BILLS DIGEST NO. 82, 2015–16              22 February 2016

Insolvency Law Reform Bill 2015

Paula Pyburne
Law and Bills Digest Section 

Date introduced: 3 December 2015

House:  House of Representatives

Portfolio: Treasury

Commencement:  Various dates as set out in the body of the Bills Digest.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

The Bills Digest at a glance

The Bill aims to restore confidence in the insolvency profession by raising the standards of professionalism and competence of insolvency practitioners. It does this by aligning and strengthening the registration, discipline and regulatory oversight of corporate insolvency practitioners with the framework currently in place for personal insolvency practitioners.

The Bill amends the Bankruptcy Act 1966 and the Corporations Act 2001 to insert an Insolvency Practice Schedule (IPS) as Schedule 2 to both of those Acts.

The IPS Bankruptcy and IPS Insolvency have many common features. They:

•       require trustees and liquidators to be registered

•       set out the conditions for registration and provide that registration is for a period of three years

•       set out a process for registration including the composition and conduct of committees which make decisions on suitability for registration

•       set out mechanisms for the disciplining of registered trustees and liquidators and

•       contain general rules for:

–      the remuneration of a registered trustee or a registered liquidator respectively, including the setting of maximum default amounts

–      funds handling

–      provision of information to creditors and the relevant regulator, keeping of books and preparation of administration returns

–      holding meetings

–      committees of inspection and

–      rights of review of certain decisions.

In addition, the Bill contains consequential and transitional amendments to both Acts to accommodate the proposed changes.

Purpose of the Bill

The purpose of the Insolvency Law Reform Bill 2015 (the Bill) is to:

•       increase efficiency in insolvency administrations

•       align the registration and disciplinary frameworks that apply to registered liquidators and registered trustees

•       align a range of specific rules relating to the handling of corporate external administrations and personal bankruptcies

•       enhance communication and transparency between stakeholders

•       improve the powers available to the corporate regulator to regulate the corporate insolvency market and

•       improve overall confidence in the professionalism and competence of insolvency practitioners.

The Bill is ‘the first phase of the Government’s reforms to strengthen and streamline Australia’s bankruptcy and corporate insolvency regimes’.[1] Information about proposed future changes to insolvency laws is contained in the National Innovation and Science Agenda.[2]

Structure of the Bill

The Bill has three Schedules. Schedule 1 has three parts:

•       Part 1 amends the Bankruptcy Act 1966[3] to insert the Insolvency Practice Schedule (Bankruptcy) as Schedule 2 to that Act

•       Part 2 makes consequential amendments to the Bankruptcy Act and the Bankruptcy (Estate Charges) Act 1997[4]

•       Part 3 sets out the rules for the transition to the Insolvency Practice Schedule (Bankruptcy).

Schedule 2 of the Bill also has three parts:

•       Part 1 amends the Corporations Act 2001[5] to insert the Insolvency Practice Schedule (Corporations) as Schedule 2 to that Act

•       Part 2 makes consequential amendments to the Australian Securities and Investments Commission Act 2001[6] (ASIC Act), the Corporations Act and numerous other statutes

•       Part 3 amends the ASIC Act and the Corporations Act to set out the rules for the transition to the Insolvency Practice Schedule (Corporations).

Schedule 3 of the Bill contains seven parts. It makes miscellaneous amendments to the Corporations Act and the Private Health Insurance (Prudential Supervision) Act 2015.[7]

Background

Regulation of insolvency practitioners

Australia currently has separate regulatory systems for personal and corporate insolvency. This includes separate laws and regulators.

The laws relating to personal insolvency are fully contained in the Bankruptcy Act and Bankruptcy Regulations 1996.[8] The Inspector-General in Bankruptcy (Inspector-General), located within the Australian Financial Services Authority (AFSA), is the personal insolvency regulator.[9] The laws relating to corporate insolvency are contained in the Corporations Act and Corporations Regulations 2001,[10] with supporting regulator-related provisions in the ASIC Act. The Australian Securities and Investment Commission (ASIC) is the corporate insolvency regulator.[11]

Since the early 2000s the regulation of insolvency practitioners—particularly corporate insolvency practitioners—has been the subject of a number of reviews. These include:

•       the Corporate insolvency laws: a stocktake, completed by the Parliamentary Joint Committee on Corporations and Financial Services in June 2004[12]

•       the Rehabilitating large and complex enterprises in financial difficulties report, completed by the Corporations and Markets Advisory Committee (CAMAC) in October 2004[13] and

•       the Issues in external administration report, completed by CAMAC in November 2008.[14]

Despite the numerous findings and recommendations for improved regulation, action in that regard was not taken. It is not possible to say with certainty why this was so. However, at that time, the Government was enacting complex and technical personal property securities legislation which would strongly impact on the order in which secured creditors would be paid out in the event of insolvency.[15] There were ongoing public reports of misconduct by insolvency practitioners.[16] This culminated in 2009 when ASIC commenced proceedings against liquidator Stuart Ariff in the Supreme Court of New South Wales.[17] The subsequent decision by the Court sets out a long list of admissions which were made by Ariff as to his conduct in carrying out his duties as a liquidator:

The CarLovers group of companies operated the business of car washing … The conduct admitted by [Ariff] includes, but obviously is not limited to, … charging the CarLovers companies for overseas travel for himself and his family members, including travel expenses, accommodation charges and the like over a period 2003 through to 2007 … those expenses had absolutely nothing to do with the business of the CarLovers companies. The admitted facts also includes (sic) admissions of conduct … by which he paid his family members large amounts of the companies’ money claimed to be for services to the companies but which had nothing to do with the CarLovers companies … Compounding this conduct is [his] inability to produce any documents relating to the amounts identified …[18]

The Supreme Court ultimately declared that Ariff was unfit to hold the office of official liquidator, registered liquidator, liquidator, provisional liquidator, voluntary administrator, administrator of a deed of company arrangement or controller and ordered that he was prohibited from holding any of those offices, for life.[19]

Senate inquiry

In 2010, in the wake of the Ariff case, the Senate Economics Committee (Economics Committee) conducted an inquiry into insolvency practitioner misconduct.

The committee received a range of comment about the extent to which the well publicised cases of wrongdoing in the insolvency industry reflect generally poor industry practices. At one end of the spectrum, there are those who argue that the industry generally performs well and that Mr Ariff is the exception. At the other end are those who claim the insolvency industry has systemic problems and operates in a regulatory vacuum. Between these positions are more nuanced views, which recognise that there are specific problems that require targeted reform.[20]

The report of the Economics Committee contained 17 recommendations. First and foremost, the Economics Committee recommended that responsibility for regulation of insolvency practitioners should no longer lie with the ASIC and should, instead be transferred to AFSA (then known as the Insolvency and Trustee Service Australia).[21] This recommendation was not accepted by the Government which determined that ‘a new single regulator is not required in order to address the concerns of the Senate Committee in relation to ASIC’s role in regulating the corporate insolvency industry’.[22]

In addition, the Committee recommended, amongst other things, establishing a licensing system for corporate insolvency practitioners,[23] the payment of a license registration fee[24] and empowering the insolvency regulator to suspend a license in the event that overcharging has occurred.[25]

The Bill delivers on many of those recommendations.

Treasury consultation

Options paper

On 2 June 2011 the Attorney-General, Robert McClelland and the Parliamentary Secretary to the Treasurer, David Bradbury, jointly released an options paper entitled, A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia.[26] Thirty-three submissions were received in response to the options paper.[27]

Proposals paper

Following on from the options paper, on 14 December 2011 the Attorney-General and the Parliamentary Secretary to the Treasurer jointly released a proposals paper, Reforms to modernise and harmonise insolvency.[28] The key reform proposals included:

•       new powers for ASIC to compel practitioners to answer questions about an administration or their conduct

•       changes to the standards of entry to require practitioners to have undertaken insolvency specific education and a new registration and disciplinary system based on the personal insolvency regime

•       changes to the way information is distributed to creditors and a new right for creditors to remove a practitioner

•       giving creditors the power to pass a resolution capping practitioner fees

•       removing conflicts of interest by preventing practitioners and their related parties from deriving a benefit from the use of disbursements without the approval of creditors.[29]

Twenty-nine submissions were received in response to the proposals paper.[30] Responders to the proposals paper were generally supportive of the need for reform. The Institute of Chartered Accountants in Australia acknowledged that ‘in respect of practitioner discipline, we believe that the intended policy outcome of the reforms is for a fair, timely, effective and transparent process for resolving disciplinary matters, and through that, an improvement in practitioner behaviours’.[31]

Insolvency Practitioners Australia supported:

… the proposed steps towards harmonisation of the laws and processes of personal and corporate insolvency and further recommend that the proposed reforms be approached with a view to ensuring alignment where that is possible. This applies both to laws concerning the regulation of the profession, and to laws concerning insolvency processes—meetings, time limits, voting rights, dividends etc.[32]

First exposure draft

Announcing the release of the draft Bill for public comment on 19 December 2012, Attorney-General, Nicola Roxon and Parliamentary Secretary to the Treasurer, Bernie Ripoll, explained:

The draft Insolvency Law Reform Bill 2012 amends the personal and corporate insolvency laws to improve regulatory oversight of the insolvency profession, improve value for money for recipients of insolvency services, and enhance creditor rights across all forms of insolvency administration.

In particular, these draft laws provide greater powers for creditors to remove practitioners and curb excessive fees, and therefore deliver better outcomes for creditors, many of whom are small businesses.[33]

There were 16 submissions in response to the first exposure draft.[34] Importantly, no draft regulations were issued at that time. That being the case, Deloitte made clear that its comments were ‘subject to this qualification as it is apparent that many important matters are intended to be addressed in the regulations to the Bill’.[35]

On the other hand, McGrathNicol cautioned against attempts to harmonise the corporate and personal insolvency regimes without due regard to the significant and substantive differences between corporate and personal insolvency stating:

Insolvent companies typically involve a far greater number and value of creditors than personal insolvencies and are far more likely to be trading enterprises and employers. The harmonisation approach appears to have taken the view that processes and requirements that work well in bankruptcy can be applied, without modification, to corporate insolvency. There are certainly aspects in which this premise holds, but there are several where it does not and, in our view, harmonisation in these aspects will unnecessarily add cost and confusion.[36]

Second exposure draft

It was two years before the second exposure draft Bill was circulated for comment. On 7 November 2014, Minister for Finance Mathias Cormann and Attorney-General George Brandis announced that the Government was ‘releasing draft legislation to implement the first phase of reforms to strengthen and streamline Australia’s personal bankruptcy and corporate insolvency regimes’.[37] The draft Bill was accompanied by the Insolvency Practice Rules proposals paper.[38] The proposals paper sets out the details of the Government’s Insolvency Practice Rules, as well as amendments to the Corporations Regulations and the Bankruptcy Regulations necessary to implement the reforms.[39]

Treasury received 20 submissions in response to that consultation. The views of submitters are canvassed under the heading ‘Key issues and provisions’ below.[40] ‘Minor and technical amendments were made [to the final form of the Bill] in response to concerns that the Bill may have an unintended consequence for the efficient management of insolvencies’.[41]

Committee consideration

Selection of Bills Committee

At its meeting of 3 February 2016, the Selection of Bills Committee determined that the Bill would not be sent to committee for inquiry and report.[42]

Senate Standing Committee for the Scrutiny of Bills

The Standing Committee for the Scrutiny of Bills commented on the Bill in its Alert Digest of 3 February 2016.[43] Relevant comments are set out under the Key issues and provisions part of this Bills Digest.

Policy position of non-government parties

Speaking on the Bill, ALP member Dr Jim Chalmers indicated that the ALP ‘will be supporting [the Bill] through the Parliament’.[44] Despite generally supporting the Bill, Dr Chalmers identified four issues of concern:

The first one is that the Bill defers some fine detail to a legislative instrument called the 'insolvency practice rules'. The intended insolvency practice rules have not been released yet. They should be released to allow practitioners the opportunity to prepare for the change in regime …

The second one is that the Bill claims a compliance saving of $50 million, which the industry itself has said is completely wrong. It says that the regime will cost them substantially …

The third concern is that … there are more components coming. We think you can minimise the cost to the industry if you release all the parts of the insolvency reforms close together to give people the opportunity to consider them together and try to harmonise the various phase-ins of the separate tranches of law reforms.

The fourth area of concern is around ASIC funding … There have been a couple of years of fairly substantial cuts to ASIC. If we want ASIC to do its job, we have to make sure it is adequately resourced to do that job.[45]

Position of major interest groups

As the Bill has been through several iterations, the commentary has been largely supportive of the general policy of aligning the registration and disciplinary frameworks that apply to registered liquidators and registered trustees. Comments from stakeholders about individual provisions are set out under the heading ‘Key issues and provisions’ below.

Financial implications

According to the Explanatory Memorandum for the Bill, ‘$2.8 million will be reappropriated from 2012–13 and 2013–14 into 2016–17 to implement the Bill. Past revenue collected has already offset this expenditure. The Bill will result in revenue of $1 million per annum from commencement’.[46]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[47]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee for Human Rights determined that the Bill does not raise human rights concerns.[48]

Key issues and provisions—IPS Corporations

Assistant Minister to the Treasurer, Alex Hawke, speaking on the Bill stated that it aims:

… to restore confidence in the insolvency profession by raising the standards of professionalism and competence of practitioners, and identifying and removing “bad apples” from the profession more swiftly.

The Bill does this by aligning and strengthening the registration, disciplining and regulator oversight of corporate insolvency practitioners with the framework currently in place for personal insolvency practitioners.[49]

As the primary changes are being made to the Corporations Act and other statutes in relation to insolvency, this Bills Digest commences with a detailed outline of those amendments. The Digest then identifies some of the main differences between the current regime for registration of trustees in bankruptcy and the proposed Insolvency Practice Schedule (IPS) Bankruptcy.

Commencement

With the exception of items 94 and 303, the provisions in Schedule 2 to the Bill commence on a single day to be fixed by Proclamation. However, if the provisions do not commence within the period of 12 months beginning on the day the Insolvency Law Reform Act 2016 receives Royal Assent, they commence on the day after the end of that period.

About insolvency and the Corporations Act

Nature of insolvency

A company is classified as being solvent if, and only if, it is able to pay all of its debts as and when they become due and payable. Otherwise the company is insolvent.[50]

The three main insolvency procedures are voluntary administration,[51] liquidation[52] and receivership.[53]

Voluntary administration

Voluntary administration is designed to resolve a company’s future direction quickly. An independent and suitably qualified person takes full control of the company to try to work out a way to save either the company or its business.

If it is not possible to save the company or its business, the aim is to administer the affairs of the company in a way that results in a better return to creditors than they would have received if the company had been placed straight into liquidation.

After taking control of the company, the voluntary administrator investigates and reports to creditors on the company’s business, property, affairs and financial circumstances, and on the three options available to creditors. These are:

•        end the voluntary administration and return the company to the directors’ control

•        approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts or

•        wind up the company and appoint a liquidator.[54]

Liquidation

Liquidation is the name given to the orderly winding up of a company’s affairs. A liquidator can be appointed either by a court or at a general meeting of the company, for the purpose of winding up the affairs and distributing the property of the company.[55] When a company is being liquidated because it is insolvent, the liquidator has a duty to all the company’s creditors. The liquidator’s role is to:

•       collect, protect and realise the company’s assets

•       investigate and report to creditors about the company’s affairs, including any unfair preferences which may be recoverable, any uncommercial transactions which may be set aside, and any possible claims against the company’s officers[56]

•       enquire into the failure of the company and possible offences by people involved with the company and report to ASIC

•       after payment of the costs of the liquidation, and subject to the rights of any secured creditor, distribute the proceeds of realisation—first to priority creditors, including employees, and then to other unsecured creditors and

•       apply for deregistration of the company on completion of the liquidation.[57]

In its current form, the Corporations Act provides for the formal registration of auditors and liquidators (in Part 9.2 of Chapter 9). Essentially, a person must not consent to be appointed and must not act as a liquidator unless the person is a registered liquidator.[58] The Australian Securities and Investments Commission (ASIC) is responsible for the registration of liquidators.[59] ASIC must not register a person who has been disqualified from managing a corporation as a liquidator.[60]

Part 2 of Schedule 2 to the Bill repeals the existing rules for the registration of liquidators. As a result, Part 9.2 of the Corporations Act will set out the rules for the registration of auditors only.

Receivership

A company goes into receivership when an independent and suitably qualified person (the receiver) is appointed by a secured creditor, or in special circumstances by the court, to take control of some or all of the company’s assets. The receiver’s primary duty is to the company’s secured creditor. A receiver also has the same general duties as a company director. [61] A person is not eligible to be appointed as a receiver if the person is not a registered liquidator.[62]

Insolvency in context

The table below sets out the number of insolvency appointments in each state and territory since the financial year 1999–2000.

Period

NSW

Vic.

Qld

SA

WA

Tas.

NT

ACT

Australia

1999–2000

2,968

1,862

1,557

387

567

67

44

113

7,565

2000–2001

3,350

2,472

1,913

508

788

104

56

123

9,314

2001–2002

4,077

2,646

1,894

518

918

139

48

201

10,441

2002–2003

4,379

2,848

1,891

540

900

97

59

168

10,882

2003–2004

4,679

2,967

1,765

493

806

57

76

165

11,008

2004–2005

4,371

2,824

1,732

507

747

62

76

162

10,481

2005–2006

5,711

3,347

2,053

552

746

54

43

183

12,689

2006–2007

5,570

3,056

2,055

488

497

89

31

170

11,956

2007–2008

5,879

3,245

2,086

494

509

74

30

207

12,524

2008–2009

6,591

4,215

3,003

555

861

69

33

240

15,567

2009–2010

5,659

3,555

3,079

506

922

108

36

191

14,056

2010–2011

5,710

3,900

3,005

547

1,052

125

52

175

14,566

2011–2012

6,033

3,898

3,380

654

1,056

133

39

223

15,416

2012–2013

5,747

4,472

3,251

744

1,101

205

67

228

15,815

2013–2014

5,059

3,902

2,943

585

1,079

125

53

239

13,985

2014–2015

4,398

3,427

2,667

528

1,317

98

74

217

12,726

Source: ASIC, Australian insolvency statistics, ASIC, December 2015, accessed 8 February 2016.

