The regulation of insolvency practitioners (IPs) might come in for scrutiny in light of two current matters involving apparent missing funds – a liquidator and $2.5 million taken over six years, that only now is coming to a regulatory conclusion; and a bankruptcy trustee where close to $2m is said to be missing, with freezing orders from the court already having been obtained.
The liquidator
As to the first case, ASIC reports a liquidator, Peter Amos, has entered a plea of guilty to charges that from 6 October 2016 to 31 December 2022, he transferred a total of $2,498,546.45 from the accounts of various insolvency administrations to his firm, Amos Insolvency Pty Ltd, since wound up. He is committed for sentence to the District Court of NSW on 17 June 2024.[1]
Amos was a liquidator registered and regulated by ASIC; and an ARITA member and a member of CAANZ.
Some background from ARITA is that following concerns raised by one of its members, it lodged industry notices with ASIC in October 2021 about the conduct of Amos.[2] Initially, ARITA said it chose not to pursue Mr Amos directly so as not to prejudice action that was the proper jurisdiction of enforcement agencies. In August 2022, ARITA terminated his membership.[3]
On 23 August 2022, CAANZ said it received a “complaint” from ARITA of serious allegations concerning Amos which it started to investigate before becoming aware, in March 2023, that ASIC was investigating and it ended up suspended his membership. [4]
The trustee
AFSA reports that on 2 February 2024, the Inspector-General in Bankruptcy cancelled the registration as a trustee of Paul Leroy, effective 5 February 2024, saying that he had failed to maintain mandatory professional indemnity and fidelity insurance cover.[5] ARITA thereupon terminated his membership. He also appears to be or was a member of CPA and IPA.
There is more to it than lapsed insurance with the Inspector-General then saying he
“is investigating the management of bankrupt estates administered by the now deregistered trustee. The investigation is ongoing and further details will be provided at an appropriate time”.
Recovery action against Mr Leroy is now before the Federal Court with a next return date of 14 June 2024.
Regulatory structure
The regulatory structure for insolvency practitioners in Australia is rather unique, as introduced by the ILRA 2016. Unlike the UK and NZ, it is largely based on direct government regulation, by ASIC and AFSA, but with some nominal co-regulation from “industry bodies”, 14 in all. These include ARITA, CPA, CAANZ and IPA, and the law societies and bar associations around the states and territories.[6]
That co-regulation enables an industry body to notify either of the two regulators – ASFA or ASIC – by way of an “industry notice”, if it has concerns about the conduct of a trustee or liquidator.[7] The law assumes that each one of those bodies takes on some responsibility for regulation of its accounting members or, through lawyer members who might have some dealings with IPs.
Their inclusion seems to have been a law reform after-thought.[8] In any event, the main regulation comes from each of AFSA and ASIC, separately.
The regulatory players
Financial fraud can be hard to promptly detect but no doubt some inquiry would need to be made how Amos’ actions seem to have remained undetected – from 2016 to 2022, in an amount of over $2.5 million, despite the degree of regulation. No doubt details concerning Mr Leroy will be reported soon.
Industry bodies
Under the co-regulatory scheme, ARITA, CAANZ, CPA and IPA are the main actors, unless other individual members had concerns they should have reported, or lawyers for the creditors came across any concerns. ARITA members are required to “consider reporting unethical and illegal behaviour which they observe”, apart from their legal obligations, which may have occurred with Amos.
As to Amos and Leroy themselves, as ARITA members they were subject to a “quality assurance review from time to time” to be conducted by an appropriately qualified and experienced person, meaning in this case a file review by ARITA or on its behalf by a Foundation Organisation, such as CAANZ, CPA or IPA and “conducted in accordance with the Regulations”. Each of CAANZ, CPA and IPA would have their own quality review process. What reviews were in fact conducted would be relevant.
The law
When the particular harmonised legal requirements for liquidators and trustees to handle estate funds were aligned by the ILRA 2016, there was much of the usual comment about the need for “strict liability” offences for
“late-banked monies, monies withdrawn from accounts without authority or where a practitioner fails to bank funds into the correct account [with] penalties for these offences [to] be increased to provide a genuine deterrent”.
Increasing the level of penalties for breaches of these obligations would
“provide an appropriate disincentive to insolvency practitioners from either falsifying or failing to keep a proper record of the [estate]”.
The deterrent effect of penalties is problematic and is said to broadly rely upon the likelihood of prompt detection and enforcement, even though in each case the amount involved would lead to a severe penalty on conviction. While under the regulatory scheme, the accounts of practitioners are nominally open to inspection by the regulators, and creditors, and oversight by the courts, the perception, and reality, of the likelihood of detection occurring may be inadequate to support the intended deterrent impact of the law.
