House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business, Assistant Treasurer, the Hon Kelly O'Dwyer MP and the Attorney-General, the Hon Senator George Brandis)

Chapter 4 - Introduction - Insolvency Practice Schedule (Corporations)

Outline of chapter

4.1 Schedule 2, Part 1 to this Bill inserts the Insolvency Practice Schedule (Corporations) (the Schedule) as Schedule 2, to the Corporations Act.

4.2 Part 1 of the Schedule contains an Introduction to the Schedule which sets out the object of the Schedule, a simplified outline of the Schedule and the Dictionary of definitions.

Context of amendments

4.3 Two of the key objectives of the Bill are to align the registration and disciplinary frameworks that apply to registered liquidators and registered trustees and also align a range of specific rules relating to the handling of corporate external administrations and personal bankruptcy. This is achieved by introducing new Schedules into the Bankruptcy Act and the Corporations Act containing common rules in relation to these subject matters.

Summary of new law

4.4 The Schedule has three objectives:

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to ensure that any person registered as a liquidator:

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has an appropriate level of expertise;

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behaves ethically; and

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maintains sufficient insurance to cover his or her liabilities in practising as a registered liquidator;

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to regulate the external administration of companies consistently, unless there is a clear reason to treat a matter that arises in relation to a particular kind of external administration differently; and

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to regulate the external administration of companies to give greater control to creditors.

Comparison of key features of new law and current law

Detailed explanation of new law

4.5 The Insolvency Practice Schedule (Corporations) (the Schedule) is inserted into the Corporations Act. [Schedule 2, Part 1, item 1, section 600K]

4.6 The Dictionary defines terms used in the Schedule. In some cases, the definition is a signpost to another provision in the Schedule in which the meaning of the term is explained. [Schedule 2, Part 1, item 2, Insolvency Practice Schedule (Corporations), Part 1, section 5-1]

4.7 A company is taken to be under external administration if:

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the company is under administration;

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a deed of company arrangement has been entered into in relation to the company;

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a liquidator has been appointed in relation to the company; or

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a provisional liquidator has been appointed in relation to the company. [Schedule 2, item 2, Insolvency Practice Schedule (Corporations), Part 1, sections 5-5 and 5-15]

4.8 A company is not under external administration for the purposes of the Schedule merely because a receiver, receiver and manager, or other controller has been appointed in relation to property of the company. [Schedule 2, item 2, Insolvency Practice Schedule (Corporations), Part 1, note to section 5-15]

4.9 A person is an external administrator of a company if the person is:

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the administrator of the company;

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the administrator under a deed of company arrangement that has been entered into in relation to the company;

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the liquidator of the company; or

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the provisional liquidator of the company. [Schedule 2, item 2, Insolvency Practice Schedule (Corporations), Part 1, sections 5-5 and 5-20]

4.10 Where there are 2 or more joint external administrators - a reference in the schedule to the external administrator is a reference to all the external administrators. Where there are 2 or more joint and several external administrators - a reference in the schedule to the external administrator is a reference to all of the external administrators or any one or more of the external administrators. [Schedule 2, item 2, Insolvency Practice Schedule (Corporations), Part 1, note to section 5-25]

4.11 References to the property of a company include any Personal Property Securities Act 2009 retention of title property of the company. [Schedule 2, item 2, Insolvency Practice Schedule (Corporations), Part 1, note to section 5-26]

4.12 Companies will be taken to be in a pooled group if a pooling determination is in force in relation to a group of 2 or more companies; or a pooling order is in force in relation to a group of 2 or more companies. Each of these companies is deemed to be a member of the pooled group. [Schedule 2, item 2, Insolvency Practice Schedule (Corporations), Part 1, note to section 5-27]

4.13 A person will be deemed to have a financial interest in the external administration of a company if they are one of the defined persons under section 5-30.

4.14 A person will be deemed to have a financial interest in the external administration of a company if they are one of the defined persons under section 5-30.