IPS Corporations and Insolvency Practice Rules

The Bill inserts the Insolvency Practice Schedule (Corporations) (IPS Corporations) as Schedule 2 to the Corporations Act.[63]

Proposed clause 105-1 empowers the Minister, by legislative instrument, to make Insolvency Practice Rules. References to this rule-making power appear throughout the proposed IPS Corporations.

Key issue—delegation of legislative power

The report of the Scrutiny of Bills Committee draws particular attention to the making of Insolvency Practice Rules. The Scrutiny of Bills Committee took the view that ‘important matters should be included in primary legislation unless a compelling justification is provided’.[64] That being the case the Committee considered it ‘regrettable that the explanatory materials did not include a more detailed justification for why particular aspects of the new regulatory framework and the content of the rules are to be provided for in the Rules rather than the primary legislation’.[65]

The Committee’s report highlighted a number of proposed provisions of the Bill where powers and standards are to be prescribed under the Rules:

•       subclause 65-50 which provides that significant rules in relation to the consequences for failure to comply with Division 65 of the Schedule may be provided for by the Insolvency Practice Rules and

•       clause 70-50 which relates to reporting to creditors.

The Scrutiny of Bills Committee has sought the Assistant Treasurer’s detailed explanation of the general division between the Rules and primary legislation, including the justification for including matters in the Rules.[66]

Dictionary terms

The Dictionary in proposed clause 5-5 refers to, amongst other things, external administration of a company and the external administrator of a company. Accordingly, a company is taken to be under external administration in any of the following circumstances:

•       the company is under administration

•       a deed of company arrangement has been entered into in relation to the company

•       a liquidator has been appointed in relation to the company or

•       a provisional liquidator has been appointed in relation to the company.

However, a company is not under external administration for the purposes of the proposed IPS Corporations merely because a receiver, receiver and manager, or other controller has been appointed in relation to property of the company.[67]

A person is an external administrator of a company if the person is any of the following:

•       the administrator of the company

•       the administrator under a deed of company arrangement that has been entered into in relation to the company

•       the liquidator of the company or

•       the provisional liquidator of the company.

However, a person is not an external administrator of a company for the purposes of the proposed IPS Corporations merely because the person has been appointed as a receiver, receiver and manager, or controller in relation to property of the company.[68]

In additional to the definitions that are common to both IPSs, the proposed IPS Corporations contains the definition of a pooled group.[69] If a pooling determination or a pooling order is in force in relation to a group of two or more companies then the companies are together a pooled group and each of the companies is a member of the pooled group.[70]

Basic steps for registering liquidators

Quick Guide to Division 20

Although liquidators are currently registered under section 1282 of the Corporations Act, that registration is not limited to a prescribed time period. The requirement in the IPS Corporations for registration, and renewal of registration every three years, is intended to promote a high level of professionalism and competence in insolvency practitioners. To that end, Division 20 requires:

·    a formal application to ASIC to be registered as a liquidator

·    referral of an application by ASIC to a committee for assessment against specified criteria—one of which is the holding of adequate and appropriate professional indemnity insurance and fidelity insurance against the liabilities that the person may incur working as a registered liquidator[71] and

·    the registration of the liquidator by ASIC, which may be subject to conditions.

First, a person may apply to ASIC to be registered as a liquidator on the approved form.[72] Fees for lodging documents such as an application for registration may be imposed under the Corporations (Fees) Act 2001.

Second,              within two months of receiving an application for registration as a liquidator, ASIC must refer it to a committee for consideration.[73] The committee must comprise ASIC, a registered liquidator chosen by a prescribed body and a person appointed by the Minister.[74] (The common rules for committees are discussed below under the heading ‘About committees’.)

Third, in considering the application, the committee must interview the applicant and may also require the applicant to sit for an exam.[75] The committee must make its decision within 45 business days after interviewing the applicant.[76] A person must be registered as a liquidator provided that the committee is satisfied that he, or she, meets each of the conditions set out in proposed subclause 20-20(4) of the IPS Corporations. These include, but are not limited to, having the prescribed qualifications, experience, knowledge and abilities; a willingness to take out adequate and appropriate professional indemnity insurance and fidelity insurance; and being a fit and proper person.[77] The registration of a person as a liquidator may be subject to conditions specified by the committee.[78] The decision of the committee not to register a liquidator may be reviewed by the Administrative Appeals Tribunal.[79]

Fourth, once the decision is made, the committee must give the applicant and ASIC a report setting out the decision and the reasons for the decision—including the reasons, if there are any, for imposing a condition on the person’s registration.[80] The decision of the committee to impose conditions on the registration of a liquidator may be reviewed by the Administrative Appeals Tribunal.[81]

Finally, the person will be registered as a liquidator once written evidence has been provided to ASIC that the required professional indemnity insurance and fidelity insurance have been taken out against the liabilities that the applicant may incur working as a registered liquidator.[82] The proposed IPS Corporations requires ASIC to establish and maintain a Register of Liquidators which may be in any form that ASIC considers appropriate.[83] Once the person is registered as a liquidator, ASIC must give the person a certificate of registration which may be in electronic form. The period of registration is three years.[84]

A person commits an offence if he, or she, makes a representation about being a registered liquidator and the representation is false. In that case the maximum penalty is 30 penalty units.[85]

Key issue—timing

As stated above, ASIC must convene a committee within two months of receiving an application for registration. The committee then has a further 45 business days within which to make its decision. A worst case scenario would be that a decision to register a liquidator may not be made for over four months from the date of application.

Many submitters considered that the 45 business day time frame for the decision of the committee was too long.[86] In addition, KordaMentha was concerned that ‘there is no timeframe in which the interview must be held. There is also no timeframe for when the exam must be sat if an exam is required’.[87]

Key issue—registration for three years

Currently section 1279 of the Corporations Act provides that a person may apply to ASIC for registration as a liquidator, or as a liquidator of a specified body corporate that is to be wound up, amongst other things, under that Act. Section 1282 provides that ASIC must grant the application if the following criteria are satisfied:

•       the person holds the required academic qualification (or qualifications and experience that are adjudged to be equivalent)

•       the person has had suitable experience in connection with externally administered bodies corporate

•       ASIC is satisfied that the person is capable of performing the duties of a liquidator and

•       ASIC is satisfied that the person is a ‘fit and proper’ person.

Existing subsection 1282(8) provides that the registration continues until the registration is cancelled by ASIC or by the Companies Auditors and Liquidators Disciplinary Board (CALDB), or the person dies.

Economics Committee view

The Economics Committee noted that the possibility of a licensing system for insolvency practitioners had been considered—and rejected—in 2007 when the Corporations Amendment (Insolvency) Bill 2007 was under consideration.[88] The Economics Committee recommended that a licensing system for corporate insolvency practitioners be established and that practitioners should be required to renew their license every three years.[89] The rationale for this position was:

In addition to quickly stopping wrongdoing, a licensing system would also have the advantage of improved monitoring of insolvency practitioners. Unlike the current registration process, a licensing system would have a requirement for regular renewal. This would involve the practitioner lodging information every three years (for example) and an assessment by the regulator of the practitioner's conduct and need for professional development. Pending this assessment, the regulator has the options of renewing the license, imposing conditions on it, suspending the license or revoking it.[90]

None of the submitters to Treasury’s second exposure draft opposed the move to limit the period of registration to three years. The transitional provisions in Part 3 of Schedule 2 to the Bill operate so that on the day that the Insolvency Law Reform Act commences, those liquidators who are registered will be taken to be registered as a liquidator under Division 20 of the IPS Corporations. That registration will cease on the first anniversary of the person’s registration under the former rules that occurs after the commencement day.[91]

Example

Bill Brown was registered as a liquidator on 15 November 2014. If the Insolvency Law Reform Act were to commence on 1 July 2017 he would be taken to be registered under the rules set out in the IPS Corporations on that date. However, on 15 November 2017 his registration would cease unless he had taken the relevant steps to renew it.

This means that in the first 12 months following the commencement of the Insolvency Law Reform Act all existing registrations will end unless the liquidator applies to have the registration renewed in the appropriate manner. (See discussion under the heading ‘Renewing registration’ below.)

About committees

Division 50 of the IPS Corporations sets out the general rules for committees. These rules apply equally to the committees which may be formed for the following purposes:

•       a committee convened by ASIC to consider an application for registration[92]

•       a committee convened by ASIC to consider an application to vary a condition of registration[93]

•       a committee convened by ASIC to consider the nature of any disciplinary action which may be taken when a registered liquidator has received a show cause notice and has either not responded to it or ASIC is not satisfied with the response[94] and

•       a committee convened by ASIC to determine an application to have a suspension lifted or shortened.[95]

In each of those circumstances, the manner in which a committee i is to perform its functions will be set out in the Insolvency Practice Rules.[96]

Composition of the committee

As stated above, for the purposes of the proposed IPS Corporations, a committee must comprise ASIC, a registered liquidator chosen by a prescribed body and a person appointed by the Minister.

The Insolvency Practice Rules may prescribe a body which is to appoint a person to a committee. In that case the prescribed body must be satisfied that the person has the knowledge or experience which is prescribed in relation to appointment. If no knowledge or experience is prescribed, then the prescribed body must be satisfied that the person has the knowledge and experience necessary to carry out his, or her, functions as a member of the committee if appointed.[97]

The power of the Minister to appoint a person to a committee may be delegated, in writing to ASIC, an ASIC member or to a staff member of ASIC who is an SES employee or acting SES employee or to an APS employee who holds, or is acting in, an Executive Level 2 position or to a person who holds, or is acting in, an office or position that is equivalent to an SES employee, or an Executive Level 2. The delegate must comply with any directions of the Minister.[98]

The power of the Minister to delegate the power to appoint a person to a committee to ASIC, may have the effect that ASIC has one of the three places on the committee and it is ASIC which is empowered to choose a person to take another of those places. Of concern to Deloitte is that ‘this may create the impression that the committee is not seen as independent’.[99]

Activities of the committee

A single committee may be convened to consider one or more matters. The matters may relate to the registration as a liquidator of one or more applicants and to the conduct of one or more registered liquidators.[100]

The proposed IPS Corporations creates an offence where a member of a committee uses or discloses information or a document for purposes other than exercising the powers or performing functions as a member of the committee if the information or the document was disclosed to him, or her, for that purpose. The maximum penalty for the offence is 50 penalty units (that is, a maximum of $9,000).[101]

The offence provision does not apply where the information or document is disclosed to the Inspector-General in Bankruptcy in the exercise of his, or her, powers and functions, or to another committee to assist in the exercise of its powers.[102] A person who wishes to rely on this exception bears the evidential burden to prove that the disclosure was made appropriately.[103]

Key issue—reverse onus of proof

The proposed IPS Corporations contains a number of offences in which the evidential burden of proof is reversed so that the defendant bears the onus of proof if he or she wishes to rely on an exception to a general rule.[104] This generally occurs ‘where the facts in relation to the defence might be said to be peculiarly within the knowledge of the defendant, or where proof by the prosecution of a particular matter would be extremely difficult or expensive whereas it could be readily and cheaply provided by the accused’.[105] However, the Scrutiny of Bills Committee noted that the Explanatory Memorandum to the Bill provides no explanation for the reversal of the onus of proof. That being the case, the Committee has asked the Assistant Treasurer to provide a detailed justification of this approach wherever it occurs in the Bill.[106]

Other steps in registering practitioners

Imposing conditions

Where a committee has decided that a person’s registration as a liquidator is to be subject to a condition, or conditions, the person may apply to ASIC for their variation or removal.[107] In that case, the application must be lodged with ASIC in the approved form.[108] Within two months of receiving such an application, ASIC must refer it to a committee for consideration.[109] That consideration is to include interviewing the applicant unless he or she agrees otherwise. The committee must decide, within 20 business days, whether the condition should be varied or removed. If a condition is to be varied, the committee must specify the way in which it is to be varied. The committee must give the applicant and ASIC a written report setting out the reasons for its decision and where appropriate, details of any variation that is to be made.[110]

Renewing registration

A registered liquidator must apply to ASIC to have his, or her, registration renewed before the existing registration ceases to have effect.[111]

ASIC must renew the registration of the applicant as a liquidator if the application is properly made, the applicant has produced evidence that the required insurances are maintained and that any condition dealing with continuing professional education to which the applicant is subject has been complied with.[112] The renewed registration is subject to the current conditions imposed on the registered liquidator.[113] The period of the renewed registration is three years beginning on the day after the person’s immediately preceding registration as a liquidator ceased to have effect.[114]

Offences

The proposed IPS Corporations creates a range of offences arising from the registration regime that are of different degrees of severity.

First, a registered liquidator commits an offence if he, or she, intentionally or recklessly fails to comply with the requirement to maintain adequate and appropriate professional indemnity insurance and adequate and appropriate fidelity insurance against the liabilities that the person may incur working as a registered liquidator.[115] In that case, the maximum penalty is 1,000 penalty units (being a maximum amount of $180,000). According to the Explanatory Memorandum to the Bill:

The new maximum penalty for intentionally or recklessly failing to comply with a registered liquidator’s insurance obligations is a significant increase over the current five penalty unit penalty provided for under the Corporations Act. The new penalty provides an appropriate deterrent to non-compliance with these important obligations and more appropriately reflects the possible magnitude of the loss third parties may suffer due to a breach.[116]

In the alternative, a registered trustee commits an offence of strict liability if he, or she, fails to comply with the requirement to maintain adequate and appropriate insurance. The maximum penalty for this offence is 60 penalty units (being a maximum amount of $10,800).[117]

Second, a person who is a registered liquidator during all or part of a liquidator return year[118] for the person must, within one month after the end of that year, lodge with ASIC a return on the approved form and accompanied by evidence that the registered liquidator held the required insurance against the liabilities the person may incur working as a registered liquidator.[119] A registered liquidator commits an offence of strict liability if he, or she, fails to comply with the requirement to lodge an annual return. The maximum penalty is five penalty units (being a maximum amount of $900).[120]

Third, a registered liquidator must notify ASIC of certain events within five business days after the registered liquidator could reasonably be expected to be aware of them occurring. The events are:

•       the liquidator becomes an insolvent under administration

•       a bankruptcy notice is issued under the Bankruptcy Act in relation to the liquidator as debtor, or a corresponding notice is issued in relation to the liquidator as debtor under a law of an external Territory or a law of a foreign country

•       the liquidator is convicted of an offence involving fraud or dishonesty

•       the liquidator is disqualified from managing corporations under Part 2D.6 of the Corporations Act, or under a law of an external Territory or a law of a foreign country

•       the liquidator ceases to have adequate and appropriate professional indemnity insurance or adequate and appropriate fidelity insurance against the liabilities that the liquidator may incur working as a registered liquidator

•       the liquidator is issued with a notice under section 40-40 of Schedule 2 to the Bankruptcy Act (a show cause notice) in relation to the liquidator’s registration as a trustee under that Act

•       the liquidator’s registration as a trustee under the Bankruptcy Act is suspended or cancelled or

•       any other event prescribed.[121]

A registered liquidator who intentionally or recklessly fails to comply with this notification requirement commits an offence.[122] The maximum penalty is 100 penalty units.[123]

Fourth, a registered liquidator has an additional requirement to notify ASIC if the information included in an annual liquidator return, an annual administration return or an end of administration return, which has been prepared by, or on behalf of, the liquidator is, or becomes, inaccurate in a material particular or of any other prescribed event. That notification must be made with 10 business days after the registered liquidator could reasonably be expected to be aware that the event has occurred. A registered liquidator commits an offence if he, or she, intentionally or recklessly fails to comply with the requirement. The maximum penalty is five penalty units.[124]

Key issue—creating strict liability offences

The second of the offences outlined above is an offence of strict liability. Both the IPS Corporations and the IPS Bankruptcy create new strict liability offences and retain strict liability offences existing in the Bankruptcy Act and the Corporations Act. The proposed IPS Corporations sets out a further nine strict liability offences.[125]

The Scrutiny of Bills Committee noted the contents of the Explanatory Memorandum to the Bill—in particular:

… the application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. The defence maintains adequate checks and balances for individuals who may be accused of breaching such offences.[126]

In its submission to Treasury in relation to the second exposure draft, ARITA likewise drew attention to the imposition of strict liability offences and the penalties attached to them.[127]

The rationale for the imposition of strict liability offences is set out in the Explanatory Memorandum:

Strict liability offences are appropriate in this area of commercial regulation, as it is necessary to strongly deter misconduct that can have serious consequences for affected parties. Strict liability offences also reduce non-compliance, which bolsters the integrity of the regulatory regime enforced by ASIC and AFSA. Strict liability is particularly beneficial to these regulatory bodies as they need to deal with offences expeditiously to maintain public confidence in their regulatory regimes.[128]

Whilst most of the strict liability offences in the proposed IPS Corporations relate to conduct by insolvency practitioners, some apply to the conduct of creditors. Proposed clause 80-60 makes it an offence for a creditor to directly or indirectly become the purchaser of any part of the administration estate, subject to certain exceptions. In the IPS Corporations, ‘strict liability is only imposed on non-practitioners for more serious misconduct that may have significant consequences for innocent third parties’—for example, a person who purchases the property in good faith only to have the transaction set aside by the Court.[129]

Disciplining practitioners

Quick Guide to Divisions 40 and 45

Division 40 of the IPS Corporations provides that the Companies Auditors and Liquidators Disciplinary Board will no longer be responsible for the discipline of registered liquidators as is currently the case. Instead, the IPS Corporations empowers ASIC to:

·    take a range of direct actions against insolvency practitioners who breach their duties, including to suspend or cancel a liquidator’s registration or to prevent them from taking on new appointments

·    to give a show cause notice and, if a sufficient explanation is not given, to refer the matter to a committee and

·    take further disciplinary action on the decision of a committee.

