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 9 - Regulation impact statement

Introduction

9.1 The insolvency system has a significant effect on both the level and nature of business activity taking place within an economy. An efficient insolvency system is a strong determinant of the accessibility and cost of credit in an economy; and minimises the affect of business failure of stakeholders, such as creditors and employees. It plays a key role in the efficient reallocation of resources and the minimisation of market distortions arising from business failure.

9.2 The insolvency system also plays an important role in detecting criminal activity that may lead to a business winding up and in so doing provides 'a credible threat of detection of wrongdoing that is important to the overall confidence of creditors' ^[1] .

9.3 The Corporations Act 2001 (Corporations Act), the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Bankruptcy Act 1966 (Bankruptcy Act) as well as associated regulations govern the regulation of the insolvency system.

9.4 This Regulation Impact Statement (RIS) seeks to quantify the costs and benefits of regulatory amendments to the personal insolvency and corporate insolvency laws. Those amendments seek to address a wide range of issues that negatively impact on the efficiency and effectiveness of the insolvency system in providing for the fair allocation of resources where a company or individual is unable to meet their debts.

What is the problem to solve?

9.5 Various Parliamentary and Government inquiries have criticised the insolvency system and found changes are necessary to:

•

improve the effectiveness of the regulation of Australia's insolvency profession;

•

improve the effectiveness and efficiency of the regulation of Australia's insolvency laws; and

•

address a range of current regulatory and market failures in the operation of the insolvency system.

The effectiveness of the regulation of Australia's insolvency profession

9.6 Under Australia's insolvency law framework, a corporate insolvency practitioner is registered by the Australian Securities and Investments Commission (ASIC) to undertake the winding up of insolvency corporations (corporate insolvency administration), as well as the voluntary administration and receivership of corporations. A personal insolvency practitioner is registered by the Australian Financial Security Authority (AFSA) to administer the estate of an insolvent individual or regulated debtor (personal insolvency administration).

9.7 Australia has always had separate personal and corporate insolvency systems. This includes separate laws ^[2] , regulators ^[3] , agencies responsible for policy development ^[4] , and ministerial responsibility ^[5] . This formal division mirrored the separation of corporate and personal insolvency laws in the United Kingdom prior to the Cork Report ^[6] and subsequent reforms in the mid-1980s.

9.8 The current framework for the regulation of corporate insolvency practitioners has been subject to consistent criticism since the commencement of a Senate Economics References Committee (the Senate Committee) inquiry into corporate insolvency practitioners and administrators in 2009 (the 2010 Senate Inquiry) ^[7] .

9.9 The 2010 Senate Inquiry considered the practices of corporate insolvency practitioners in conducting external administrations, as well as the role of ASIC in overseeing the corporate insolvency profession. The 2010 Senate Inquiry gave voice to creditor discontent following high profile cases of fraud and negligence by members of the corporate insolvency industry.

9.10 Submissions to the 2010 Senate Inquiry identified a wide range of regulatory failures in relation to the regulation of corporate insolvency practitioners, and in particular expressed concerns regarding:

•

the process for the registration of new corporate insolvency practitioners;

•

the process for the discipline and deregistration of insolvency practitioners who had engaged in misconduct; and

•

the regulatory tools available to ASIC.

9.11 In The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework (the 2010 Senate Report) the Senate Committee criticised the current regulatory framework for the regulation of the insolvency profession, ASIC's performance in the regulatory oversight of registered corporate insolvency practitioners and the effectiveness of the current insurance obligations and remuneration of registered corporate insolvency practitioners.

9.12 Submissions to consultation papers released by the Australian Government in 2011, as well as subsequent consultation with industry participants and other stakeholders in 2012 and 2014 ^[8] further reflected concerns with the current corporate regulation in these areas.

9.13 ASIC has increased its focus on the insolvency industry since the 2010 Senate Inquiry. From 2011 ASIC has formalised a proactive corporate insolvency practitioner practice review program while continuing to review particular transactions prompted by third party complaint or internal intelligence gathering.

Source: ASIC regulation of registered corporate insolvency practitioners: January to December 2014; ASIC regulation of registered corporate insolvency practitioners: January to December 2012

9.14 When undertaking a transaction review, ASIC examines the whole of the transaction in question to ensure the registered corporate insolvency practitioner has adequately and properly performed their duties and functions-complying with the Corporations Act 2001 (Corporations Act) and the Corporations Regulations 2001 (Corporations Regulations), and the professional standards relevant to that transaction.

Source: ASIC regulation of registered corporate insolvency practitioners: January to December 2014; ASIC regulation of registered corporate insolvency practitioners: January to December 2012

9.15 ASIC figures show that the adequacy of investigation and reporting to creditors, remuneration and practitioner independence remain key areas of concern with the industry.

9.16 ASIC's increased surveillance of the insolvency profession has resulted in greater levels of formal investigation and enforcement action, as shown in Table 3.

Source: ASIC regulation of registered corporate insolvency practitioners: January to December 2014

9.17 Despite the increased activity by ASIC in relation to its oversight of the corporate insolvency industry, insolvency practitioners received the lowest rating for perceived integrity in a 2013 survey of ASIC's stakeholders. The survey noted that small businesses 'were particularly negative about the integrity of insolvency practitioners'.

9.18 The negative perception of insolvency practitioners also continues to be borne out in the level of inquiries and reports of alleged misconduct received by ASIC with 384 such reports made to ASIC in 2014, although it is noted that this is down from 446 in 2013 and 477 in 2012. ^[9]

9.19 The Senate Economics References Committee, as part of the 2014 report for its inquiry into ASIC's performance, noted that:

'Clearly, the conduct of liquidations in Australia is still subject to strident criticism and the source of much dissatisfaction.' ^[10]

The effectiveness of the regulation of Australia's insolvency laws

9.20 The Productivity Commission (the Commission) has found that the 'different regulatory treatment of the administration of personal insolvency and corporate insolvency imposes an unnecessary regulatory burden on insolvency practitioners and is impeding the efficient conduct of the insolvency regime' ^[11] . In 2010 the Commission identified that there is clear scope for harmonisation or alignment of provisions to reduce the burden on practitioners, and commented that there was a case for harmonised or aligned provisions in relation to procedural matters such as hiring and firing practitioners, setting and reviewing remuneration, record keeping and reporting, and the holding of meetings. ^[12]

9.21 World Bank research has shown that if creditors are not protected or allowed to participate in insolvency proceedings, they will have less incentive to lend in the future, with flow on effects to the development of a jurisdiction's credit market. ^[13]

9.22 The Commission has commented that Australia's insolvency regime is costly and slow to get started but that, as indicated in Table 4, it is comparable with other countries (including the United States) in terms of time taken, the proportion of funds recovered, creditor participation and management of debtor assets. ^[14]

9.23 The vast majority of companies being wound up in Australia (around 80 per cent) are small (those with fewer than 20 employees), and many of those have no assets to distribute. ^[15] There is a need to ensure that the regulatory framework provides for the most efficient means of winding up such companies by ensuring that the administrative processes that are required under the law during the winding up process are necessary and appropriate to maintain confidence in the system.

Current regulatory and market failures

Registration processes

9.24 A number of submissions to the 2010 Senate Inquiry, and the Senate Committee itself ^[16] , raised concerns with the application process for registered corporate insolvency practitioners. Currently the application is considered 'on the papers' and applicants are not required to demonstrate their understanding of the legislation, or demonstrate that they are 'fit and proper' through practical scenarios.

9.25 Once a corporate insolvency practitioner is registered, ASIC has limited powers to remove or review the practitioner's registration.

High and inflexible entry standards limit competition within the market

9.26 A number of submissions to the 2010 Senate Inquiry remarked on the high level of fees charged by corporate insolvency practitioners. The Senate Committee itself noted that while these charges may be justified in complex cases, overcharging and over servicing was evident in the industry. ^[17]

9.27 The Senate Committee noted that the market for corporate insolvency practitioners is distorted due to the lack of adequate incentives for practitioners to offer fees that are genuinely commensurate with the efficient and effective performance of their duties. ^[18]

9.28 One reason for the lack of competition on price may be the barriers to entry into the market for insolvency services arising from the current registration requirements. Those requirements necessarily limit the ability of competent people to be appointed as a liquidator in an administration until they have can satisfy the statutory experience requirement of five years. There is no scope within the current regulatory framework for an applicant who is capable of providing insolvency services obtaining registration unless they meet the high experience and academic study requirements.

9.29 Furthermore, the current distinction between official corporate insolvency practitioners ^[19] and registered corporate insolvency practitioners imposes an additional regulatory burden on corporate insolvency practitioners given the need to comply with the administrative requirement to be appointed as an official corporate insolvency practitioner. There is no corresponding tiered arrangement in the personal insolvency framework.

9.30 According to a 2011 survey of official liquidators 'the majority of official liquidators (84%) were of the view that the tasks undertaken in their capacity as official liquidators were the same as the tasks undertaken in their capacity as a voluntary liquidator' ^[20] .

Practitioner discipline

9.31 The potential for the removal of poorly performing registered corporate insolvency practitioners is important in maintaining the integrity and credibility of the system. As noted above, ASIC surveys as well as completed and ongoing parliamentary inquiries into the insolvency industry indicate that there is a lack of confidence in the profession.

9.32 The current systems for the cancellation or suspension of registration and discipline of registered corporate insolvency practitioners and registered trustees diverge significantly. The maintenance of two divergent regimes creates additional complexity for practitioners brought before the disciplinary process and may therefore create additional costs.

9.33 The discipline of registered corporate insolvency practitioners through the Companies Auditors and Corporate insolvency practitioners Disciplinary Board (CALDB) has previously been perceived by stakeholders to be a slow and expensive process. In particular, the level of procedural complexity in disciplinary processes has been criticised for being inconsistent with the obligation under the Corporations Act for CALDB to be fast and efficient. ^[21] Cost effectiveness is also affected where respondents choose to use Senior Counsel at hearings, and ASIC consequently considers there is a need for it to be likewise represented. While the speed of disciplinary matters progressing through CALDB has improved significantly since 2010, the time taken for CALDB to finalise matters remains more than twice as long as matters finalised under the personal insolvency system.

Procedural rules

9.34 The corporate and personal insolvency regulatory frameworks currently provide procedural rules regarding: the treatment of estate monies; the obligation on registered corporate insolvency practitioners and registered trustees to lodge, and have audited, a range of reports and documents with ASIC and AFSA respectively; and the keeping of books including the period of time for which those books must be retained.

9.35 The current divergence in rules and requirements for personal and corporate insolvency creates unnecessary complexity and costs for creditors and insolvency practitioners, making it difficult for creditors of individuals as well as companies to understand how the different regimes apply without an in-depth knowledge of both frameworks. This lack of knowledge and expertise is not something that creditors can easily address and it imposes both financial and time costs on creditors to obtain the information they need to protect their interests in a corporate or personal insolvency.

9.36 The divergence also limits the ability for practitioners to easily move between corporate and personal insolvencies as the different approaches to account and record keeping increases costs and the administrative burden on practitioners. Similar but different rules may contribute to error by practitioners through the application of the wrong set of rules in an administration. ^[22]

Insurance requirements

9.37 A registered corporate insolvency practitioner is required to maintain adequate and appropriate professional indemnity insurance and fidelity insurance to cover claims that may be made against him or her. ^[23] An action may be brought by the company, its creditors, a bankrupt's creditors or other affected stakeholders for losses suffered as a result of an act or omission of the registered corporate insolvency practitioner or registered trustee. The insurance requirements attempt to ensure that funds are available to compensate claimants for loss suffered.

