Options to improve the framework for regulating and remunerating the
insolvency profession in Australia
This inquiry has gathered evidence indicating that there are several
points of weakness in the regulation of the insolvency profession in Australia.
Chapter 7 discussed various options to tighten the registration process and
broaden the professional base. This chapter focuses on the options to reform
the regulatory and disciplinary framework and the method for remunerating
practitioners. In this context, the committee has heard several options, which
- creating a specialised insolvency regulator (paragraphs
- a systematic, annual or biennial review of all insolvency
practitioners (paragraphs 10.19–10.27);
- the creation of a 'flying squad' to monitor practitioners on a
profiling basis (paragraphs 10.28–10.29);
- abolishing the Companies Auditors and Liquidators Disciplinary
Board (CALDB) or limiting its role to more serious matters (paragraphs
establishing an insolvency ombudsman to oversee the profession
and adjudicate on complaints made against insolvency practitioners (paragraphs
- introducing provisions similar to the Chapter 11 Bankruptcy
process in the United States (paragraphs 10.49–10.58);
- various options to improve the basis for remunerating
practitioners, from establishing a tendering process to legislating the
Insolvency Practitioners Association's remuneration report template (paragraphs
- various options to improve the system for registering
practitioners, from a licensing system to an interview process to a written
examination (paragraphs 10.79–10.84).
This chapter discusses the range of views that the committee has
received on these proposals. As the options to reform the registration system
have been discussed in chapter 7, the chapter gives only a brief summary of
A specialised insolvency regulatory agency
Past inquiries into Australia's insolvency industry have raised the
possibility that the personal bankruptcy regulator and the corporate insolvency
regulator could be merged to form a single agency governed by the same
processes and procedures.
The 1988 Harmer Report, for example, noted that there does not appear to
be any constitutional impediment to federal insolvency legislation covering
both individuals and companies. It listed three arguments in favour of
integrating individual and corporate insolvency:
- there are many aspects of insolvency law affecting the individual
and the corporation that are, or should be, the same;
- with a single statutory scheme, one government would have
effective control of policy in relation to insolvency and changes could be made
- there would be greater efficiency and cost savings from common
The Harmer report also listed arguments against unifying insolvency legislation.
These include the many areas peculiar to individuals and corporations and the
many areas of individual and corporate insolvency in more urgent need of
reform. The Law Reform Commission's view was that while there may be advantages
in unified insolvency legislation:
[I]t is more important to concentrate on the particular
reform proposals put forward in this Report than to be overly concerned with
attempting to put the two very different aspects of insolvency law into one
The 2004 Parliamentary Joint Committee (PJC) on Corporations and
Financial Services acknowledged that administrative arrangements for insolvency
reflect the different historical evolution of personal and corporate insolvency
systems, rather than a development based on logic or policy. It considered that
a merger of the two systems could produce public benefits including cost
savings, a single system for the registration of practitioners and greater
consistency in the law and the formulation of policies.
However, in the absence of any concrete proposal for a merger of
corporate and personal insolvency law, the committee made no firm
recommendation. Instead, it recommended that the government ensure that
personal and corporate insolvency laws are harmonised wherever possible.
The Government's response was to note that the Insolvency and Trustee Service
Australia (ITSA) and Australian Securities and Investments Commission (ASIC)
have entered into a Memorandum of Understanding ... and will continue to consult
in the development of insolvency / bankruptcy policy.
During the course of the current inquiry, the Productivity Commission
released a draft report of its Annual Review of Regulatory Burdens on Business.
Chapter 4 of the report contained a section on insolvency practitioners. It
focussed on a submission from the Insolvency Practitioners Association of Australia
(IPAA) which stated the Association's concern that the different regulatory
treatment of the administration of personal insolvency and corporate insolvency
is imposing an unnecessary regulatory burden on insolvency practitioners.
The IPAA's submission highlighted:
...the costs of dealing with separate regulators—...ITSA
[Insolvency and Trustee Service Australia] and ASIC—and keeping up-to-date with
changing compliance and reporting requirements of both; and the costs of
practitioners setting up compliance systems, collecting information, preparing
and checking reports, form-filling, document storage, for both.