Division 45 sets out the Court’s powers to make orders in relation to a registered liquidator and the right of an industry body to notify ASIC where it is suspected that reasonable grounds exist for disciplinary action to be taken against a registered liquidator.

Current procedure

The Bill makes major changes to who disciplines registered liquidators and the manner in which they are disciplined. Currently, it is for the Companies Auditors and Liquidators Disciplinary Board (CALDB) to determine the appropriate disciplinary action once ASIC has identified some wrongdoing on the part of a registered auditor or liquidator.

In the event that the alleged wrongdoing is established the following orders may be made:

•       cancel or suspend the auditor or liquidator's registration and/or

•       admonish or reprimand the auditor or liquidator and/or

•       require the auditor or liquidator to give an undertaking.[130]

In evidence to the Economics Committee, then Chairman of the CALDB described the Board’s role as being:

… to protect the public interest by ensuring that the regulatory system for disciplining members of the auditing and liquidating professions who fail to perform their professional duty adequately are appropriately dealt with.

Firstly, so that the particular person concerned is properly dealt with and deterred from engaging in further conduct of the same or similar nature.

Secondly, so that the other members of the profession can see that that particular conduct has led to that particular result … deterring them from engaging in the same or similar conduct.

Thirdly, to reassure the public that the regulatory system is there and that it is working effectively … so that the public can have confidence in the services provided by auditors and by liquidators.[131]

Nevertheless, the Economics Committee stated:

The committee's evidence is that, on at least some of these scores, the CALDB has been found wanting. There have been various criticisms including that the Board lacks independence from ASIC, takes a prolonged time (and cost) to reach a finding, has few cases referred and makes few findings, and is often referred inconsequential matters.[132]

ASIC’s proposed role

The Bill amends the ASIC Act to reduce the function of the CALDB to the discipline of auditors only.[133] Instead, the proposed IPS Corporations places with ASIC the power to discipline registered liquidators.

ASIC may give a registered liquidator a written direction to comply with a requirement to lodge a document or to give any information or document where a registered liquidator has failed to do so.[134] In that case, the time within which the registered liquidator must comply is 10 business days after the notice is given—although this period may be extended, or further extended, at the request of the registered liquidator.[135] A decision to direct a liquidator to lodge documents is an excluded decision under section 1317C of the Corporations Act and is therefore not reviewable by the Administrative Appeals Tribunal.[136]

If the liquidator does not comply within the requisite period, ASIC may either give the registered liquidator a direction not to accept further appointments[137] or apply to the Court for an order directing the liquidator to comply with the requirement within such time as is specified in the order, or both.[138]

ASIC may exercise equivalent powers in circumstances where it reasonably suspects that information that a registered liquidator is required to give to ASIC is incomplete, or incorrect in any particular, and the registered liquidator has failed to comply with a notice to complete or correct the information.[139] A decision to direct a liquidator to correct inaccuracies is an excluded decision under section 1317C of the Corporations Act and is, therefore, not reviewable by the Administrative Appeals Tribunal.[140]

Cancellation or suspension of registration

The registration of a liquidator is automatically cancelled if the person becomes an insolvent under administration or he, or she, dies.[141]

Proposed clauses 40-25 and 40-30 of the IPS Corporations set out in essentially equivalent terms the basis on which ASIC may decide to suspend or cancel the registration of a liquidator respectively. The circumstances which may lead to such a decision include:

•       the person is disqualified from managing corporations under Part 2D.6 of the Corporations Act, or under a law of an external Territory or a law of a foreign country

•       the person ceases to have adequate and appropriate insurance against the liabilities that the person may incur working as a registered liquidator

•       the person’s registration as a trustee under the Bankruptcy Act has been cancelled or suspended other than in compliance with a written request by the person to cancel or suspend registration

•       if the Court has made an order that the person repay remuneration—the person has failed to do so

•       the person has been convicted of an offence involving fraud or dishonesty or

•       the person lodges a request with ASIC in the approved form to have the registration suspended or cancelled.

ASIC must, within 10 business days after making the decision to suspend or cancel registration give the person a written notice setting out the decision and the reasons for the decision. The decision comes into effect on the day after the notice is given to the person.[142]

Disciplinary action by committee

ASIC may give a registered liquidator notice in writing asking the liquidator to give it a written explanation as to why the liquidator should continue to be registered (a show cause notice). Proposed clause 40-40 lists the circumstances in which ASIC may give such a show cause notice.

If ASIC has given a registered liquidator a show cause notice and either does not receive an explanation within 20 business days after the notice is given, or is not satisfied by the explanation which is provided, ASIC may refer the matter to a committee.[143] In that case, the committee must make a decision about whether the liquidator should continue to be registered, whether the liquidator’s registration should be suspended for a period or whether the liquidator’s registration should be cancelled.[144]

The committee also has a range of other disciplinary options open to it. These include, but are not limited to, that the liquidator should be publicly admonished or reprimanded; that a condition should be imposed on the liquidator;[145] or that a condition should be imposed on all other registered liquidators so that they must not allow the liquidator to carry out any of the functions or duties, or exercise any of the powers, of a liquidator on their behalf for a period specified in the decision of no more than 10 years.[146]

The committee must give the registered liquidator and ASIC a report setting out the committee’s decision and the reasons for the decision. Where the liquidator is to be registered subject to a condition, the details of the condition and the reasons for imposing it are also to be included.[147] ASIC must give effect to the committee’s decision.[148]

The proposed IPS Corporations also sets out the rules to be followed when a registered liquidator applies to have a suspension lifted or shortened.[149]

Key issue—no role for CALDB

The submission to Treasury by ASIC in response to the second exposure draft suggests that, since the Economics Committee reported its criticism of CALDB, there have been improvements in its performance.

The CALDB recently delivered decisions on five ASIC applications concerning liquidator misconduct. We expect to shortly file four new applications to add to one existing matter with CALDB. This follows a number of years during which ASIC brought no significant applications to the CALDB. Our recent experience strongly evidences a more effective and timely process …

In light of our recent experience, we believe that CALDB’s independent disciplinary role is now a more important element of the regulatory framework for insolvency practitioners.[150]

Chartered Accountants Australia New Zealand also expressed its concern at the removal of CALDB from the disciplinary process stating:

We understand that the committee approach works in the personal bankruptcy arena. However corporate proceedings often involve many more stakeholders and complex issues and often the financial or other impacts are higher. Therefore a robust and transparent process for resolving these issues is essential and we do not believe that the committee approach as proposed will provide the requisite rigour.[151]

ASIC also identified a potential problem with the operation of the relevant transitional provisions.[152] Specifically, proposed section 1565 of the Corporations Act provides that where an application has been made to CALDB before the commencement day but CALDB has not taken action in relation to that application under the current rules, then on the commencement day the Board must cease its consideration of the matter. It is then up to ASIC to deal with it under the proposed IPS Corporations.

ASIC believes:

… that this will result in unnecessary cost and delay for both the applicant and the respondent because, regardless of how progress the proceedings may be, they must recommence in another forum. ASIC cannot afford to lose resources invested in these matters and fears losing momentum in its enforcement program.[153]

Action initiated by industry body

An industry body[154] may lodge with ASIC a notice in the approved form (called an industry notice) that it reasonably suspects that there are grounds for ASIC to suspend or cancel the registration of a registered liquidator, to give a registered liquidator a show cause notice or to impose a condition on a registered liquidator.[155]

ASIC must consider the information and any documents included with the industry notice. If ASIC decides to take no action in relation to the matters raised by the industry notice, it must give the industry body written notice of that fact within 45 days of the date that the industry notice was lodged.[156] A decision of ASIC to take no action in relation to matters raised by an industry body is an excluded decision under section 1317C of the Corporations Act and is therefore not reviewable by the Administrative Appeals Tribunal.[157]

It is open to ASIC to suspend or cancel the registration of a registered liquidator, to give the registered liquidator a show cause notice or to impose a condition on a registered liquidator. If ASIC does take such action based wholly or partly on the information or documents included with the industry notice, it must give the industry body notice of that fact.[158]

Importantly, proposed clause 40-105 provides that neither an industry body which has given an industry notice to ASIC, nor an individual who makes a decision as a result of which the industry body lodges an industry notice is liable civilly, criminally or under any administrative process provided that the actions taken were taken in good faith and the suspicion that is the subject of the notice is a reasonable suspicion.

Consequences of certain disciplinary and other action

Proposed clause 40-111 provides that where the registration of a liquidator is suspended or cancelled at a time when the liquidator is conducting the external administration of a company, then ASIC may, in writing, appoint another registered liquidator to conduct the external administration of the company.

Similarly, ASIC may, in writing, appoint another registered liquidator to conduct the external administration of a company, where a liquidator who is conducting the external administration of that company fails to renew his, or her, registration as a liquidator before that registration ceases to have effect and the Court has not made an order extending the period during which the liquidator may apply for renewal.

Court oversight

The proposed IPS Corporations gives the Court oversight of registered liquidators.[159] The Court may make such orders as it thinks fit in relation to a registered liquidator either on its own initiative during proceedings before the Court, or on application by the registered liquidator or ASIC.[160] In particular, the Court may make orders about costs. Relevant orders may include an order that the registered liquidator is personally liable for some or all of those costs and/or the registered liquidator is not entitled to be reimbursed by a company or its creditors in relation to some or all of those costs.[161]

Rules about external administrations

Quick Guide to Division 60

According to the Economics Committee ‘from 2006–2010, eight per cent of insolvency related complaints to ASIC concerned remuneration issues, including excessive fees and poor disclosure of remuneration’.[162]

Division 60 of the proposed IPS Corporations responds to this issue by consolidating provisions about the rights of insolvency practitioners to claim remuneration. It provides that remuneration is to be set by a remuneration determination. In the absence of a remuneration determination, a maximum default amount applies. The Court may review a remuneration determination and, in deciding whether it was reasonable, must take into account a range of prescribed matters. These relate, amongst other things, to the quality of the work performed and its complexity.

In addition, Division 60 prohibits an external administrator from directly or indirectly deriving a profit or advantage from a transaction, sale or purchase for, or on account of, the company under external administration. The purpose of this prohibition is to prevent such conduct as overcharging, secret commissions, kick-backs and secretly acquiring company property.

Currently there is no statutory direction or formula to provide a basis for calculating the remuneration of insolvency practitioners in Australia. The statutory and judicial expectation is that remuneration is ‘reasonable’.[163]

According to the Economics Committee report, ‘several submitters and witnesses to this inquiry were critical of the largesse of insolvency practitioners’ fees’.[164] In response to the broad criticism of remuneration of insolvency practitioners, the Law Council of Australia submitted to the Economics Committee that there was ‘understandable dissatisfaction’ arising from individuals who have already suffered from a corporate failure, who are unfamiliar with the system and who ‘see practitioners charge large sums of money, which are paid out in priority to their own claims’.[165]

Remuneration by determination

The proposed IPS Corporations provides for the remuneration of an external administrator. The general rules about remuneration do not apply to a provisional liquidator or to a liquidator appointed by ASIC under section 489EC (winding up by ASIC). Remuneration for those two categories of external administrator is subject to separate rules.[166]

The external administrator of a company is entitled to receive remuneration for necessary work properly performed in relation to the external administration in accordance with the remuneration determination (if any).[167]

Making remuneration determinations

A remuneration determination for an external administrator (other than in a members’ voluntary winding up) may be made:

•       by resolution of the creditors

•       in the absence of such a resolution—by the committee of inspection (see below for discussion about the composition, functions and obligations of the members of a committee of inspection) or

•       by the Court. [168]

By comparison a remuneration determination for an external administrator of a company in a members’ voluntary winding up may be made:

•                     by resolution of the company at a general meeting or

•                     in the absence of such a resolution, by the Court.[169]

Contents of remuneration determination

The remuneration determination may specify either an amount of remuneration or a method for working out an amount of remuneration.[170] If the method specified calculates the remuneration wholly or partly on a time-cost basis, the determination must include a cap on the amount of remuneration.[171] There is no capacity under the proposed IPS Corporations to specify that remuneration may be worked out on the basis of a specified percentage of money received by the external administrator in respect of the company (which is permitted under the proposed IPS Bankruptcy).

Review of determinations

The proposed IPS Corporations provides that ASIC, a person with a financial interest in the external administration of the company or an officer of the company may apply to the Court for a review of the remuneration determination. The Court must affirm the remuneration determination, vary it or set it aside and substitute another remuneration determination.[172] Proposed clause 60-12 sets out the matters to which the Court must have regard in making such a determination. These include, but are not limited to, matters such as the extent to which the work by the external administrator was necessary and properly performed,[173] the period during which the work was, or is likely to be, performed by the external administrator[174] and the quality[175] and complexity of that work.[176]

Remuneration if there is no determination

If no remuneration determination is made, the external administrator is entitled to receive reasonable remuneration for the work. However, that remuneration must not exceed the maximum default amount.[177] The rules for calculating the maximum default amount are equivalent in both IPSs.[178]

According to the Explanatory Memorandum to the Bill:

The maximum default amount does not seek to establish an industry average for remuneration in an administration. Rather this provision seeks to facilitate a liquidator being able to draw a base amount of remuneration without incurring the expense of convening a meeting to obtain creditor approval. This provision is expected to be particularly valuable during a no- or low-asset administration.[179]

Remuneration of provisional liquidators

A provisional liquidator is entitled to receive remuneration, by way of percentage or otherwise, as determined by the Court. In the absence of such a determination, remuneration is determined by agreement between the liquidator and the committee of inspection. In the event that the liquidator and the committee of inspection fail to agree then remuneration is determined by resolution of the creditors.[180]

Remuneration of liquidators in a winding up by ASIC

If ASIC orders that a company be wound up under section 489EA of the Corporations Act, ASIC may determine the remuneration that the liquidator is entitled to receive.[181]

Duties of external administrators

Proposed clause 60-20 codifies the general rule that:

… equity will not allow a fiduciary to enter into any engagement in which he has, or could have, a personal interest conflicting with that of his principal … nor will it allow him to retain any benefit or gain obtained or received by reason of his fiduciary position or through some opportunity or knowledge resulting from it.[182]

Accordingly, the clause provides that an external administrator of a company must not directly or indirectly derive any profit or advantage from the external administration of the company and sets out, for the avoidance of doubt, the circumstances in which an external administrator is deemed to do so. One of those circumstances is where a related entity of the external administrator directly or indirectly derives a profit or advantage from the external administration of the company.[183]

Meaning of related entity

For the purposes of the IPS Corporations the meaning of related entity is equivalent to the definition in section 5 of the Bankruptcy Act, so that in relation to a person, related entity means any of the following:

a)       a relative of the person

b)      a body corporate of which the person, or a relative of the person, is a director

c)       a body corporate that is related to the body corporate referred to in paragraph (b)

d)      a director, or a relative of a director, of a body corporate referred to in paragraph (b) or (c)

e)       a beneficiary under a trust of which the person, or a relative of the person, is a trustee

f)        a relative of such a beneficiary

g)       a relative of the spouse, or de facto partner, of such a beneficiary

h)      a trustee of a trust under which the person, or a relative of the person, is a beneficiary

i)         a member of a partnership of which the person, or a relative of the person, is a member.

For the purposes of paragraph (c) of this definition, the question whether a body corporate is related to another body corporate is to be determined in the same manner as that question is determined for the purposes of the Corporations Act 2001.

This provision, as set out in an earlier exposure draft, caused considerable disquiet amongst stakeholders. For instance, Chartered Accountants Australia New Zealand stated that it could ‘prevent the effective running of the proceeding’ and expressed concern that ‘the prohibition on employing a related party without creditor consent could prevent a practitioner from using experts in their firm to secure premises or IT systems on appointment to the detriment of the proceedings’.[184]

However, proposed subclause 60-20(4) now clarifies that the deeming will not operate where the profit or advantage arises because the external administrator employs a person to provide services in connection with the external administration of the company and the person is a related entity of the external administrator where, amongst other things, it is not reasonably practicable in all the circumstances to obtain the agreement, by resolution, of the creditors to the related entity being employed or engaged and the cost of employing the related entity is reasonable in all the circumstances.

A person who is subject to the requirement not to directly or indirectly derive a profit or advantage from the external administration of the company commits an offence of strict liability if he, or she, fails to comply with the requirement. The maximum penalty is 50 penalty units.[185] A transaction or any other arrangement entered into in contravention of this section may be set aside by the Court.[186]

Funds handling

Quick Guide to Division 65

Division 65 formalises funds handling procedures including the requirement that an external administrator pay all money received on behalf of the company into an administration account.

In addition, the provisions in Division 65 empower those persons with a financial interest in the external administration of the company to ask the Court to give directions to the external administrator about the way in which money of the company is to be handled.[187]

Paying money into the administration account

The proposed IPS Corporations requires an external administrator to pay all the money he or she receives on behalf of the company into an administration account within five business days after receipt. A failure to comply with that requirement gives rise to a strict liability offence. The maximum penalty is 50 penalty units.[188] The proposed IPS Corporations contains an additional descriptor of an administration account for a member of a pooled group of companies.[189] Where an amount has not been paid into an administration account a liability arises to pay interest to the Commonwealth on the excess as a penalty—worked out at the rate of 20 per cent per year or another rate that is prescribed—for the period during which the failure to comply occurred.[190] Importantly, the external administrator is personally liable for the payment of that interest.[191]

Paying money out of the administration account

The proposed IPS Corporations prohibits an external administrator of a company from paying money out of the administration account for the company otherwise than for the administration of the company or in accordance with the Corporations Act or in response to a direction of the Court. A person who fails to comply with the prohibition commits an offence of strict liability. The maximum penalty is 50 penalty units.[192]

The proposed IPS Corporations also provides rules for the handling of securities such as bills of exchange, promissory notes and negotiable instruments, including that the Court may give directions regarding the payment, deposit or custody of money and securities.[193]

Information

Quick Guide to Division 70

The provisions contained in Division 70 apply in relation to an ongoing external administration of a company. The Division is intended to address the information asymmetry between external administrators and creditors which interferes with the efficiency of the insolvency market and contributes to the risk of misconduct by market participants.[194]

Division 70 addresses this issue by requiring an external administrator to maintain certain records and to report to ASIC annually. In addition, it allows creditors to request information from an insolvency practitioner and to request that a creditors meeting be held during an external administration. Creditors and members with a financial interest will be able to make a reasonable request for information. Insolvency practitioners will be obliged to meet those requests.

