Chapter 11
The committee's views and recommendations
11.1
The final chapter of this report makes important recommendations on each
of the report's three key themes—the regulation, registration and remuneration
of the insolvency profession in Australia. The committee considers that there
is clearly a strong case for a new framework to enhance oversight of the
insolvency profession.
11.2
In making these recommendations, the committee is mindful of how its
proposals are likely to interact with each other. As far as possible, the
intent is to make these measures complementary and to ensure they build on
existing structures and systems. There are useful systems and processes
currently in place in the oversight of the insolvency industry in Australia.
Notwithstanding the need for structural reform, the committee's intent is to
preserve and enhance these elements.
Regulating the profession
11.3
As chapters 4 and 6 discuss in detail, the committee heard a range of evidence
concerning the role and competence of the Australian Securities and Investments
Commission (ASIC), the Companies and Liquidators Disciplinary Board (CALDB) and
the Insolvency Practitioners Association of Australia (IPAA). The criticism of
ASIC's approach to monitoring the insolvency industry as outlined in chapter 6
of this report is of particular concern for the committee.
11.4
ASIC has consistently claimed that it has the resources to fulfil its current
responsibilities in insolvency matters.[1]
It has also admitted that there are areas in which it could improve.[2]
Taken together, these comments suggest that ASIC believes it can address these
areas without more funding, provided its responsibilities in insolvency are not
increased.
11.5
However, the committee believes that regardless of funding, ASIC is
overburdened. The oversight of insolvency practitioners is just one of 13
'stakeholder teams' within ASIC's organisational structure.[3]
Its 2008–09 Annual Report lists six strategic priorities, none of which relate
directly to corporate insolvency matters.[4]
Understandably, the strategic priority of managing the domestic and
international implications of the Global Financial Crisis has consumed much of
ASIC's time and resources.
11.6
The committee believes that corporate insolvency in Australia needs more
priority and prominence in the regulatory framework. This will not be achieved through
more funding and responsibilities for the same overburdened agency. Rather, as
chapter 10 flagged, the committee argues that there is a need to combine the
regulation of personal bankruptcy and corporate insolvency under the one body. This
would be best achieved by transferring ASIC's corporate insolvency
responsibilities to within the Insolvency and Trustee Service Australia (ITSA).
The new agency would therefore be under the Attorney-General's portfolio.
11.7
The committee foresees several benefits in this reorganisation. These
include:
- giving more prominence to corporate insolvency matters through
enabling the Chief Executive of the new structure greater control and focus
over day‑to‑day functions and more strategic oversight;
- promoting a more proactive mindset in the regulation of corporate
insolvency, conducive to establishing a flying squad and a system of licensing
(see recommendations 3 and 5);
- the opportunity to feed off ITSA's current processes to devise a
panel interview and written exam to screen corporate insolvency practitioner
applicants;
-
greater coordination of the registration process and hence a
lower compliance burden given that many practitioners are registered as both
personal and corporate insolvency practitioners;
- improving corporate insolvency data gathering and dissemination
through building on ITSA's systems;[5]
and
- providing an opportunity to treat insolvency matters more
holistically.
11.8
The committee recognises that the creation of a single insolvency regulator
built on ITSA's framework would require a transfer of ASIC's skills and
expertise on corporate insolvency matters. Both ITSA and the IPAA commented
that ITSA does not currently have that knowledge.[6]
The committee believes it should be possible to transfer resources, however.
Recommendation 1
11.9
The committee recommends that the corporate insolvency arm of ASIC be transferred
to ITSA to form the Australian Insolvency Practitioners Authority (AIPA). The
agency should be governed by the Financial Management and
Accountability Act under the Attorney General's portfolio.
11.10
The Memorandum of Understanding between ASIC and ITSA should be updated
to ensure that ASIC provides to the new agency adequate resources and the expertise
needed to support the oversight of corporate insolvency sector.