9.38 If the practitioner has acted illegally, for example by committing fraud or intentionally breaching their duties, an insurance company is likely to refuse to cover the breach which will impact on the amount a claimant will be able to recover. Likewise, if the practitioner does not hold insurance, the recovery of any losses suffered due to the breach may be reduced.

9.39 Insurance cover may also be ineffective if the insured party ceased paying premiums prior to a claim being made or where they have otherwise breached the contract, such as through inadequate disclosures. In either case, claimants may have to rely merely on the practitioner's individual resources, as claims against the insurance will not be met because of the void or non-existent status of the policy.

9.40 Concerns were raised during the 2010 Senate Inquiry about insurance cover held by practitioners. One area of concern was the inability of the regulator to know when the insurance policy of a corporate insolvency practitioner had lapsed.

Creditor engagement

9.41 Information asymmetries exist between debtors, directors, insolvency practitioners, creditors and members. For example, at the commencement of an insolvency administration, the insolvency practitioner may have little information about the financial affairs of the debtor. The debtor (or in the case of a company, its directors) may be uncooperative in completing and lodging a Report as to Affairs (RATA) which is required to be provided by the debtor at commencement of the administration..

9.42 Furthermore, insolvency administration services may involve a high level of technical complexity. Creditors, particularly small business creditors and non-business creditors, may lack the knowledge and skills to properly understand the full nature of the 'product' that is being offered. It may therefore be difficult for clients to determine what a reasonable and appropriate fee is for such services and then to be able to determine that they are getting what they have 'purchased'.

9.43 As a result, personal and corporate insolvency laws contain a number of mechanisms designed to ensure that stakeholders are appropriately informed of debtors' affairs and the process of insolvency administrations. These mechanisms impose obligations upon practitioners to provide specified types of information and rights for stakeholders to make ad hoc requests for information.

9.44 There are limited opportunities for creditors in an external administration to access the information necessary to determine whether this is actually occurring. The potential inability of creditors to access information about the conduct of the external administration negatively impacts on the ability of creditors to monitor the external administration.

9.45 In the 2010 Senate Report, the Senate Economics References Committee found that while creditors in corporate insolvency may have a right to call a meeting where creditors representing 10 per cent in value agree, the cost of calling and holding the meeting acts as an effective deterrent to creditors doing so.

9.46 Industry concerns have been raised regarding the need for corporate insolvency practitioners to report to creditors annually, or hold meetings, about the state of an ongoing liquidation, and the requirement for a final meeting of creditors under an external administration. These concerns relate to the low level of interest by creditors in these reporting mechanisms that lead to a compliance-based approach to the completion of these processes. The costs of these regulatory requirements are borne by the estate as a whole.

9.47 Creditors and members in a corporate insolvency currently possess limited opportunities to remove a corporate insolvency practitioner or administrator once they are appointed, regardless of poor performance or misconduct. Aside from the costs involved for members or creditors of seeking to remove a registered corporate insolvency practitioner, there is a high potential for the corporate insolvency practitioner's costs of defending an action (even unsuccessfully) to be borne by the liquidation or administration. Court-based remedies are also associated with significant delay, during which the incumbent practitioner will likely continue to act.

Practitioner remuneration

9.48 Concern with the level and method of remuneration charged by insolvency practitioners, particularly the proportionality of remuneration claimed on a 'time-charging' basis to assets available in the liquidation, remains a perennial issue. ^[24] Anecdotally, there appears to be little indication of active price-based competition occurring between insolvency practitioners.

9.49 Complaints regarding remuneration issues, including excessive fees and poor disclosure of remuneration, constituted eight per cent of all insolvency related complaints to ASIC from 2006-2010. A further 12 per cent of complaints were in relation to criticism of insolvency practitioners failing to act in a timely manner which results in practitioners receiving a greater remuneration outcome than ought to have been required for the proper conduct of the administration. ^[25]

9.50 While the law currently provides mechanisms for the review of practitioner remuneration, these mechanisms are mostly court-based and are therefore costly and only likely to be undertaken where the insolvency is of a substantial size.

9.51 The market failures which make the setting of remuneration difficult are set out in the box below.

Cross-subsidisation

9.52 Because practitioner remuneration is paid from assets, practitioners are often not remunerated in full, or at all, because no assets remain. It has been asserted that this may lead to overcharging for services where there will be money available, as a recoupment action.

9.53 The unrecovered costs borne by practitioners in assetless administrations, or administrations with insufficient assets to meet remuneration and disbursements incurred, may be seen as being borne by other administrations through the charging of these risk premiums. It has been estimated that 'insolvency practitioners are required to personally fund disbursements of $1.4 million and remuneration of $47.3 million in the conduct of their roles as Official Corporate insolvency practitioners annually'. ^[26] Concerns persist both within and outside the industry about the effects of this cross-subsidisation.

Expensive options for obtaining remuneration approval

9.54 The law currently provides a mechanism in corporate insolvency for deeming the approval of remuneration up to $5,000 in a court ordered liquidation where a practitioner convenes a meeting but is unable to obtain a quorum.

9.55 In a 2011 survey of official liquidations it was found that of the 31 insolvencies surveyed, corporate insolvency practitioners used this mechanism on two occasions only. The value of remuneration drawn in those matters was $1,307 and $1,049. The limited use of the mechanism reflects commercial decisions made by practitioners of expected returns given that the costs of convening a creditors meeting ordinarily ranges from $3,000 to $4,000.

Obtaining the RATA and books of the company

9.56 RATAs are documents that must be completed and provided by debtors or directors at the commencement of an insolvency administration. They are a means of ensuring that practitioners are provided with information necessary to facilitate efficient administration. The provision of this information is also essential in ensuring that practitioners can provide an appropriate level of information to stakeholders regarding the affairs of the debtor; the likely outcomes of the administration; and the tasks that may need to be performed by the practitioner.

9.57 Where a director fails to provide a corporate insolvency practitioner with the RATA and the company's books and records there is a negative impact on the practitioner's ability to properly conduct the administration. A refusal to provide a completed RATA or to provide books may be motivated by a wish to conceal corporate misconduct in the lead up to insolvency.

9.58 A perennial issue has been directors not providing RATAs. According to lodged initial external administrators' reports from 1 July 2013 to 30 June 2014, there were:

•

1,018 reported breaches of a director's obligation to provide a RATA; and

•

869 reported breaches of a director's obligation to provide the company's books. ^[27]

9.59 It is not possible to state in which situations the RATA and books are least likely to be provided as the statistics are not broken down by administration type. It is, however, assumed that it would most likely be in relation to Court-ordered windings up (as the directors are engaged in the process for commencing the external administration in a voluntary administration or a creditors' voluntary winding up).

9.60 According to a 2012 survey of official corporate insolvency practitioners, a RATA was received in 72 per cent of official liquidations, while ASIC's assistance to obtain a RATA was requested in 20 per cent of cases ^[28] .

9.61 Currently ASIC may assign such a referral to its Corporate insolvency practitioner Assistance Program, which seeks provision of the completed form or books, and commence prosecutions against non-compliant directors.

Source: ASIC

Regulator monitoring, oversight and intervention

9.62 The divergent powers of ASIC and AFSA in relation to surveillance also affect the approaches that the respective regulators take to communicating with creditors. As part of its complaints handling processes, AFSA may examine the file relating to an allegation and report the findings to the person who made the allegation. ASIC is constrained in the extent of any information that it might otherwise similarly provide.

9.63 Similarly, the current wording of some of the statutory powers to conduct investigations and to communicate the outcomes of those investigations under the ASIC Act is more restrictive than the commensurate powers for AFSA under the Bankruptcy Act and the Bankruptcy Regulations 1996. For example, while some of ASIC's powers are exercisable only where it suspects that there has been a contravention of the law, the Inspector-General is not similarly constrained.

9.64 In the 2010 Senate Inquiry, the Committee stated that the reactive approach to monitoring registered corporate insolvency practitioners taken by ASIC at that point in time was inadequate and expressed concern that a complaints system alone cannot deter all misconduct. Since 2010 ASIC has commenced a small proactive surveillance program however the limitations on ASIC powers continue to make that program less efficient and effective than is possible under the personal insolvency system.

9.65 Given the significant information, technical knowledge and technical skill asymmetries present in most insolvencies, creditors may not know when misconduct is occurring within an administration or may think it is occurring when it is not.

Why is government action needed?

Why should the Government intervene?

9.66 While the returns in corporate insolvency in Australia are comparable to other overseas jurisdictions, there remains clear dissatisfaction with the regulation of the corporate insolvency profession and opportunities for improving the efficiency of Australia's insolvency system.

9.67 The insolvency system has a significant effect on both the level and nature of business activity taking place within an economy. An efficient insolvency system is a strong determinant of the accessibility and cost of credit in an economy; and minimises the impact of business failure of stakeholders, such as creditors and employees. It plays a key role in the efficient reallocation of resources and the minimisation of market distortions arising from business failure.

9.68 It is difficult for the market in specialist insolvency services to operate efficiently. This is largely because of asymmetries in technical knowledge, skill and information between practitioners and creditors; the highly heterogeneous nature of the services provided; and the fractured nature of decision making by the 'client'. ^[29]

9.69 These market failures adversely affect efficient price setting of insolvency services; the ability of stakeholders to conduct effective reviews of claims for remuneration; and the ability of stakeholders to monitor the progress of an administration in which they have a financial interest.

9.70 For over 100 years Governments have taken a role in regulating the provision of insolvency administration services, as well as the practitioners who provide those services.

Are there alternatives to government action?

9.71 As at November 2013, 80 per cent of registered corporate insolvency practitioners and 93 per cent of registered trustees were members of the Australian Restructuring, Insolvency and Turnaround Association (ARITA).

9.72 ARITA members are subject to the ARITA Code of Professional Practice which acts as the standard for professional conduct in the insolvency profession. According to ARITA, the Code aims to:

•

set standards of conduct for insolvency professionals;

•

inform and educate ARITA members as to the standards of conduct required of them in the discharge of their professional responsibilities; and

•

provide a reference for stakeholders and disciplinary bodies against which they can gauge the conduct of ARITA members.

9.73 As an industry code of conduct, the Code remains subject to the law as well as the views of the courts, which may decide not to accept or follow particular requirements or guidance in the Code. The Code has been updated twice since 2010.

9.74 ARITA has disciplinary processes in place to deal with breaches of the Code, however the most serious penalty available is to strip a practitioner of their ARITA membership. Such an action may have a commercial impact on the practitioner, but does not prevent the practitioner from continuing to operate in the market.

Objectives, outcomes, goals and target of government action

9.75 The Government is seeking to:

•

improve the effectiveness of the regulation of Australia's insolvency profession to restore confidence in the insolvency services industry, including through providing insolvency regulators with the powers they need to efficiently and effectively oversight the industry;

•

improve the efficiency and effectiveness of the regulation of Australia's insolvency laws by aligning Australia's personal and corporate insolvency laws; and

•

address current regulatory and market failures by:

-

enhancing competition within the market for insolvency services; and

-

empowering stakeholders with an interest in the conduct of an insolvency administration to better protect their own interests.

Options considered as part of this RIS

9.76 The RIS considers a range of options to address the problems identified above.

Options for improving the effectiveness of the regulation of Australia's insolvency profession through changes to the law regarding:

(i)

the registration, discipline and regulator oversight of insolvency practitioners (Options 1.1 to 1.5); and

(ii)

practitioner insurance (Options 3.1 to 3.3).

Options to improve the efficiency and effectiveness of the regulation of Australia's insolvency laws and better address the current regulatory and market failures are considered. Options are therefore considered with respect to:

(iii)

the procedural rules relating to external administrations (Options 2.1 to 2.3);

(iv)

better facilitating creditor involvement in an insolvency (Options 4.1 to 4.3);

(v)

remuneration for providing insolvency services (Options 5.1 to 5.3); and

(vi)

improving information for corporate insolvency practitioners during an insolvency (Options 6.1 to 6.5).