Administration return

The external administrator of a company during all or part of an administration return year must lodge a return in relation to the administration. An administration return year is the period of 12 months beginning on the day on which the person first began to be an external administrator of the company and each subsequent period of 12 months.[195] The return must be lodged with ASIC within three months after the end of the year.[196]

In addition, the person must give notice that the return has been lodged when next forwarding any report, notice of meeting, notice of call or dividend:

•       to the members of the company in a members’ voluntary winding up

•       to the creditors in a creditors’ or court-ordered winding up

•       to the Court if the external administrator is appointed as a provisional liquidator and

•       to the company if the company is under administration or has executed a deed of company arrangement.[197]

If two or more companies are members of a pooled group, then the returns for those companies may be set out in the same document.[198]

End of administration return

The person who is the external administrator of the company when the external administration of the company ends[199] (the last external administrator) must lodge a return in relation to the external administration of the company with ASIC within one month of the end of the administration.[200] The last external administrator must give notice that the return has been lodged to the company, members of the company, the creditors or the Court (as the case may be) if requested to do so in writing.[201]

Record keeping

The proposed IPS Corporations contains requirements for an external administrator to keep books of meetings and other affairs of the company, to ensure that the books are available for inspection and to permit a creditor or contributory to inspect the books.[202] In addition, an external administrator must allow those books to be audited by a registered company auditor if required to do so[203]—although Deloitte expressed concern about ‘how this would be paid if the administration is without funds’.[204]

The proposed IPS Corporations also empowers ASIC, by written notice to a person who has ceased to be the external administrator of a company, to require the person to transfer possession or control of the books of the external administration to ASIC within the period specified in the notice. If the books are not in the possession or control of the person, ASIC may require the person to give it notice to that effect.[205]

A person who intentionally or recklessly fails to comply with a notice to transfer possession or control of the books of the external administration, commits an offence, the maximum penalty for which is 50 penalty units.[206]

If ASIC has possession or control of books relating to an external administration of a company it must either:

•       as soon as practicable, transfer possession or control of those books to the new administrator if one is appointed or

•       if the company ceases to be a company under external administration, as soon as practicable transfer possession or control of those books to the company.[207]

ASIC must retain all books of the company, and of the external administration of the company that are in its possession or control under this section, the possession of which is not transferred to another entity, for a period (the retention period) of two years after the end of the external administration of the company—at which time ASIC may destroy them.[208]

Giving information

In addition to the rights of creditors to request information, documents and reports from the external administrator[209] the proposed IPS Corporations also provides equivalent rights to members of a company in a members’ voluntary winding up.[210]

Direction to external administrator to comply with the request

Where the external administrator of a company refuses a request made by a person for information, a report or document, ASIC may, in writing, direct the external administrator to give all or part of the relevant material to the person who made the request within five business days after the direction is given.[211] A decision of ASIC to direct an external administrator to comply with a request for information is an excluded decision under section 1317C of the Corporations Act and is therefore not reviewable by the Administrative Appeals Tribunal.[212]

However, before giving that formal direction, ASIC must notify the external administrator in writing that it proposes to give such a direction and invite the external administrator to make a written submission, within 10 business days, about whether the external administrator objects to giving the relevant material. If so, the reasons for that objection must be stated. Where there is an objection, ASIC must take it into account when deciding whether to direct that the relevant material be given to the person.[213]

Where relevant material is to be given to a person, ASIC may, by notice in writing to the person, impose conditions on its use and disclosure by the person. [214] The person commits an offence if they do not comply with the conditions. The maximum penalty for the offence is 10 penalty units or imprisonment for three months or both.[215] A decision of ASIC to impose a condition on the use or disclosure of relevant material is an excluded decision under section 1317C of the Corporations Act and is therefore not reviewable by the Administrative Appeals Tribunal.[216]

If the external administrator refuses to comply with the formal direction of ASIC to give a person relevant material ASIC may apply to the Court for an order that the external administrator comply with the direction.[217]

Meetings

Quick Guide to Division 75

One of the aims of the Bill is to enhance communication and transparency between stakeholders. To that end, Division 75 sets out:

·    the instances in which the external administrator must convene a meeting at the request of a percentage of the creditors

·    the instances in which the external administrator may convene a meeting

·    who may attend the meeting and

·    the mechanism for resolving a matter without holding a meeting.

The Insolvency Practice Rules may provide for a range of matters in relation to meetings of creditors. These include, but are not limited to, matters such as the notice for convening meetings, the agenda for the meeting, who is to preside at meetings, voting (including casting votes) and costs in relation to meetings and security for those costs.[218]

Requirement to convene a meeting

The proposed IPS Corporations contains a general power which allows an external administrator to convene a meeting of the creditors or the members of the company.[219] In addition, the external administrator of a company must convene a meeting of creditors in certain circumstances.[220] In particular, a meeting of creditors must be convened if all of the following are satisfied:

•       the company is being wound up under a creditors’ voluntary winding up

•       less than 25 per cent, but more than five per cent, in value of the creditors direct the external administrator to do so in writing

•       none of the creditors who give the direction is a related entity in relation to the company and

•       the direction is given no more than 20 business days after the resolution for the voluntary winding up of the company is passed.[221]

Proposal without a meeting

In addition to the requirement to hold meetings of creditors in certain circumstances, the external administrator of a company may at any time put a proposal to the creditors by giving notice, in writing. In that case, the notice must contain a single proposal. The reasons for the proposal, and the likely impact it will have on creditors if passed, are to be included with the proposal. The creditors are to be invited to vote for or against the proposal or to object to the proposal being resolved without a meeting of creditors.[222]

Vote determined by a related entity

The proposed IPS Corporations sets out the powers of the Court to make orders in certain circumstances.

The first is where the Court is satisfied that a proposal has been voted on by creditors and the outcome was unduly influenced by the vote or votes of a related creditor[223]—that is, if the proposal passed, it would not have been passed but for the vote of the related creditor and vice versa. In addition, the outcome of the vote is either contrary to the interests of the creditors as a group or has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted contrary to the related creditor to an extent that is unreasonable.[224]

In making a determination about the prejudice (or otherwise) of the outcome of the proposal, the Court must consider the benefits resulting to the related creditor from the proposal if passed (or from the failure to pass the proposal), the nature of the relationship between the related creditor and the company and any other relevant matter.[225] That done, the Court may make the following orders:

•       an order that the proposal be considered and voted on at a meeting of the creditors convened and held as specified in the order

•       an order directing that the related creditor is not entitled to vote on the proposal or a resolution to amend or vary the proposal

•       if the proposal was passed—an order setting aside the resolution passing the proposal and

•       such other orders as the Court thinks fit.[226]

Use of casting vote

The second circumstance in which the Court may make orders is where a resolution is passed at a meeting of the creditors of a company under external administration because the person presiding at the meeting exercises a casting vote.

In that case, either ASIC or a person who voted against the resolution in some capacity (or on another’s behalf), may apply to the Court for an order setting aside or varying the resolution.[227] The Court may, by order set aside or vary the resolution and make such further orders, and give such directions, as it thinks fit.

Similarly, where a resolution is not passed at a meeting of creditors of a company under external administration because the person presiding at the meeting exercises a casting vote, or refuses or fails to exercise such a vote, ASIC or a person who voted for the resolution in some capacity (or on another’s behalf), may apply to the Court for an order. The Court may order that the proposed resolution is taken to have been passed at the meeting and make such further orders, and give such directions, as it thinks fit.[228]

Committees of inspection

Quick Guide to Division 80

Creditors of a company under external administration may decide that there is to be a committee of inspection to monitor the administration and give assistance to the external administrator.

Division 80 sets out:

·    the rules for appointing the committee

·    the procedures to be followed by the committee

·    the powers of the committee and

·    the power of the Court to inquire into and make orders about the conduct of a committee of inspection.

Creditors of a company may decide that there is to be a committee of inspection in relation to the external administration of the company.[229] The functions of the committee of inspection include, but are not limited to:

•       advising and assisting the external administrator of the company

•       giving directions to the external administrator of the company and

•       monitoring the conduct of the external administration of the company.[230]

However, whilst the external administrator must have regard to any directions given by the committee of inspection he, or she, is not required to comply with such directions.[231] This is necessary as it may not be ‘reasonable for practitioner to attend to tasks if there are no funds from which they will be remunerated’.[232] If the external administrator of a company does not comply with a direction he, or she, must make a written record of that fact and the reasons for it.

Composition of the committee

The creditors of a company may, by resolution, appoint members of a committee of inspection and by subsequent resolution may remove a person as a member of a committee of inspection and appoint another person to fill the vacancy.[233]

In addition, a creditor representing at least 10 per cent in value of the creditors, or a group of creditors who together represent at least 10 per cent in value of the creditors, of a company may appoint a person as a member of a committee of inspection in relation to the external administration of the company.[234] Further, an employee (or employees) of the company representing at least 50 per cent in value of the amounts owed in respect of employees by the company, in respect of services rendered to the company, may appoint a person as a member of a committee of inspection to represent the employees.[235]

Proposed clause 80-30 states that the Insolvency Practice Rules may provide, amongst other things, for matters pertaining to a person’s eligibility to be appointed as a member of a committee of inspection. It may be that the membership of a committee of inspection could be capped or curtailed under those Rules.

Pooled groups

However, there are separate provisions in relation to meetings of members of pooled groups.[236] Under proposed clause 80-27, the external administrator of the members of a pooled group must convene a meeting in any of the following circumstances:

•       the committee of inspection (if one has been formed) directs the external administrator to do so[237]

•       the creditors of one of the members of the pooled group direct the external administrator to do so, by resolution[238]

•       at least 25 per cent in value of the creditors of one of the members of the pooled group, direct the external administrator to do so in writing[239]

•       less than 25 per cent, but more than 10 percent, in value of the creditors of one of the members of the pooled group direct the external administrator to do so in writing and security for the cost of holding the meeting is given to the external administrator before the meeting is convened[240] or

•       all of the following are satisfied:

–                    the members of the pooled group are each being wound up under a creditors’ voluntary winding up

–                    less than 25 per cent, but more than five percent, in value of the creditors of one of the members of the pooled group direct the external administrator to do so in writing

–                    none of the creditors who give the direction is a related entity in relation to that member of the pooled group and

–      the direction is given no more than 20 business days after the last resolution for the voluntary winding up of the members of the pooled group is passed.[241]

The external administrator need not comply with the direction if the direction is not reasonable.[242] In addition, the requirement to hold a meeting does not apply if one of the external administrators is a provisional liquidator of a member of the pooled group; or one of the external administrators is the administrator of a member of the pooled group and the member is under administration.[243]

Where each company that is a member of a pooled group is being wound up and the external administrator has been directed to convene a meeting under proposed clause 80-27, the meeting must be on a consolidated basis, of the creditors of all of the companies for the purposes of determining whether there is to be a committee of inspection for the pooled group and if so who are to be appointed members of the committee.[244]

If it is resolved that there is to be a committee of inspection for the pooled group then any committee of inspection which was in existence for a company that is a member of the pooled group ceases to exist when the resolution is passed.[245]

The Insolvency Practice Rules may contain other rules in relation to meetings of companies which are in external administration and are members of a pooled group (pooled group meetings).[246]

Access to information

So that the committee of inspection may carry out its functions, the proposed IPS Corporations empowers it to request information, reports and documents from the external administrator about the company. The Insolvency Practice Rules may prescribe circumstances where it is, or is not, reasonable for the external administrator to comply with a request for information.[247]

Obtaining specialist advice or assistance

In addition to its powers to obtain information, a committee of inspection may obtain any advice or assistance it considers desirable in relation to the obligations of external administrators of companies. However, the committee of inspection must obtain the approval of the external administrator of the company or the Court before expenses are incurred in obtaining the advice or assistance.[248]

Obligations

Members of a committee of inspection must not directly or indirectly derive any profit or advantage from the external administration of the company. However the creditors may resolve otherwise.[249]

The proposed IPS Corporations sets out, for the avoidance of doubt, the circumstances in which a member of an inspection committee is deemed to derive a profit or advantage from the administration of the estate. One of those circumstances is where a related entity of the member of the committee directly or indirectly derives a profit or advantage from the external administration of the company.

A person who is subject to this requirement commits an offence of strict liability if he or she fails to comply with it. The maximum penalty is 50 penalty units.[250]

In addition, where a creditor representing at least 10 per cent in value of the creditors has been appointed as a member of a committee of inspection, the creditor must not directly or indirectly become the purchaser of any part of the regulated debtor’s estate—although the creditors may resolve otherwise.[251]

Review of external administration of a company             

Quick Guide to Division 90

Division 90 provides for the review of the external administration of a company:

·    by the Court or

·    by another registered liquidator.

It also provides for the removal of an external administrator by the creditors.

Review by the Court

The proposed IPS Corporations provides for the Court to inquire into the external administration of a company on its own initiative or at the request of one of a number of persons including: a person with a financial interest in the external administration of the company; an officer of the company; a creditor on behalf of the committee of inspection (if any); ASIC; if the application is in relation to a company that is a friendly society within the meaning of the Life Insurance Act 1995 and which may be wound up voluntarily under subsection 180(2) of that Act—the Australian Prudential Regulation Authority.[252]

However, the proposed IPS Corporations contains an additional power for Court to direct that a meeting of creditors and contributories [253] is convened and held, with a person appointed to act as chair who will report the result of the meeting to the Court. This is to ensure that the Court is able to ascertain the wishes of the creditors and contributories.[254]

Review by another registered liquidator

The proposed IPS Corporations provides for a registered liquidator to be appointed by ASIC on its own initiative, or on application by a person with a financial interest in the external administration or an officer of the company.[255] The Court may also appoint a registered liquidator to carry out a review into a matter that relates to the external administration of a company upon an application by ASIC or a person with a financial interest in the external administration.[256] However, in neither case may the review relate to the remuneration that the external administrator is to receive under proposed subclause 60-5(2) being remuneration if no remuneration determination has been made.[257]

However a registered liquidator may be appointed to carry out a review into the remuneration of the external administrator of the company or a cost or expense incurred by the external administrator. In that case there are two ways in which the appointment may be made.

First, the appointment may be made by resolution of the creditors or, if the company is being wound up under a members’ voluntary winding up—by the company.[258] Where the appointment is made by resolution, it must specify the remuneration, costs or expenses which the liquidator is appointed to review and the way in which the cost of carrying out the review is to be determined.[259] The cost of the review forms part of the expenses of the external administration of the company.[260]

The second method of appointment is by one or more of the creditors, or if the company is being wound up under a members’ voluntary winding up—by one or more of the members. In this instance, the appointment may only be made if the external administrator of the company agrees.[261] The cost of the review is to be borne by the creditors or members.[262]

In either case, the registered liquidator has no power to review the remuneration which the external administrator is to receive under proposed subclause 60-5(2) (being remuneration if no remuneration determination has been made).[263] In addition, the registered liquidator must consent to the appointment in writing.[264]

If a review liquidator is appointed his, or her, review may include an assessment of whether the remuneration is reasonable. If the matter being reviewed is a cost or expense incurred by the external administrator, the review must include an assessment whether the cost of expense was properly incurred.[265]

Where a reviewing liquidator has been appointed but has not completed the review, the Court may, on application by the reviewing liquidator or by a person with a financial interest in the external administration of the company or an officer of the company, make a range of orders including, but not limited to, requiring the provision of books, information or assistance to the reviewing liquidator, extending the matters to be reviewed, and removing the reviewing liquidator from office and appointing another registered liquidator.[266]

One of the circumstances in which ASIC may give a liquidator a show cause notice is that the liquidator has been appointed to act as a reviewing liquidator and has failed to properly exercise the powers or perform the duties of a reviewing liquidator.[267] (See further discussion below.)

Removal of the external administrator

The Economics Committee was told how it was difficult to remove Mr Ariff as the administrator:

Mr Ariff and his legal advisers composed a deed of company arrangement and the Berjaya Group abandoned their claims as creditors, and therefore had no voting rights. Unsecured creditors, such as the Australian Taxation Office, lost interest in the administration as Mr Ariff's fees ate up any potential dividend.

… no-one who could vote had any interest in bringing the administration to an end and Mr Ariff was therefore able to continue in office as administrator of this group over the opposition of its owner.[268]

The Economics Committee, having considered the various reports about the state of the insolvency industry at that time, recommended that the Court should be able to remove a liquidator and appoint another liquidator where there has been a vote of no confidence by a majority of creditors or where it appears time based charging of the incumbent liquidator has not or will not result in a reasonable cost-benefit analysis for the company.[269]

The proposed IPS Corporations takes this recommendation one step further by authorising the creditors, by resolution at a meeting, to remove the external administrator of a company and by resolution at the same or a subsequent meeting, to appoint another person as external administrator of the company —provided that at least five business days’ notice of the meeting is given to all persons who are entitled to receive notice of creditors’ meetings.[270] A former external administrator may apply to the Court to be reappointed.[271]

It has been suggested that there is a significant risk of abuse in giving creditors a broad power of removal at any time during an insolvency administration. In Multi-Core Aerators Pty Ltd v Dye,[272] Justice Warren stated:

… it is not sufficient that a court remove a liquidator merely because of levels of feeling and rancour between parties especially where the hostility has at all times emanated from the party seeking the removal of the liquidator. To do so would provide a creditor with an opportunity to manipulate the liquidation of the company. In my view to accede to the application of the applicant in the present matter would be to disregard the principle that the onus of proof borne by an applicant will not be easily discharged if the liquidator has become well acquainted with the business and affairs of the company and/or the process of winding up has almost reached completion.[273]

In response to the Government’s June 2011 options paper entitled: A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia, Arnold Bloch Leibler submitted:

Introducing a broad power of removal would magnify the risk of manipulation of the course of the insolvency administration in favour of a majority of creditors. Majority creditors could attempt to direct the course of the insolvency either by requisitioning a meeting and voting for removal of the incumbent insolvency practitioner, or by threatening the insolvency practitioner with removal if he or she does not act in accordance with the directions of the majority.[274]

In oral evidence to the Economics Committee, Dr Vivienne Brand from Flinders University acknowledged the need for greater education of creditors to understand the work of liquidators and what a reasonable fee structure might look like. She told the Economics Committee that creditors:

…might well live and work in an economy where to charge $850 an hour is just unbelievable. They do not know what the normal run of a liquidation would look like, so they cannot really tell if they are being ripped off. They do not have the information that the liquidator has. They do not have access to the full understanding of the company’s operations. It is very hard for them to make an informed decision about whether or not the liquidator is doing the right thing.[275]

And further:

People who are involved in liquidations as creditors often do not have a lot of expertise. They may not know when misdemeanours are occurring and, conversely, they may think they are occurring when they are not.[276]

Associate Professor Brown also told the Economics Committee:

… the problem is creditor’s perception. A lot of the complaints [about insolvency practitioners’ fees] which are received … are based on misunderstanding the nature of insolvency work and … can often involve a certain amount of anger because everybody to some extent loses out on an insolvency.[277]

While similar views were not expressed by submitters to Treasury in respect of the second exposure draft, it remains that this Bill seeks to strike a balance between the needs of creditors and the need for a speedy and efficient insolvency process. It is unclear whether this provision will tip the balance too far in favour of the creditors.