11.11
The committee believes that as part of this restructure, the government
should also review the Bankruptcy Act 1966 and the Corporations Act
2001 to examine opportunities to harmonise personal and corporate
insolvency legislation (see chapter 10).
Recommendation 2
11.12
The committee recommends that the government commission the Australian
Law Reform Commission to inquire into the opportunities to harmonise
Australia's personal insolvency and corporate insolvency legislation. The
Commission must report to the government within 12 months of the tabling of
this report.
Proactive surveillance
11.13
Chapter 10 noted two options to improve the monitoring of corporate
insolvency practitioners: an annual (or biennial) review of all practitioners
and a random audit through a 'flying squad'.
11.14
Firstly, the committee believes that the current approach to monitoring
the practices of insolvency practitioners is inadequate (see chapters 5 and 6).
The complaints system alone, however responsive and attuned, will not deter all
misconduct. A proactive approach is needed to deter misconduct and place
practitioners on notice that, either on a random or systemic basis, they will
be monitored.
11.15
The question then becomes, which of these two proactive options is
preferable. The annual inspection program that ITSA employs has the advantage
of being relatively thorough in the detection, and therefore the deterrence of
misconduct.[7]
A flying squad might use the regulator's market intelligence, but the
surveillance of particular practitioners would be done randomly. One would
therefore expect a flying squad to have lesser impact in terms of both
detection and deterrence of misconduct.
11.16
The flying squad has the advantage of being less costly than the ITSA
model. Chapter 10 noted ASIC's estimate that an additional 65 full time employees
would be needed for it to conduct an annual inspection of all 662 insolvency
practitioners. If correct, this constitutes a tripling of ASIC's current
staffing load in the corporate insolvency area.
11.17
The committee's view is that as a first step towards a more proactive
approach, the new regulatory agency should have a flying squad that conducts
spot checks of insolvency practitioners. It believes that this initiative would
have a considerably greater effect on both the detection and deterrence of
practitioner misconduct than the current complaints system. The work of the
flying squad must be based on detailed and accurate market intelligence and
data analysis.
Recommendation 3
11.18
The committee recommends that a 'flying squad' be established within the
new insolvency regulator. The unit should be responsible for conducting investigations
of a sample of insolvency practitioners, some selected at random, others with
the aid of a risk profiling system and market intelligence.
An Insolvency Ombudsman
11.19
Chapter 10 noted the support of several submitters to this inquiry for
an Insolvency Ombudsman. In large measure, this support reflected complainants'
frustration with ASIC's current complaints handling process and the widespread
perception that the CALDB is inefficient in its role and subject to ASIC's
direction.
11.20
The committee notes that the Office of Fair Trading in the UK has
recently recommended the creation of an independent complaint handling body
with the ability to review complaints and assess fees. It proposed that the
body should be funded by the IP profession and should be able to sanction
insolvency practitioners in a way that deters future transgressions. If the
body finds that a practitioner has overcharged, it should have the power to
order that any overcharge be returned to creditors.[8]
11.21
The committee can see several potential advantages to establishing an
Insolvency Ombudsman. These include:
- a designated body to review promptly smaller financial matters;
- providing a voice for complainants;
- performing an educative role on what is acceptable conduct and
reasonable fees;
- maintaining community confidence in the insolvency regime;
- a body that is independent from the regulator and is not subject
to directions from the regulator;
- an Ombudsman appointed for a fixed term and must not be—or be able
to be perceived as—an advocate for the insolvency industry;
- a body with statutory power to dismiss a liquidator from an
appointment; and
-
a body that is able to enquire into systemic issues as well as
individual complaints.
11.22
However, the committee believes the priority must be to establish the
structure and role of the new insolvency regulator. It is hoped that the new
Authority's complaints system will be responsive to the concerns of small
creditors and businesses. If a new regulatory insolvency agency is established
and the government considers that it is not handling complaints promptly
and effectively, then the committee believes that an Insolvency Ombudsman
should be seriously considered.