Strict liability offences

4.15 Both Schedules create new strict liability offences and retain strict liability offences existing in the Bankruptcy Act and the Corporations Act. It is worth noting from the outset that the application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for individuals who may be accused of breaching such offences.

4.16 Strict liability offences are appropriate in this area of commercial regulation, as it is necessary to strongly deter misconduct that can have serious consequences for affected parties. Strict liability offences also reduce non-compliance, which bolsters the integrity of the regulatory regime enforced by ASIC and AFSA. Strict liability is particularly beneficial to these regulatory bodies as they need to deal with offences expeditiously to maintain public confidence in their regulatory regimes.

4.17 With the exception of section 60-21 discussed in detail below, the strict liability offences in the Bill meet all the conditions listed in the Guide to Framing Commonwealth Offences (pages 23 and 24). For example, the fines for the offences do not exceed 60 penalty units for an individual.

4.18 The majority of strict liability offences relate to conduct by an insolvency practitioner. For example, Division 65 of the Schedule provides strict liability offences around payments into and out of an administration account. By providing a strict liability enforcement regime for duties of insolvency practitioners, the Bill significantly enhances the likelihood of compliance by practitioners.

4.19 Insolvency practitioners possess statutory powers they may use with a high level of discretion in the exercise of these powers. Further, given the financial responsibilities associated with their duties, the consequences of an abuse of power can have far-reaching and significant consequences.. As such, practitioners should be subject to a higher level of scrutiny in the performance of their duties as registered trustees and liquidators. Insolvency practitioners should, therefore, not only refrain from consciously doing wrong but actively take steps to fulfil their obligations and uphold the professional standards imposed upon them. Any changes to practitioner rules and standards do not take effect until 2017. Practitioners will, therefore, have sufficient time to familiarise themselves with any new requirements and guard against the possibility of any contravention.

4.20 Further, many of the strict liability offences relate to conduct where a requirement for proof of intention would be difficult to establish and would render the offence unenforceable. For example, where the prosecution has to prove the accused intended to refrain from paying money into the appropriate administration account when he or she failed to do so. Further, a requirement to establish intent will draw a level of resources for investigation and prosecution from the regulators that cannot always be justified, especially for offences with such a low maximum penalty.

4.21 Some strict liability offences relate to creditor conduct (such as sections 80-55 and 80-60). For example, section 80-60 makes it an offence for a creditor to directly or indirectly become the purchaser of any part of the administration estate, subject to certain exceptions. Strict liability is only imposed on non-practitioners for more serious misconduct that may have significant consequences for innocent third parties. Such as, people who purchase the property in good faith only to have the transaction set aside by the Court.

4.22 Item 265 of Schedule 2 increases the penalty for breaching section 595 such that a person commits an offence of strict liability with a penalty of 50 penalty units, or 3 months imprisonment, or both. The severity of the penalty recognises the importance of appointing an impartial trustee who would have significant power to determine the outcome of an estate for creditors and for the regulated debtor. The conduct described in this offence amounts to an abuse of the insolvency process that could see favourable treatment for the creditors involved in the breach at the expense of innocent creditors. Such conduct would significantly undermine the integrity of the insolvency regime and have far-reaching consequences for insolvency practitioners, debtors, creditors and financial institutions.

Consequential amendments

4.23 The definition of externally-administered body corporate is deleted and replaced by the label Chapter 5 body corporate. The current label of externally-administered body corporate is very similar to the label external administration of a company which is defined for the purposes of the Schedule. An external administration of a company is a smaller subset of the types of administration referred to in the definition of a Chapter 5 body corporate. [Schedule 2, Part 2, items 64 and 67, section 9]

Application and transitional provisions

4.24 The commencement day for the Schedule means the day on which Part 1 of Schedule 2, to this Bill commences. [Schedule 2, item 2, Part 3,section 1551]