The Productivity Commission noted that, in principle, there are likely
to be efficiencies in having a single regulator take responsibility for both
areas of insolvency law. These benefits include pooling of regulatory
resources, greater consistency in decision-making and benefits for business in
dealing with one regulator. However, the Productivity Commission also observed
that if ITSA was merged into ASIC, there is a risk of a loss of focus or a
transfer of resources to other regulatory activities. Alternatively, if ASIC's
insolvency functions and responsibilities are merged into ITSA, there may not
be the same cost savings or administrative efficiencies given ITSA's range of
The Productivity Commission recommended that a taskforce be established
to examine the case for making one regulator responsible for both personal and
corporate insolvency law. The taskforce would also identify personal and
corporate insolvency provisions that could be aligned. In this context, the
Productivity Commission urged that:
where there is a clearer case for harmonised provisions
(perhaps in relation to such procedural matters as hiring and firing
practitioners, setting and reviewing remuneration, record keeping and
reporting, holding of meetings and determining voting entitlements) changes
should be implemented as soon as practicable, rather than waiting for agreement
to be reached in relation to more complex or controversial matters.
Several witnesses to this inquiry queried why there should be separate
regulators for personal and corporate insolvency. Dr David Morrison from the
University of Queensland commented that in terms of the conduct matters that
ITSA and ASIC deal with in insolvency, there is no substantive difference in
their role. He told the committee that:
At the moment they are only separate by historic accident—namely,
there is a Commonwealth Bankruptcy Act and therefore a regulator, and a Commonwealth
Corporations Act in cooperation with the states and therefore a regulator attached
to that body. But if you look at this in terms of subject matter and you look
at the issues that are being raised by people who deal with that subject
matter, what difference does it really make whether or not my business is
incorporated? The difference it makes is that if my business is incorporated
then ASIC deals with me and if my business is not incorporated then it is a bankruptcy
matter. But from the point of view of outsider, the person who deals with the business,
and from the point of view of my conduct or the insolvency professional that
manages it in the end game, it is all the same.
Associate Professor David Brown of Adelaide University Law School also
questioned whether there is any need for different systems of registration for
personal and corporate insolvency practitioners. He commented:
...it is interesting that ASIC registers liquidators and that
is what the legislation requires it to do but, as we have seen, we are not just
talking about liquidators these people do administrations, receiverships and of
course also bankruptcy work for which there is a different registration system
through ITSA. I query whether we really need two separate registration systems
when both are essentially the same people wearing different hats...
...if you are an insolvency practitioner in the provinces who
is doing a bit of insolvency and bankruptcy work and also liquidations and
receiverships, you would be asking yourself why you are subject to the different
Some submitters drew the committee's attention to potential operational
difficulties with a single insolvency regulator. Ms Veronique Ingram of ITSA observed
that merging ITSA with the insolvency arm of ASIC would be complex. First, she
noted that ITSA currently has the advantage of a single focus on the bankruptcy
of individuals, which is less complex than the insolvency of corporations. Second,
she told the committee that even with a single regulator, corporate insolvency
matters would still require ASIC's involvement:
...it is very difficult to divorce insolvent trading from the
regular operation of the company in the sense that, if you had a separate regulator,
you would have to work very closely with ASIC. Also with the fact that you are looking
at antecedent transactions you have all these issues where breaches of
directors duties are all core Corporations Act obligations on those involved in
companies, so you are taking it out of that regime and putting it in another. I
think that raises real complexity issues. You would have to build in a lot of
bells and whistles to make it work.
Nonetheless, Ms Ingram did note that she could see no reason why some of
ITSA's processes and legislative provisions could not be transferred into the Corporations
ASIC does not believe that separating its corporate insolvency function
to a separate body will lead to better outcomes. ASIC's Chairman, Mr Tony
D'Aloisio, contrasted the roles of ITSA and ASIC's corporate insolvency
responsibilities, noting that the Commission deals with 'a much more complex
area'. He added:
...we think that the way it is structured, with the Corporations
Law aspects and the liquidators and insolvency practitioners we are talking
about, it does logically fit within ASIC's role. ASIC is the oversight body for
a whole range of gatekeepers—auditors, accountants, boards, CEOs, financial officers
and so on—from the birth to death of corporations...It is an issue for the
committee to separate that out into personal bankruptcy. I do not think that by
separating in that way you will get improved results, because improved results
are going to go with the expertise that is needed to handle complex groups and
Mr D'Aloisio told the committee that in separating the corporate
insolvency area from ASIC, care needs to be taken to ensure that the current
level of expertise is replicated in the new organisation. He gave the example
If you are winding up a major financial institution that is
engaged in over-the-counter trading in the wholesale market with CDOs and so
on, you really have to have expertise to analyse and understand those issues in
a collapse situation. ASIC does have that expertise in its other groups so, if
you are minded to take that area out, all I am saying is that one of the things
you need to look at is the resources that are needed to replicate that
A potential criticism of the proposal to merge ASIC's insolvency
function into ITSA is that complaints about insolvency practitioners would not
be directed through ASIC's online complaints handling system. The committee
acknowledges that ASIC's system for complaint handling has improved and will
continue to be enhanced as part of ASIC's forward program. However, it also
notes that ITSA has an efficient and well-developed complaints handling
process. As Mr Jeff Hanley of ITSA told the committee:
A large part of the work we do is complaints handling. That
may be a bankrupt, a debtor, a creditor or an interested party who just wishes
to make a complaint. We will go and perform an inspection. Our inspectors will
physically go into the practice and examine the allegation, and then we will
report the findings to the person who made the allegation.