11.23
If an Insolvency Ombudsman is created, it is important to establish a
clear delineation between its powers and responsibilities and those of the
regulator and the disciplinary board. While an Ombudsman must not be subject to
direction from either the regulator or the disciplinary board, there would need
to be some level of coordination between these bodies.
11.24
An Ombudsman should have the power to obtain information from the
regulator and must be able to refer a matter it has investigated to the CALDB
for disciplinary proceedings. The regulator should be able to refer a matter to
the Ombudsman, where it is deemed appropriate. Both the regulator and the
Ombudsman should be able to obtain information on matters that the other has
investigated. The Ombudsman should have an unconditional right to make public
reports and statements on the findings of investigations and on issues giving
rise to complaints.[9]
The CALDB
11.25
The committee believes that the CALDB should be retained in its current
form. The Board's focus will continue to be on determining the disciplinary
action to take against practitioners.
11.26
The committee is concerned, however, that the CALDB's investigative and
adjudicative processes lack transparency. It believes that the Board's
deliberations and findings should be given in open unless there is a ruling
otherwise. Past hearings and evidence of the CALDB should also be open to
inspection by any person.
Recommendation 4
11.27
The committee recommends that section 213 of the Australian
Securities and Investment Commission Act 2001 be replaced with the
following:
All hearings, evidence and reasons
shall be heard or given in open session unless otherwise ordered by a judge of
a Court of any State or Territory or the Federal Court of Australia who may, at
any time during or after the hearing of a proceeding in the Court, make such
order forbidding or restricting the publication of particular evidence, or the
name of a party or witness, as appears to the Court to be necessary in order to
prevent prejudice to the administration of justice or the security of the
Commonwealth. Subject to section 216(2), any past hearings, evidence and/or
reasons shall be open to inspection by any person, and a register of past
matters with the names of parties shall be published and made available for
inspection by the public by means of the internet.
Registration
11.28
Chapter 7 of this report referred to the idea of a licensing system to
replace the current registration system for insolvency practitioners. The
committee strongly supports this idea for the flexibility that a licensing
system gives the regulator to review, suspend and cancel a practitioner's
appointment.
Recommendation 5
11.29
The committee recommends that the new Insolvency Practitioners Authority
establish a licensing system for corporate insolvency practitioners similar to
the system currently used by ITSA. Practitioners should be required to renew
their license every three years.
11.30
The new regulator should have the power to suspend a practitioner's
license if they are not adequately insured or if a matter referred to the CALDB
is of sufficient concern as to warrant suspension.
11.31
The committee also supports the idea of a licensing fee to be levied
prior to licensing new practitioners and upon renewing licenses. It should be
clearly stated on forms requiring this payment that purpose of the fee is to
cover the insurance industry for its new responsibilities.
Recommendation 6
11.32
The committee recommends that as part of the licensing and
re-licensing processes, all corporate insolvency practitioners are required to
pay a licensing fee.
11.33
As discussed in Chapter 7, the committee believes that insolvency practitioners,
like other professionals, should undertake continuing professional development
and education.
Recommendation 7
11.34
The committee recommends that it be a condition of a practitioner's
first license renewal (ie: after three years of registration) that he or she
has completed the IPAA's Insolvency Education Program.
A written exam and / or an
interview
11.35
The committee supports the introduction of a written examination, the
passing of which should be a pre-requisite for gaining a license as an
insolvency practitioner. The examination should be 'closed book' and must test
candidates' knowledge of their fiduciary duties as a practitioner. It should
cover issues including the conduct of meetings, the use of casting votes,
different types of resolutions, basic equitable legal concepts, as well as recent
legislative changes to consumer protection and corporations law.
Recommendation 8
11.36
The committee recommends that the new Australian Insolvency
Practitioners Authority set and administer a 'closed book' written examination.
The passing of this examination should be a pre-requisite for gaining a license
as a corporate insolvency practitioner.
11.37
The committee recommends that the new regulator convene an eight person
advisory panel to discuss and devise the format and content of the examination.
