This article discuesses whether it is time for Insolvency Practice Standards contained in the ARITA Code, to be given the force of law.
Accounting standards and auditing standards in Australia were initially developed by the professional accounting bodies, and were enforceable under their codes of ethics. It is likely these steps were taken by the accounting profession to appease concerns raised about accountants and the quality of their work following the high-profile company collapses of the early 1960s. At this time companies were regulated by State corporate affairs commissions and governed by Uniform Companies Acts enacted by each State between 1961 and 1962.
In 1980 The Commonwealth and the States enacted legislation to implement a cooperative scheme of company law implemented via the Companies Act 1981 (Cth). In 1984 the first steps were initiated that ultimately resulted in the position today of those standards having the force of law through statutory recognition. Standards once the sole responsibility of the profession are now developed by standard setting bodies. Company law is now regulated by the Commonwealth solely via the Corporations Act 2001 (Cth).
Between 1992 and 2005 the Insolvency Practitioners Association of Australia (“the IPAA”) developed and promulgated several statements of best practice for insolvency practitioners. The statements provided insolvency practitioners with direction and guidance on disclosures, conduct and standards expected to be maintained in the specific areas of practice the statements were applicable to. The statements imposed disclosures, standards and conduct beyond that required by statute or case law at the time. Some of the disclosures required by the statements of best practice were subsequently adopted by the legislature.
These statements were developed by the IPAA in response to criticism of the practice and conduct of some insolvency practitioners in their administration of insolvent companies. The criticism come from the ASC (now known as ASIC), the Courts and other stakeholders.
These statements formed the basis of Code of Professional Practice for Insolvency Practitioners (“The Code”) issued by the IPAA in 2007. The IPAA Changed its name to the Australian Restructuring Insolvency & Turnaround Association (“ARITA”). Compliance with the Code is mandatory for ARITA members in conducting their practices. The requirements of the Code impose duties beyond those contained in the law.
The inconsistency between the Law and the Code has been highlighted by judicial officers in several cases. The judiciary have recognised the Code’s higher requirements. However, they have said the Code provides guidance but does not have force of law. Accordingly, the higher duties contained in the Code are not able to be imposed by the judiciary who must decide the matter based on the law.
Is it time for the legislature to consider giving the force of law to the ARITA Code like the accounting and auditing standards? Should an Australian Insolvency Practice Standards Board (“the Board”) be established consisting of restructuring professionals, ARITA representatives, ASIC and AFSA representatives and other stakeholder representatives?
One role of the Board could be to review and propose the adoption of the ARITA Code or parts of the Code by the legislature. Alternatively, the Board could become responsible for the development of Insolvency Practice Statements for adoption by the legislature and given the force of law.
Is it time? I think so.