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Proposed Reforms to Insolvency Industry Regulation.

20 January, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Insolvency & Restructuring

 

 

The way the insolvency industry is regulated could be reformed under proposals contained in a Federal Government paper. The reform is aimed at promoting a high level of practitioner professionalism and competency, and increased efficiency in insolvency administration. 
 
How does it affect you?
 
  • The paper suggests reforming insolvency profession regulation in the following areas:

 

  • standards of entry into the insolvency profession;
  • registration of practitioners;
  • remuneration arrangements;
  • communication and monitoring;
  • funds handling and record keeping;
  • insurance;
  • discipline and deregistration mechanisms;
  • removal and replacement of insolvency practitioners;
  • regulators' powers; and
  • the insolvency framework for small businesses.
 
  • The closing date for submissions of feedback and comments on the proposals paper is 3 February 2012.
 
Background
 
On 2 June 2011, an options paper, A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia, was released. It called for submissions to assist the Federal Government in its review of Australia's insolvency framework.
 
The proposals paper, A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia (the paper), released on 14 December 2011, was prepared in response to submissions received about the options paper. This update summarises its key suggested reforms.
 
The proposals
 
Standards of entry into the insolvency profession
 
The paper suggests reforms to the standards of entry into the insolvency profession. The suggested reforms are modelled on current entry standards for personal insolvency practitioners. Notably, the paper suggests:
 
  • the removal of the current preference for accounting over legal studies;

 

  • a prescribed level of formal tertiary studies in insolvency administration-specific study; and

 

  • a requirement for insolvency practitioners to have been engaged in relevant employment on a senior full-time basis for more than three years in the preceding five years.
 
Further, the paper suggests mutual recognition of involuntary deregistration between personal insolvency and corporate insolvency regimes.
 
Registration of insolvency practitioners
 
The paper proposes reforms to the registration of insolvency practitioners, with the introduction of a registration committee structure based on the current personal insolvency structure.
 
It is proposed that the various classes of corporate insolvency practitioner be replaced by a single class of practitioner, by the removal of the class of official liquidators. The paper also contemplates two classes of restricted registration, including that of registered liquidator restricted to act as a receiver, and receiver and manager; and of registered liquidator restricted to act as a receiver only.
 
Insolvency practitioners would be required to renew their registration every three years under the proposed reforms.
 
Remuneration framework for insolvency practitioners
 
The paper includes the following proposed reforms:
 
  • minimum fee entitlements;

 

  • mandated caps on prospective fee approvals;

 

  • prevention of chairs casting votes for the approval of the

 

  • remuneration of a liquidator in any external administration;

 

  • restrictions on payments of disbursements to related entities; and

 

  • the introduction of mechanisms for independent investigations into costs for corporate insolvency.
 
Communication and monitoring
 
The paper suggests reforms to the current requirements relating to communication to creditors. In particular:
 
  • a closely aligned set of rules for both corporate and personal administrations, to enhance creditor participation in insolvencies via committees of inspection, which would have an advisory and supervisory role;

 

  • an obligation for insolvency practitioners to give information about the administration estates to creditors who reasonably request it;

 

  • the empowerment of creditors to pass resolutions imposing reasonable reporting requirements; and

 

  • an amendment of the Corporations Act 2001 (Cth) to allow voting on resolutions without the need to call a meeting.
 
Funds handling and record keeping
 
The paper suggests further alignment of regulations governing funds handling and record keeping for corporate and personal insolvencies, with a view to reducing compliance costs. It also suggests that audit provisions in corporate insolvency be extended to empower a regulator or the court to appoint another insolvency practitioner to review and report on all or part of an administration.
 
Insurance requirements for insolvency practitioners
 
The suggested reforms aim to harmonise the regulation of insurance requirements between corporate and personal insolvency regimes. The paper suggests the creation of an offence of up to $110,000 for a breach of an insolvency practitioner's duty to maintain adequate and appropriate professional indemnity insurance.
 
Discipline and deregistration of insolvency practitioners
 
Various reforms in relation to the handling of discipline and deregistration of insolvency practitioners are suggested in the paper, including the:
 
  • adoption of the current personal insolvency show cause process to corporate insolvency practitioners;

 

  • creation of two committees, each able to:

 

  • deregister a practitioner;
  • suspend a practitioner's registration;
  • suspend a practitioner's ability to accept new appointments;
  • impose conditions on a practitioner's registration;
  • issue private or public admonishments or reprimands; and
  • remove a person from a specified administration;
 
  • empowerment of regulators to act directly to suspend or deregister practitioners, without referral to a committee. In certain circumstances, regulators would also be empowered to suspend a practitioner's ability to accept new appointments, without referral to a committee;

 

  • provision for referral of a disciplinary matter to a committee;

 

  • empowerment of prescribed legal or accounting professional bodies to refer their members to the committee; and

 

  • the empowerment of persons, regulators, professional bodies and trade unions to apply to a court for the review of an insolvency practitioner's conduct.
 
Removal and replacement of insolvency practitioners
 
A creditor's right to remove a practitioner in any insolvency administration by a resolution passed by the majority in value and number is suggested in the paper.
 
The requirement for a default initial meeting of creditors to be held in creditors' voluntary liquidations will be removed under the proposed reforms.
 
Regulator powers
 
The paper suggests reforms that will give regulators the:
 
  • ability to require insolvency practitioners to answer questions concerning an administration or their conduct;

 

  • authority to conduct practice reviews;

 

  • authority to make available to stakeholders any information or material relating to an insolvency administration that an insolvency practitioner would ordinarily be required to give on their own initiative; and

 

  • the power to direct that a meeting of creditors be called, as well as to require the inclusion of certain material in convening documents.
 
Specific issues for small business
 
Further reforms are proposed in the paper to address concerns relating to small businesses, including creating a framework for a 'one-stop-shop' for both corporate and insolvency matters.
 
Notably, the paper contemplates allowing practitioners to assign causes of action arising under the corporate or personal insolvency regimes, including the assignment of statutory rights of action arising out of the Corporations Act that vest with the practitioner (or company) during an administration, to a third party.
 
Changes to the application of the assetless administration fund to assist in the deterrence of phoenix behaviour are also suggested.
 
It is also proposed that the penalty for failure to lodge a report as to affairs would be increased to $5,500, in line with other forms of insolvency.
 
2010 corporate insolvency reforms
 
The proposals paper also sets out the Government's revised position (where relevant) in relation to various corporate insolvency reforms announced in early 2010.
 
Conclusion
 
The reforms suggested in the paper are aimed at addressing key concerns that stakeholders have raised in the past few years, namely:
 
  • regulation of individual insolvency practitioners;

 

  • the inefficiency of the existence of divergent personal and corporate insolvency regimes; and

 

  • communication between insolvency practitioners and stakeholders.
 
We will keep you updated as submissions are made to the Federal Government in response to the proposals paper, and as any reforms are implemented. 
 

 

For further information, please contact:

 

Michael Quinlan, Allens Arthur Robinson

michael.quinlan@aar.com.au

 

Laura Racky, Allens Arthur Robinson

laura.racky@aar.com.au 

 

Nicole Meyer, Allens Arthur Robinson

 

 

 

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