9.77 The options considered in relation to the registration, discipline and regulator oversight of insolvency practitioners will address issues in relation to the remuneration for insolvency services through enhancing competition in the insolvency services market. Similarly the other options may have benefits that address the other objectives the Government is seeking to achieve in these reforms.

1. Registration, discipline and regulation of insolvency practitioners

9.78 Five options have been identified to address the problems associated with the registration, discipline and regulation of insolvency practitioners.

Option 1.1 - status quo

Practitioner registration

9.79 The current frameworks for the regulation of registered corporate insolvency practitioners and external administrations, as set out in the Corporations Act, and for registered trustees and personal bankruptcies, as set out in the Bankruptcy Act, could be maintained.

9.80 The high entry standards for registration as a corporate insolvency practitioner set out under section 1282 of the Corporations Act would be maintained. Corporate insolvency practitioners seeking to be appointed to Court-appointed windings up continue to be required to seek further registration as official corporate insolvency practitioners with ASIC.

9.81 The consideration of applications for registration as a corporate insolvency practitioner are completed 'on the papers'. Once registered a corporate insolvency practitioner remains registered until deregistered voluntarily or involuntarily.

Practitioner deregistration or discipline

9.82 Where ASIC determines that a corporate insolvency practitioner should be deregistered or disciplined, ASIC would either refer the matter to CALDB or the Court. Alternatively, where AFSA determines that a personal insolvency practitioner should be deregistered or disciplined, AFSA would convene a three-person committee to determine the matter or refer the matter to the Court. Any person, regardless of whether the person has a financial interest in an external administration, is able to commence proceedings in relation to a practitioner's conduct of an administration.

Regulators' powers

9.83 ASIC is able to provide information to AFSA where the information will enable or assist it to perform a function or exercise a power, and vice versa. This power is at the discretion of the regulators. There is no obligation on either regulator to seek or provide information in relation to dually registered practitioners.

9.84 ASIC is also able to provide information to enable or assist the accounting bodies CPA Australia and Chartered Accountants Australia & New Zealand to perform one of their functions, but not ARITA. AFSA is able to provide a copy of any report resulting from its inquiries and investigations into the conduct of a personal insolvency practitioner or a bankruptcy administration to any person.

9.85 Where a stakeholder's attempt to obtain information from a practitioner is improperly obstructed by an insolvency practitioner, the stakeholder can go to Court to get an order to obtain access to the information.

9.86 ASIC is empowered to investigate the files of a corporate insolvency practitioner where it has reason to suspect that the corporate insolvency practitioner has contravened the Corporations Act; or has not, or may not have, faithfully performed his or her duties. The requirement for ASIC to have reason to suspect a contravention before commencing an investigation may inhibit the ability of ASIC to undertake a surveillance program on a proactive basis.

9.87 Where a creditor requests that an insolvency practitioner hold a meeting and that request is ignored or unreasonably rejected, the creditor maintains a right to apply to Court for an order requiring a meeting to be held.

Option 1.2 - alignment between corporate and personal insolvency frameworks

9.88 The current registration, deregistration, disciplinary and maintenance of registration mechanisms in the Corporations Act and Bankruptcy Act would be replaced ^[30] with a new regime, based on the current Bankruptcy Act provisions. This regime would introduce a common set of provisions, with minor tailoring to the needs of each system.

Practitioner registration

Registration of insolvency practitioners

9.89 A new aligned registration process based upon the existing Bankruptcy Act provisions would be introduced replacing the current systems for registration of corporate insolvency practitioners and registered trustees. There would be a single class of practitioner in corporate insolvency (although registrations may be conditional or restricted to some kinds of administration). The separate class of official corporate insolvency practitioner, as well as debtor company specific registration, would be removed. Registered corporate insolvency practitioners would be able to perform all functions currently restricted to official corporate insolvency practitioners.

9.90 Applicants would be required to meet a set of minimum initial and ongoing standards for registration as an insolvency practitioner. These requirements would be relevant not only to initial registration, but also to subsequent disciplinary processes.

9.91 An individual would be able to be registered where they do not meet the prescribed academic requirements, provided that a committee convened to consider the application is otherwise satisfied that the individual would be able to satisfactorily perform the duties of a registered corporate insolvency practitioner or registered trustee.

9.92 The mandatory experience requirements for registration would be lowered in corporate insolvency from five years to three years, with a new obligation to complete formal tertiary qualifications in insolvency added to the current requirements for legal and accounting qualifications.

9.93 A committee would consist of a member of the relevant regulator, a representative of ARITA, and a representative of the relevant Minister. A committee would be convened on an ad hoc basis to consider applications for registration as well as disciplinary matters (see below).

9.94 The current residency requirement (that exists in corporate insolvency) would be removed. However, the regulator would be empowered to impose conditions to address non-residency.

9.95 Under an aligned registration system, the regulators would be responsible for: accepting initial applications; determining that they are complete and accompanied by the relevant fee (the 'application fee') (estimated to be approximately $2,200); and referring them to a committee convened to determine whether the applicant should be registered. The current requirements for how an application is considered in personal insolvency would substantively be adopted under both regimes.

9.96 The procedures of a committee would be based upon current personal insolvency committees. A committee would also be entitled to dispense with a hearing and determine a matter on the papers with the consent of the practitioner.

9.97 If a committee determines that a person should be registered, the regulator must register them subject to their taking out insurance and paying a registration fee (currently expected to be set at $1,300) which would be imposed as a tax. This registration fee is in addition to the application fee.

9.98 A person would be able to apply for restricted registration. This will provide flexibility in the system to increase the number of participants in limited sections of the market. For example, an applicant may seek registration as a corporate insolvency practitioner restricted to performing receiverships only.

Conditions on registration

9.99 Practitioners would be obliged to comply with any conditions on their registration, whether they are industry wide conditions, or specific conditions imposed on the practitioner by a committee or by agreement with the regulator.

9.100 Regulators would be empowered to approve industry wide conditions in relation to specific areas such as continuing professional education and the establishment and maintenance of a system for resolving complaints.

9.101 A committee would also be empowered to impose conditions upon specific practitioners.

Renewal of registration

9.102 Registration would be for a three-year period. A practitioner would be required to apply to the respective regulator for renewal of their registration. A fee would be payable (currently expected to be set at $1,700).

9.103 Renewal would be granted where the applicant has provided proof of insurance and has no outstanding administration-related taxes or fees in excess of a certain amount and has complied with any continuing professional education obligations.

Involuntary deregistration and disciplinary processes

9.104 A new aligned deregistration and disciplinary process based upon the existing Bankruptcy Act provisions would be introduced replacing the current systems for deregistration and discipline of corporate insolvency practitioners and registered trustees. The system would be modelled on the current system for registered trustees.

An aligned committee system

9.105 Where a regulator believes that a practitioner has breached their duties or obligations under the respective statute, the regulator will be empowered to issue a 'show cause' notice to the practitioner and, if not satisfied with the response, refer the matter to a committee convened by the regulator for that purpose (on an ad hoc basis) to determine the matter. A committee so convened would again consist of three members, being a delegate of the regulator, a representative of ARITA, and a third member selected by the Minister. The procedures for the committee would be the same as for a committee established for registration of a practitioner.

9.106 The regulator would also be required to issue a show cause notice and make a referral where, in the opinion of the regulator, a practitioner no longer meets the ongoing requirements to maintain registration or is no longer actively practising as an insolvency practitioner.

9.107 A committee would be empowered to grant a wide range of remedies, including: deregistration; suspension; suspension of the person's ability to accept new appointments; imposition of conditions; admonishment or reprimand; and removal of a practitioner from a specified administration.

9.108 The relevant regulators would be bound to give effect to the decision of a committee. The regulator would also be empowered to publicise or require publication of, as it sees fit, the decision and reasons for the exercises of its powers.

Regulator disciplinary powers

9.109 In parallel to being able to refer a matter to a Committee, the regulator would be empowered to impose a restricted class of remedy (deregister or suspend only) on a restricted set of grounds without referral to a Committee.

9.110 The regulators would also be empowered to:

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suspend a practitioner's ability to accept new appointments, without requiring a reference to a Committee, if the practitioner fails to comply with a notice directing them to lodge an outstanding annual administration or practitioner return;

•

direct that a practitioner corrects an inaccurate return previously lodged; and

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appoint replacement practitioners upon a vacancy arising following suspension or deregistration of a practitioner.

9.111 The regulator must afford natural justice to the practitioner prior to determining whether to exercise this power.

Court control over practitioners

9.112 The power of persons to seek a review of a corporate insolvency practitioner's conduct in various kinds of insolvency administration would be aligned and consolidated. In particular, there would be alignment of the persons who have standing to seek court reviews of practitioners' conduct. A person would be required to have a financial interest in an administration in order to seek a review in relation to the administration.

9.113 A Court would be empowered, when considering whether to remove a person from a particular administration, to take into account public interest considerations (such as maintaining confidence in the insolvency system as a whole) that may override the individual interests of the practitioner, creditors and members in a particular administration.

Option 1.3 - co-regulation

9.114 A co-regulation model could be adopted whereby the insolvency industry develops and administers its own arrangements, but Parliament provides legislative backing to enable the arrangements to be enforced.

9.115 Under this option, the regulators would work with the corporate and personal insolvency industries to develop and implement a scheme for the registration, discipline and deregistration of practitioners which would consist of the following:

•

a statutory board, in which all powers and functions for the registration and regulation of insolvency practitioners would be vested. The board would be empowered to vest powers and functions to professional associations; and

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professional associations which would then be responsible for the registration and regulation of their members. ^[31]

9.116 The statutory board would be responsible for:

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determining appropriate standards for the registration of practitioners;

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surveillance of practitioners;

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acting upon complaints received against insolvency practitioners; and

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delegating responsibility for functions to appropriate professional associations.

9.117 The statutory board would consist of: representatives of major industry representative bodies such as ARITA, the Chartered Accountants Australia & New Zealand, CPA Australia and the Law Council of Australia; appointees of the Attorney-General and the Treasurer; and two lay persons. The board would initially be funded jointly by industry (for example, through contributions by industry representative bodies) and the Government.

9.118 A professional body or bodies would exercise powers delegated by the statutory board, including:

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administering the registration system for insolvency practitioners;

•

undertaking surveillance of practitioners; and

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conducting investigations into complaints concerning insolvency practitioners.

9.119 This option would not affect the current rules with which corporate insolvency practitioners and registered trustees must obey in carrying out an external administration or personal bankruptcy, such as the procedural rules, practitioners' obligations to communicate with stakeholders or the ability to remove and replace a practitioner.

Option 1.4 - interim suspension orders

9.120 The regulators could be empowered to prohibit a practitioner from acting on a particular administration for a limited period if the regulator believes serious misconduct occurred on the part of the practitioner and that it is in the best interests of creditors.

9.121 The order would be for a short period of time pending a full hearing about whether the order should be made permanent.

9.122 The stop-order power could be valuable where there is:

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systemic non-compliance by an insolvency practitioner with their duties and obligations or suspected fraud identified by the regulator during its surveillance activities or as a result of investigating a report of alleged misconduct received by the regulator;

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cause to intervene to prevent the sale or transfer of assets by an insolvency practitioner to a related party in furtherance of suspected illegal phoenix activity or where the practitioner's conduct otherwise facilitates the promotion of interests other than those of creditors; and

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an obvious conflict of interest and where the practitioner refuses to step aside.

Option 1.5 - improve regulator powers

Increased regulator powers

9.123 In order to ensure that both regulators have the powers necessary to conduct proactive practice reviews and reviews of individual administrations, both regulators would be empowered to attend premises at which the practitioner is carrying out administrations or keeps books; to inspect books; to require reasonable assistance; and to utilise copying facilities. Suspicion of a breach would not be required for these powers to be exercised.

