In brief - Bill implements reforms proposed in options paper
The Insolvency Law Reform Bill (the Bill) introduced in December 2012 effectively implements reforms previously proposed in the 2011 options paper A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia.
Requirements imposed on insolvency practitioners to be more rigorous
The Bill will amend the Corporations, Australian Securities and Investment Commission and Bankruptcy Acts. On a superficial level, the Bill aims to promote a high level of practitioner professionalism and competency, enhance transparency and communication between insolvency practitioners and stakeholders and promote increased efficiency in insolvency administrations.
What this basically means to the insolvency practitioner is that the laws on registration, disciplining and regulation will impose more stringent requirements than in the past. It also means enhanced creditor rights across all forms of insolvency administrations and provides greater powers for creditors to remove practitioners and determine fees.
The three main avenues through which the Bill seeks to achieve the federal government's goals are more stringent insurance obligations for insolvency practitioners and harsher penalties for non-compliance, new requirements for practitioners to notify regulators of prescribed events and the general disciplining of insolvency practitioners.
More stringent insurance obligations for insolvency practitioners and harsher penalties for non-compliance
Insolvency practitioners must maintain adequate and appropriate professional indemnity and fidelity insurance or face penalties ranging from $10,200 to a maximum of $170,000 in circumstances where they recklessly or intentionally fail to comply.
While the definition of "adequate and appropriate" has not yet been provided, the Explanatory Memorandum to the Bill states that the Inspector-General may determine what constitutes "adequate and appropriate insurance" in relation to both categories of insurance.
We will all stay tuned on this.
New requirements for practitioners to notify regulators of prescribed events
Insolvency practitioners must notify their respective regulators - the Australian Securities & Investments Commission (ASIC) for corporate insolvency practitioners and Insolvency and Trustee Service Australia (ITSA) for personal insolvency practitioners - where prescribed events occur that would effect the ability of that person to continue to practice.
Where the person intentionally or recklessly fails to notify the relevant regulator within five business days after they could reasonably be expected to be aware that the prescribed event has occurred, they commit an offence.
What constitutes a prescribed event is yet to be determined, however, it would be safe to assume at this stage that any event affecting the ability of a person to carry out their duty would be reportable.
The regulators may direct an insolvency practitioner to lodge a practitioner or administration statement or correct an inaccurate one. There is no current corresponding law under either the bankruptcy of insolvency regimes.
Insolvency practitioner's registration can be cancelled in certain circumstances
Pursuant to Sch 2, Pt 3, Div 16.D of the proposed Bill the regulators may, by giving a written notice, suspend or cancel the registration of an insolvency practitioner where the practitioner:
• is disqualified from managing companies
• ceases to have adequate and appropriate professional or fidelity insurance
• has their registration cancelled under other insolvency framework
• is convicted of an offence involving fraud or dishonesty
• requests it
Additionally, registered trustees may be suspended or cancelled directly by the Inspector-General where they owe more than a prescribed amount of estate charges.
Issuing a show cause notice to insolvency practitioners
Regulators may issue a show cause notice to a practitioner and make a referral to a Committee where in the regulator's opinion, a practitioner:
• has breached their duties
• no longer meets the requirements to maintain registration
• is no longer residing in Australia
The Committee which consists of the relevant regulator, a practitioner appointed by the Insolvency Practitioners Association of Australia (IPAA) and a person appointed by the relevant Minister, may then:
• deregister the practitioner
• suspend the practitioner's registration
• suspend the practitioner's ability to accept new appointments
• impose a condition on a practitioner's registration
• issue a public admonishment
• prevent the practitioner from operating as an employee, agent, or consultant for another insolvency practitioner for up to 10 years
Bill aims to modernise and harmonise regulatory framework governing corporate and private administration
As stated in the title of the 2011 options paper from which the Bill was derived, the ultimate goal is the modernisation and harmonisation of the regulatory framework governing corporate and private administration. Where there have previously existed two classes of liquidator - registered liquidator and official liquidator - the reforms will remove the designation of official liquidator to create a single class of practitioner capable of accepting all forms of corporate administration.
The new Bill provides for the exercise of greater creditor powers in both corporate insolvencies and personal bankruptcies. Creditors may request information from an insolvency practitioner through a resolution or on an ad hoc basis, and if the request is not unreasonable, the practitioner must comply with the request. In addition to this, the circumstances in which an insolvency practitioner must convene a meeting of creditors will be standardised, with the Committees of Inspection having the ability to direct the practitioner to convene meetings.
The Treasury website notes that "a second tranche of the Bill is expected to be released shortly setting out further consequential amendments to the corporate and personal insolvency legislation as a result of these reforms, along with transitional measures".
There are varying views as to how effective the proposed amendments will be.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.