In response to the PJC Report, although a bit premature, ASIC is reviewing its RG 16, on offence reporting obligations, its consultation paper acknowledging many of the issues raised in the Report, but also awaiting the government’s response to that report: see 24-072MR ASIC consults on misconduct reporting guidance for external administrators and controllers | ASIC. ASIC says it expects its proposed updates will “provide improved guidance on reporting requirements, reducing unnecessary effort and expense”.
My 2019 article – Offence reporting by insolvency practitioners (2019) 20(4&5) INSLB 88 was written at a time of “ongoing tension between ASIC and the corporate insolvency profession about offence referrals by liquidators”. Offence reporting by insolvency practitioners — (2019) 20(4&5) INSLB 88 (1)
The profession refers many breaches of the law to ASIC – in the thousands each year – pursuant to their duties to do so under s 533 and related sections of the Corporations Act, and at a cost to themselves and creditors, but few regulatory proceedings or prosecutions eventuate.
This tension was evident during the 2023 PJC inquiry when virtually automatic – 45 second – rejections of referrals were reported by IPs, based it seems on AI assessment. There was some support for the offence reporting, but opposition to the extent required, and the inaction following.
The PJC’s recommendation 19 was that any comprehensive review of insolvency law consider whether the current statutory reporting obligations for insolvency practitioners are best serving the integrity, efficiency, and efficacy of the Australian corporate insolvency framework, including (but not limited to) the ability of ASIC to appropriately process, use and respond to those reports on current resources; and the appropriateness of existing reporting thresholds, having regard to their regulatory value as well as the burden imposed on insolvency practitioners.
The committee further recommended that in the interim, the government and ASIC consider whether any timely changes could be made to the regulations on reporting thresholds, and ASIC’s response to insolvency practitioner reports.
Hence, in response to that, ASIC is reviewing its RG 16 – External administrators and controllers: Reporting of possible offences and misconduct – with feedback due by 6 June 2024.
Background
Some history puts the issue in perspective. A threshold point is the validity of the assumption that each and every insolvency requires some investigation and reporting of any misconduct. This appears to have originated in the 19th century, and in respect of corporate insolvency.
There was said to be good reason for that.
McPherson has noted[1] that while the corporate form has been of great benefit to society, it has also
‘provided opportunities for fraud on a scale undreamt of in the past. …
According to one estimate,[2]
‘at least one in every six of the companies wound up during the first 25 years of general limited liability owed its failure to fraud or gross mismanagement verging on fraud and the proportion is said to have increased, rather than declined, during the closing years of the 19th century’.
He compares that to Australia in the 1980s, such that
‘[b]y the late 1980s and early 1990s Australia saw a large number of corporate collapses, a good portion of which can probably be attributed to the excesses of the 1980s’.
At the same time, many companies went into liquidation not through abuse or fraud but as a result of the harsh recession around that time. McPherson refers to further large corporate collapses in the early 21st century, including Ansett Airlines, OneTel, and the HIH Insurance Group, with mixed causes.
He goes on to say
‘it is evident that facilities for investigations, examinations and prosecutions form an important part of the scheme for policing and enforcing obedience to the requirements of the Corporations Act 2001 and other corporate legislation’.
…. winding up provides what is generally the only opportunity for subjecting the affairs of a company to the sort of close and detailed scrutiny that can reveal the existence and extent of any frauds that may have been committed by those involved in its promotion and management. Publicity, discovery and deterrence are the principal objects of both investigations and examinations’.
He explains that examinations have been important over the years and a large body of law has grown up in relation to them. Criminal prosecutions may result from discoveries made during the winding-up process and applications made for civil penalty orders. It is not only large enterprises that might need scrutiny. SMEs are the largest tax defaulters and wage theft and related abuses exist.
How much if any investigation is required?
All that may well be but, applying some perspective, I suspect that if any solvent trading company were on a given day subjected to a liquidator’s combing through the records, breaches of the law would be found – the winding up process is like that.
In fact, it is a little odd that this investigation takes place when the company has collapsed, and the damage done, not when it is trading.
And the scrutiny given to the companies that go through external administration compares with the limited, if any, scrutiny given to the five times as many assetless companies that manage to avoid the process and are deregistered by default, under s 601AB. This is said to be because
“both employees and general unsecured creditors … will need to fund the company’s liquidation themselves if they hope to recover anything of what they are owed, and risk further losses if it eventuates that company has no assets. As a result, many of these creditors do nothing, and the abandoned companies are eventually deregistered by ASIC for failure to return documents or pay annual fees”.[3]
The PJC has recommended that these deregistered companies be looked at more closely.
If the public purse is to assume its proper responsibilities for investigating insolvencies, an informed assessment of the extent of that investigation must be made. That is a policy decision of government exercised across a range of compliance areas. The tax system relies upon self-assessment regulated by audits. The PJC wisely suggested that now would be an appropriate time for the costs and benefits of liquidator reporting to be examined to provide an appropriate basis for future policy and legislative settings, and who pays. Provision of access to Director IDs and free ASIC searches would be needed.
