2001.
The Australian PJC Report into corporate insolvency of 12 July 2023, in looking at “the role, remuneration, financial viability, and conduct” of IPs, discussed issues concerning the remuneration of IPs, the extent of unfunded work, and the imposition of ASIC levies. The regulation of firms, nor IPs for that matter, did not directly arise. It is the current PJC inquiry into Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry that may bring some focus to firm regulation.
=============================
================================================
[1] Regulatory Guide 258 Registered Liquidators: Registration, disciplinary actions and insurance requirements (RG 258), Table 5.
[2] Processes for registration of trustees | Australian Financial Security Authority (afsa.gov.au)
[3] Re Dare [1992] FCA 509