Administrative Appeals Tribunal

Unlike the IPS Bankruptcy, the proposed IPS Corporations does not provide an avenue of appeal to the Administrative Appeals Tribunal. Instead that right is embedded in the body of the Corporations Act so that section 1317B provides that applications may be made to the Administrative Appeals Tribunal for review of a decision made under the Corporations Act by the Minister, ASIC, the Companies Auditors Disciplinary Board (see discussion below about the renaming of the Companies Auditors and Liquidators Disciplinary Board) and a committee convened under proposed Part 2 of the IPS Corporations.[278]

Amendments in Part 2 of Schedule 2

Most of the amendments in Part 2 of Schedule 2 of the Bill are consequential in nature. They apply to a range of statutes to remove references to an ‘externally administered body corporate’ and to replace them with references to a ‘Chapter 5 body corporate’[279] and to insert references to Schedule 2 of the Bankruptcy Act and/or the Corporations Act.[280]

However, there are also significant amendments to the Australian Securities and Investments Commission Act 2001 (ASIC Act) and to the Corporations Act.

Amendments to the ASIC Act

Items 5–32 of Part 2 of Schedule 2 to the Bill amend the ASIC Act. Item 12 inserts proposed section 30B into the ASIC Act to empower ASIC to give a registered liquidator a written notice requiring the liquidator to give specified information and to produce specified books at a specified place and time. The provision contains strong limits on the exercise of the power so that it may only be used by ASIC in the performance or exercise of its functions and powers in relation to the liquidator requirements, to ascertain compliance with those requirements or in order to investigate an alleged or suspected contravention of the requirements. The liquidator requirements are defined as the requirements in relation to registered liquidators, the external administration of companies or the control of the property of corporations under Chapter 5 or              Schedule 2 to the Corporations Act and other provisions of the Corporations Act that relate to that Chapter or Schedule.[281]

Proposed section 39C of the ASIC Act, at item 16 of Schedule 2 to the Bill, introduces the term administration information into the Act. This refers to information or books that ASIC generates in the exercise of its powers or the performance of its functions in relation to the external administration of a company. ASIC is able to give administration information in whole or in part to a person under strict conditions and subject to adherence to the process set out in the section.

Companies Auditors and Liquidators Disciplinary Board

The Companies Auditors and Liquidators Disciplinary Board (CALDB) is an independent statutory body established under the Part 11 of the ASIC Act. The primary role of CALDB is to act as an expert disciplinary tribunal to consider applications for the cancellation or suspension of the registration of auditors or liquidators under the Corporations Act.[282] Items 24–28 amend the ASIC Act to reduce the function of the CALDB to the discipline of auditors only. This is consistent with the provisions of the proposed IPS Corporations which transfers the responsibility for discipline of registered liquidators to ASIC. Item 63 of Part 2 of Schedule 2 to the Bill amends the name of the Board to the Companies Auditors Disciplinary Board.

Amendments to the Corporations Act

Items 64–81 of Part 2 of Schedule 2 to the Bill insert new definitions or amend existing definitions relating to the operation of Chapter 5 (external administration) and Schedule 2 (the IPS Corporations) of the Corporations Act in section 9 of that Act.

Powers of directors

Item 84 of Part 2 of Schedule 2 to the Bill inserts proposed section 198G into Part 2D.1 of the Corporations Act which deals with the powers of directors. The provision would make it an offence for an officer of a company under external administration to perform or exercise a function or power of that office unless the officer of the company is the external administrator of the company, has the written approval of the external administrator of the company or the Court or where, despite the fact that the company is under external administration, the officer is permitted by the Corporations Act so to act.

Section 9 of the Corporations Act defines the term officer of a corporation as any of the following:

•       a director or secretary of the corporation

•       a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or who has the capacity to affect significantly the corporation’s financial standing; or in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation)

•       a receiver, or receiver and manager, of the property of the corporation

•       an administrator of the corporation

•       an administrator of a deed of company arrangement executed by the corporation

•       a liquidator of the corporation or

•       a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

Arrangements and reconstructions

Item 90 of Part 2 of Schedule 2 to the Bill inserts proposed sections 415A–415C into Part 5.1 of the Corporations Act which deals with arrangements[283] and reconstructions.[284] Proposed section 415A is in similar terms to proposed clause 75-41 of the IPS Corporations—that is, it empowers the Court to make a range of orders (including orders to set aside or amend the resolution) in the event that the outcome of voting at a creditor’s meeting was determined by the vote of a related entity. Proposed section 415B allows the Court to make interim orders in circumstances where an application under section 415A has not yet been determined.[285]

Receivers and controllers

Item 91 of Part 2 of Schedule 2 to the Bill inserts proposed sections 422A–422D into Part 5.2 of the Corporations Act which deals with receivers and other controllers of property of corporations. Proposed subsection 422A(5) defines a control return year for a controller as the period of 12 months beginning on the day on which the person first began to be a controller of the property of the corporation and each subsequent period of 12 months. Proposed subsection 422A(3) requires the controller of property during all or part of a control return year to forward an annual return to ASIC within three months after the end of the control return year. In addition, when the period of receivership has concluded the controller of the property of the corporation must forward a return to ASIC within one month after the control of the property ends. Item 99 of Part 2 of Schedule 2 to the Bill inserts proposed section 434H into Part 5.2 of the Corporations Act so that regulations may set out the obligations of a controller of property to give information, provide reports and to produce documents to ASIC.

Executing a deed of company arrangement

Items 100–136 of Part 2 of Schedule 2 to the Bill amend Part 5.3A of the Corporations Act which deals with executing a deed of company arrangement. The amendments repeal various sections which are redundant or are replicated in the IPS Corporations.[286]

Winding up in insolvency or by the Court

Items 137–156 of Part 2 of Schedule 2 to the Bill amend Part 5.4B of the Corporations Act which deals with the winding up of a company in insolvency or by the Court. Item 144 repeals existing section 473 which currently sets out general provisions in relation to liquidators, including the remuneration of liquidators. These matters are contained in the proposed IPS Corporations. Proposed section 473 and 473A (which are inserted by item 144) allow for the resignation of a liquidator appointed by the Court and the filling of a vacancy in the office of a liquidator appointed by the Court respectively.

Voluntary winding up

Items 158–169 of Part 2 of Schedule 2 to the Bill amend Part 5.5 of the Corporations Act which deals with voluntary winding up of a company. Item 162 repeals and replaces section 497 which currently requires the liquidator of a company to call a meeting of the company’s creditors within 11 days of the day that the resolution to voluntarily wind up a company is passed. Under clause 75-10 of the proposed IPS Corporations it will no longer be a requirement to hold an initial meeting of creditors in a creditors’ voluntary winding up. Proposed section 497 provides that the liquidator of the company must, within 10 business days after the day of the meeting of the company at which the resolution for winding up is passed send to each creditor a summary of the affairs of the company and a list of all the creditors and the estimated amounts of their claims, as shown in the records of the company. The list must identify any creditors that are related entities of the company. However, unless the Court orders otherwise, the liquidator is not required to send the list to a creditor whose debt is $1,000 or less. The liquidator is also required to lodge a copy of the documents with ASIC.

Also consequential on the repeal of existing section 497 is the repeal and replacement of section 506A.[287] Proposed section 506A requires a liquidator, within 10 business days after the day of the meeting of the company at which the resolution for voluntary winding up is passed, to make a declaration of relevant relationships[288] and a declaration of indemnities and to give a copy of each declaration to as many of the company’s creditors as reasonably practicable.[289]

Item 169 repeals and replaces section 509 of the Corporations Act. The amendments to section 509 are consequential on the removal of the obligation imposed on a liquidator in a creditors’ voluntary winding up to convene a meeting of creditors when the affairs of a company are fully wound up.[290] Proposed section 509 will require ASIC to deregister a company three months after lodgement of the administration return stating that the affairs of a company are fully wound up, is lodged with it.

Registration of auditors

Currently Part 9.2 of the Corporations Act deals with the registration of auditors and liquidators. As the IPS Corporations will set out the rules for the registration of liquidations if the Bill is passed, items 217–243 of Part 2 of Schedule 2 to the Bill set out consequential amendments to Part 9.2 so that the existing provisions relate only to the registration of auditors.

Penalties

Schedule 3 to the Corporations Act sets out, in table form, the relevant penalties for each of the offences in the Act. Items 260, 263 and 264 repeal and replace existing penalties to reflect the penalties in the Bill. The following items in Part 2 of Schedule 2 to the Bill repeal items in the penalties table:

•       item 259 (in relation to subsection 437C(1) which is repealed by item 104 of Part 2 of Schedule 2 to the Bill)

•       item 261 (in relation to section 448D which is repealed by item 128 of Part 2 of Schedule 2 to the Bill), and

•       item 262 (in relation to section 471A which is repealed by item 139 of Part 2 of Schedule 2 to the Bill).

Key issues and provisions—IPS Bankruptcy

Commencement

The provisions in Schedule 1 to the Bill commence on a single day to be fixed by Proclamation. However, if the provisions do not commence within the period of 12 months beginning on the day the Bill receives Royal Assent, they commence on the day after the end of that period.

About bankruptcy and the Bankruptcy Act

Where a person has unmanageable debt and needs time to consider all the possible options, he or she may apply for temporary protection from enforcement action by unsecured creditors by lodging a declaration of intention to lodge a debtor’s petition.[291] This provides relief for up to 21 days to negotiate payment arrangements with creditors or alternatively to consider a formal insolvency administration by way of:

•       bankruptcy

•       personal insolvency agreement or

•       debt agreement.[292]

Bankruptcy

Bankruptcy is a process where a person who cannot pay his, or her, debts becomes bankrupt to receive the protection of the Bankruptcy Act and where the person’s estate is administered by a trustee.[293] Bankruptcy may be voluntary or involuntary.

•       Voluntary bankruptcy occurs where a person who is unable to pay their debts and cannot come to suitable repayment arrangements with his, or her, creditors chooses to voluntarily lodge a petition to become bankrupt. This is called a debtor’s petition. Lodging a debtor’s petition is an act of bankruptcy.[294]

•       Involuntary bankruptcy occurs where a creditor who is owed $5,000 or more applies to the court to make a person bankrupt. Where the act of bankruptcy is established the court may make a sequestration order against the estate of the debtor.[295]

The Official Trustee in Bankruptcy (the Official Trustee) is a body corporate, established under the Bankruptcy Act, to administer bankruptcies and other personal insolvency arrangements when a private trustee or other administrator is not appointed.[296]

Personal insolvency agreement

A personal insolvency agreement is an alternative to bankruptcy.[297] Under Part X of the Bankruptcy Act, a personal insolvency agreement arises when creditors accept a debtor’s proposal to settle his or her debts. It is a legally binding arrangement between the debtor and his, or her, creditors which is an offer to pay them in full or in part by instalments or a lump sum.[298] This may occur, for instance, upon the sale of an asset. There are no debt, asset or income limits to be eligible to propose a personal insolvency agreement.

The offer must be accepted by a special resolution of the creditors and requires a ‘yes’ vote from a majority of creditors who represent at least 75 per cent of the dollar value of the debts. Importantly, if the vote is a ‘no’ vote the creditors can use this process to apply to the court to make the debtor bankrupt.

Only a registered trustee, the Official Trustee or a suitably qualified solicitor can act as a controlling trustee in relation to a personal insolvency agreement.[299]

Debt agreement

A debt agreement is a binding agreement under Part IX of the Bankruptcy Act between a debtor and their creditors where creditors agree to accept a sum of money which the debtor can afford.[300] This may be by way of:

•        weekly or monthly payments from income

•        deferral of payments for an agreed period

•        the sale of an asset to pay creditors or

•        a lump sum payment to be divided among creditors.[301]

A person who wishes to enter into a debt agreement must make a formal proposal about the substance and effect of the agreement to the Official Receiver for approval.[302] A person cannot propose a debt agreement if their unsecured debts are more than $108,162.60[303] or if their after tax income for the year is more than $81,121.95.[304]

A person who decides that a debt agreement is the best option, may appoint an administrator[305] who may be a registered, or non-registered, debt agreement administrator.[306]

Trustees and debt agreement administrators

In its current form, the Bankruptcy Act provides for the formal registration of trustees (in Division 1 of Part VIII) and debt agreement administrators (in Division 8 of Part IX). As at 30 June 2015, there were 281 personal insolvency practitioners in Australia comprised of 212 registered trustees and 69 registered debt agreement administrators.[307]

Part 2 of Schedule 1 to the Bill repeals the existing rules for the registration of trustees (discussed below). The rules about the registration of debt agreement administrators remain largely unchanged.

Equivalent provisions in the IPSs

The Bill inserts the Insolvency Practice Schedule (Bankruptcy) (IPS Bankruptcy) as Schedule 2 to the Bankruptcy Act.[308] The effect of the amendments in Schedule 1 to the Bill is to ensure that the proposed IPS Bankruptcy contains a discrete set of rules about the registration and discipline of trustees and the regulation of the administration of regulated debtors’ estates. These are largely equivalent to those that apply to insolvency practitioners as set out in proposed IPS Corporations. References to ASIC in the IPS Corporations are substituted with references to the Inspector-General in the IPS Bankruptcy. Similarly, references to external administrators are substituted with references to registered trustees. The proposed IPS Bankruptcy is set out in the same order and uses, for the most part, equivalent clause numbers to those in the IPS Corporations. Importantly the offences and penalties are equivalent in both of the IPSs.

Registration of trustees

Proposed clause 5-5 contains the definitions that are to be applied in the interpretation of the proposed IPS Bankruptcy. In particular, it defines a registered trustee as an individual who is registered as a trustee under Part 2 of the IPS Bankruptcy. The object of the proposed IPS Bankruptcy is to ensure that any such person:

•       has an appropriate level of expertise

•       behaves ethically and

•       maintains sufficient insurance to cover his or her liabilities in practising as a registered trustee.[309]

Importantly, the Bankruptcy Act establishes the position of Inspector-General of Bankruptcy who is responsible for the general administration of the Bankruptcy Act.[310] The Inspector-General already has powers under the Bankruptcy Act to regulate bankruptcy trustees and debt agreement administrators, review decisions of trustees and investigate allegations of offences under the Act.[311]

The proposed IPS Bankruptcy contain a singly-located set of rules for the registration of trustees. For the most part it replicates existing rules in Part VIII of the Bankruptcy Act.

The proposed IPS Bankruptcy requires the Inspector-General to establish and maintain a Register of Trustees which may be in any form that the Inspector-General considers appropriate.[312] Once the person is registered as a trustee, the Inspector-General is required to give the person a certificate of registration which may be in electronic form. The period of registration is three years.[313]

About committees

The proposed IPSs contain common rules for committees. The manner in which a committee is to perform its functions will be set out in the Insolvency Practice Rules.[314] For the purposes of the proposed IPS Bankruptcy, a committee must comprise the Inspector-General, a registered trustee chosen by a prescribed body and a person appointed by the Minister.

The rules about a prescribed body appointing a person to a committee are equivalent in both the IPS Bankruptcy and the IPS Corporations.[315]

For the proposed IPS Bankruptcy a person is to be appointed by the Minister as a member of the committee only if the Minister is satisfied that the person is qualified for appointment due to his or her knowledge of, or experience in, business, law (including the law relating to bankruptcy), economics, accounting and public policy relating to bankruptcy—or a combination of those fields.[316]

Consistent with the IPS Corporations, a single committee may be convened to consider one or more matters. The matter or matters may relate to the registration as a trustee of one or more applicants, and to a matter or matters relating to one or more registered trustees.[317]

Imposing conditions and renewing registrations

Consistent with the IPS Corporations, where a committee has decided that a person’s registration as a trustee is to be subject to a condition, or conditions, the person may apply to the Inspector-General for their variation or removal.[318] In that case, the application must be lodged with the Inspector-General in the approved form.[319] Within two months of receiving such an application, the Inspector-General must refer it to a committee for consideration.[320] That consideration is to include interviewing the applicant unless he or she agrees otherwise. The committee must decide, within 20 business days, whether the condition should be varied or removed. If a condition is to be varied, the committee must specify the way in which it is to be varied.[321] The committee must give the applicant and the Inspector-General a written report setting out the reasons for its decision and where appropriate, any variation that is to be made.[322]

Similarly, a registered trustee must apply to the Inspector-General to have his, or her, registration renewed before the existing registration ceases to have effect. In addition, the registered trustee must pay the renewal fee at least one month before the registration ceases to have effect.[323] A failure to do so gives rise to a penalty equal to 20 per cent of the renewal fee.[324]

Offences

The proposed IPS Bankruptcy creates a range of offences which are of different degrees of severity.