The panel should include a senior official from the new Insolvency Authority, a
representative from the Institute of Chartered Accountants of Australia, a
representative from the Insolvency Practitioners Association (IPAA), an
insolvency practitioner nominated by the IPAA, two academic experts on
insolvency law, a person nominated by the Australian Bankers' Association and a
person nominated by the Council of Small Business Organisations of Australia.
The committee suggests that this panel reconvene annually to discuss any
changes that should be made to the content and format of the examination.
Recommendation 9
11.38
The committee recommends that the new Australian Insolvency
Practitioners Authority convene an eight person advisory panel to devise a
written examination. The panel should be chaired by the Chairman of the
Authority and should also include:
- a representative from the Institute of Chartered Accountants of
Australia;
- a representative from the Insolvency Practitioners Association
(IPAA);
- an insolvency practitioner nominated by the IPAA;
-
two academic experts on insolvency law chosen by the Authority;
- a person nominated by the Australian Bankers' Association;
- a person nominated by the Council of Small Business Organisations
of Australia; and
- a person nominated by a consumer advocacy group.
Professional indemnity insurance
11.39
The committee believes it is very important that the administration of
section 1284 of the Corporations Act relating to professional indemnity
(PI) insurance is tightened. Currently, ASIC's approach is to wait for
confirmation in annual statements by liquidators that practitioners have
adequate PI insurance. It is also of concern that insurance companies have
advised the IPAA that they do not offer run-off cover. This is despite ASIC's Regulatory
Guide stating that practitioners should obtain run-off cover for as long as
reasonably practicable (see chapter 7).
11.40
Other requirements should be put in place to provide the regulator and
the public greater assurance that registered practitioners have not let their
PI insurance lapse. In the committee's opinion, the regulator must work with
insurance companies to devise a system whereby the company advises the
regulator when a registered liquidator is operating without PI insurance. If
the insurance company advises that a practitioner's PI insurance has lapsed or
expired, the regulator should contact the practitioner and give 14 days to
update their insurance. If it is not updated in this time, the regulator should
suspend the practitioner's license.
11.41
The regulator should, as part of its random and routine checks of
practitioners (see recommendations 3 and 5), sight the PI insurance documents
of the practitioner. The licensing fee (see recommendation 6) should be
hypothecated to assist the insurance industry to cover the monitoring costs of
this system.
Recommendation 10
11.42
The committee recommends that the new insolvency regulator work with the
insurance industry to ensure that insurance companies notify the regulator if a
practitioner's insurance lapses or expires. In these cases, the regulator
should contact the practitioner immediately and allow the practitioner 14 days
to acquire the policy. If this is not done, the regulator must suspend the
practitioner's license.
11.43
The regulator should sight the insurance documents of practitioners as
part of its 'flying squad' activities.
Recommendation 11
11.44
The committee recommends that the Corporations Act 2001 be
amended to impose a penalty on registered insolvency practitioners who operate
without professional indemnity insurance.
11.45
As chapter 10 discussed, a typical PI insurance policy will cover
practitioners for negligence but not fraud. Premia are considerably higher for
policies that cover fraud and wrongdoing. The Law Society operates a fidelity
fund to cover its members for fraud and wrongdoing. The committee believes a
similar arrangement would be appropriate for the insolvency profession.
Recommendation 12
11.46
The committee recommends that the major accountancy bodies—the Institute
of Chartered Accountants of Australia, CPA Australia and the National Institute
of Accountants—establish a fidelity fund to ensure that creditors are insured
for fraud and wrongdoing.
Remuneration
11.47
The committee notes the concerns of many contributors to this inquiry about
the high level of fees being charged by liquidators. It recognises that in some
cases, these charges may well be justified given the complexity of the task and
the practitioner's exposure to risk. In other cases, there is clearly overcharging
and over servicing.