If IPs are acknowledged as performing public responsibilities as agents of the state, and if insolvency’s “private functions should be performed by the private sector and paid out of funds otherwise available for distribution among creditors, while public functions should be performed by public officials and paid for out of public funds …”,[7] then the costs of these tasks – one estimate to the PJC was $5,000 – and who wears those costs, has to be resolved.
See also Insolvency practitioner offence reporting – a need for reform – Murrays Legal
AFSA
As to comparisons, AFSA refers to the statutory obligations of trustees to
‘enquire into the conduct of a bankrupt to ensure the bankrupt discharges his or her obligations under the Act, to consider whether the bankrupt has committed an offence against the Act and refer to the Inspector-General, or to the relevant law enforcement authority, evidence of any offence by a bankrupt against the Act’.[4]
AFSA says that ‘[i]t is also expected [my emphases] that a trustee will report any offence committed by any person under the Act to [AFSA]. For example, a person commits an offence under section 263(1)(d)(iii) if they lodge a proof of debt that is untrue in any particular, or a person commits an offence under section 263(1)(a)(i) if they conceal property of a bankrupt with intent to defeat creditors’.
AFSA continues that
‘[t]rustees are considered officers of the court and have a pivotal role in supporting the integrity of the Australian personal insolvency system. Trustees are therefore expected to discharge their duties in a manner that not only serves the operation of the Act, but also provides equality between creditors and fairness to bankrupts and debtors’.
It is good of trustees to take on these public interest tasks. The contributions of bankruptcy trustees to AFSA’s regulation of criminal conduct – Murrays Legal
New Zealand
NZ has tried several provisions dealing with this issue over the years.
NZ’s s 60 of the Insolvency Practitioners Regulation Act 2019 is an attempt to moderate the task imposed on IPs. It imposes a duty on insolvency practitioners to report if they have
“reasonable grounds to believe that a serious problem has arisen in relation to a company in respect of which” they are appointed.
“Serious problem” means any of criminal offending, misapplication of money or property, default and breach of trust, breach of director’s duties and mismanagement causing insolvency.
Section 60(6) provides that
“nothing in this section requires an insolvency practitioner to take any steps to investigate whether a serious problem has arisen”.
At the same time, the penalty is NZ$10,000 for breach.
Protections and guidance are given in following sections. Licensed insolvency practitioner obligations | Companies Office
This is an attempt to provide a materiality threshold, a broad suggestion that ASIC made to the PJC: [10.30].
Section 60 was enacted to replace provisions in the NZ Companies Act 1993 and Receiverships Act 1993 that required a liquidator, for example, “who consider[ed] that an offence that is material to the liquidation has been committed to notify or report suspected offences …”: s 258A. Section 60(6) appears to create no onerous obligation on an insolvency practitioner unless the evidence and offence is clear.
UK
The creation and development of an insolvency profession in the UK in the 1980s has been described as an opportunity by the then Thatcher government to “clean up the markets” to address problems in their “efficiency and legitimacy”.[5] While, for the first time, the insolvency profession was given standing and extensive co-regulatory authority, with appointments limited to its licensed practitioners, the quid pro quo was that its
“members would be charged with both public and private responsibilities, concomitantly as agents of state purposes and commercial interests[6]”,
by way of a legal requirement to refer misconduct under the Company Directors Disqualification Act 1986. In Secretary of State for Business and Trade v Sekhon (Re Combat Construction Ltd – Company Directors Disqualification Act 1986) [2024] EWHC 674 (Ch) (28 March 2024) (bailii.org), the director’s policy of non-payment of Crown debts, but payment of other creditors, established that his conduct fell below the standards of probity and competence appropriate for a person fit to be a director. The Court imposed a ban of 4 years.
Australia
ASIC’s consultation will be useful but any complete review by the government recommended by the PJC where data can be gathered and the costs and benefits can be examined, and who pays for these investigations, will be more useful.
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[1] [15.10] Purposes of investigation powers
[2] “Insolvencies following registration amounted to just over 30 per cent over the period 1856-1883, rising steadily during this period”, citing The Limited Companies of 1866-83 in Carus-Wilson (ed), Essays in Economic History, pp 380-385.
[3] Anderson, It’s all about the money.
[4] See Insolvency Practice Rules (Bankruptcy) (IPR) which outline the standards for trustees generally and s 19 of the Bankruptcy Act which outlines the duties of a trustee in bankruptcy. Inspector-General Practice Statement 14 IGPS 14 – Referring offences against the Bankruptcy Act 1966 to the Inspector-General.
[5] P 153
[6] When things go wrong – Organisational Failures and Breakdowns, Helmut K Anheier, Sage, 1999, Ch 9, Creating the Agents of Corporate Rescue, Halliday and Carruthers at 155.
[7] P Heath, Insolvency Law Reform: The Role of the State (1999) NZLRev 569