9.124 Both regulators would be given a broad power to share:

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regulatory information regarding persons with dual registration with the other regulator (or persons seeking dual registration, or in respect of events/actions taking place at a time when they held dual registration);

•

information with ARITA and other relevant professional bodies; and

•

information with the Department of Employment in relation to practitioners' conduct regarding the General Employee Entitlements and Redundancy Scheme.

9.125 Both regulators would be empowered to give written directions to insolvency practitioners to answer questions in respect of an administration or their conduct as a registered practitioner.

9.126 Both regulators would have discretionary powers to provide or make available to stakeholders (including creditors, members, directors, employees, the bankrupt) any information or material relating to an insolvency administration that would fall within the authority of the practitioner to provide on their own initiative. However, the regulator would not be able to provide or make available information to which legal professional privilege applies.

•

Both regulators would also be authorised to direct practitioners to provide information to stakeholders directly.

•

Each regulator would need to give the practitioner responsible for an administration notice of its intention to disclose the information.

•

Where the cost of providing the information sought may impose a significant burden upon an administration, the regulator may require the person seeking access to recompense the administration by an amount determined by the regulator as being reasonable as a precondition of it exercising this power.

9.127 Both regulators would be empowered to share information in such circumstances to enable the adoption of a 'one stop shop' approach for creditors and other stakeholders with an interest in interconnected personal and corporate small business insolvencies.

Power to direct that a meeting of creditors be called

9.128 Both regulators would be given broad powers to direct that a meeting of creditors be called. Regulators would also be empowered to require the inclusion of certain material in convening documents; and attend and participate at meetings of creditors and committees of inspection (COIs) (AFSA currently has this power in relation to meetings of creditors in personal insolvency).

What is the likely net benefit of each option?

Option 1.1 - status quo

9.129 A 'do nothing' option is to be considered in cases where problems may be self-corrected by market mechanisms. As the problems are caused by existing legislative requirements, maintaining the status quo and hence doing nothing will not resolve the issues.

Option 1.2 - alignment between corporate and personal insolvency frameworks

Aligning registration

Registration of insolvency practitioners

9.130 Unregistered individuals working in the corporate insolvency industry wishing to be registered as corporate insolvency practitioners will be able to seek registration earlier than under the status quo. Reducing the registration requirements may facilitate the entry of more practitioners into the insolvency industry thus increasing market competition for insolvency services.

9.131 The Option will facilitate the timelier introduction of new practitioners into the industry by allowing appropriately qualified individuals to register as practitioners up to two years earlier.

9.132 However to ensure standards new practitioners will be required to have undertaken insolvency specific tertiary studies, requiring new practitioners to attend an interview (and potentially sit an exam) rather than merely lodge a written application and new and increased fees.

9.133 Members from the peak insolvency industry body that choose to sit on committees established to consider registration applications will face new costs, which will not be wholly compensated through sitting fees paid by the regulators.

9.134 There will be transitional and minimal increased ongoing cost to ASIC due to the requirement for Committee consideration of a new practitioner, the interview of applicants and amendments to renewal process to accept proof of insurance.

9.135 The removal of a separate official corporate insolvency practitioner status will remove the current obligation on these practitioners to consent to act in a court ordered winding up solely because the company has no assets to cover the anticipated professional costs of the liquidation. This change will assist in addressing the current cross-subsidisation occurring within the industry where the costs incurred in assetless administrations are recouped through higher remuneration costs in larger administrations.

9.136 This current obligation is a result of an undertaking made to ASIC that an official corporate insolvency practitioner will not refuse consent to act as a corporate insolvency practitioner in a court winding up.

9.137 As a result of the change, where a person is petitioning the court to wind up a company the person will likely have to provide a guarantee of a minimum amount to the corporate insolvency practitioner in order for the corporate insolvency practitioner to agree to the appointment. This may mean a reduction in the number of assetless companies liquidated as corporate insolvency practitioners would not be expected to commence such administrations without some form of guarantee or where they do not believe they are likely to be remunerated.

Conditions on registration

9.138 By improving the ability for the regulators to register practitioners with conditions, the regulators will have more flexibility to allow more new participants, which may not previously have been registered because the system did not allow conditions to be utilised to address potential weaknesses in the applicant.

Renewal of practitioner registration

9.139 The introduction of a renewal process on practitioner registration for corporate practitioners will add new compliance costs for current practitioners, as well as new entrants. Based on industry feedback, the renewal process is not expected to increase compliance costs, as the information will be provided at the time of the annual return.

9.140 The actual renewal charge ($1700 every three years), while clearly a cost for business, will not be included in the formal RBM because the fee is classified as a direct financial cost under the RBM framework.

Aligning deregistration and discipline

An aligned committee system

9.141 The Senate Economics References Committee inquiry into corporate insolvency practitioners and administrators in 2010 heard a significant amount of criticism of CALDB for its slowness and the lack of matters put before it. Since the 2010 Senate Inquiry the timeliness of CALDB decision making has significantly improved.

9.142 CALDB has revised its operating procedures twice since 2010 significantly simplifying its proceedings and improving the efficiency and effectiveness of CALDB hearings. The changes in procedures, as well as ASIC's increased focus on the insolvency profession since that time, has resulted in a greater number of referrals to CALDB. The average time taken to hear the six matters heard by CALDB between 2012 and 2014 has halved from 19 months to 91/2 months, compared to the period 2006 and 2010.

9.143 While CALDB has improved the efficiency of its hearing processes, it remains high compared to the average time taken to hear matters through an AFSA disciplinary committee (the average time taken to hear the past six matters was 4.4 months, with five of those six matters being dealt with within three months). The movement to the personal insolvency framework for disciplinary matters aims for a more timely consideration of corporate insolvency practitioner disciplinary matters.

9.144 It is expected that the change to a Committee structure will increase the speed and the informality of a disciplinary proceeding, reducing the costs borne by a practitioner through a more limited need for the engagement of senior barristers or at least reducing the length of their engagement.

9.145 The movement to a disciplinary committee approach, and away from a Tribunal, may continue to see ASIC taking the most complex matters directly to Court. However, this may see the committee dealing with a more refined set of simpler cases allowing it to develop the expertise to be a more streamlined process than currently possible through the Tribunal structure.

Regulator disciplinary powers

9.146 This option would increase the number of types of matters which the regulators would be able to deal with directly without recourse to either a disciplinary committee or the Court. This change will improve the speed at which certain breaches can be dealt with.

9.147 This will better enable timely and appropriate disciplinary action to be taken when misconduct occurs. In order to ensure that practitioners are treated fairly, only objectively assessable breaches should be able to be dealt with by ASIC.

Court control over practitioners

9.148 The alignment of the Court's powers for the discipline of practitioners will aid practitioner and stakeholders understanding of those powers, which will make the system both fairer and more efficient as costs previously wasted on understanding the various systems are avoided.

Source: ASIC, Treasury assumptions, ARITA

Option 1.3 - co-regulation

Industry

9.149 This option would transfer the cost of determining market entrants from the Government (through the regulators) onto private professional bodies. It would also transfer the cost of disciplining practitioners onto these bodies.

9.150 Currently, there is no professional body or industry association that is resourced or structured to undertake this type of a role across the whole insolvency industry. The professional body or industry association willing to undertake these obligations would need to be substantially reformed. Up-front and ongoing funding for this reform would need to be obtained from industry members. Given the small size of the industry (685 registered corporate insolvency practitioners and 208 registered trustees), the cost per industry participant of maintaining the infrastructure needed for effective co-regulation (including ongoing surveillance, dispute resolution, and continuing professional education etcetera) may be prohibitive.

9.151 Once established however, self-regulatory schemes tend to be more flexible and impose lower compliance costs on industry participants than direct government regulation ^[32] .

9.152 It has been recognised that industry members can be harder on 'erring colleagues than generalist tribunals' because of the appreciation of the damage that reports of errors or neglect can have on the reputation of the professional as a whole. Industry members would be expected to be able to quickly perceive where unprofessional errors have occurred ^[33] .

9.153 By providing more power to industry bodies, there is an increased potential for new entrants to be effectively prevented from entering the market as it is in the interests of the current members to restrict the number of entrants to the market.

Consumers

9.154 Granting professional bodies these responsibilities would provide an opportunity for anti-competitive behaviour where it is in the interests of the bodies' members to restrict the number of entrants to the market. The limiting of competition for insolvency services is likely to result in an increase in the cost of these services.

9.155 Given the highly complex nature of corporate insolvency, and the presence of significant and entrenched information asymmetry between practitioners and creditors, there is a significant risk of consumers being harmed where a practitioner knowingly, or unwittingly, breaches their duties and obligations.

9.156 As well, community cynicism regarding industry regulating itself may lead to a distrust of self-regulatory schemes. Professionals, as decision makers, can occasionally be incapable of seeing or reluctant to see the perspective of stakeholders and may be overly attentive to the burdens on fellow professionals ^[34] .

Government

9.157 Any movement toward further co-regulation will encompass transition costs for the Government in the immediate term. However, following the initial transitory period, the cost to Government (in particular, the cost to ASIC and AFSA) of co-regulation should be reduced compared to a purely regulatory system.

9.158 The Court would retain its powers to censure or deregister practitioners. The cost borne by Courts in dealing with applications for investigation or deregistration would not be effected.

Option 1.4 - interim suspension orders

9.159 While it is desirable for regulators to be able to act quickly to protect the public in situations where it perceives that a corporate insolvency practitioner is breaching his or her obligations in a manner that is detrimental to the interests of creditors, the flow-on impacts of this option outweigh the potential benefits of that prompt action. Particularly in situations where the regulator does not subsequently take further formal disciplinary action and the creditors have potentially unnecessarily borne the costs of the disruption.

9.160 There are currently a range of other professions where a member of the profession can be stood down on an interim basis for acting within their field of employment. However, the suspension of an insolvency practitioner would be expected to have a detrimental impact on third parties (in particular, on the creditors of the company and potentially any employees impacted by a disruption to a company being traded on in a voluntary administration or winding-up due to the removal of the controller of the company). This type of impact distinguishes itself from the other professional areas where these powers are available, such as the legal or medical professions.

9.161 The standard approach in the Corporations Act is that a licence or registration can be cancelled or suspended without a hearing on objective grounds, such as the bankruptcy of the person, but a hearing is required for grounds that involve elements of subjective judgment (such as not being a fit and proper person). This approach assures that an individual is afforded procedural fairness before their livelihood is detrimentally affected.

9.162 While a hearing prior to administrative action is the norm, as noted above there is precedent in the Corporations Act for ASIC to take administrative action that detrimentally affects the rights of individuals or companies for a short period in order to protect the public interest.

9.163 Such a power would cause significant reputational damage to the practitioner involved. It would also have a significant negative impact on the efficient administration of the company to which the stop order applies as the administration would have to halt during the period or a replacement practitioner be found to continue the work during the stop order period.

Option 1.5 - increased regulator powers

Increased regulator powers

9.164 An effective proactive surveillance regime is necessary to provide confidence to the market about the conduct of corporate insolvency practitioners, however such a regime must be implemented as efficiently as possible in order to minimise the regulatory burden on practitioners themselves.

9.165 This option would better align the powers available to ASIC in undertaking its proactive surveillance with those available to AFSA removing potential constraints around the exercise of its powers where a suspicion of contravention is not present.

Power to direct that a meeting of creditors be called

9.166 Irrespective of the rights that exist for a stakeholder to obtain information, there may be cases where an insolvency practitioner may improperly obstruct these rights. In such situations empowering the regulatory to intervene to facilitate the provision of information can provide a lower cost alternative to Court intervention. This option would provide for the same powers currently available to the Inspector-General under the personal insolvency framework to be made available to ASIC in relation to corporate external administrations.