11.48
Chapter 10 noted various proposals for reforming the remuneration
system. These included:
- a committee-set schedule of fees;
- reintroducing scale rates for each staff member, depending on education
and experience;
- establishing a fixed price government tendering process for
appointments;
-
limiting appointments to a timeframe that is pre-set with company
directors;
-
requiring the administrator to set a baseline value for assets
and fixing remuneration according to the realisation of this value;
-
a competitive tendering process for each appointment;
- broadening the educational statutory requirement for
registration; and
- improved disclosure and itemising of fees.
11.49
In this context, the committee makes two points. The first is that the
market must set prices to remunerate practitioners. It is important that
complex work done to a high standard attracts commensurate financial reward. The
committee believes that any attempt to control practitioners' fees will create
distortions and disincentives. The first four of the options listed above fall
into that category.
11.50
The suggestions of a competitive tendering process and a set timeframe (items 3
and 6, above) are appealing in principle. However, they would force insolvency
practitioners to meet pre-agreed estimates on cost and time. The committee
feels that this is unreasonable given that the complexity of an insolvency job
is often not apparent prior to an appointment.
11.51
The second point, however, is that the market for insolvency
practitioners is distorted as it is. Practitioners lack adequate incentives to
offer fees that are genuinely commensurate with the efficient and effective
performance of their duties. The market lacks the competitive tension that
would put downward pressure on practitioners' fees, and return more to
creditors' pockets.
11.52
In this context, mention should also be made of the priority payment
system for liquidators and administrators. The committee is aware of the
arguments for keeping and for changing this system. On the one hand, there
needs to be a guarantee that a practitioner will be remunerated for his or her
work. The priority payment system provides that assurance. On the other hand, a
system whereby the liquidator receives full payment before a secured or
unsecured creditor receives any return seems to lack incentives for the
practitioner to maximise returns to creditors.
11.53
In the absence of data on the proportion of funds taken by the
liquidator as fees and by secured and unsecured creditors, it is difficult to
recommend any change to the priority payment system. The committee suggests
that once this data is collected and properly analysed (see recommendation 17),
consideration should be given to various options for reform. One option is to
set a pre-agreed baseline fee for the liquidator, beyond which secured and
unsecured creditors would be paid. If there are funds remaining after these
payments, the liquidator would receive a further payment.
Introducing competition
11.54
The committee believes the best way to resolve the problem of
overcharging and over servicing is to open the profession to more entrants. Presently,
the requirements for registration as a liquidator are for 'a course of study in
accountancy of not less than three years' and 'a course of study in commercial
law of not less than two years'.[10]
The committee believes the profession should also attract applicants with
suitable experience from the legal profession as well as applicants with a
Masters in Business Administration and relevant commercial experience. The
committee emphasises, however, the importance of a written examination to
screen the wider range of applicants (see recommendations 8 and 9).
Recommendation 13
11.55
The committee recommends that section 1282(2)(a)(i) of the Corporations Act
is amended to read:
...is an Australian Legal Practitioner
holding a current practising certificate with at least five years' post
admission experience as a practising commercial lawyer;
and / or
...holds a Masters of Business
Administration with at least five years' commercial experience.
Dismissing a liquidator
11.56
The committee is concerned that there are no checks against a dishonest
liquidator from charging more than the costs cited in the remuneration report.
As in the Ariff case, there is nothing that creditors can do to stop a
liquidator in the middle of the process to check the veracity of the
remuneration report.[11]
Recommendation 14
11.57
The committee recommends that as part of the proposed licensing system,
the insolvency regulator can suspend a liquidator's license if they believe
overcharging has occurred.
11.58
The committee believes that in addition to the proposed insolvency regulator
having the power to dismiss a liquidator, the courts should be able to remove a
liquidator. Currently, section 503 of the Corporations Act states that
'[T]he Court may, on cause shown, remove a liquidator and appoint another
liquidator'. This section should be amended to state that:
For purposes of this section, cause shown includes:
(a)
A vote of no confidence by a
majority of creditors;
(b)
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.
Recommendation 15
11.59
The committee recommends that section 503 of the Corporations Act
2001 be amended to insert the following provision:
For purposes of this section, cause
shown includes:
(a)
A vote of no confidence by a majority of creditors;
(b)
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.