First, a registered trustee commits an offence if he or she intentionally or recklessly fails to comply with the requirement to maintain adequate and appropriate professional indemnity insurance and adequate and appropriate fidelity insurance against the liabilities that the trustee may incur working as a registered trustee.[325] In that case, the maximum penalty is 1,000 penalty units.

In the alternative, a registered trustee commits an offence of strict liability if he or she fails to comply with the requirement to maintain adequate and appropriate insurance. The maximum penalty for this offence is 60 penalty units.

Second, a person who is a registered trustee during all or part of a trustee return year[326] for the person must, within one month after the end of that year, lodge with the Inspector-General a return on the approved form and accompanied by evidence that the registered trustee held appropriate insurance.[327] A registered trustee commits an offence of strict liability if he or she fails to comply with the requirement to lodge an annual return. The maximum penalty is five penalty units.

Third, a registered trustee must notify the Inspector-General of certain events within five business days after the registered trustee could reasonably be expected to be aware of them occurring. The events are:

•       the trustee becomes an insolvent under administration

•       a bankruptcy notice is issued under the Bankruptcy Act in relation to the trustee as debtor, or a corresponding notice is issued in relation to the trustee as debtor under a law of an external Territory or a law of a foreign country

•       the trustee is convicted of an offence involving fraud or dishonesty

•       the trustee is disqualified from managing corporations under Part 2D.6 of the Corporations Act, or under a law of an external Territory or a law of a foreign country

•       the trustee ceases to have               adequate and appropriate professional indemnity insurance or adequate and appropriate fidelity insurance against the liabilities that the trustee may incur working as a registered trustee

•       the trustee is issued with a notice under section 40-40 of Schedule 2 to the Corporations Act (a show cause notice) in relation to the trustee’s registration as a liquidator under that Act

•       the trustee’s registration as a liquidator under the Corporations Act is suspended or cancelled or

•       any other event prescribed.[328]

A registered trustee who intentionally or recklessly fails to comply with this notification requirement commits an offence. The maximum penalty is 100 penalty units.

Fourth, a registered trustee has an additional requirement to notify the Inspector-General if the information included in an annual trustee return, or in an annual administration return, which has been prepared by or on behalf of the trustee is or becomes inaccurate in a material particular, or a prescribed event occurs. That notification must be made with 10 business days after the registered trustee could reasonably be expected to be aware that the event has occurred. A registered trustee commits an offence if he, or she, intentionally or recklessly fails to comply with the requirement. The maximum penalty is five penalty units.[329]

Disciplining practitioners

In addition to imposing the penalties for offences as set out above, the proposed IPS Bankruptcy empowers the Inspector-General to suspend or cancel the registration of trustee. The difference between the proposed clause and the existing provisions of the Bankruptcy Act is that the Bankruptcy Act does not give the Inspector-General the option of suspending the registration of a trustee—only to involuntarily terminate it.[330] The circumstances which may lead to such a decision include:

•       the person is disqualified from managing corporations under Part 2D.6 of the Corporations Act, or under a law of an external Territory or a law of a foreign country

•       the person ceases to have adequate and appropriate insurance against the liabilities that the person may incur working as a registered trustee

•       the person’s registration as a liquidator under the Corporations Act has been cancelled or suspended

•       the person owes more than the prescribed amount of notified estate charges

•       if the Court has made an order that the person repay remuneration—the person has failed to repay the remuneration and

•       the person has been convicted of an offence involving fraud or dishonesty.[331]

The Inspector-General must, within 10 business days after making the decision, give the person a written notice setting out the decision to suspend or cancel their registration as a trustee, and the reasons for the decision. The decision comes into effect on the day after the notice is given to the person.[332]

Disciplinary action by committee

The Inspector-General may give a registered trustee notice in writing asking the trustee to give the Inspector-General a written explanation why the trustee should continue to be registered. The Bankruptcy Act already contains such a power. Proposed clause 40-40 lists the circumstances in which the Inspector-General may give such a show cause notice.

If the Inspector-General has given a registered trustee a show cause notice and either does not receive an explanation within 20 business days after the notice is given or is not satisfied by the explanation which is provided, he or she may refer the matter to a committee.[333] In that case, the committee must make a decision about whether the trustee should continue to be registered, whether the trustee’s registration should be suspended for a period or whether the trustee’s registration should be cancelled.

The committee also has a range of other disciplinary decisions open to it, including but not limited to publicly admonishing or reprimanding the trustee, or imposing a condition on the trustee.[334] The Inspector-General must give effect to the committee’s decision.[335]

Action initiated by industry body

An industry body[336] may lodge with the Inspector-General a notice in the approved form (called an industry notice) that it reasonably suspects that there are grounds for the Inspector-General to suspend or cancel the registration of a registered trustee, to give a registered trustee a show cause notice or to impose a condition on a registered trustee.[337]

The Inspector-General must consider the information and any documents included with the industry notice. If the Inspector-General decides to take no action in relation to the matters raised by the industry notice, the Inspector-General must give the industry body written notice of that fact within 45 days of the date that the industry notice was lodged.

Court oversight of registered trustees

Part III of the Bankruptcy Act sets out the jurisdiction and powers of courts in bankruptcy. In particular,
section 27 of the Bankruptcy Act provides that the Federal Court and the Federal Circuit Court have concurrent jurisdiction in bankruptcy. The proposed IPS Bankruptcy gives the Courts oversight of registered trustees in addition to their existing powers.[338] The Court may make such orders as it thinks fit in relation to a registered trustee either on its own initiative during proceedings before the Court or on application by the registered trustee or the Inspector-General.[339] In particular, the Court may make orders about costs. Relevant orders may include an order that the registered trustee is personally liable for some or all of those costs and/or the registered trustee is not entitled to be reimbursed by a regulated debtor’s estate or creditors in relation to some or all of those costs.[340]

Rules about estate administrations

Remuneration of trustee

The proposed IPS Bankruptcy defines the trustee of a regulated debtor’s estate as the person who is:

•       in relation to a bankrupt—the trustee of the bankrupt’s estate

•       in relation to a person whose property is subject to control under Division 2 of Part X of the Bankruptcy Act—the controlling trustee

•       in relation to a debtor under a personal insolvency agreement—the trustee of the agreement and

•       in relation to a deceased person whose estate is being administered under Part XI of the Bankruptcy Act—the trustee administering the estate under that Part.[341]

The trustee of a regulated debtor’s estate is entitled to receive remuneration for necessary work properly performed by the trustee in relation to the administration of the regulated debtor’s estate, in accordance with the remuneration determinations (if any) for the trustee. If no remuneration determination is made, the trustee is entitled to receive reasonable remuneration for the work. However, that remuneration must not exceed the maximum default amount.[342]

The maximum default amount is set at $5,000 in respect of a trustee appointed during the financial year commencing on 1 July 2016. It is indexed according to the formula set out in proposed clause 60-15 in respect of a trustee appointed during the financial year commencing on 1 July 2017 and beyond.[343] The remuneration is to be paid from the funds in the regulated debtor’s estate. [344]

Duties of trustees

Proposed clause 60-20 provides that a trustee of a regulated debtor’s estate must not directly or indirectly derive any profit or advantage from the administration of the estate and sets out, for the avoidance of doubt, the circumstances in which a trustee of a regulated debtor’s estate is taken to derive a profit or advantage from the administration of the estate. A person who is subject to this requirement commits an offence of strict liability if they fail to comply with it. The maximum penalty is 50 penalty units.

Two other strict liability offences arise in relation to the duties of trustees.

First, a person must not give, or agree or offer to give, to another person any inducement which would secure his, or her, appointment or nomination as a trustee of a regulated debtor’s estate or which would prevent the appointment or nomination of a third person to that role. A person commits an offence of strict liability if he or she contravenes that prohibition. The maximum penalty is 50 penalty units or imprisonment for three months, or both.[345]

According to the Explanatory Memorandum proposed clause 60-21:

… creates an offence (in personal insolvency) for a person to offer an inducement to securing the appointment or nomination of their preferred trustee. It provides that a person commits an offence of strict liability with a penalty of 50 penalty units, or 3 months imprisonment, or both. This provision, and its corresponding penalty, is modelled on section 595 of the Corporations Act. The severity of the penalty recognises the importance of appointing an impartial trustee who would have significant power to determine the outcome of an estate for creditors and for the regulated debtor. The conduct described in this offence amounts to an abuse of the insolvency process that could see favourable treatment for the creditors involved in the breach at the expense of innocent creditors. Such conduct would significantly undermine the integrity of the insolvency regime and have far-reaching consequences for insolvency practitioners, debtors, creditors and financial institutions.[346]

Second, if another person performs the trustee’s ordinary duties, they must not be paid unless the creditors or committee of inspection authorise that payment. A person commits an offence of strict liability if he or she contravenes that prohibition. The maximum penalty is 50 penalty units.[347]

Funds handling and information

The proposed IPS Bankruptcy sets out the requirements for handling of funds, including the need to maintain an administration account in relation to a regulated debtor’s estate, in equivalent terms to those in the IPS Corporations. Similarly there are equivalent provisions for the keeping of records and the provision of information.

Meetings of creditors

The proposed IPS Bankruptcy requires the trustee of a regulated debtor’s estate to convene creditor meetings in each of the following circumstances:

•       a committee of inspection directs the trustee to do so

•       the creditors direct the trustee to do so by resolution[348]

•       at least 25 per cent in value of the creditors direct the trustee to do so in writing and

•       less than 25 percent but more than 10 per cent, in value of the creditors direct the trustee to do so in writing and security for the cost of holding the meeting is given to the trustee before the meeting is convened.[349]

In addition, the Inspector-General may, in writing, direct the trustee of a regulated debtor’s estate to convene a meeting of the creditors.[350]

Removal of the trustee

The proposed IPS Bankruptcy authorises the creditors, by resolution at a meeting, to remove the trustee of a regulated debtor’s estate and by resolution at the same or a subsequent meeting, to appoint another person as trustee of the regulated debtor’s estate—provided that at least five business days’ notice of the meeting is given to all persons who are entitled to receive notice of creditors’ meetings.[351]

However, if that occurs, the former trustee may apply to the Court to be reappointed as trustee and the Court may order that the former trustee be reappointed if the Court is satisfied that his, or her, removal was an improper use of the powers of one or more creditors.[352]

Committees of inspection

Creditors of a regulated debtor’s estate may decide that there is to be a committee of inspection.[353] The functions of the committee of inspection include, but are not limited to:

•       advising and assisting the trustee of the regulated debtor’s estate

•       giving directions to the trustee of the regulated debtor’s estate and

•       monitoring the conduct of the administration of the estate.

However, whilst the trustee must have regard to any directions given to the trustee by the committee of inspection he, or she, is not required to comply with such directions.[354]

Composition of the committee

First, a creditor representing at least 10 per cent in value of the creditors, or a group of creditors who together represent at least 10 per cent in value of the creditors, of a regulated debtor’s estate may appoint a person as a member of a committee of inspection in relation to the administration of the estate.[355]

Second, an employee (or employees) of the regulated debtor representing at least 50 per cent in value of the amounts owed in respect of employees by the regulated debtor, in respect of services rendered to the regulated debtor, may appoint a person as a member of a committee of inspection to represent the employees.[356]

Proposed clause 80-30 states that the Insolvency Practice Rules may provide, amongst other things, for matters pertaining to a person’s eligibility to be appointed as a member of a committee of inspection. It may be that the membership of a committee of inspection could be capped or curtailed under those Rules.

Committees of inspection have the same access to information under the proposed IPS Bankruptcy as they do under the IPS Corporations.[357]

Amendments in Parts 2 and 3 of Schedule 1

The amendments in Part 2 of Schedule 1 to the Bill are consequential in nature. They:

•       repeal provisions which are, with the enactment of the Insolvency Law Reform Act, to be included in the proposed IPS Bankruptcy[358]

•       create uniformity of terms, for instance, time limits are amended so that they are expressed as business days rather than working days[359]

•       impose uniform penalties across the Bankruptcy Act [360]and

•       insert references to Schedule 2 (the proposed IPS Bankruptcy) throughout the Bankruptcy Act for clarity.

The amendments in Part 3 of Schedule 1 to the Bill are transitional in nature. Essentially:

•       a person registered as a trustee before the commencement of the Insolvency Law Reform Act will continue to be registered and must comply with the requirements and duties set out in the proposed IPS Bankruptcy[361]

•       the proposed IPS Bankruptcy will apply to an administration of an estate that starts on or after the commencement of the Insolvency Law Reform Act and to most ongoing administrations where a new event occurs[362]

•       regulations may be made to deal with other transitional matters.[363]

Other provisions—Schedule 3

Commencement

The provisions in Schedule 3 to the Bill commence immediately after the provisions in Schedule 1 to the Bill.

Contravention of a deed of arrangement

Division 10 of Part 5.3A of the Corporations Act sets out the rules entering into a deed of company arrangement.

Item 2 of Part 2 of Schedule 3 to the Bill inserts proposed Division 11AA into Part 5.3A of the Corporations Act. Within the new Division, proposed subsection 445HA(1) requires the director of a company that is subject to a deed of company arrangement who becomes aware that there has been, or is likely to be, a material contravention of the deed by a person bound by the deed to give notice of the contravention or likely contravention to the administrator of the deed of company arrangement as soon as possible.

In addition, proposed subsection 445HA(2) requires the administrator of a deed of company arrangement to advise the company’s creditors as soon as practicable after becoming aware of a material contravention, or likely material contravention, of the deed by a person bound by it.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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[1].              A Hawke, ‘Second reading speech: Insolvency Law Reform Bill 2015’, House of Representatives, Debates, 3 December 2015, p. 14637, accessed 9 February 2016.

[2].              Australian Government, ‘National Innovation and Science Agenda’, Australian Government website, accessed 10 February 2016.

[3].              Bankruptcy Act 1966, accessed 22 December 2015.

[4].              Bankruptcy (Estate Charges) Act 1997, accessed 22 December 2015.

[5].              Corporations Act 2001, accessed 22 December 2015.

[6].              Australian Securities and Investment Commission Act 2001, accessed 22 December 2015.

[7].              Private Health Insurance (Prudential Supervision) Act 2015, accessed 22 December 2015.

[8].              Bankruptcy Regulations 1996, accessed 22 December 2015.

[9].              Australian Financial Services Authority (AFSA), ‘Introduction to AFSA’, AFSA website, accessed 22 December 2015.

[10].              Corporations Regulations 2001, accessed 22 December 2015.

[11].              Australian Securities and Investments Commission (ASIC), ‘Insolvency’, ASIC website, accessed 22 December 2015.

[12].              Parliamentary Joint Committee on Corporations and Financial Services, Corporate insolvency laws: a stocktake, The Committee, Canberra, June 2004, accessed 22 December 2015.

[13].              Corporations and Markets Advisory Committee (CAMAC), Rehabilitating large and complex enterprises in financial difficulties, The Committee, Sydney, October, 2004, accessed 22 December 2015.

[14].              CAMAC, Issues in external administration, The Committee, Sydney, November 2008, accessed 22 December 2015.

[15].              P Pyburne and D Spooner, Personal Property Securities Bill 2009, Bills digest, 36, 2009–10, Parliamentary Library, Canberra, 2009, accessed 23 December 2015.

[16].              R Williams, ‘Probe on insolvency abuse’, Age, 26 November 2009, p. 6; A Ferguson, ‘Unsecured creditors often left penniless’, Australian, 27 June 2008, p. 21; M Jacobs, ‘‘Abuse of process’ claim’, Australian Financial Review, 25 July 2008, p. 19; A Ferguson, ‘Receivers clean up as firms collapse’, Weekend Australian, 8 November 2008, p. 1, all accessed 23 December 2015.

[17].               R Nickless, ‘Ariff case sparks new rules for insolvency’, Australian Financial Review, 23 September 2009, p. 15; A Ferguson, ‘Ariff shows ASIC’s ineptitude’, Age, 24 August 2010, p. 12, accessed 24 December 2015.

[18].               Australian Securities and Investments Commission v Stuart Karim Ariff [2009] NSWSC 829 (18 August 2009), paragraphs 9–10, accessed 24 December 2015.

[19].              Australian Securities and Investments Commission, Liquidator (Stuart Ariff) banned for life, media release, 18 August 2009, accessed 23 December 2015.

[20].              Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, The Senate, Canberra, September 2010, p. 58, accessed 22 December 2015.

[21].              Ibid., recommendation 1, p. xix.

[22].              Australian Government, Government response to the Senate Economics Committee report: inquiry into liquidators and administrators, accessed 3 February 2016.

[23].              Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, op. cit., recommendation 5, p. xx.

[24].              Ibid., recommendation 6, p. xx.

[25].              Ibid., recommendation 14, p. xxi.

[26].              R McClelland (Attorney-General) and D Bradbury (Parliamentary Secretary to the Treasurer), Modernising insolvency regulation, media release, 2 June 2011, accessed 23 December 2015.

[27].              Treasury, ‘A modernisation and harmonisation of the regulatory framework: options paper’, Treasury website, 2 June 2011, accessed 23 December 2015.

[28].              R McClelland (Attorney-General) and D Bradbury (Parliamentary Secretary to the Treasurer), Reform package to modernise and harmonise insolvency, media release, 14 December 2011, accessed 23 December 2015.

[29].              Ibid.

[30].              Treasury, ‘Reforms to modernise and harmonise insolvency: proposals paper’, Treasury website, 14 December 2011, accessed 23 December 2015.

[31].              Institute of Chartered Accountants in Australia, Submission to Treasury, Reforms to modernise and harmonise insolvency, 3 February 2012, p. 1, accessed 23 December 2015.

[32].              Insolvency Practitioners Australia, Submission to Treasury, Reforms to modernise and harmonise insolvency, 3 February 2012, p. 1, accessed 23 December 2015.

[33].              N Roxon (Attorney-General) and B Ripoll (Parliamentary Secretary to the Treasurer), Insolvency reforms to benefit business, media release, 19 December 2012, accessed 23 December 2015.

[34].              Treasury, Insolvency Law Reform Bill: exposure draft, Treasury, 19 December 2012, accessed 23 December 2015.