9.167 Empowering the regulator to force access to information by stakeholders may decrease monitoring costs and effectiveness for stakeholders and promote confidence through increased transparency. Improving the potential for information to become available may also have a deterrence effect on misconduct. Administrations and practitioners may also avoid ongoing costs where any decisions not to release information are then 'confirmed' by a similar refusal by the regulator to provide access.

9.168 There are a number of consequences that flow from empowering the regulator to force access to information which need to be balanced against any gains. Disclosure may result in costs to administrations (such as losses from disclosing commercially sensitive information) that are not justified in light of the benefits of disclosure. Disclosure may also result in costs that are more direct to an administration, in the form of remuneration and disbursements incurred in providing the information.

9.169 Providing regulators with the power to disclose information may also result in their being exposed to increased workloads. There is also a risk that any such power may result in the regulator second guessing a practitioner on decisions to provide information that are essentially business judgements best left to the practitioner. These disadvantages can however be mitigated through imposing appropriate restraints on any rights by the regulator to provide access.

9.170 Empowering a regulator to call a meeting of creditors ought to address concerns that an external administrator (or registered trustee) facing removal or questions regarding their conduct may delay the calling of a meeting of creditors or interfere with meeting processes for the purposes of avoiding questions on their conduct or consideration of their removal. Additionally, if the registered corporate insolvency practitioner is dishonest, the practitioner, as chair of the meeting, would remain in a position to breach further requirements for the fair conduct of a creditors' meeting to prevent them from being removed.

Source: Source: ASIC, Treasury assumptions, ARITA

2. Procedural rules

9.183 Three options have been identified to address the problems associated with the procedural rules relating to insolvency in order to reduce complexity for insolvency practitioners and other stakeholders involved in both corporate and personal insolvency. While some of the other reforms will assist in restoring confidence in the honesty of the insolvency profession.

Option 2.1 - status quo

9.184 The current rules regarding: the treatment of estate monies; the obligation on registered corporate insolvency practitioners and registered trustees to lodge, and have audited, a range of reports and documents with ASIC and AFSA respectively; the keeping of books and the period of time for which those books must be retained remain divergent between the corporate and personal insolvency systems. Registered trustees are required to keep the original administration books for six or fifteen years.

Option 2.2 - remove statutory procedural rules

9.185 This option removes the rules regarding: the treatment of estate monies; the obligation on registered corporate insolvency practitioners and registered trustees to lodge, and have audited, a range of reports and documents with ASIC and AFSA respectively; the keeping of books and the period of time for which those books must be retained.

Option 2.3 - alignment of procedural rules

9.186 This option aligns the rules regarding funds handling, record keeping and audit requirements between corporate and personal insolvency.

9.187 The requirements on corporate insolvency practitioners and registered trustees to handle estate funds under all administrations would be aligned with minor enhancements, although this would not extend to rules regarding the investment of estate funds. Strict liability offences will apply to late-banked monies, monies withdrawn from accounts without authority or where a practitioner fails to bank funds into the correct account. The penalties for these offences will be increased to provide a genuine deterrent.

9.188 Where an insolvency practitioner is replaced, possession of both debtor and administration records would now pass to the newly appointed practitioner; with rights for former practitioners to inspect and obtain copies. The regulators would also be empowered to take possession of, and transfer, administration and debtor records to new practitioners. This would include any circumstance where there is a temporary vacancy.

9.189 Corporate insolvency record destruction rules will be reproduced in personal insolvency law, but with record destruction dates aligned with trustee release timeframes seven years rather than with the current five-year timeframe in corporate insolvency. The regulators will be empowered to allow electronic copies to be preserved in substitution of hard copies of documents. The unauthorised destruction of records or failing to keep records will be an offence.

9.190 Rules regarding the audit of insolvency administration accounts will be aligned, with audits being able to be initiated by court order as well as at the regulator's initiative. A decision by the regulator to initiate an audit would be reviewable by the AAT.

What is the likely net benefit of each option?

Option 2.1 - status quo

9.191 A 'do nothing' option is to be considered in cases where problems may be self-corrected by market mechanisms. As the problems are caused by existing legislative requirements, maintaining the status quo and hence doing nothing will not resolve the issues.

Option 2.2 - remove all procedural rules

9.192 The option would reduce costs for practitioners by allowing each individual to determine the optimal manner for handling estate funds; however, it would have a negative impact on creditor confidence in the insolvency system. As it would make the handling of funds less transparent, it would make the detection of inappropriate handling of funds by practitioners more difficult for both creditors and regulators reducing the scope for appropriate oversight of practitioner conduct.

9.193 By removing the statutory requirements for these procedural rules, it is expected that the Court would exercise its ability to oversee corporate insolvency practitioners as officers of the Court. In so doing, practitioners would likely remain subject to general trust law in relation to the holding of trust monies.

Option 2.3 - alignment of requirements, with modifications

9.194 Inconsistent rules make it difficult for creditors of individuals as well as companies to understand how the different regimes apply without an in-depth knowledge of both frameworks (something which creditors are unlikely to have). This lack of knowledge and expertise is not something that creditors themselves can easily address and it may impose both financial and time costs on creditors who wish to obtain information necessary to protect their own interests.

9.195 Aligning the disparate and slightly differing formulation of rules regarding the handling of funds will result in minimal costs for practitioners in order to educate themselves of the changes, but should have small long-term savings in internal practice costs for practitioners operating in both personal and corporate insolvency by aligning rules across the different forms of external administration. Alignment should also make it easier for creditors to understand their rights.

9.196 Increasing the level of penalties for breaches of these obligations will provide an appropriate disincentive to insolvency practitioners from either falsifying or failing to keep a proper record of the liquidation. Ensuring the integrity of the books of a liquidation or bankruptcy is paramount to providing creditors and regulators with the ability to monitor the progress of an external administration.

9.197 Clarifying the rules for the transfer of documents between incoming and outgoing practitioners will reduce legal uncertainty for the practitioners themselves (with flow-on savings from legal advice), and improve the efficiency of the process (with flow-on time savings for the respective administrations).

9.198 Providing the Regulator with the ability to take possession of books reduces legal uncertainty in situations where an administration or a number of administrations are vacated by a practitioner (for example, due to illness, death or for disciplinary reasons). Providing this power allows an independent party to take possession of the books while new practitioners are found to take on the files.

Source: AFSA, ARITA

Insurance

9.206 Three options have been identified to address the problems associated with practitioner insurance in order to assist in restoring confidence in the insolvency profession.

Option 3.1 - status quo

9.207 Currently, a registered corporate insolvency practitioner is required to maintain adequate and appropriate professional indemnity (PI) insurance and fidelity insurance to cover claims that may be made against him or her ^[35] .

9.208 In corporate insolvency, a breach of these requirements is an offence of strict liability and the penalty is five penalty units. If ASIC becomes aware that a corporate insolvency practitioner has contravened these requirements, they have the option of cancelling a corporate insolvency practitioner's registration.

9.209 In personal insolvency, a breach of the insurance requirements is not an offence but the Inspector-General may ask a personal insolvency practitioner to provide a written explanation why they should continue to be registered.

Option 3.2 - increase severity of penalties for failing to maintain insurance

9.210 The penalties for failing to hold insurance could be increased from 5 penalty units to 1000 penalty units to better reflect the seriousness of the breach and to provide a stronger deterrent effect.

Option 3.3 - require notification of lapsed insurance policies

9.211 The Government could adopt part of the recommendation of the Senate Committee's Inquiry that the insurance industry be required to notify the regulator if a practitioner's insurance lapses or expires, as this would aid the detection of breaches of the insurance requirements.

What is the likely net benefit of each option?

Option 3.1 - status quo

9.212 A 'do nothing' option is to be considered in cases where problems may be self-corrected by market mechanisms. As the problems are caused by the absence of market mechanisms to effectively deter the breach of practitioner's holding insurance, maintaining the status quo and hence doing nothing will not resolve the issues.

Option 3.2 - increase severity of penalties for failing to maintain insurance

9.213 It is important to ensure that there is a significant incentive for practitioners to maintain their insurances. The current criminal penalties for non-compliance with insurance requirements do not provide that incentive.

9.214 The penalty for a registered corporate insolvency practitioner who intentionally or recklessly fails to meet their obligation to maintain insurance coverage and who exposes third parties to potential resulting loss should be severe in order to deter this behaviour (including cancellation or suspension of their registration as an insolvency practitioner).

Option 3.3 - require insurers to give notification of lapsed insurance policies

9.215 Insurers would be required to amend their systems in order to cater for the provision of notices to regulators, as well as to accurately identify all insolvency practitioners. Industry feedback has been that an insurer's systems would generally code full service accounting firms with insolvency as one service among many as 'accountants' not 'corporate insolvency practitioners'. These system changes would have a cost to the insurers, which may result in insurance providers opting not to offer insurance to the limited size of the insolvency practitioner population.

9.216 Such a notification process would also be expected to lead to a number of 'false positives' as insurers may not be expected to be aware of whether the reason for the lapse in insurance was as a result of the practitioner transferring to another insurer.

4. Improving creditor oversight and engagement

9.221 Three options have been identified to address the problems associated with creditor oversight and engagement with corporate insolvencies.

Option 4.1 - status quo

9.222 Under this option, the current ability of creditors to obtain information and influence the direction of an insolvency would be maintained

9.223 Creditors and COIs would continue to be able to request information regarding an external administration, however the practitioner is not obligated to provide the information unless they are a registered trustee. Creditors of a company in external administration wishing to call a meeting are required to pay the costs of calling and holding the meeting, regardless of the number or percentage of debt held by the creditors in the company.

9.224 Corporate insolvency practitioners would also continue to hold annual and final creditors meetings, as well as send out hard copies of biannual reports to creditors, regardless of the interest of the creditors for whose benefit the meetings are held.

9.225 If the creditors of a company in external administration believe that the corporate insolvency practitioner appointed is not providing value for money, or otherwise should be removed, the creditors would petition the Court for the corporate insolvency practitioners' removal. However, creditors in a bankruptcy are able to remove a personal insolvency practitioner through a creditor resolution.

9.226 Upon removal of a practitioner (whether it be a corporate insolvency practitioner, administrator or registered trustee) from a matter, the administration documents (as opposed to the books of the company itself) likely remain the property of the outgoing practitioner, subject to an express order of the Court.

Option 4.2 - Improving information available to creditors in an aligned manner

9.227 Under this option, amendments would be made to encourage the utilisation of COIs, remove default meeting and reporting requirements, and provide stakeholders with more powers to obtain information when they want it.

Align and consolidate rules for committees of inspection

9.228 The current divergent rules governing COIs in liquidations, voluntary administrations, deeds of company arrangement, bankruptcies, controlling trusteeships and personal insolvency agreements would be aligned. The rules for convening a COI would be common in all administrations, unless there are substantive reasons for divergence.

9.229 COIs would be convened without the involvement of a company's members. ^[36] Rules made under the Act will allow members to be involved where there is a reasonable prospect of them having a financial return because of the conduct of the administration.

9.230 Eligibility for membership of a COI would mirror the current non-pooling corporate and the personal insolvency provisions.

9.231 In order to assist a COI monitor the administration, the COI may be able to obtain specialist advice or assistance, with the expenses taken to be an expense of the administration.

9.232 Members of a COI would be banned from receiving benefits or purchasing assets from the administration without the approval of the Court or the general body of creditors.