The regulators
As to ASIC and AFSA, the government’s reforms did accept that greater alignment of the two sets of laws, including regulation, would be of benefit in enhancing regulators’ powers “to conduct surveillance and inquire into … conduct”. Almost as a fall-back, s 10-5 provides that if there are regulatory issues with the one co-registered practitioner, ASIC and AFSA must “co-operate”.[9] That is as close to a harmonised regulatory approach as the law achieved.
AFSA sets out its processes for trustee regulation, including fraud control within estates: see Monitoring and inspection of bankruptcy trustees and debt agreement administrators – IGPS 11 with data available at Practitioner Surveillance, Enforcement and Compliance statistics.
It reports on a tiering regime for trustees, based upon failure leading to harm that is 1 systemic, 2 moderate and 3 minor. It has shifted its regulatory focus from individual practitioners to firms, noting that of 144 firms, 9 firms (including the Official Trustee) are responsible for administering 80% of all active personal insolvencies: [1] Inspector-General, (2024) 36(1) ARITA J 46. State of the Personal Insolvency System Report | Australian Financial Security Authority (afsa.gov.au)
ASIC’s Corporate Plan says it will “continue to identify and take action against poor behaviour by registered liquidators, including behaviour related to independence, remuneration and competence.” Its Corporate Insolvency Updates provide regular regulatory guidance.
Getting the money back?
IPs are required to maintain adequate insurance, ie, adequate and appropriate professional indemnity insurance and adequate and appropriate fidelity insurance against the liabilities that the IP may incur working as a registered trustee[11] or liquidator.[12]
Some history to that goes back to the 19th century when modern insolvency law was evolving and the standards of practitioners were not high. Trustees in Victoria were accused or engaging in a free for all
“actuated simply by a desire to get all they possibly can out of an estate; they do not look to the interests of creditors, and there is no proper check or proper control over them. … Thousands and thousands of pounds have been lost to the creditors of various estates by the manner in which trustees have been allowed to go on taking the money belonging to the estate …”.[13]
That is when the requirement for a bond or security was imposed, eg, the 1897 Insolvency Act (Vic) and that requirement continued into the 1966 Bankruptcy Act. Bonds were ultimately replaced by the current insurance requirements in 1996.[14]
Corporate insolvency reform came, typically, later, in 2008. Former s 1284 of the Corporations Act required liquidators to maintain with ASIC a security for the due performance of their duties.[15] These insurance performance bonds became no longer available, and in practice ASIC had been waiving the requirement for many years. Professional indemnity insurance and fidelity insurance became requirements in 2008.
How much insurance will assist in these cases, or actual recovery of funds, we need to wait and see.
Having explained all this, the occurrence of such frauds among insolvency practitioners does not appear to be that common and may well be lower than among the comparable professional population. In perspective, bankruptcy trustees administered over $290 million in receipts in 2022–23, and over $287 million in payments.[16]
We will be clearer about what might have gone wrong in each case, and what changes might be needed, when the regulators report.
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[1] 23-347MR Former registered liquidator pleads guilty to dishonest conduct | ASIC
[2] “Pursuant to provisions in the Corporations Act that allow professional bodies to raise conduct concerns about registered liquidators”….: ARITA.
[3] Termination of ARITA Membership – Mr Peter Amos.
[4] Disciplinary hearing decisions | CA ANZ (charteredaccountantsanz.com).
[5] AFSA rocked by ex-trustee’s alleged theft (insolvencynewsonline.com.au)
[6] ARITA; CPA Australia; Chartered Accountants Australia and New Zealand; the Institute of Public Accountants; the New South Wales Bar Association; the Law Society of New South Wales; the Victorian Legal Services Commissioner; the Victorian Legal Services Board; the Bar Association of Queensland; the Queensland Law Society; the Legal Practice Board of Western Australia; the Law Society of South Australia; the Legal Profession Conduct Commissioner of South Australia; the Law Society of Tasmania; the Law Society of the Australian Capital Territory; and the Law Society Northern Territory.
[7] Section 40-100 IPSB, IPSC.
[8] That I know of.
[9] Section 10-5 IPSB IPSC.
[10] Inspector-General, (2024) 36(1) ARITA J 46.
[11] Inspector-General’s expectation in relation to insurance afsa.gov.au
[12] RG 258 – Registered liquidators: Registration, disciplinary actions and insurance requirements
[13] Inspector-General in Bankruptcy v Bradshaw [2005] FCA 424
[14] Bankruptcy Legislation Amendment Act 1996.
[15] Corporations Amendment (Insolvency) Act 2007
[16] AFSA Stats.