Our inspections are usually quite fast, so it is not as if they
are going to have to wait six months before they can continue actioning it. We
aim to inspect a number of administrations in a matter of days.
Several submitters to this inquiry have argued that the regulation of
corporate insolvency requires a more proactive approach than simply the current
complaints based system. In this context, two options were raised. The first
option is a systematic annual or biennial review of all insolvency
practitioners. The second proposal is a model based on a sample, some selected
at random, other by profiling. This is the idea of a 'flying squad'.
Systematic surveillance—an annual
or biennial review
Evidence provided to this inquiry has contrasted ASIC's reactive complaints
handling approach to ITSA's proactive biennial review of all practitioners. Several
submitters argued that the corporate insolvency sector needs to adopt ITSA's
The IPAA, notably, strongly advocated the implementation of a proactive annual
review process of all practitioners through a certain number of randomly
selected files. It argued that a proactive annual review will give a better
sense of how a particular practice is running and also a sense of the industry
The IPAA noted of ITSA's biennial surveillance of all practitioners that:
The scope and regularity of review arguably identifies
underperforming practitioners more promptly, and enables ITSA to take timely
disciplinary action (ie through education, suspension, termination of
registration) against practitioners. The regularity of the practitioner review
also identifies early trends in industry behaviour.
The Institute of Chartered Accountants argued along the same lines. It
recommended in its submission that ASIC conduct a regular inspection program of
registered and official liquidators. It also suggested that ASIC assess ITSA's
annual inspection program for suitability and adaptability to the corporate
Mr Lee White from the Institute explained the merit of a proactive regulatory
approach in the following terms:
I would put to you, Chair, that when practitioners know that
they might get a knock on the door, rather than waiting for complaints to
happen, it actually smartens everyone up. I think that is actually a good
Former insolvency practitioner, Mr Geoffrey McDonald, told the committee
that ITSA's proactive surveillance system could be readily replicated in the
corporate insolvency sector. He observed that ITSA's system is effective
without being adversarial:
The system is that your files are audited on a random basis
once a year by an independent section of the Insolvency Trustee Service
Australia. Last week I had my files audited—I still have a few follow-on files
as a trustee in bankruptcy. I got the phone call on Monday and they said,
‘We’re going to be around, are you available next week?’ I said, ‘Yes’, and
they said, ‘Well, lock the days in and we’ll tell you two days before which
files we’re going to review’. So you have got enough time to find them and to
get them in order, but not to fix them. It is just the way it is, and you accept
that—this is the way it is going to be. You make sure your files are up to date
and you make sure they are up to date all the time because you are expecting
this. When the people do arrive they are pleasant, they are good to deal with
and they will give you an interim report. They will make mistakes, but it will
not be an adversarial situation; they will say, ‘Oh, we did not see that
report—it must have been misfiled’. Or, ‘We missed it in the file’. Fine—no-one
gets upset by that. They classify the errors, A to C—A is serious—and you learn
from it. If next year you keep on making the same mistakes it means there is a
system problem and they would deal with it. I am aware that a number of
registered trustees have, following these types of annual review, volunteered
to hand in their licenses. That sounds like a reasonable system. It involves
some resources and it involves an attitude as well. I commend that system, and
I think it could easily be replicated for corporate insolvency.
Indeed, ITSA itself has emphasised that its annual inspection program is
primarily aimed at providing constructive feedback to practitioners to improve
compliance and practice. It noted that the majority of practitioners welcome
the feedback and are willing to rectify non-compliance. ITSA can cancel the
practitioner's registration, but only in serious cases.