Reporting to stakeholders generally

9.233 The current mandatory reporting requirements (including annual and final reporting to creditors) will be removed.

9.234 The obligations on all insolvency practitioners to comply with reasonable requests for information from creditors and members/debtors in liquidations, voluntary administrations, DOCAs, bankruptcies, controlling trusteeships and personal insolvency agreements would be aligned. An insolvency practitioner would be required to give, or make available, information about the administration of the estate to a creditor who reasonably requests it, as is currently the case under the Bankruptcy Act.

9.235 This ability to request information would be extended to the Department of Employment where the company's employees will be calling on the Fair Entitlements Guarantee as a result of the company's liquidation.

9.236 Creditors (and COIs, if delegated by creditors) would be empowered to pass resolutions imposing reasonable reporting requirements regarding the debtors affairs and administrations.

9.237 Rules would be made under the Act to outline when a request will not be reasonable. This would include where there are insufficient funds to pay for the preparation and dissemination of the reporting requirements.

9.238 The current anomalous requirement for notice of a Court decision to wind up a company to be placed in a newspaper would be replaced with the need for the notice to be published on ASIC's Public Notices Website like all other external administration public notices.

Meetings of creditors

9.239 The current mandatory reporting requirements (including annual and final reporting to creditors, and annual and final meetings requirements in corporate insolvency) will be removed, as will the initial creditors' meeting in a voluntary winding up.

9.240 In order to ensure that creditors in a creditors' voluntary liquidation are able to have an opportunity to replace the corporate insolvency practitioner early in the liquidation, the threshold for holding a creditors meeting would be lowered to five per cent by value for replacement resolutions requests made in the two weeks following notification of the commencement of an administration.

9.241 A practitioner in any form of administration would be required to convene a meeting of creditors whenever: the creditors so direct by resolution (at meeting or postal vote); the COI so directs; it is so requested in writing by at least 25 per cent by value of creditors; or it is so requested in writing by less than the specified threshold of the creditors, being a creditor, or creditors who together, represent 10 per cent by value AND who have lodged with the practitioner sufficient security for the cost of holding the meeting.

9.242 Given the short timeframes involved in voluntary administrations, which reduces the practicality of relying on requests to call meetings, initial meetings in this form of administration would be retained.

9.243 During an administration, a resolution of any form would be able to be passed through a postal vote.

Annual returns

9.244 For every estate that an insolvency practitioner administers during a year, the practitioner would be required, within a specified period after the end of that year, to give the respective regulator a return, in the approved form, in relation to the administration of that estate. This would align the laws to the current personal insolvency requirements. The current offence under the Bankruptcy Act would however be removed. Instead, the practitioner would be liable to personally pay a default late lodgement fee (the fee would be imposed as a tax).

9.245 This new obligation in corporate insolvency would be offset by the removal of the requirement to lodge six-monthly copies of receipts and payments with ASIC.

Option 4.3 - Better empower creditors to replace poorly performing practitioners

9.246 Creditors (and members in a members' voluntary winding up) in all forms of administration would be empowered to remove a practitioner through an ordinary resolution. Currently, creditors in a personal bankruptcy are able to remove a corporate insolvency practitioner without obtaining a Court-order.

9.247 In order to protect against abuses of process, insolvency practitioners would retain a right to apply to Court to prevent removal in restricted circumstances. The Court would not, however, be empowered to conduct a merits review of the collective decision of members/creditors to remove a practitioner.

9.248 Insolvency practitioners would be obligated to provide, in the initial notifications to creditors in all administrations, information on creditors' rights to remove and replace practitioners.

What is the likely net benefit of each option?

Option 4.1 - status quo

9.249 A 'do nothing' option is to be considered in cases where problems may be self-corrected by market mechanisms. As the problems are caused by existing legislative requirements, maintaining the status quo and hence doing nothing will not resolve the issues.

Option 4.2 - Improving information available to creditors in an aligned manner

Align and consolidate rules for committees of inspection

9.250 A COI can also play a valuable role where there are contentious or substantial issues in the external administration or bankruptcy requiring the advice (particularly on industry issues), consent or ratification of a workable representative group of creditors or contributories.

9.251 The provisions setting out the rights and rules for committees are spread throughout Chapter 5 of the Corporations Act. This may not facilitate their easy use and understanding by creditors. There is also significant divergence between personal and corporate insolvency rules, both in respect of key powers and obligations and in respect of procedural matters.

9.252 Aligning the disparate and slightly differing formulation of rules regarding the formation and conduct of committees of inspection will result in minimal education costs for practitioners, but should have small long-term savings in legal/ time costs for practitioners and creditors. Alignment is also expected to make it easier for creditors to understand their rights ^[37] .

9.253 COIs provide an important means for the efficient oversight of insolvency practitioners by creditors, as well as a means for efficiently making decisions on behalf of creditors (for example, approval of remuneration). Improving the rights of COIs to obtain information from the practitioner and engage specialist advice will allow them to more effectively monitor the administration of a liquidation.

9.254 Under this option, a COI would be able to incur expenses obtaining specialist advice where the committee obtains external administrator or Court approval for incurring expenses. These expenses would then be taken to be incurred by a person as a member of the committee, make the expense an administration expense. It is expected that this power would be used rarely, and only where the size, expense and complexity of the administration warrants it ^[38] . The need for court or practitioner approval will also assist in limiting the potential for unnecessary costs being incurred by the COI.

9.255 Removing the statutory right of contributories to membership of a COI will reduce the compliance costs for practitioners by clearly removing the requirement for a meeting of contributories to be called. While industry practice has been to form COIs without considering contributories for some time, a recent West Australian Supreme Court decision ^[39] highlighted the fact that 'a failure by a corporate insolvency practitioner to hold separate meetings of the creditors and contributories to determine if a COI should be established, and its membership, constitutes a contravention of s 548(1) of the [Corporations Act]'.

9.256 While current industry practice is not to hold these meetings, the recent decision in ex parte Woodings is expected to alter industry practice such that regulatory savings are expected from the measure due to:

•

providing legal certainty to COIs already established in ongoing administrations by removing the potential for legal challenge to COI decisions or the need for Court orders to be obtained to validate the formation of established COIs; and

•

avoiding the need to attempt to hold meetings of contributories into the future.

Source: ASIC, Treasury assumptions, ARITA

Reporting to stakeholders generally

9.257 Removing the current mandatory reporting requirements in corporate insolvency, including annual and final reporting to creditors will mean that insolvency administrations will no longer be required to incur costs for annual and final reporting to creditors where creditors are not interested in the contents.

9.258 It is expected that this amendment will save the costs associated with the development of statutory reports, as well as postage and handling costs, in creditors' voluntary winding ups where these reports would otherwise have been provided.

9.259 To ensure that creditors are able to obtain this information when they desire it, creditors will be able to resolve their own information requirements of practitioners. Removing any ability for creditors to obtain meaningful information regarding the administration would severely restrict their ability to monitor the administration, the conduct of the practitioner or protect their interests during the administration.

9.260 The savings from removing the reporting obligations will be offset by an expectation that creditors would exercise their new right to request reasonable reporting requirements in order to continue to require an annual report in 20 percent of administrations.

9.261 Requiring an insolvency practitioner to give, or make available, information about the administration of the estate to a creditor who reasonably requests it will make practitioners more responsive to creditors, and facilitate creditors obtaining the information that they need to satisfy themselves regarding whether the provision of services by the practitioner is good value for money.

9.262 Rules to be made following passage of the primary legislation will provide for when such requests are reasonable and unreasonable in order to avoid vexatious and unnecessary requests being made which either frustrate the administration or waste resources.

9.263 A rule that practitioners will be able to reject a request for the provision of information where the practitioner has otherwise made the information available to creditors, will encourage the utilisation of the practitioners' website as a means of providing information to creditors in an efficient manner.

9.264 Extending the ability to request information to the Department of Employment where the company's employees will be calling on the Fair Entitlements Guarantee provides the Government with the same rights that an employee would have had were the FEG scheme not in place. This change is expected to result in new costs of around $10,400 per annum.

9.265 Allowing for notices of successful applications to the Court for the winding up of a company will save practitioners the difference between the current cost of placing a notice in a national newspaper (which is estimated at $1000) and the lodgement fee for publication on the Public Notices Website (which is estimated at $151).

Source: ASIC, Treasury assumptions, ARITA

Meetings of creditors

9.266 The removal of the current mandatory including initial and annual meetings in a creditors voluntary winding up, and final meetings in all forms of corporate insolvency will mean that insolvency administrations will no longer be required to incur costs for meetings of creditors where creditors are not interested.

9.267 It is expected that this amendment will save the costs associated with the holding of meetings in corporate insolvencies where these meetings would otherwise have been held in order to determine matters arising during the administration.

9.268 To ensure that creditors are able to call meetings when they desire it, 25 percent of creditors by value will be able to call meetings and have the cost treated as an administration cost. Removing any ability for creditors to call meetings would limit their ability to monitor the administration through face-to-face questioning of the practitioner, or to effectively and efficiently make decisions as a whole.

9.269 The savings from removing the meeting requirements will be offset by an expectation that creditors would continue to call an initial meeting on 20 percent of occasions, and require an annual and final meeting in 20 percent of administrations.

9.270 Facilitating postal voting will provide a more efficient means for obtaining creditor resolutions on decisions needed for the smooth operation of the administration. Allowing creditors to object to a resolution being determined through a postal vote will limit the potential for practitioners utilising the mechanism as a means of avoiding appropriate scrutiny of decisions.

9.271 The costs of preparing the resolution materials, printing and postage would continue to be incurred unless the corporate insolvency practitioner has the consent of creditors to provide materials electronically. The potential for further savings by deeming consent of creditors to the electronic provision of documents will be consulted on as part of the development of the legislative rules.

Source: ASIC, Treasury assumptions, ARITA

Annual returns

9.272 The current obligation for corporate insolvency practitioners and receivers to lodge 6-monthly copies of receipts and payments with ASIC is an important means of accountability. However the provision of this lodgement is through providing a pdf scan of the receipts and payments. This limits both the ability of ASIC to utilise the information provided in the receipts and payments, as the information is not provided in a manipulable format, and to determine whether other information may be of interest to creditors.

9.273 In contrast the current annual returns completed by registered trustees in relation to all bankruptcies allows for relevant information about an administration to be provided to the regulator in a format which can be manipulated for the regulators purposes, for example to determine the practitioners' asset realisation charge or to determine industry statistics.

9.274 It is expected that this amendment will not result in substantial savings as the same sort of information is likely to be expected, although there will be some savings from practitioners only being required to lodge information once a year instead of twice. However the final regulatory cost or saving for this reform will not be able to be determined until the form is developed by ASIC. The regulatory costs of the final form will be determined by ASIC as part of its implementation of this measure.

Option 4.3 - Better empower creditors to replace poorly performing practitioners

9.275 This option would provide creditors with greater control in an administration or liquidation.

9.276 The barriers to removal from appointment means that there is less incentive for a corporate insolvency practitioner, once appointed, to attempt to minimise the cost of the liquidation or to improve the quality of their outputs. Allowing creditors the power to remove a corporate insolvency practitioner for market-related reasons, not only where gross negligence or impropriety is present, may result in more competitive pricing of services. These impacts on pricing may influence not only the initial cost estimates quoted in order to obtain the work, but on an ongoing basis throughout the administration or liquidation (for example, if creditors feel that they are not getting value for money).

9.277 Breaking down the barriers to removal could also be expected to result in better communication between the corporate insolvency practitioner and creditors during the liquidation as the corporate insolvency practitioner seeks to ensure that the creditors are satisfied with the propriety of costs and appreciate the work being performed on their behalf.

9.278 Offsetting these benefits is the risk that creditors may however choose to unwisely replace an insolvency practitioner. Their assessments of the practitioner may be incorrect or they may misjudge the benefits of replacement compared with the costs and disruption involved in changing the practitioner.