[35].              Deloitte, Submission to Treasury, Insolvency Law Reform Bill: exposure draft, 27 February 2013, accessed 23 December 2015.

[36].              McGrathNicol, Submission to Treasury, Insolvency Law Reform Bill: exposure draft, 8 March 2013, accessed 23 December 2015.

[37].              M Cormann (Minister for Finance and Acting Assistant Treasurer) and G Brandis (Attorney-General), Reforms to align, simplify and strengthen insolvency rules, media release, 7 November 2014, accessed 23 December 2015.

[38].              Treasury, ‘Insolvency Law Reform Bill 2014: exposure draft’, Treasury website, 7 November 2014, accessed 23 December 2015.

[39].              Treasury, Insolvency practice rules, proposals paper, The Treasury, Canberra, November 2014, accessed 23 December 2015.

[40].              Treasury, ‘Insolvency Law Reform Bill 2014: submissions’, Treasury website, accessed 9 February 2016.

[41].              J Prentice, ‘Second reading speech: Insolvency Law Reform Bill 2015’, House of Representatives, Debates, (proof), 10 February 2016, p. 23, accessed 11 February 2016.

[42].              Selection of Bills Committee, Report, 1, 2016, The Senate, 4 February 2016, accessed 8 February 2016.

[43].              Standing Committee on the Scrutiny of Bills, Alert digest, 1, 2016, The Senate, 3 February 2016, pp. 25–31, accessed 8 February 2016.

[44].              J Chalmers, ‘Second reading speech: Insolvency Law Reform Bill 2015’, House of Representatives, Debates, (proof), 9 February 2016, p. 83, accessed 10 February 2016.

[45].              Ibid., p. 84.

[46].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, p. 3, accessed 22 December 2015.

[47].              The Statement of Compatibility with Human Rights can be found at pages 229–233 of the Explanatory Memorandum to the Bill.

[48].              Parliamentary Joint Committee for Human Rights, Thirty-third report of the 44th Parliament, 2 February 2016, p. 2, accessed 11 February 2016.

[49].              A Hawke (Assistant Minister to the Treasurer), ‘Second reading speech: Insolvency Law Reform Bill 2015’, House of Representatives, Debates, 3 December 2015, p. 14637, accessed 3 February 2016.

[50].              Section 95A, Corporations Act 2001, accessed 11 January 2016.

[51].               Australian Securities and Investments Commission (ASIC), Voluntary administration: a guide for creditors, information sheet, 74, ASIC, 2008, accessed 11 January 2016.

[52].               ASIC, Liquidation: a guide for creditors, information sheet, 45, ASIC, 2012, accessed 11 January 2016.

[53].               ASIC, Receivership: a guide for creditors, information sheet, 54, ASIC, 2008, accessed 11 January 2016.

[54].              ASIC, Voluntary administration: a guide for creditors, op. cit.

[55].               Corporations Act, section 499.

[56].               The claims against the company’s officers would arise from an alleged breach of directors’ duties which are set out in Chapter 2D of the Corporations Act. An example of such a claim is in the ‘Centro’ case: Australian Securities and Investments Commission v Healey (2011) 278 ALR 618, [2011] FCA 717 (27 June 2011), accessed 17 September 2015.

[57].              ASIC, Liquidation: a guide for creditors, op. cit.

[58].               Corporations Act, section 532. Section 1282 of the Corporations Act sets out the requirements for registration of liquidators.

[59].               ASIC, External administration: liquidator registration, regulatory guide, 186, ASIC, 2005, accessed 18 January 2016.

[60].               Corporations Act, subsection 1282(4).

[61].              ASIC, Receivership: a guide for creditors, op. cit., pp. 1–2. It is possible for a company in receivership to also be in provisional liquidation, liquidation, voluntary administration or subject to a deed of company arrangement.

[62].              Corporations Act, paragraph 418(1)(d).

[63].              Item 2 of Part 1 of Schedule 2 to the Bill.

[64].              Standing Committee on the Scrutiny of Bills, Alert digest, 1, 2016, op. cit., p. 28.

[65].              Ibid.

[66].              Ibid., p. 29.

[67].              Corporations Act, proposed clause 5-15 of Schedule 2.

[68].              Corporations Act, proposed clause 5-20 of Schedule 2.

[69].              Corporations Act, proposed clause 5-27 of Schedule 2.

[70].              Subsection 571(2) of the Corporations Act provides that the consequences of a pooling determination are: (i) each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against each other company in the group; (ii) each debt payable by a company in the group to any other company in the group is extinguished; and (iii) each claim that a company or companies in the group has against any other company or companies in the group is extinguished.

[71].              ASIC’s Insurance Requirements for registered liquidators, regulatory guide 194, outlines ASIC’s policy on how it administers the insurance requirements under the Corporations Act, including guidance to assist registered liquidators to determine what are adequate and appropriate insurance arrangements.

[72].              Corporations Act, proposed clause 20-5 of Schedule 2.

[73].              Corporations Act, proposed clause 20-15 of Schedule 2.

[74].              Corporations Act, proposed clause 20-10 of Schedule 2.

[75].              Corporations Act, proposed subclause 20-20(2) of Schedule 2.

[76].              Corporations Act, proposed subclause 20-20(3) of Schedule 2.

[77].              The list of matters which the Australian Securities and Investments Commission takes into account in making its determination about whether a person is ‘fit and proper’ is set out in Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, op. cit., paragraph 7.3.

[78].              Corporations Act, proposed subclause 20-20(6) of Schedule 2.

[79].              Corporations Act, subsection 1317B(1) as amended by item 248 of Part 2 of Schedule 2 to the Bill.

[80].              Corporations Act, proposed clause 20-25 of Schedule 2.

[81].              Corporations Act, subsection 1317B(1) as amended by item 248 of Part 2 of Schedule 2 to the Bill.

[82].              Corporations Act, proposed subclause 20-30(1) of Schedule 2.

[83].              Corporations Act, proposed clause 15-1 of Schedule 2.

[84].              Corporations Act, proposed subclause 20-30(6) of Schedule 2.

[85].              Corporations Act, proposed clause 20-80 of Schedule 2. Under section 4AA of the Crimes Act 1914 a penalty unit is equivalent to $180. This means the maximum penalty is $5,400.

[86].              ARITA, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, 18 December 2014, p. 23; Lynch Meyer Lawyers, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, 8 December 2014, accessed 9 February 2016.

[87].              KordaMentha, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, 10 December 2014, p. 2, accessed 9 February 2016.

[88].              Parliament of Australia, ‘Corporations Amendment (Insolvency) Bill 2007 homepage’, Australian Parliament website, accessed 9 February 2016.

[89].               Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, op. cit., recommendation 5, p. 152.

[90].               Ibid., paragraph 7.44.

[91].              Corporations Act, proposed sections 1553 and 1555, at item 322 of Schedule 2 to the Bill.

[92].              Corporations Act, proposed clause 20-10 of Schedule 2.

[93].              Corporations Act, proposed clause 20-45 of Schedule 2.

[94].              Corporations Act, proposed clause 40-45 of Schedule 2.

[95].              Corporations Act, proposed clause 40-75 of Schedule 2.

[96].              Corporations Act, proposed clause 50-25 of Schedule 2.

[97].              Corporations Act, proposed clause 50-5 of Schedule 2.

[98].              Corporations Act, proposed subclauses 50-10(4) and (5) of Schedule 2.

[99].              Deloitte, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, 18 December 2014, accessed 9 February 2016.

[100].              Corporations Act, proposed clause 50-15 of Schedule 2.

[101].              Corporations Act, proposed subclause 50-35(1) of Schedule 2.

[102].              Corporations Act, proposed subclause 50-35(2) of Schedule 2.

[103].              Criminal Code Act 1995, section 13.3.

[104].              See proposed subclauses 50-35(2); 60-20(3), (4) and (5); 65-5(2); 65-15(2); 65-40(2); 70-10(3); 70-25(3); 70-35(2) and (3); 80-55(3), (5) and (6); and 80-60(3) and (5).

[105].              Attorney-General’s Department (AGD), A guide to framing Commonwealth offences, infringement notices and enforcement powers, AGD, Canberra, September 2011, p. 51.

[106].              Standing Committee on the Scrutiny of Bills, Alert digest, 1, 2016, op. cit., p. 27.

[107].              Corporations Act, proposed clause 20-40 of Schedule 2.

[108].              Corporations Act, proposed subclause 20-40(3) of Schedule 2.

[109].              Corporations Act, proposed clause 20-50 of Schedule 2. Under proposed clause 20-45 the committee must comprise ASIC, a registered liquidator chosen by a prescribed body and a person appointed by the Minister.

[110].              Corporations Act, proposed clause 20-60 of Schedule 2.

[111].              Corporations Act, proposed clause 20-70 of Schedule 2.

[112].              Corporations Act, proposed paragraphs 20-75(1) of Schedule 2.

[113].              Proposed clause 5-10 formally defines a current condition by reference to the conditions which can be placed on the registration of a liquidator in various clauses of the Insolvency Practice Schedule (Corporations).

[114].              Corporations Act, proposed subclause 20-75(6) of Schedule 2.

[115].              Corporations Act, proposed subclause 25-1(3) of Schedule 2.

[116].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, op. cit., p. 134.

[117].              Corporations Act, proposed subclause 25-1(4) of Schedule 2.

[118].              A liquidator return year for a person who is a registered liquidator is the period of 12 months beginning on the day on which that registration first began and each subsequent period of 12 months. Corporations Act, proposed subclause 30-1(2) of Schedule 2.

[119].              Corporations Act, proposed subclauses 30-1(1) and (3) of Schedule 2.

[120].              Corporations Act, proposed subclause 30-1(5) of Schedule 2

[121].              Corporations Act, proposed subclause 35-1(1) of Schedule 2.

[122].              Corporations Act, proposed subclause 35-1(2) of Schedule 2.

[123].              This means that the maximum penalty is $18,000.

[124].              Corporations Act, proposed subclause 35-5(2) of Schedule 2. The maximum penalty is $900.

[125].              See proposed subclauses 60-20(6), 65-5(3), 65-15(3), 65-25(2), 65-40(3), 70-10(4), 70-25(4), 80-55(7) and 80-60(6).

[126].              Standing Committee on the Scrutiny of Bills, Alert digest, 1, 2016, op. cit., p. 30.

[127].              ARITA, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, op. cit., p. 14.

[128].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, op. cit., p. 118.

[129].              Ibid., p. 119.

[130].              Companies Auditors and Liquidators Disciplinary Board (CALDB), ‘Functions’, CALDB website, last updated 19 October 2014, accessed 10 February 2016.

[131].              Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, op. cit., p. 45.

[132].              Ibid., p. 75.

[133].              Items 24–28 in Part 2 of Schedule 2 to the Bill.

[134].              Corporations Act, proposed clause 40-5 of Schedule 2.

[135].              Corporations Act, proposed subclauses 40-5(2) and (3) of Schedule 2.

[136].              Corporations Act, section 1317C amended by item 251 in Part 2 of Schedule 2 to the Bill.

[137].              Corporations Act, proposed clause 40-15 of Schedule 2 sets out the power of ASIC to give a direction not to accept further appointments.

[138].              Corporations Act, proposed subclause 40-5(4) of Schedule 2. Proposed clauses 90-15 and 90-20 operate to give the Court broad powers to make orders in relation to external administration either on its own initiative or on application by (a) a person with a financial interest in the external administration of the company; (b) an officer of the company; (c) a committee of inspection upon a resolution by that committee; or (d) ASIC.

[139].              Corporations Act, proposed clause 40-10 of Schedule 2.

[140].              Corporations Act, section 1317C amended by item 251 in Part 2 of Schedule 2 to the Bill.

[141].              Corporations Act, proposed clause 40-20 of Schedule 2.

[142].              Corporations Act, proposed subclauses 40-35(2) and (3) of Schedule 2.

[143].              Corporations Act, proposed clause 40-50 of Schedule 2. Proposed clause 40-45 of the IPS Corporations permits ASIC to convene the committee. The composition of the committee is the same as for the committee which is convened to decide applications for registration and is governed by proposed clause 50-10. Similarly, proposed clause 50-25 provides that the Insolvency Practice Rules may set out the procedure and other rules of the committee—for instance, dealing with conflicts of interest and the ability of a practitioner to object to a proposed committee member.

[144].              Corporations Act, proposed clause 40-55 of Schedule 2.

[145].              Proposed subclause 40-55(2) of Schedule 2 provides a list of possible conditions which may be imposed on the registered trustee.

[146].              Corporations Act, proposed paragraphs 40-55(1)(e)–(g) of Schedule 2.

[147].              Corporations Act, proposed clause 40-60 of Schedule 2.

[148].              Corporations Act, proposed clause 40-65 of Schedule 2.

[149].              Corporations Act, proposed clauses 40-70 to 40-95 of Schedule 2.

[150].              ASIC, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, 26 November 2014, pp. 4–5, accessed 9 February 2016.

[151].              Chartered Accountants Australia New Zealand, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, 18 December 2014, p. 2, accessed 10 February 2016.

[152].              Corporations Act, proposed sections 1565–1569 inserted by item 322 in Part 3 of Schedule 2 to the Bill.

[153].              Australian Securities and Investments Commission, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, op. cit., p. 5.

[154].              Proposed clause 40-110 of Schedule 2 provides that the Insolvency Practice Rules may prescribe industry bodies.

[155].              Corporations Act, proposed clause 40-100 of Schedule 2.

[156].              Corporations Act, proposed subclauses 40-100(2) and (3) of Schedule 2.

[157].              Corporations Act, section 1317C amended by item 251 in Part 2 of Schedule 2 to the Bill.

[158].              Corporations Act, proposed subclauses 40-100(5) and (6) of Schedule 2.

[159].              Corporations Act, proposed clause 45-1 of Schedule 2.

[160].              Corporations Act, proposed subclauses 45-1(1)–(3) of Schedule 2.

[161].              Corporations Act, proposed subclause 45-5(2) of Schedule 2.

[162].              Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, op. cit., p. 95.

[163].               Ibid., p. 97.

[164].               Ibid., p. 100.

[165].               Ibid., p. 105.

[166].              Corporations Act, proposed clause 60-2 of Schedule 2.

[167].              Corporations Act, proposed subclause 60-5(1) of Schedule 2

[168].              Corporations Act, proposed subclause 60-10(1) of Schedule 2.

[169].              Corporations Act, proposed subclause 60-10(2) of Schedule 2

[170].              Corporations Act, proposed subclause 60-10(3) of Schedule 2.

[171].              Corporations Act, proposed subclause 60-10(4) of Schedule 2.

[172].              Corporations Act, proposed subclause 60-11(4) of Schedule 2.

[173].              Corporations Act, proposed paragraph 60-12(a) of Schedule 2.

[174].              Corporations Act, proposed paragraph 60-12(c) of Schedule 2.

[175].              Corporations Act, proposed paragraph 60-12(d) of Schedule 2.

[176].              Corporations Act, proposed paragraph 60-12(e) of Schedule 2.

[177].              Corporations Act, proposed subclause 60-5(2) of Schedule 2.

[178].              Corporations Act, proposed clause 60-15 of Schedule 2.

[179].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, op. cit., p. 172.

[180].              Corporations Act, proposed clause 60-16 of Schedule 2.

[181].              Corporations Act, proposed clause 60-17 of Schedule 2.

[182].              M Evans, Outline of equity and trusts, 3rd edn, Butterworths, Sydney, 1988, p. 76.

[183].              Corporations Act, proposed paragraph 60-20(2)(c) of Schedule 2.

[184].              Chartered Accountants Australia New Zealand, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, op. cit. pp. 2–3.

[185].              This means that the maximum penalty is $9,000. A defendant bears an evidential burden in relation to the matters in proposed subclauses 60-20(3), (4) and (5).

[186].              Corporations Act, proposed subclause 60-20(7) of Schedule 2.

[187].              Proposed clause 5-30 provides that a person has a financial interest in the external administration of a company if: (a) the person is the company, a creditor of the company, an external administrator of the company or in a member’s voluntary winding up, a member of the company; or (b) in any other circumstances prescribed.

[188].              Corporations Act, proposed clause 65-5 of Schedule 2.

[189].              Corporations Act, proposed subclause 65-10(2) of Schedule 2.

[190].              Corporations Act, proposed subclause 65-20(3) of Schedule 2.

[191].              Corporations Act, proposed subclause 65-20(4) of Schedule 2.

[192].              Corporations Act, proposed clause 65-25 of Schedule 2. This means that the maximum penalty is $9,000.

[193].              Corporations Act, proposed clauses 65-40 and 65-45 of Schedule 2.

[194].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, op. cit., p. 165.

[195].              Corporations Act, proposed subclauses 70-5(3) and (5) of Schedule 2.

[196].              Corporations Act, proposed subclause 70-5(4) of Schedule 2.

[197].              Corporations Act, proposed subclause 70-5(6) of Schedule 2.

[198].              Corporations Act, proposed subclause 70-5(7) of Schedule 2.

[199].              Proposed clause 5-5 of the IPS Corporations provides that the end of an external administration of a company means: (i) in relation to a company under administration—the day worked out under paragraph 435C(1)(b) of the Corporations Act; (ii) in relation to a company subject to a deed of company arrangement—the day the deed is terminated; and (iii) in the case of a winding up of a company—the day on which the affairs of the company are fully wound up.

[200].              Corporations Act, proposed subclauses 70-6(2) and (3) of Schedule 2.

[201].              Corporations Act, proposed subclauses 70-6(4) and (5) of Schedule 2.

[202].              Corporations Act, proposed clause 70-10 of Schedule 2. The IPS Bankruptcy contains equivalent provisions in relation to registered trustees.

[203].              Corporations Act, proposed clause 70-15 of Schedule 2.

[204].              Deloitte, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, op. cit.

[205].              Corporations Act, proposed subclause 70-31(1) of Schedule 2.

[206].              Corporations Act, proposed subclause 70-31(2) of Schedule 2. The maximum penalty is $9,000.

