Insolvency shake up

On 7 November 2014, the Government released the draft Insolvency Law Reform Bill 2014, with key changes proposed to be put in place by 30 June 2015.

The main changes centre on replacing the current registration system with a user-pays licensing scheme requiring liquidators to pay a fee to obtain a practising license. This scheme recognises that those who benefit from the industry should contribute to the cost of regulation and is designed to allow the Australian Securities and Investments Commission (ASIC) to use the funds received from licensing fees to conduct its supervision of the industry in a more proactive manner.

Following on from the proposed licensing scheme is the consideration of placing the responsibility on insurance companies to notify ASIC when a liquidator’s professional indemnity insurance has expired. In these circumstances, ASIC may automatically suspend the liquidator’s license.

The changes also focus on giving creditors more power to remove liquidators through a special resolution.  Under the present system, creditors may remove a liquidator at the first meeting of the voluntary administration or liquidation; however, in a court-appointed liquidation creditors must commence legal action to remove a liquidator.

The proposal

The draft legislation contemplates extensive changes to the Corporations Act 2001 (Cth) (Act) and the Bankruptcy Act 1966 (Cth) including:

• giving creditors the power to determine when and what information will be provided by an insolvency practitioner and the power to remove liquidators by a special resolution;
• increasing ASIC’s investigation powers to examine liquidators suspected of engaging in misconduct;
• new insolvency practitioners being interviewed by a three-person panel, with one member of the panel being from the professional body, the Australian Restructuring Insolvency & Turnaround Association, and with accreditation requiring renewal every three years; and
• requiring liquidators to be registered, with the proposed fee for lodgement of an application set at $2,000.
• To become registered, applicants will be required to:
  • hold at least one degree representing three years’ full-time study in commercial law and accounting, with no less than one year’s equivalent full-time study in either;
  • have completed formal tertiary studies in insolvency administration of at least two course units or three months’ study;
  • be employed on a full-time basis, for at least three of the preceding five years (if the applicant wishes to be registered without limitation, the relevant experience must encompass assisting an external administrator in the performance of their duties in relation to a broad range of external administrations, providing advice and having experience in insolvency administrations outside corporate insolvency); and
  • demonstrate a capacity to perform satisfactorily the duties of an insolvency practitioner.

Interested parties are invited to make submissions on the draft bill by 19 December 2014.

Why is change needed?

Under the current regime, discharge of liquidators’ duties and standards is mainly regulated by ASIC, through reactive monitoring, reviewing liquidators’ conduct and acting on complaints received.  Where misconduct by a liquidator is identified, ASIC or the Australian Prudential Regulatory Authority may apply to the Companies Auditors and Liquidators Disciplinary Board to cancel or suspend a liquidator’s registration.

While the clear process and criteria for registration of liquidators is currently regulated by the Act in conjunction with ASIC, the post-registration supervision of liquidators is not as stringent.

At present, the Act provides that to become a registered liquidator, you must be a natural person who has a certain base level of qualifications, has experience in winding up bodies corporate, is capable of performing the duties of, and is otherwise a fit and proper person to be, a registered liquidator, is not a person disqualified under Part 2D.6 from managing corporations, and is (generally) resident in Australia¹.

In order to remain registered, a liquidator must, amongst other things, continue to perform adequately and properly the duties of a liquidator and remain a fit and proper person².  Further, in winding up a company, liquidators owe a fiduciary duty to the company, its creditors and its members to act honestly, avoid conflicts of interest and act impartially.  A liquidator is also precluded from profiting from their position, except by way of remuneration and must carry out their role with care and diligence.

Ariff investigation and 2010 Senate Inquiry

The pitfalls of taking a reactive, as opposed to pro-active approach have been exemplified by a number of cases, with the most publicised example of a liquidator failing to carry out their duties adequately and properly being the case of Stuart Ariff. 

Ariff was reported to ASIC in 2005 by a director of a company for which he was then a liquidator; however, no action was taken by ASIC. Although his behaviour was also raised in Parliament that year, ASIC still did not step in until October 2007.

In 2009, four years after the initial complaint, Ariff accepted all 83 allegations of misconduct against him in relation to 16 companies, with such misconduct including charges for international family holidays and hairdressing treatments for his wife and sisters.  He was banned from acting as a liquidator or administrator for life and agreed to pay $4.9 million in compensation to his clients³.  In September 2011, Ariff was jailed for six years after being found guilty on 19 charges of criminal fraud. This series of events highlighted the need for a prompt complaints system.

On the back of the Ariff investigation, Senator John Williams led a Senate inquiry in 2010 to investigate the regulation, registration and remuneration of insolvency practitioners in Australia. The inquiry looked at ASIC’s role in the regulation of liquidators and identified ASIC’s reliance on complaints, the delay in responding to complaints, whether ASIC provided adequate information to stakeholders in the insolvency process and whether ASIC was adequately resourced as the main areas for concern. 

Key takeaway points

• The draft Insolvency Law Reform Bill 2014 aims to reform the insolvency industry by replacing the current registration system with a user-pays licensing scheme.
• The scheme is designed to allow ASIC to use the funds from licensing fees to conduct supervision of the industry in a more proactive manner.
• The changes also provide more stringent requirements for liquidators to obtain and retain their registration as a registered liquidator.
• Key changes are proposed to be put in place by 30 June 2015.
• Interested parties are invited to make submissions on the draft bill by 19 December 2014.

For more information on Insolvency matters, please contact HopgoodGanim Lawyers' Insolvency team.

^{1. Section 1282(2) of the Act.}

^{2. Section 1292(2) of the Act.}

^{3. ASIC v Stuart Karim Ariff [2009] NSWSC 829}