Australia: Insolvency Law Reform Bill 2015 - important implications for insolvency practitioners and their insurers

Last Updated: 14 December 2015
Article by Jonathan Newby, Mark Robertson and Scott Hedge

In brief - Proposed reforms designed to modernise disciplinary frameworks for insolvency practitioners

Despite their aims, the reforms proposed in the Insolvency Law Reform Bill 2015 could substantially increase the costs of practising and could also result in more claims being brought against insolvency practitioners.

ASIC's powers to bypass disciplinary committees under new "show cause" regime

On 3 December 2015, the government introduced the Insolvency Law Reform Bill 2015 into parliament. The reforms, if passed into law in their present form, will be wide ranging and will have important consequences for all insolvency practitioners and underwriters of professional indemnity policies covering insolvency practitioners.

The Bill is the result of a number of years of consultation and review with the restructuring profession. The industry's professional body, the Australian Restructuring Insolvency & Turnaround Association (ARITA), has been actively involved.

Insolvency practitioners and their insurers should ready themselves for a new "show cause" regime which gives ASIC the power to take direct action without referring the practitioner through to a disciplinary committee.

Bill seeks to remove unnecessary costs, boost efficiency and increase ASIC's powers

The two key objectives of the Bill are stated to be "to align and modernise the registration and disciplinary frameworks that apply to registered liquidators and registered trustees and also to align and modernise a range of specific rules relating to the handling of corporate external administrations and personal bankruptcy". The Bill seeks to create common rules with the aim of:

  • removing unnecessary costs and increasing efficiency in insolvency administrations
  • aligning the registration and disciplinary frameworks that apply to registered liquidators and registered trustees in bankruptcy
  • aligning a range of specific rules relating to the handling of personal bankruptcies and corporate external administrations and enhancing communication and transparency between stakeholders
  • promoting "market competition" on price and quality
  • improving the powers available to ASIC to regulate the corporate insolvency market
  • improving the overall confidence in and professionalism and competence of insolvency practitioners

Greater regulation will lead to increased costs for insolvency practitioners

The Bill is being promoted by the government as a means of achieving net regulatory savings for insolvency practitioners, but there is a sharp sting in the tail for insolvency practitioners and their insurers.

That sting is likely to come in the form of a new scheme of greater regulation and stronger investigative and compliance enforcement powers granted to the regulatory authorities. The reality is that the amendments will substantially increase the costs of practising for insolvency practitioners, particularly at the smaller end of the market.

New register of trustees in bankruptcy and new rules for registration of liquidators

The Bill will affect both trustees in bankruptcy and external administrators of corporate entities (collectively referred to here as "insolvency practitioners"). Amongst other things, a new register of trustees will be established. New rules will apply to the registration of liquidators.

A new regime of strict liability and criminal offences will be created and the ability of regulatory authorities to remove offending practitioners from the register without the requirement to bring the matter before a tribunal will be strengthened. We highlight some of the other more important changes that will impact most on the insurance industry below.

Continuity of adequate and appropriate professional indemnity and fidelity insurance

Of particular relevance to the insurance industry is that a registered trustee or liquidator is required to maintain adequate and appropriate professional indemnity insurance, as well as adequate and appropriate fidelity insurance. (We note that section 1284 of the Corporations Act 2001 already requires that registered liquidators maintain such insurance. Whether such insurance is "adequate" or "appropriate" will be determined by the Inspector General by legislative instrument, or ASIC, as the case may be.)

Under the new law, the reporting requirements as to the adequacy and continuity of insurance will be strengthened. If the insolvency practitioner ceases to have adequate and appropriate professional indemnity insurance or fidelity insurance, then that practitioner must notify the regulatory authority or face penalties.

Further, at the end of each year, the insolvency practitioner will be required to file an annual return together with evidence that proves that they continuously held adequate and appropriate professional indemnity and fidelity insurance.