[207].              Corporations Act, proposed subclauses 70-31(3) and (4) of Schedule 2.

[208].              Corporations Act, proposed subclauses 70-31(8) and (9) of Schedule 2.

[209].              Corporations Act, proposed clauses 70-40 and 70-45 of Schedule 2.

[210].              Corporations Act, proposed clauses 70-46 and 70-47 of Schedule 2.

[211].              Corporations Act, proposed clauses 70-65 and 70-70 of Schedule 2.

[212].              Corporations Act, section 1317C amended by item 251 in Part 2 of Schedule 2 to the Bill.

[213].              Corporations Act, proposed subclause 70-75(2) of Schedule 2.

[214].              Corporations Act, proposed clause 70-85(1) of Schedule 2.

[215].              Corporations Act, proposed clause 70-85(2) of Schedule 2.

[216].              Corporations Act, section 1317C amended by item 251 in Part 2 of Schedule 2 to the Bill.

[217].              Corporations Act, proposed clause 70-90 of Schedule 2.

[218].              Corporations Act, proposed clause 75-50 of Schedule 2.

[219].              Corporations Act, proposed clause 75-10 of Schedule 2.

[220].              Corporations Act, proposed clause 75-15 of Schedule 2.

[221].              Corporations Act, proposed paragraph 75-15(1)(e) of Schedule 2.

[222].              Corporations Act, proposed clause 75-40 of Schedule 2.

[223].              Corporations Act, proposed subclause 75-41(4) of Schedule 2 provides that a related creditor for the purposes of a vote, in relation to a company, means a person who, when the vote was cast, was a related entity, and a creditor, of the company.

[224].              Corporations Act, proposed subclause 75-41(1) of Schedule 2.

[225].              Corporations Act, proposed subclause 75-41(2) of Schedule 2.

[226].              Corporations Act, proposed subclause 75-41(3) of Schedule 2.

[227].              Corporations Act, proposed subclauses 75-42(2) and (3) of Schedule 2.

[228].              Corporations Act, proposed clause 75-43 of Schedule 2.

[229].              Corporations Act, proposed clause 80-10 of Schedule 2.

[230].              Corporations Act, proposed subclause 80-35(1) of Schedule 2.

[231].              Corporations Act, proposed subclause 80-35(2) of Schedule 2.

[232].              ARITA, Submission to Treasury, Insolvency Law Reform Bill 2014: exposure draft, op. cit., p. 14.

[233].              Corporations Act, proposed subclauses 80-15(1) and (2) of Schedule 2.

[234].              Corporations Act, proposed clause 80-20 of Schedule 2.

[235].              Corporations Act, proposed clause 80-25 of Schedule 2.

[236].              See footnote 70 for the effect of pooling under the Corporations Act.

[237].              Corporations Act, proposed paragraph 80-27(1)(a) of Schedule 2.

[238].              Corporations Act, proposed paragraph 80-27(1)(b) of Schedule 2.

[239].              Corporations Act, proposed paragraph 80-27(1)(c) of Schedule 2.

[240].              Corporations Act, proposed paragraph 80-27(1)(d) of Schedule 2.

[241].              Corporations Act, proposed paragraph 80-27(1)(e) of Schedule 2.

[242].              Corporations Act, proposed subclause 80-27(2) of Schedule 2. Note that proposed clause 85-5 reiterates that the external administrator of a company must have regard to any directions given by the creditors of that company but is not required to comply with those directions. If there is a conflict between directions given by the creditors and by the committee of inspection then the directions given by the creditors override any directions given by the committee.

[243].              Corporations Act, proposed subclause 80-27(5) of Schedule 2.

[244].              Corporations Act, proposed subclause 80-26(2) of Schedule 2.

[245].              Corporations Act, proposed subclause 80-26(3) of Schedule 2.

[246].              Corporations Act, proposed subclauses 80-26(5) and (6) of Schedule 2.

[247].              Corporations Act, proposed clause 80-40 of Schedule 2.

[248].              Corporations Act, proposed clause 80-50 of Schedule 2.

[249].              Corporations Act, proposed subclause 80-55(3) of Schedule 2.

[250].              Corporations Act, proposed clause 80-55 of Schedule 2.

[251].              Corporations Act, proposed clause 80-60 of Schedule 2.

[252].              Corporations Act, proposed subclause 90-20(1) of Schedule 2.

[253].              Section 9 of the Corporations Act sets out the formal definition of the term contributory. A contributory is a person who is liable, as a member or past member, to contribute to the property of the company in the event of its being would up, including the holder of fully paid shares, and prior to the final determination of the person who are contributories, any person alleged to be a contributory. Source: Butterworths concise Australian legal dictionary, 3rd edn, P Butt (ed.), LexisNexis Butterworths, Sydney, 2004, p. 94.

[254].              Corporations Act, proposed clause 90-21 of Schedule 2.

[255].              Corporations Act, proposed subclauses 90-23(1) to 90-23(5) of Schedule 2.

[256].              Corporations Act, proposed subclauses 90-23(6) to 90-23(9) of Schedule 2. Under proposed paragraph 40-40(1)(g), ASIC may give a liquidator a show cause notice if the liquidator has been appointed to act as a reviewing liquidator and has failed to properly exercise the powers or perform the duties of a reviewing liquidator.

[257].              Corporations Act, proposed subclause 90-23(10) of Schedule 2.

[258].              Corporations Act, proposed clause 90-24 of Schedule 2.

[259].              Corporations Act, proposed subclause 90-24(3) of Schedule 2.

[260].              Corporations Act, proposed paragraph 90-27(1)(b) of Schedule 2.

[261].              Corporations Act, proposed subclauses 90-24(4) and (5) of Schedule 2.

[262].              Corporations Act, proposed paragraph 90-27(1)(a) of Schedule 2.

[263].              Corporations Act, proposed subclause 90-24(7) of Schedule 2.

[264].              Corporations Act, proposed clause 90-25 of Schedule 2.

[265].              Corporations Act, proposed clause 90-26 of Schedule 2

[266].              Corporations Act, proposed clause 90-28 of Schedule 2.

[267].              Corporations Act, proposed paragraph clause 40-40(1)(g) of Schedule 2.

[268].              Senate Economics Committee, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, op. cit., p. 53.

[269].              Ibid., p. 157.

[270].              Corporations Act, proposed clauses 90-35(1) and (2) of Schedule 2.

[271].              Corporations Act, proposed subclause 90-35(4) of Schedule 2.

[272].               Multi-Core Aerators Pty Ltd v Dye [1999] VSC 205 (4 June 1999), accessed 11 February 2016.

[273].               Ibid., paragraph 48.

[274].               Arnold Bloch Leibler, Submission to Treasury, A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia: options paper, 5 August 2011, paragraph 50, accessed 11 February 2016.

[275].               V Brand (Senior Lecturer in Law, Flinders Law School, Flinders University), Evidence to Senate Economics Committee, Inquiry into liquidators and administrators, Adelaide, 9 April 2011, pp. E14–15, accessed 11 February 2016.

[276].               Ibid., p. E4.

[277].               D Brown (Associate Professor), Evidence to Senate Economics Committee, Inquiry into liquidators and administrators, Adelaide, 9 April 2011, p. E17, accessed 11 February 2016.

[278].              Items 247 and 248 of Part 2 of Schedule 2 of the Bill.

[279].              For instance items 3 and 4 of Part 2 of Schedule 2 to the Bill amend the Aged Care (Accommodation Payment Security) Act 2006; items 274–277 of Part 2 of Schedule 2 to the Bill amend the Income Tax Assessment Act 1997; item 289–293 of Part 2 of Schedule 2 to the Bill amend the Medical Indemnity Act 2002; and item 307 of Part 2 of Schedule 2 to the Bill amends the Payment Systems and Netting Act 1998.

[280].              For instance item 273 of Part 2 of Schedule 2 to the Bill amends the Cross-Border Insolvency Act 2008; item 308 of Part 2 of Schedule 2 to the Bill amends the Private Health Insurance (Prudential Supervision) Act 2015; and item 316 of Part 2 of Schedule 2 to the Bill amends the Taxation Administration Act 1953.

[281].              ASIC Act, proposed subsection 30B(3).

[282].              CALDB, ‘About CALDB’, CALDB website, accessed 1 February 2016.

[283].              Schemes of arrangement are binding, court-approved agreements that allow the reorganisation of the rights and liabilities of members and creditors of a company. Source: ASIC, Schemes of arrangement, regulatory guide, 60, ASIC, September 2011, accessed 18 February 2016.

[284].              A reconstruction is a compromise or arrangement between an entity and its members or between a managed investment scheme and the members of the scheme. Source: ASIC, Disclosure in reconstructions, regulatory guide, 188, ASIC, 23 February 2007, accessed 18 February 2016.

[285].              This amendment is consequential to the repeal of section 600A by item 195 of Part 2 to Schedule 2 of the Bill.

[286].              For instance, item 108 repeals section 438E of the Corporations Act. Subsections 438E(1) and (2) are repealed because there is no longer an obligation imposed on an administrator of a company under administration to lodge six monthly accounts with ASIC. Subsections 438E(3)–(7) have been replaced by requirements in the Insolvency Practice Schedule (Corporations) relating to the administration of administration books. Source: Explanatory Memorandum, Insolvency Law Reform Bill 2015, op. cit., p. 202.

[287].              Item 167 of Part 2 of Schedule 2 to the Bill.

[288].              Subsection 60(2) of the Corporations Act provides that a declaration of relevant relationships, in relation to a liquidator of a company, means a written declaration stating whether the liquidator, a partner in the liquidator’s firm, the firm or an associate of the firm if it is a body corporate has, or has had within the preceding 24 months, a relationship with the company, an associate of the company, a former liquidator, or former provisional liquidator, of the company, a former administrator of the company or a former administrator of a deed of company arrangement executed by the company and if so, the liquidator’s reasons for believing that none of the relevant relationships result in the liquidator having a conflict of interest or duty.

[289].              Section 9 of the Corporations Act defines a declaration of indemnities, in relation to an administrator of a company under administration, as a written declaration stating whether the administrator has, to any extent, been indemnified, for any debts for which the administrator is, or may become, liable; or his, or her, remuneration and if so, stating the identity of each indemnifier and the extent and nature of each indemnity.

[290].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, op. cit., p. 206.

[291].               Bankruptcy Act, section 54A.

[292].              Australian Financial Security Authority (AFSA), Formal options, AFSA website, accessed 22 February 2016.

[293].              An act of bankruptcy is any of the actions, events or declarations which are listed in section 40 of the Bankruptcy Act.

[294].               Bankruptcy Act, paragraph 40(1)(daa).

[295].               Bankruptcy Act, section 43.

[296].              Bankruptcy Act, section 18.

[297].               Bankruptcy Act, section 188A.

[298].              AFSA, ‘Personal insolvency agreement (PIA) overview’, AFSA website, accessed 4 January 2016.

[299].              Bankruptcy Act, section 188.

[300].               Bankruptcy Act, section 185C.

[301].               AFSA, Personal insolvency information for debtors, booklet, AFSA, November 2015, accessed 4 January 2016.

[302].              Bankruptcy Act, section 185C.

[303].                             Bankruptcy Act, paragraphs 185C(4)(b) and (c) and subsection 185C(5). AFSA, ‘Indexed amounts’, AFSA website, 27 January 2016, accessed 19 February 2016.

[304].               Bankruptcy Act, paragraph 185C(4)(d) and subsection 185C(5).

[305].              Bankruptcy Act, paragraph 185C(2)(c).

[306].              Debt agreement administrators are registered under the Bankruptcy Act, section 186D.

[307].              AFSA, Personal insolvency practitioners compliance report 2014–15, 2015, pp. 8 and 9, accessed 4 January 2016.

[308].              Item 2 of Schedule 1 of the Bill.

[309].              Bankruptcy Act, proposed clause 1-1 of Schedule 2.

[310].              Bankruptcy Act, subsection 11(2).

[311].              AFSA, ‘Our roles’, AFSA website, accessed 4 January 2016. In addition, proposed clause 90-21 empowers the Inspector-General to carry out a review of the remuneration received by the trustee of a regulated debtor’s estate for services performed by the trustee in relation to the administration of the estate.

[312].              Bankruptcy Act, proposed clause 15-1 of Schedule 2.

[313].              Bankruptcy Act, proposed subclause 20-30(6) of Schedule 2.

[314].              Bankruptcy Act, proposed clause 50-25 of Schedule 2.

[315].              Bankruptcy Act, proposed clause 50-5 of Schedule 2.

[316].              Bankruptcy Act, proposed clause 50-10 of Schedule 2.

[317].              Bankruptcy Act, proposed subclause 50-15 of Schedule 2.

[318].              Bankruptcy Act, proposed clause 20-40 of Schedule 2.

[319].              Bankruptcy Act, proposed subclauses 20-40(3) and (4) of Schedule 2.

[320].              Bankruptcy Act, proposed clause 20-50 of Schedule 2. Under proposed clause 20-45 the committee must comprise the Inspector-General, a registered trustee chosen by a prescribed body and a person appointed by the Minister.

[321].              Proposed paragraph 96-1(b) provides that a decision by a committee to vary or remove a condition of registration under clause 20-55 is reviewable by the Administrative Appeals Tribunal.

[322].              Bankruptcy Act, proposed clause 20-60 of Schedule 2.

[323].              The renewal fee is determined by the Minister by legislative instrument.

[324].              Bankruptcy Act, proposed clause 20-70 of Schedule 2.

[325].              Bankruptcy Act, proposed subclause 25-1(3) of Schedule 2.

[326].              A trustee return year for a person who is a registered trustee is the period of 12 months beginning on the day on which that registration first began and each subsequent period of 12 months. Bankruptcy Act, proposed subclause 30-1(2) of Schedule 2.

[327].              Bankruptcy Act, proposed subclauses 30-1(1) and (3) of Schedule 2.

[328].              Bankruptcy Act, proposed subclause 35-1(1) of Schedule 2.

[329].              Bankruptcy Act, proposed subclause 35-5(2) of Schedule 2.

[330].              Bankruptcy Act, sections 155H and 155I.

[331].              Bankruptcy Act, proposed clauses 40-25 and 40-30 of Schedule 2 respectively. Proposed paragraphs 96-1(d) and (e) provide that decisions by the Inspector-General to cancel or suspend registration respectively under clauses 40-25 and 40-30 are reviewable by the Administrative Appeals Tribunal.

[332].              Bankruptcy Act, proposed subclauses 40-35(2) and (3) of Schedule 2.

[333].              Bankruptcy Act, proposed clause 40-50 of Schedule 2. Proposed clause 40-45 of Schedule 2 permits the Inspector-General to convene the committee.

[334].              Proposed subclauses 40-55(1) and (2) of Schedule 2 provides a list of possible conditions which may be imposed on the registered trustee. Proposed paragraph 96-1(f) provides that a decision by a committee to take disciplinary action against a registered trustee under clause 40-55 is reviewable by the Administrative Appeals Tribunal.

[335].              Bankruptcy Act, proposed clause 40-65 of Schedule 2.

[336].              Proposed clause 40-110 of Schedule 2 provides that the Insolvency Practice Rules may prescribe industry bodies.

[337].              Bankruptcy Act, proposed clause 40-100 of Schedule 2.

[338].              Bankruptcy Act, proposed clause 45-1 of Schedule 2.

[339].              Bankruptcy Act, proposed subclauses 45-1(1)–(3) of Schedule 2.

[340].              Bankruptcy Act, proposed subclause 45-5(2) of Schedule 2.

[341].              Bankruptcy Act, proposed clause 5-20 of Schedule 2.

[342].              Bankruptcy Act, proposed clause 60-5 of Schedule 2.

[343].              Bankruptcy Act, proposed clause 60-15 of Schedule 2.

[344].              Bankruptcy Act, proposed clause 60-5 of Schedule 2.

[345].              Bankruptcy Act, proposed clause 60-21 of Schedule 2.

[346].              Explanatory Memorandum, Insolvency Law Reform Bill 2015, p. 11.

[347].              Bankruptcy Act, proposed clause 60-26 of Schedule 2.

[348].              Proposed clause 85-5 of Schedule 2 provides that the trustee of a regulated debtor’s estate must have regard to the directions given by the creditors of the estate but is not obliged to comply with those directions if they are unreasonable.

[349].              The percentage value of the creditors is to be worked out by reference to the value of the creditors’ claims against the regulated debtor’s estate that are known at the time the direction is given. Bankruptcy Act, proposed clause 75-15 of Schedule 2.

[350].              Bankruptcy Act, proposed clause 75-20 of Schedule 2.

[351].              Bankruptcy Act, proposed clauses 90-35(1) and (2) of Schedule 2.

[352].              Bankruptcy Act, proposed subclause 90-35(5) of Schedule 2.

[353].              Bankruptcy Act, proposed clause 80-10 of Schedule 2.

[354].              Bankruptcy Act, proposed clause 80-35 of Schedule 2.

[355].              Bankruptcy Act, proposed clause 80-20 of Schedule 2.

[356].              Bankruptcy Act, proposed clause 80-25 of Schedule 2.

[357].              Bankruptcy Act, proposed clause 80-40 of Schedule 2.

[358].              For instance, item 24 removes Divisions 5 and 5A from Part IV of the Bankruptcy Act, which relate to meetings of creditors and committees of inspection and item 47 removes sections 154A–155K of Part VIII of the Bankruptcy Act, which relate to the registration of trustees.

[359].              Items 42-44, 61-62, 70 and 84-85 in Part 2 of Schedule 1 to the Bill.

[360].              Items 19, 20 and 22 in Part 2 of Schedule 1 to the Bill.

[361].              Item 103–125 in Part 3 of Schedule 1 to the Bill. See Bankruptcy Act, proposed clause 40-40 of Schedule 2 for the matters on which the Inspector-General may rely in giving a registered trustee notice to show cause why he, or she, should continue to be registered.

[362].              Items 127–177 in Part 3 of Schedule 1 to the Bill. See, for example, items 133–140 which relate to funds handling.

[363].              Item 178 in Part 3 of Schedule 1 to the Bill.