31 January 2003

The Secretary, 
Parliamentary Joint Committee 
on Corporations and Financial Services 
Room SG.64, Parliament House,
CANBERRA  ACT 2600. 
corporations.joint@aph.gov.au 

Dear Senators

With respect to the Committee’s consideration and reporting on the operation of Australia’s insolvency and voluntary administration laws I would like to make the following submission on behalf of Deloitte’s Corporate Reorganisation Group.

The terms of reference for the enquiry  included the following areas of interest.

(A)	the appointment, removal and functions of administrators and liquidators;
(B)	the duties of directors;
(C)	the rights of creditors;
(D)	the cost of external administrations;
(E)	the treatment of employee entitlements;
(F)	the reporting and consequences of suspected breaches of the Corporations Act 2001;
(G)	compliance with, and effectiveness of, deeds of company arrangement; and
(H)	whether special provision should be made regarding the use of phoenix companies. 

We have made our submission with respect to each of these matters. Our submission covers the matters which we believe are of concern; therefore there is not necessarily discussion with respect to both administrators and liquidators for each point.

Our submission raises matters of concern for which we do not necessarily propose a definitive answer. Our submission is therefore intended to highlight these matters for further detailed and wider discussion. 

The issues we believe need to be addressed are as follows:

A.	The appointment, removal and functions of administrators and liquidators;
(1)	We believe that greater power be given to creditors to choose who should be liquidator where a company moves from administration to liquidation or where a deed is terminated and the company placed into liquidation. 
Currently, when creditors, at a meeting convened under section 439A of the Corporations Act, choose to  place the company into liquidation pursuant to section 439C(c), or at a meeting convened under section 445F to vary or terminate a deed creditors choose to place the company into liquidation pursuant to section 445E, the administrator is deemed to become the  liquidator by virtue of section 446A. 
We believe that this should remain the default position, but that creditors be given the right to choose who should be the liquidator.
Currently creditors do have the right to replace the administrator at the first meeting of creditors convened under section 436E. However, by the time the administration has progressed to the stage of deciding on the company’s future creditors may not be happy with the performance of the administrator and may wish to have a different liquidator. 
This approach is currently supported, in effect, in section 444A which states that where creditors choose to enter a deed, the administrator of the company will become the administrator of the deed unless they appoint someone else.
It therefore seems contradictory that if creditors vote on one course of action at the 439A meeting they can choose the appointee, but if they vote on another course they cannot.
With respect to the termination of a deed and the placing of the company into liquidation, creditors may well be unhappy with the performance of the administrator and should, at that time, be able to choose an alternative.
We are mindful of the need to frequently jump from appointee to appointee. Full flexibility could well give rise to multiple practitioners acting during the full course of events. However, as pointed out above, under the current law an administrator can be replaced at the first meeting and again when it is resolved to enter into a deed. The proposal we make would add the possibility of a fourth practitioner should the deed collapse and the company proceed to liquidation.
The inclusion of specific parameters and guidelines as to when a replacement could be made should reduce the possibility of changes being made on a whim.
(2)	We believe the first meeting of creditors should be abolished in its current format. We believe it achieves little, if anything. In fact, it acts as a distraction from the real task of controlling the business and assessing the causes of failure in the crucial first days. Increasing the number of staff on the engagement to compensate for the distraction would only add additional cost to the administration.
A first meeting should be held at a later time sufficient to allow the administrator to report in a meaningful way to creditors (say, min 2 weeks, max 4 weeks).
With respect to small administrations where the result is inevitable and there is no chance of a deed being put forward e.g. the company has ceased trading, there should be the option of being able to proceed straight to liquidation at this early stage.
In other cases a second, or proposal, meeting should be held to decide on the company’s future, as currently occurs.
The convening period for the second meeting should be altered to be not be less than one month from the date of the first meeting. Creditors and administrators  should have the ability to extend this to a specified maximum, say two months. A further or longer extension could be granted by the court. 
This would allow the legislation to be more flexible in dealing with insolvencies for companies of all sizes and complexities.
