RSM Australia

Insolvency reform edition 9 - February 2017

The Ariff reforms 

The Insolvency Law Reform Act 2016 (“ILRA”), associated Insolvency Practice Schedules (Bankruptcy and Corporations) (“IPS”) and associated Insolvency Practice Rules (Bankruptcy and Corporations) (“IPR”) is the legislature’s long awaited response to the September 2010 Senate Economic Reference Committee Report “The regulation, registration and remuneration of insolvency practitioners in Australia: the case for reform”.

The Williams Inquiry was held under the shadow of the well-publicised misconduct and subsequent prosecution of rogue insolvency practitioner Stuart Ariff. The Committee in its report specifically rejected the characterisation of the inquiry being a knee jerk reaction to the case of Ariff and a few others. The Chairman of the committee is a recognised advocate for debtors and company directors in their disputes with insolvency practitioners (“IP”).

The aims of the ILRA were described by the Minister for Small Business and Assistant Treasurer, the Hon Kelly O’Dwyer MP as:

  • restoring confidence in the insolvency profession
  • cutting unnecessary costs and red tape
  • tailoring meeting and reporting requirements to meet creditor needs
  • raising market competition for insolvency services and putting downward pressure on the cost of providing those services

The proof is in the pudding

The legislative response to the Williams Inquiry has failed to allay concerns among IPs the Inquiry was a knee jerk reaction to demonstrated misconduct by a small number of IPs. The legislative response has taken nearly seven years to be enacted.

The underlying tone of the legislature’s response is that there is a crisis of confidence in providers of insolvency services by stakeholders, creditors interests are not being served by IPs, IPs are paid too much for what they do and there is a lack of competition in the market for the provision of insolvency services. IPs can rightfully feel less than happy with increased regulatory and reporting burdens imposed by the legislation.

There are approximately 710 registered liquidators and 220 registered trustees. Most Registered trustees are also registered liquidators. The overwhelming majority of IPs undertake and perform their duties as external administrators and trustees in an exemplary manner. The nature of insolvency appointments leads to disputes between stakeholders and between stakeholders and IPs. Litigation and complaints to regulators and politicians by disgruntled stakeholders is a regular feature of insolvency practice. However, few complaints to regulators are found to involve a breach of duty by an IP and most commonly are found to represent valid commercial disputes between the IP and the stakeholder.

The increased supervision and regulation of IPs can be contrasted with the continuing failure of the legislature to fund the regulator to enforce and prosecute the existing laws against misconduct by company officers and bankrupts. This failure can cause distortions in the market place between competitors and lead to good businesses failing. The underlying reason for the appointment on an IP is the insolvency of the debtor. The insolvency is the result of the actions of the debtor and its officers. However, the legislature have chosen to ignore this fundamental truth.

Does the ILRA meet its stated aims?

Now the ILRA, IPS and IPR are able to be examined in their totality it is possible to determine whether the well-intentioned aims of the Insolvency Law Reform package described by the Minister will be met.

Parts 1 & 2 of the IPS (Bankruptcy) and IPS (Corporations) commence 1 March 2017. These relate to the registration and regulation of insolvency practitioners.

Part 3 of the IPS (Bankruptcy) and IPS (Corporations) commence 1 September 2017. These are general rules relating to estate and external administrations.

We will highlight three failures by the legislature to meet the stated aims of the legislation.

The first miss by the legislature is the apparent requirement by insolvency practitioners to obtain creditor approval to charge for work performed by either;

  • employees of a company of which the IP, or relative of the IP, is a shareholder, or director; or
  • employees of a partnership in which the IP, or relative of the IP, is a partner

It would appear most IPs will need to seek creditor approval to use their staff on administrations as staff are often employed by a service entity associated with the IP’s practice. This requirement imposes additional costs and uncertainty on the provision of insolvency services. What will happen if creditors fail to vote on the proposed resolution or vote against the resolution? The requirement would appear to be a direct response to the inappropriate use of relatives by Stuart Ariff on insolvency administrations. The legislative response appears to go well beyond what was required.

The second miss by the legislature is the right of an individual creditor to request information etc. from the IP. A creditor may request the IP to:

  • give information; or
  • provide a report; or
  • produce a document;

The IP must comply with the request unless the IP can demonstrate:

  • the information, report or document is not relevant to the administration; or
  • the IP would breach their duties in relation to the administration in complying; or
  • it is otherwise not reasonable to comply with the request.

It is difficult to understand how the imposition of these obligations on IPs will assist in cutting costs or unnecessary red tape. Put simply it is a recipe for the incurrence of unnecessary costs by IPs that are borne by all creditors in dealing with the demands of a minority of activist creditors. Further, the provision can be utilised by related parties to exhaust the resources available to pay for the activities undertaken by the IP for the benefit of creditors. This obligation is in addition to the collective right of creditors to make the same request if supported by a resolution of creditors.

The third miss by the legislature is the adoption of an ordinary resolution as the threshold for the removal of an IP by creditors. That is a majority in value and number of creditors in attendance in person, by proxy or by attorney.

There is little prospect of reducing the costs of the provision of insolvency services by making it easier to remove an incumbent IP.  It is considered this provision will result in the mischief of the replacement of independent IPs by IPs aligned either with directors or shareholders or creditors targeted by IPs for recovery actions.

It should be noted that no protections against the mischief associated with the acquisition of debts, or proxies, by directors, bankrupts or their proxies has been considered by the legislature for Corporations. This mischief is combated by the Bankruptcy Act 1966 which limits the value of debts assigned for voting to the value of the consideration paid for the assignment not the face value of the debt assigned.

Conclusion

Whilst the Government proposes to remove the stigma of business failure from those responsible for the failure, they have chosen to stigmatise IPs. ARITA and Australia’s 1000 IPs have been unable to bring sufficient pressure on the Government to adopt a more reasonable response to the Williams Inquiry. Overall it seems the legislative changes will only add unnecessary costs and red tape, rather than its stated objective of reducing it.


If you have any questions in relation to this article, please contact your local RSM adviser or David Kerr.

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