ITSA argued in its submission that the benefits of its proactive
approach are 'demonstrable'. It noted the recent example of the identification
of major systemic error in the practice of a debt agreement administrator
through the annual inspection program in August 2009. The practitioner was
ASIC has estimated that for it to obtain a similar level of monitoring
of registered liquidators to that of the ITSA surveillance model (reviewing
each liquidator on an annual or biennial basis), it would require an
65 FTEs for a visit to each liquidator annually;
31 FTE's for a visit to each liquidator on a biennial basis.
ASIC Commissioner Mr Michael Dwyer told the committee that given the
additional costs that would be incurred from adopting ITSA's surveillance
model, it is questionable whether this change in policy would be appropriate.
He explained that:
...the additional resources that we have identified in our
second submission would be substantial, and the cost benefit of those
additional resources as against the impact of annual or biannual reviews of
practitioners would be fairly line ball. I am not saying it would not have an
impact; it would. It is a question of whether that cost is justified.
ASIC's Chairman told the committee that the cost-benefit analysis would
have to weigh the monetary cost of the additional resources with the benefit
that systemic surveillance would have in deterring and detecting misconduct, as
well as correcting any public perception of practitioner misconduct. He
recognised that in making this assessment, 'different people have different
Random surveillance—A 'flying squad'
Other submitters advocated random surveillance of practitioners through
a 'flying squad'. Dr Vivienne Brand of Flinders University identified a flying
squad as 'the number one priority' to reform oversight of the insolvency
industry. She told the committee that one of the principal benefits of a random
surveillance model would be to act as a deterrent to misconduct.
The other major benefit is better detection of misconduct:
A brief review of the UK insolvency regulator statistics
suggests that they get a far higher strike rate on identification of
misdemeanours from investigations, which they have initiated on a profiling
basis or on a random basis, than on the number of misdemeanours they pick up
from complaints. That is, there is a far higher strike rate than from
complaints. Complaints do not seem to be a particularly effective way of
identifying problems. That is perhaps not surprising because there are pretty
significant information and resource asymmetries between the consumers of
liquidation services and the liquidators. 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. So it is particularly important to have a very
Other submitters were also supportive of a random, proactive regulatory
approach. Mr Ian Fong, representing Carlovers Carwash Pty Ltd, told the
committee that 'setting up small, nimble, flexible independent teams would
Mr Steven Kugel argued in his submission that the committee must consider
an annual audit of registered liquidators' files on a random basis.
The Companies Auditors and Liquidators Disciplinary Board
As chapter 4 discussed, the CALDB is the disciplinary body for the
insolvency industry. Chapter 6 canvassed various criticisms of the CALDB,
including its lack of independence from ASIC, the prolonged time (and cost) it
takes to reach a finding, the few cases it has referred and its consideration
of inconsequential matters.
The committee received some guidance on how best to reform the
disciplinary process. Mr Vanda Gould made the wholesale recommendation that
...CALDB should be abolished and its responsibilities absorbed
into the Administrative Appeals Tribunal. The discipline of insolvency practitioners
should be overseen by the Federal Court or state supreme courts, which hear company
matters involving insolvency every day of the week. Above all, a practitioner
should have a right at all times to appeal directly to the Federal Court, just
as a taxpayer can today. The broad policy objective should be to facilitate the
resuscitation of companies where possible.
The Institute of Chartered Accountants of Australia (ICCA) observed that
the disciplinary process is 'not operating effectively'. It noted the prolonged
time that the CALDB takes to adjudicate on matters. It also expressed concern
that ASIC and practitioners are increasingly defaulting to enforceable
undertakings (EU) to resolve matters, which lack the transparency and
accountability of the CALDB.
Accordingly, the ICCA recommended that:
...an open and independent process is considered by the Inquiry
to deal with matters of a certain size. This process would deal with these
matters more transparently than an EU and in a more timely manner compared to
the CALDB tribunal. We consider the EUs should be reserved for matters where
the practitioner has admitted guilt.
An Insolvency Ombudsman
The committee maintains that the best regulatory framework overseeing
the insolvency industry combines proactive (profiling and random annual
reviews) and reactive (responding to complaints received, professional
disciplinary reports or media reports) elements. It is concerned that ASIC's
monitoring of insolvency practitioners is largely reactive in nature.
This emphasis on proactive regulation, however, should not discount from
the importance of complaints based surveillance. By necessity, complaints must
remain a critical part of the monitoring process and for creditors to voice
their concerns. The key issue for the committee is whether the regulatory
agency is the best body to receive and respond to these complaints in an
effective and timely manner.