Disclosure
11.60
The committee believes that the remuneration report template established
by the IPAA's Code of Professional Practice is a sound and clear basis upon
which to inform creditors of past and future expenses. The committee views the
remuneration report as a key measure to hold liquidators to account and guard
against overcharging and over servicing. It is crucial that company directors
and creditors can readily access an itemised list of past and proposed expenses.
11.61
The committee believes that while disbursement payments are an
inevitable part of the insolvency process, they need to be clearly and
accurately listed in the remuneration report. It is also important that the new
regulator alerts creditors to their right to query disbursement payments. The
regulator must also be alert to and dissuade attempts to blur the distinction
between disbursement payments and the section 449E understanding of
'remuneration'.
Recommendation 16
11.62
The committee recommends that the new insolvency regulator work with the
IPAA and the Institute of Chartered Accountants to ensure that insolvency
practitioners comply with the remuneration report template set out in the IPAA
Code of Professional Practice.
Better data
11.63
The committee considers that there is a strong need for industry-wide
data on the fees charged by insolvency practitioners. Properly gathered,
published and analysed, this data will be a useful source for the regulator to
identify potential cases of over charging and for creditors and the public at
large to make an assessment of what is a reasonable fee for a practitioner's
services. For each appointment, data must be gathered on:
- the type of insolvency (VA, court appointed etc);
- the proportion of total assets recovered;
-
the return to creditors;
- the method of calculating fees;
-
the hours spent and staff rates paid;
-
the cost of disbursements; and
- the size of the liquidator or administrator (employees and
capital).
Recommendation 17
11.64
The committee recommends that within the new Insolvency Practitioners
Authority, there is a unit established that is responsible for gathering,
collating and analysing data on a range of corporate and personal insolvency
matters. The data must be made publicly available in the Authority's Annual
Report and online. There should be no charge for accessing these data.
A final comment
11.65
The committee recognises that the role of the insolvency practitioner is
important to the proper functioning of a market economy. Practitioners require
a range of financial, investigative, written and interpersonal skills to
perform their role well. Their proficiency allows troubled businesses to stay
afloat and, where this is not possible, enables vulnerable creditors to
maximise their returns. The committee also acknowledges that the process of
corporate insolvency is often turbulent and distressing for company directors
and employees. Insolvency practitioners deserve to be properly remunerated.
11.66
By the same token, the insolvency profession must also be properly
regulated. There are significant responsibilities vested in the insolvency
practitioner to act in the interests of creditors and employees and in the
public interest. Accordingly, there must be an effective framework to promote
high performance and deter misconduct.
11.67
This inquiry has found several regulatory gaps in the framework for
regulating insolvency practitioners in Australia. Of greatest concern is that ASIC
lacks a proactive approach and its response to complaints is often slow and
unsatisfactory.
11.68
The recommendations made in this chapter are bold and substantive. The
committee believes they are necessary and, in many cases, long overdue. It
foresees several advantages from transferring ASIC's insolvency functions to
within ITSA, all of which will improve the monitoring of the corporate
insolvency profession.
11.69
In the committee's opinion, the financial costs associated with
implementing the recommendations are far outweighed by the deterrent effect
they will have on misconduct. Moreover, if properly implemented and enforced,
the recommendations will restore stakeholders' and the public's confidence in
the performance and reputation of corporate insolvency industry.
11.70
To this end, the committee believes it is important that there is a
review of the effectiveness of the recommendations that are implemented from
this inquiry. In particular, it is necessary to evaluate the effect of the
proposal to widen eligibility to become an insolvency practitioner (recommendation
13). If this recommendation is implemented, the Senate Economics References
Committee should, after five years, revisit the matter in light of the trends
in fee growth. If fees have increased substantially over this period, there may
be a strong case to consider more prescriptive measures to ensure the clients
of insolvency practitioners receive value for money.
Senator Alan Eggleston
Chair
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