This will necessitate that the practitioner, their insurance brokers and underwriters ensure that policy renewals are promptly implemented so that there are no gaps in coverage between policy periods. Failure to maintain the required insurances continuously may result in severe sanctions as outlined below.

Sharp increase in penalties for failure to comply with insurance requirements

The new law markedly increases the pecuniary penalties for breaching the above insurance obligations. A failure to comply with the insurance requirements will result in a fine of 60 penalty units ($10,800), or if committed intentionally or recklessly, 1,000 penalty units ($180,000).

Under the present law, a failure of a liquidator to implement adequate insurance attracts a penalty of just five penalty units.

Show cause events - ASIC's new powers to take direct action

Failure to comply with the above insurance requirements may also result in the regulatory authority issuing a show cause notice and commencing disciplinary action, which could ultimately result in the suspension or cancellation of the insolvency practitioner's registration.

More broadly, similar disciplinary action may also be taken for numerous other failures. Any kind of contravention of the Bankruptcy Act or Corporations Act is a sufficient ground for the regulatory authority to issue a show cause notice. If not satisfied with the answer to the show cause notice, ASIC can refer the matter to a committee which will make a decision on what action should be taken.

In other limited circumstances, ASIC will be empowered to take direct action against insolvency practitioners who breach their duties, without reference to a disciplinary committee or the court. The Companies Auditors and Liquidators Disciplinary Board will no longer have a role.

Disciplinary actions and administrative burden on insolvency practitioners

If a regulatory authority is given power and funding to regulate an industry, it can be expected that it will use those powers. There is little doubt that the number of disciplinary actions commenced by the regulator against insolvency practitioners is likely to increase under the new proposed law.

The recent "regulatory" conduct of ASIC has been sharply focussed on ensuring that process is followed (such as the requirement for all returns to be filed on time) and action has been taken even when no discernible loss to creditors has occurred. A similar policy can be expected, imposing a greater administrative burden on insured insolvency practitioners. We would not be surprised to see an increase in claims, at least in the short term as people adjust.

New laws to enable creditors to request information from external administrators

Further changes that the Bill proposes impose new obligations on external administrators to provide information requested by creditors and company members. There is no present law that enables creditors or members in a members' voluntary winding up to make ad hoc requests for information from an external administrator.

Similar new provisions will entitle the Commonwealth to seek and obtain specific information, reports or documents in respect of an external administration.

New ability to access information could lead to more legal claims against practitioners

The new "information" rules may prove to be costly and problematic for insolvency practitioners and insurers alike. Insolvency proceedings are often contentious and frequently require that an insolvency practitioner makes a decision that results in one group of interests being sacrificed to the interests of the company or personal estate overall.

The most frequent contest is between the interests of priority creditors such as employees and the interests of larger creditors or secured creditors. In administrations of listed companies, the interests of shareholders are often in conflict with those of creditors.

Disgruntled members or creditors may well use this new ability to access information to ferret out a basis for bringing possible legal claims against the insolvency practitioner for either meritorious or tactical reasons. Apart from the costs of responding to such requests for information, it can be expected that these new rules will result in a greater number of legal claims being brought against insolvency practitioners.

PI cover for notices which do not require attendance at a hearing

Many professional indemnity policies held by insolvency practitioners contain clauses that indemnify the insured for inquiry costs in respect of official investigations or disciplinary hearings. Costs incurred in responding to such inquiries can at times be substantial.

With the expanded regime and expected increase in frequency of the regulatory authority issuing show cause notices, brokers will be serving their clients well if they ensure that any professional indemnity policy acquired for the insured contains a cover for notices which do not strictly require attendance at a hearing.

For underwriters, there may be a need for an adjustment in the pricing of placing such risk, based on a careful assessment of each insolvency practitioner's practice and ability to obtain indemnities in their terms of appointment.

Jonathan Newby
Mark Robertson
Professional indemnity
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jonathan Newby
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