Insolvency practitioners take note - proposed amendments to regulation of the insolvency profession

The Federal Government recently released the draft Insolvency Law Reform Bill 2013 (Reform Bill) for public comment. The Reform Bill contains a number of changes to the way that insolvency practitioners are registered, disciplined and regulated and in the areas of regulator and creditor powers in personal and corporate external administrations.

The Reform Bill proposes a number of changes in three main areas, namely:

• the registration and discipline of insolvency practitioners;
• the introduction of specific new rules to improve creditor powers and practitioner accountability; and
• amendments aimed at increasing the powers of ASIC and ITSA (regulators) with respect to the registration, regulation and discipline of insolvency practitioners.

The amendments follow proposed reforms discussed in a number of reviews, most recently the Senate Economics References Committee report on The Regulation, Registration and Remuneration of Insolvency Practitioners in Australia released in September 2010 and the Federal Government's Options Paper entitled A Modernisation and Harmonisation of the Regulatory Framework applying to Insolvency Practitioners in Australia, released in June 2011.

Set out below is a summary of the main reforms in each of these areas.

Registration and discipline of insolvency practitioners

The main changes in this area are:

• There will be a single class of practitioner in corporate insolvency. The class of 'official liquidator' is to be removed;
• Applications for registration as a liquidator or trustee will be considered by a committee convened by the appropriate regulator. The committee will interview the applicant and may require the applicant to sit an exam. The committee may decide that the applicant's registration be subject to conditions;
• The penalty applicable for not holding adequate and appropriate insurance is to be increased to $10,200 (i.e. 60 penalty units, in place of the current 5 penalty unit ($850) fine);
• The regulators will have the power to deregister or suspend a practitioner directly without referral to a committee on certain objectively determinable grounds;
• The current three-person committee approach applicable to the registration of bankruptcy trustees will apply to the registration and discipline of registered liquidators;
• Insolvency practitioners will be obliged to inform their respective regulator when the practitioner becomes aware of prescribed significant events that will result in the practitioner being either automatically deregistered or able to be deregistered by a regulator without reference to a Committee:
• A practitioner's registration will be automatically cancelled where the practitioner becomes an insolvent under administration, becomes a party as a debtor to a Debt Agreement or dies; and
• A practitioner's registration may be cancelled by the regulators where the practitioner:

1. is disqualified from managing a company;
2. ceases to have appropriate professional or fidelity insurance;
3. is convicted of an offence involving fraud or dishonesty;
4. has their registration under the other framework cancelled or suspended; or
5. requests the cancellation; and

• All insolvency practitioners will be required to lodge an annual return, setting out generic information about the practitioner, as well as a return setting out information on each administration undertaken by the practitioner during the financial year.

New rules to improve creditor powers and practitioner accountability

The main changes in this area are:

• Practitioners will be required to comply with reasonable requests for information from creditors relating to an external administration. The government department administering GEERS will also have a right to seek reasonable information;
• Creditors may require an insolvency practitioner to convene a meeting whenever:
• resolved by the creditors or Committee of Inspection;
• requested by at least 25% in value of creditors;
• requested by at least 10% in value of creditors who have lodged sufficient security for the cost of holding the meeting; and
• a request is made to a liquidator by at least 5% in value of creditors unrelated to the company within the first 2 weeks of the liquidation;
• The rules regarding meetings of creditors in both corporate and personal insolvency will be prescribed by regulations. Resolutions of creditors will be able to be made via circular resolutions without the need for holding a meeting;
• ASIC and the Court will have a new power to appoint a registered liquidator to undertake a review and report on all or part of an external administration. The Court will also be given broader powers to inquire into and make orders regarding a bankruptcy or external administration, including the removal of a practitioner from a matter;
• Creditors, ASIC and the Court will have the power to appoint a costs assessor to assess and report on the reasonableness of the remuneration and costs incurred during part or all of a corporate external administration;
• Creditors may resolve to remove an insolvency practitioner and appoint a replacement at any stage of an external administration without recourse to the Court. The Court may only reinstate the practitioner's appointment where it is satisfied that the removal was an improper use of power (for example, an attempt to prevent, delay or frustrate an action being taken against a group of creditors under Part 5.7B of the Corporations Act); and
• The rules relating to committees of inspection (COI) in all forms of personal and corporate external administration will be aligned. A creditor (or group of creditors) representing at least 10% in value of the creditors will be able to select a member of a COI. The employees of the company representing at least 50% in value of employees owed entitlements will also be entitled to select a member of a COI.

Regulator powers and miscellaneous amendments

The main changes in this area are:

• ASIC will be empowered to give a registered liquidator a written notice to give specified information or produce specified books to ASIC to assist its investigative duties;
• ASIC will be given greater powers to share information (obtained through the exercise of its powers) with the corporation, the external administrator or receiver, related entities of the corporation, creditors and those reviewing an external administration;
• ASIC will be given a power to direct that a meeting of creditors be held;
• ASIC will be given a power to disqualify directors who fail to provide a RATA without reasonable excuse (until the RATA is provided, completion of the external administration or after 3 years, whichever is earlier); and
• An insolvency practitioner will be empowered to assign to a third party statutory rights of action arising out of the Corporations Act that vest with the practitioner (or company) during an external administration.

Conclusion

The Explanatory Document to the Reform Bill states that the majority of the amendments are expected to take effect from September 2013. The amendments to the registration and discipline of insolvency practitioners, and new director disqualification provisions, are expected to commence in February 2014.

Interested parties had until 8 March 2013 to make a submission to The Treasury concerning the Reform Bill.

The Reform Bill and Explanatory Document are both available from the Federal Government Treasury website.