(3)	We believe that the appointment of the committee of creditors at the first meeting needs to be reviewed. The committee has no real function other than to “advise” the administrator. The administrator is not obliged to heed the advice and the process appears unnecessary, wasteful and distractive.
B.	The duties of directors
(1)	There is no doubt that many persons acting as directors, particularly of small companies, who are not aware of the duties and responsibilities the role imposes upon them. 
A testing/licensing system could be considered to ensure that all directors know at least the fundamentals of their responsibilities and the serious consequences that can accrue from failure to abide by them.
(2)	There should be implemented an easier enforcement process for certain breaches of the Act. Such a process could range from an “on the spot” fine similar to a Perrins system, through to the accumulation of demerit points which would result in a range of predefined penalties dependant upon the accumulated points. Penalties should automatically escalate with repeat offences.
This would free up ASIC time to investigate more serious breaches of the Corporations Act.
C.	The rights of creditors
(1)	We refer back to point A(1) and creditors rights to choose the liquidator.
(2)	We believe that the ability of a liquidator to act against a Retention of Title (ROT) clause which is found to be an unregistered charge should also be given to Administrators and Controllers. 
D.	The cost of external administrations
(1)	The ACCC has ruled that the use of the Insolvency Practitioners Association of Australia (IPAA) guidance rates is not competitive and they have been “abandoned”. However, we find that reference is constantly made to IPAA rate, especially by the courts, secured creditors and others. The IPAA rates are adjusted for CPI but it uses unnecessary time in having practitioners ensure that the correct scale is used at all time.
Courts and others should be made aware that the IPAA scale no longer exists. Practitioners should be prepared to stand by, and  justify, their rates. 
E.	
The treatment of employee entitlements
(1)	We see no change required to the status quo.
The elevation of employees above fixed charge holders attacks the rights of the legal owners of the property in question. Any attempt to do so will increase the degree of risk to lenders which inevitably will be passed on through higher charges.
Generally, creditors are treated on a pari passu basis, whereby they are rated equally. This developed over time out of earlier chaos of a first come gets all basis.
Certain exceptions were made to the pari passu principle because of social expectations, such as the priority given to employees who, otherwise, would rate equally with other unsecured creditors.
We believe that the GEERS system is providing an adequate safety net to employees to satisfy social expectations. 
Any elevation in the rights of any class of unsecured creditor, including employees, comes at a reduction in the funds available to other creditors who have also been victim to the insolvency of the debtor.  
We must therefore question the justification in increasing such elevations with a view to balancing what is essential and what is fair. For example, in cases where a business has been sold by the insolvency practitioner and employees are transferred to the new employer the employees are often due for redundancy pay, despite the fact they remain employed, and this entitlement is treated as a priority over other creditors. Indeed, doubt should be cast as to whether any redundancy payments should accrue at all in cases where employment continues.
The reduction in funds available to pay dividends to trade creditors can in turn force some of them into insolvency creating knock on effects for the employees of those creditors.
(2)	We believe that changes being initiated through ASIC’s EXAD programme will make the reporting of breaches and offences much easier. 
F.	Compliance with, and effectiveness of, deeds of company arrangement
(1)	The degree of compliance depends on the terms of the deed itself. Some deeds are harder to monitor than others. There therefore should be a minimum set of monitoring standards that are easy to comply with built into the deed with severe penalty to parties who obstruct the deed administrator in so monitoring.
This could be supported by a requirement for directors of a company under a deed to report annually that the terms of the deed have been complied with severe penalties for false reports.
Additionally, where a Committee of Inspection is appointed under the deed the Committee could be given powers to ensure compliance with the terms of the deed.
G.	Whether special provision should be made regarding the use of phoenix companies
It is difficult to comment on this point. There are so many ways for control to be exercised over Phoenix companies through spouses, relatives friends, etc by past directors. There is a fine line between control and simply giving advice as an employee.  
We hope our comments will lead to further discussion and improvements to the system.

Yours faithfully

Simon Wallace-Smith
National Partner
Corporate Reorganisation Group