9.279 There may also be circumstances where a change of practitioner is sought to obstruct the proper operation of the insolvency regime. For example, creditors being pursued for preferences may seek a change of practitioner to disrupt litigation in progress. Industry submissions to various Government consultation processes have raised concerns that a corporate insolvency practitioner's investigation and recovery efforts will be compromised with cost consequences to creditors generally, if creditors are able to remove a practitioner without Court involvement. This risk will be mitigated through allowing the Court to prevent removal where the removal is for an improper purpose.

Source: ASIC, Treasury assumptions, ARITA

5. Practitioner remuneration

9.289 Three options have been identified to address the problems associated with practitioner remuneration.

Option 5.1 - status quo

9.290 Under this option, provided a practitioner obtains the approval of the creditors for his or her remuneration, the form of the approval will continue to generally remain up to the practitioner subject to any requirements imposed by the practitioner's professional body. A corporate insolvency practitioner will continue to have a casting vote on a resolution for the approval of their own remuneration where the vote is deadlocked.

9.291 Where the company has few assets, and the expected remuneration of the corporate insolvency practitioner is $5,000 or below, the corporate insolvency practitioner will continue to be able to convene and hold a meeting to consider the remuneration resolution. If the meeting is held, and a quorum is not reached, the creditors will be taken to have approved $5,000 in remuneration for the corporate insolvency practitioner.

Option 5.2 - align obligations on practitioner remuneration

9.292 Under this option, the rules regarding the ability of a practitioner to obtain approval of fees, the duties of the practitioner with respect to remuneration and the ability of creditors to obtain a cost assessment, will be aligned between the corporate and personal insolvency regimes.

Obtaining approval of fees

9.293 When requesting approval for his or her remuneration from creditors of an administration, an insolvency practitioner would only be able to seek prospective approval on the basis of a capped fee. The fee would need to be set through a resolution, including a written resolution, of the whole body of creditors or a resolution of a COI where one has been established. Once the initial fee cap is set, that amount may be revised at a later date by a creditor resolution, COI resolution or by the Court.

9.294 A corporate insolvency practitioner would also be prevented from using a casting vote as chair of a creditors' meeting, where the resolution is one for the approval of the remuneration of the practitioner in any external administration. Where there is a conflict between a resolution by number and value, the motion would be defeated.

9.295 A practitioner would however, be empowered to claim a maximum fee of $5,000 without being required to attempt to hold a meeting to approve fees that failed due to lacking a quorum. Registered trustees currently have this power.

Remuneration duties

9.296 A practitioner would be prevented, without approval, from: directly or indirectly deriving a profit or advantage from a transaction, sale or purchase for or on account of the estate; or conferring upon a related party a profit or advantage from a transaction, sale or purchase for or on account of the estate.

9.297 Personal and corporate insolvency rules would also be aligned in relation to the ability of practitioners to accept gifts and benefits, provide a benefit to another person in order to obtain a job, and acquire property from the insolvency administration.

Cost assessment

9.298 ASIC or the Court would be empowered to appoint a cost assessor to review and report on the reasonableness of the remuneration and costs incurred in all or part of an administration.

9.299 A cost assessor would be given rights to access administration records, and to require records of the corporate insolvency practitioner's firm relating to the administration (for example, time sheets or diaries) in order to complete a cost assessment. A cost assessor would be under a duty to act independently; in the interests of creditors as a whole; and avoid actual and apparent conflicts of interest. Cost assessors would only be able to report on their findings to creditors as a whole, the COI, the regulators, law enforcement, and the court. Costs, as approved by the initiating body, are borne by the administration. The Court would have a power to set, vary or review costs.

9.300 The court would also be given broad powers to intervene in (for example, prevent or vary the terms of a review; remove and replace the reviewer) or to assist a review.

9.301 AFSA would be allowed to initiate a review of a trustee's remuneration by the Inspector-General in Bankruptcy on its own initiative, without a referral from a bankrupt or creditor.

Option 5.3 - rely on industry codes of conduct

9.302 Under this option the Government could request that the peak insolvency body and the professional accounting bodies consider strengthening their industry guidance to:

•

provide for fee caps for prospective approval of remuneration;

•

restricting the use of casting votes by a practitioner on their remuneration; and

•

to allow cost assessors to review a practitioners' work.

What is the likely net benefit of each option?

Option 5.1 - status quo

9.303 A 'do nothing' option is to be considered in cases where problems may be self-corrected by market mechanisms. As the problems are caused by existing legislative requirements and the information asymmetry inherent in the relationship between insolvency practitioners and creditors, maintaining the status quo and hence doing nothing will not resolve the issues.

Option 5.2 - align obligations on practitioner remuneration

9.304 Under this option the rules regarding the approval of remuneration and the duties of corporate insolvency practitioners with respect to remuneration will be aligned with those currently in place for personal insolvency practitioners.

Obtaining approval of fees

9.305 Requiring pre-approval of a cap on fees by creditors, in conjunction with increased powers for creditors to remove a corporate insolvency practitioner, may better allow competitive forces to impact on the level of remuneration claimed by insolvency practitioners.

9.306 However, it would be unreasonable for practitioners to be bound by an estimate of cost or time made prior to appointment (at least unless they voluntarily agree to be so bound in a particular matter). This risk can be mitigated by allowing practitioners to seek remuneration above the initial cap through a new creditor resolution or resolution of a COI.

9.307 The proposal will encourage increased clarity of understanding about the expected level of remuneration between the approving creditors and the practitioner. It is expected that there would be a negligible regulatory cost for practitioners as this is currently considered to be industry best practice ^[40] .

9.308 The proposal will remove the need for convening a meeting for administrations where the work involved, or the assets in the administration, is not expected to exceed the maximum default cost for an administration.

9.309 The option is estimated to save practitioners from incurring unnecessary costs of calling and holding a meeting in half of all low asset administrations, where the only need for the meeting is obtaining approval of remuneration. Such a cost is estimated to not be incurred in the other half of low asset administrations as there is insufficient funds to pay any remuneration that would be approved, and would have been uncommercial for the practitioner to incur any such expense. The measure is therefore estimated to save the insolvency industry $11.8 million per year.

9.310 Corporate insolvency practitioners would also be banned from using a casting vote for a resolution on his or her own remuneration will remove the perception of, and potential for, conflict of interest in relation to remuneration resolutions. Corporate insolvency practitioners may however incur Court costs for remuneration approval where there has been a deadlock instead of dealing with the issue in the creditors meeting ^[41] .

Remuneration duties

9.311 The alignment of insolvency practitioners' duties regarding remuneration will result in explicit rules preventing a corporate insolvency practitioner deriving, or conferring upon a related party, a benefit without approval by the creditors. The alignment of insolvency practitioners' duties will also reduce complexity for unsophisticated creditors dealing with both systems (for example, in relation to the administration of interrelated small companies).

9.312 The proposal will potentially result in increased costs to the administration due to the need for a resolution to be passed in situations where previously no agreement was needed, but will remove the potential for conflicts of interest in relation to the conferring of a benefit on a related party (for example, a family member etc.). The measure is unquantifiable, but there may be a small administrative increase in costs.

Cost assessment

9.313 It can be difficult for creditors to assess the reasonableness of a practitioner's claim for remuneration. This Option will give creditors the power to obtain the information that they need regarding the conduct of an administration from an independent third party.

9.314 This option will assist in providing creditors with the information that they need in order to be able to meaningfully exercise their rights to challenge a practitioner's remuneration (or other rights, such as the right to replace a practitioner).

Source: ASIC, Treasury assumptions, ARITA

Option 5.3 - changes to industry codes of conduct

9.315 Effective self-regulation can limit the presence of overly prescriptive regulation and allow industry the flexibility to provide greater choice for consumers and to be more responsive to changing consumer expectations. However, community cynicism regarding the insolvency industry regulating itself may lead to a distrust of any increased reliance on self-regulatory measures.

9.316 Unlike under Option 5.2, industry regulation could not override statutory requirements to obtain approval for remuneration and therefore would not be able to provide the savings through providing maximum default remuneration.

9.317 Furthermore, industry codes of conduct do not provide legal obligations, which parties other than a professional body can enforce. This may therefore limit the scope of the measures to be enforced compared to Option 5.2.

Recommended option

9.318 It is recommended that Option 5.2 be implemented.

9.319 This option will reduce unnecessary costs for the approval of remuneration in low-asset insolvencies, assist creditors in both personal and corporate insolvencies to better understand when a practitioner can confer benefits on related parties. This option will also assist in providing creditors with the information that they need in order to be able to meaningfully exercise other rights, such as the right to replace a practitioner.

9.320 Not unexpectantly there has been much industry comment on potential changes to practitioner remuneration during the various consultation processes. These comments have rarely challenged the desired outcomes but instead focused on the practical implications and potential consequences of the draft provisions.

9.321 Amongst other things, Option 5.2 seeks to limit the misuse of disbursements by creditors through allowing creditors to control the use of disbursements where the practitioner or a related party would receive a profit or advantage.

9.322 Insolvency industry submissions in the latest consultation were strongly critical of any measure that would require that insolvency practitioners obtain approval from creditors for the engagement of the practitioners firm before the administration could commence. Most modern practice structures engage all staff (including potentially the corporate insolvency practitioner themselves), computer and office equipment, stationery and office supplies through related entities. An exception to facilitate this type of appropriate commercial conduct to apply is therefore necessary to mitigate these concerns while continuing to address egregious behaviour.

9.323 Amendments were also made to replace the obligation not to 'give up' remuneration which is present in the Bankruptcy Act, the meaning of which remains unclear despite its long presence in the law, with the obligation not to give any inducement to secure an appointment as a corporate insolvency practitioner to a particular administration which is currently present in the Corporations Act.

9.324 It has been five years since the completion of the 2010 Senate Inquiry and the ARITA code of conduct has been amended twice during that time. Despite these efforts there has been little change in the confidence in which the market has with the profession as indicated by ASIC's 2013 stakeholder survey. Judicial concern with current industry practices around remuneration has also been commented on recently indicating that industry efforts to address community concerns in the absence of regulatory reform have failed.

6. Improving information for corporate insolvency practitioners

9.325 Five options have been identified to address the problems associated with insolvency practitioners obtaining the RATA and books of the company from the company's directors in order to improve the efficiency of external administrations.

Option 6.1 - status quo

9.326 Under this option, where the directors of a company wish to wind up their company, the directors call a meeting of the company. At that meeting a corporate insolvency practitioner will be appointed. After that meeting the directors will be continue to be obliged to provide the corporate insolvency practitioner with a completed report as to affairs (RATA).

9.327 Where directors fail to submit a detailed RATA early in an administration:

•

the corporate insolvency practitioner will continue to expend additional time and expense identifying the company's assets and liabilities and getting directors to comply with their statutory obligations; and

•

the corporate insolvency practitioner may continue to approach ASIC under the Corporate insolvency practitioner Assistance Program (LAP). The LAP seeks the provision of the completed RATA or the company's books and commences prosecutions against non-compliant directors.

9.328 Where ASIC prosecute a director for breaching their obligations, the Court can continue to apply a penalty of 10 penalty units in a creditors voluntary liquidation or 25 penalty units in a court-ordered liquidation.

Option 6.2 - require RATA to be provided at point of appointment of corporate insolvency practitioner

9.329 Under this option, where a director wishes to place his or her company into liquidation, the director would be required to provide a RATA to the corporate insolvency practitioner at the company meeting at which the corporate insolvency practitioner is engaged.

9.330 If a RATA is not provided the practitioner would not accept the appointment.

Option 6.3 - Administratively suspend a director for failure to provide RATA or books of company

9.331 Under this option, a new 'contingent' disqualification provision for directors that fail to comply with their obligations to provide a report as to affairs (RATA) or to provide the books and records of the company to the registered corporate insolvency practitioner could be included in the Corporations Act. The new process could be utilised by ASIC either as an alternative or in addition to criminal prosecution.

9.332 Under the new scheme, ASIC would provide a warning notice to the director. If the director did not comply with their obligations or provide a reasonable excuse, ASIC may then formally demand compliance by the director. If the director did not comply with the demand, ASIC would be required to file a notice of disqualification on the public record. Upon being recorded on the public register, the director would be prohibited from managing a company.

9.333 There would be a delay after lodgement and notice to the director before the suspension became effective, to enable directors to seek judicial review. In particular, a director would be able to approach a Court to prevent the disqualification from taking effect where the director has a reasonable excuse for not providing the RATA or the books and records.

9.334 The disqualification would come to an end upon a person complying with their lodgement obligations; upon the completion of the insolvency administration; or after three years of non-compliance.

Option 6.4 - improve the RATA form

9.335 Under this option, the content and form of the RATA could be revised by ASIC to make the form more user-friendly and easier for directors to understand and complete.

Option 6.5 - increase the penalty level for failure to provide RATA

9.336 Under this option, the penalty for failure to lodge a report as to affairs would be increased to 50 penalty units and aligned across all forms of insolvency.

What is the likely net benefit of each option?

Option 6.1 - status quo

9.337 ASIC has noted that the failure to submit a detailed RATA early in an administration results in:

•

the corporate insolvency practitioner expending additional time and expense identifying the company's assets and liabilities and getting directors to comply with their statutory obligations; and

•

the corporate insolvency practitioner approaching ASIC under the Corporate insolvency practitioner Assistance Program (LAP). The LAP seeks the provision of the completed RATA or the company's books and commences prosecutions against non-compliant directors.

9.338 A 'do nothing' option is to be considered in cases where problems may be self-corrected by market mechanisms. As the problems are caused by the failure of the existing legislative requirements to encourage directors to provide meaningful information to insolvency practitioners in a timely fashion, maintaining the status quo and hence doing nothing will not resolve the issues.

Option 6.2 - require RATA to be provided at point of appointment of corporate insolvency practitioner

9.339 This option would not place a new obligation on directors but rather bring forward the point at which the directors of a company are expected to have prepared the RATA, and is therefore not expected to have a regulatory cost for directors. By requiring the RATA to be prepared earlier, corporate insolvency practitioners will be able to provide information to creditors earlier about the administration, which will better enable creditors to exercise their rights to replace a corporate insolvency practitioner before the costs of changing become prohibitive. This option will have unquantifiable cost savings for insolvency practitioners who would not be required to seek the RATA from directors at the later point in time.

9.340 The option would not however address issues regarding the non-provision of the RATA in a court-ordered winding up, where it would be expected that directors are less likely to be forthcoming in providing the information ^[42] .

Option 6.3 - Administratively suspend a director for failure to provide RATA or books of company

9.341 This option would seek to achieve a similar outcome as that currently provided for in personal insolvency ^[43] with the regulator assisting insolvency practitioners to obtain important information regarding the company under administration, which will assist in the efficient completion of the winding up.

9.342 The measure may assist in addressing phoenix activity in limited circumstances where a director has transferred assets out of their initial company (OldCo) into a new company (NewCo), placed OldCo into liquidation, is refusing to assist the corporate insolvency practitioner in completing the winding up of OldCo and is managing NewCo.

9.343 This option was included as part of the 2012 Bill. The measure was criticised by company directors for:

•

imposing a penalty that is not proportionate to the misconduct;

•

failing to provide appropriate Court oversight to the new power for ASIC to disqualify directors;

•

providing insufficient procedural fairness;

•

inappropriately balancing the power of ASIC with the rights of the individual directors; and

•

failing to recognise the significance of disqualifying directors.

9.344 The option was further criticised by insolvency practitioners for not addressing a director's incentive to breach their obligations. In particular, in a no-assets, no-records matter, a director that is attempting to avoid their obligations to provide information may be able to avoid disqualification by delaying the process and ensuring that the company administration finishes before the disqualification starts.

Option 6.4 - improve the RATA form

9.345 This non-regulatory option would make it easier for directors to complete their regulatory obligations, which can be expected to result in more directors either choosing to complete the form or completing the form in a manner which results in corporate insolvency practitioners obtaining the information they need to commence a winding up in an efficient manner.

9.346 The current RATA form approved by ASIC remains fundamentally the same as the Statement of Affairs prescribed in the Uniform Companies Acts in 1961. A large number of the questions are no longer relevant in the modern economy and can be confusing for directors who are required to fill out the form.

9.347 A survey of insolvency practitioners undertaken in 2011 clearly indicated that there was considerable dissatisfaction with not only the non-provision of books and RATAs but also with the inadequate information received by corporate insolvency practitioners in many RATAs. Corporate insolvency practitioners blamed not only the directors themselves for this, but also that the incomprehensibility of the form used ^[44] .

Option 6.5 - increase the penalty level for failure to provide RATA

9.348 This option would provide a more appropriate penalty for breaches of the directors' obligation to provide corporate insolvency practitioners with a report as to affairs thereby providing a better disincentive for breaches. It would also remove the unjustified divergence between the penalty levels for identical conduct based of how the insolvency proceedings have commenced.

9.349 Increasing the penalty for breaches of these provisions is expected to have a positive impact on the rate of compliance, with positive flow on impacts for the efficiency of those insolvencies.

CONSULTATION ON THESE OPTIONS?

2010 Senate Inquiry

9.356 During its inquiry, the Senate Committee received 94 submissions from industry representatives, industry participants, academics, Australian Government agencies and other affected parties. It also held hearings in Canberra, Adelaide, Newcastle and Sydney.

9.357 Concerns were raised during the Inquiry about a perceived lack of regulatory oversight of corporate insolvency practitioners by ASIC. In particular, a perception that ASIC:

•

pursues a reactionary and slow approach rather than a proactive approach to the supervision of corporate insolvency practitioners and liquidations; and

•

is reluctant to take enforcement action when a complainant, such as a creditor or director, has their own private remedies such as the right to seek orders from the Court.

9.358 The Committee also received submissions, and testimony, on a wide range of issues including:

•

the current level of regulatory oversight of corporate insolvency practitioners and administrators;

•

the timeliness and cost-effectiveness of the CALDB;

•

the difficulty of obtaining private remedies against a corporate insolvency practitioner;

•

the level of remuneration charged by insolvency practitioners; and

•

a range of miscellaneous issues regarding the adequacy of a range of basic rules regarding maintaining insurance cover, record keeping rules and other procedural requirements in respect of which there had allegedly been abuses.

2011 Options Paper

9.359 34 submissions were received in response to the options for reform outlined in the Options Paper released on 2 June 2011.

9.360 Generally, the submissions from industry stakeholders favoured alignment of the corporate and personal insolvency systems. This was, however, subject to comments that change should only be made where it was considered appropriate in the circumstances.

9.361 The majority of submissions from private individuals expressed disappointment in the Options Paper as those individuals did not feel that the failures of ASIC to act on complaints were adequately recognised or addressed.

9.362 Following the receipt of submissions, Treasury officials met with key industry stakeholders to discuss the problems raised by the submissions, and the options for addressing those problems.

2011 Proposals Paper

9.363 29 submissions were received in response to a Proposals Paper released by the former Government on 14 December 2011. The submitters were similar those that submitted to the earlier Options Paper.

9.364 Generally, the submissions from industry stakeholders favoured alignment of the corporate and personal insolvency systems. This was, however, subject to comments that change should only be made where it was considered appropriate in the circumstances.

9.365 Submissions from private individuals continued to express disappointment that the recommendation of the Senate Economics References Committee to remove responsibility for corporate insolvency from ASIC was not agreed to.

9.366 Following the receipt of submissions, Treasury officials met with key industry and private stakeholders to discuss the problems raised in the submissions. Those views were taken into account in drafting the exposure draft of the Insolvency Law Reform Bill, which was released in 2012.

Exposure of the draft Insolvency Law Reform Bill 2012

9.367 Following release of the Exposure draft of the Bill on 19 December 2012, Treasury and the Attorney-General's Department held several roundtable consultation sessions with interested stakeholders and received 16 written submissions.

9.368 Industry comments received through both formal submissions and industry roundtables were broadly supportive of the Bill. The consultation process highlighted a number of areas where unintended consequences were likely as a result of the draft Bill.

9.369 Directors were strongly critical of the measure relating to the disqualification of directors that failed to provide the corporate insolvency practitioner with the company's books, records or a RATA on the grounds that it was unjustifiably harsh. That proposal was removed from the draft Insolvency Law Reform Bill 2014.

Exposure of the draft Insolvency Law Reform Bill 2014

9.370 The proposed legislative package was released for community consultation in late-2014, with targeted consultation with industry stakeholder groups undertaken during the consultation period in order to identify and deal with identified issues in an efficient manner.

9.371 In conjunction with the release of the legislative package, a proposals paper on the regulations and other legislative instruments was also released for public comment. Specific consultation with interested stakeholder groups was then organised in order to identify issues and ensure that the suggested reforms to be included as subordinate legislation will be able to be implemented as envisioned.

9.372 Further unintended consequences were uncovered as part of the consultation process on the Bill, and further refinements were made to the drafting of a range of provisions.

Financial System Inquiry

9.373 The Financial System Inquiry draft report released in 2014 asked for views on the costs and benefits of implementing the 2012 proposals to reduce the complexity and cost of external administration for SMEs.

9.374 The final Financial System Inquiry report found that 'in some cases, external administration and bankruptcy processes overlap, causing disproportionate complexity and cost. This particularly affects small and medium-sized enterprises, where the owner faces personal bankruptcy if their incorporated business fails' and that the 'complaints and dispute resolution processes relating to the external administration regime could be improved'. ^[45]

Future consultation

9.375 A draft of the legislative instruments will be released for public comment with further targeted industry consultation to follow. The legislative instruments will stipulate what are inherently reasonable requests for information or meeting materials for practitioners; determine what the mandatory reporting requirements are for insolvencies and the extent to which the provision of information are deemed to have been provided to creditors through electronic means. The final terms of the regulations and rules will therefore have a significant impact on the final regulatory costing for the package.

9.376 In accordance with the Best Practice Regulation procedures, this RIS will continue to be improved taking into account industry comments up until the final decision point at which the legislative instruments are made by the Ministers.

Post implementation consultation

9.377 To review the effectiveness of the changes it is proposed that the Treasury, Attorney-General's Department, ASIC and AFSA undertake a review five years after implementation. The review would assess the impact of the proposal and its effectiveness in meeting its objectives, taking account of any implementation and administrations costs.

IMPLEMENTATION AND EVALUATION OF THE CHOSEN OPTIONS

9.378 The recommended options will be implemented through the Insolvency Law Reform Bill 2015, amending regulations and new legislative instruments to be known as Insolvency Law Rules which will be made by the relevant Ministers responsible for corporate and personal insolvency.

9.379 The amendments to the subordinate legislation will be progressed through regulations and rules to be consulted on and made in the first half of 2016. The consultation period will be used to assist in identifying the finalised regulatory savings from the package which will be determined by the final terms of the Insolvency Practice Rules.

9.380 Where amendment is necessary to administrative processes, which are the responsibility of ASIC or AFSA, those changes, will be consulted on by those agencies in compliance with the Australian Government Guide to Regulation.

9.381 To review the effectiveness of the changes it is proposed that the Treasury, Attorney-General's Department, ASIC and AFSA undertake a review five years after implementation. The review will assess the impact of the proposal and its effectiveness in meeting its objectives, taking account of any implementation and administrations costs.

Appendix 1

Glossary

Appendix 2

Regulatory Burden Measurement