Several submitters to this inquiry suggested that an independent insolvency
Ombudsman should be established. Dr Brand, Associate Professor Christopher
Symes and Mr Jeffrey Fitzpatrick argued in their submission that an insolvency
Ombudsman should be considered as an option for creditors to pursue a complaint.
The Ombudsman would be responsible for investigating the complaint and making a
recommendation about the liquidator's ongoing registration or licensing.
The academics viewed an 'Office of the Insolvency Ombudsman' as being 'perfectly
placed' to assist ASIC and the CALDB to have all registered liquidators satisfy
the fit and proper requirement.
They suggested that the ombudsman could attend committees of creditors to
listen to complaints made against a liquidator or administrator.
The academics also raised the possibility that an ombudsman could have an
educative role so that the creditors have access to information on fees.
They argued that notwithstanding the detailed disclosure on fees through the
IPAA's Code of Professional Practice, first time creditors often need other
channels for assessing whether fees represent value for money.
Associate Professor Brown and Associate Professor Symes identified a
threefold role of an insolvency ombudsman: giving a voice to aggrieved
creditors; reviewing and commenting on evolving professional standards; and
assessing and reviewing practitioners' fees.
In terms of providing creditors with an avenue for complaint, Associate
Professor Brown told the committee that:
...the problem is creditors' perception. A lot of the
complaints which are received—and the IPA receives a lot of complaints, by the
way, not just ASIC, about insolvency practitioners and procedures—are based on
misunderstanding the nature of insolvency work and of course...can often involve
a certain amount of anger because everybody to some extent loses out on an
insolvency. There are not many winners. Therefore, a valve for dealing with
these complaints plus, perhaps, an educational role for an ombudsman’s office
would certainly target that gap which exists at the moment in terms of creditor
information and a feeling that creditors are being short-changed in some way in
terms of information or having a voice for their concerns.
In terms of reviewing practitioners' fees, Associate Professors Symes
and Brown commented:
No amount of information or guidelines in a Code about method
and basis of calculation can prevent allegations that actual rates applied to
time spent are excessive. If this is something that courts do not feel
resourced or inclined to do, what other solutions might there be? Given that
the professional body itself cannot provide that level of independence, and
that expert witnesses similarly can only give a certain amount of comfort, is
there a role for some other body, perhaps an insolvency services ombudsman or
similar insolvency assessor.
Associate Professor Brown also flagged the issue of funding an ombudsman
as a matter for consideration, noting that the banking and finance ombudsman
model is not a user pays but a respondent pays model.
Mr Stephen McNamara, a director of a small law firm acting for directors
and guarantors of companies in liquidation, supported the idea of an insolvency
ombudsman to expedite the complaints process. He told the committee that an
ombudsman would be able to quickly deal with several small matters, whereas
ASIC has more substantive corporate governance matters with which to deal.
Mr Greg Nash told the committee that an ombudsman may lead to small
matters being settled without being referred. If a creditors' committee says to
the liquidator that it will take a matter to the ombudsman, the liquidator may
well choose to resolve it beforehand.
Professional bodies' view of an Insolvency
ASIC has argued that the case for an insolvency ombudsman needs to be
made in terms of what it could add to current processes. In its supplementary
submission, ASIC noted that there is merit in considering the introduction of
an internal dispute resolution (IDR) mechanism because it is often the most
efficient and cost-effective way to deal with complaints. However:
...any proposal would require comprehensive industry
consultation...The insolvency practitioner is usually trying to allocate
insufficient funds to a range of people who might not understand why they are
to receive less than 100 cents in the dollar. Therefore, imposing a requirement
for insolvency practitioners to have an IDR scheme may result in significant
burdens on an insolvency practitioner. It is likely that the additional
resources and costs required to implement and maintain an IDR scheme will be
passed on to stakeholders by way of increased fees.
ASIC's Chairman, Mr Tony D'Aloisio, was cautious about the idea of an insolvency
If it is considered that an ombudsman would provide additional
value in oversight of what ASIC does in this area, again it is a matter for the
committee...It is simply an issue of trying to understand what value would be
added. In fairness to the point, it probably does deal with some of the
perception issues we talked about earlier because it is another avenue to look
at what we are doing. But my sense of it is that we are one of the agencies
that are very, very significantly subject to oversight.
The IPAA argued in its submission that given the importance of maintaining
community confidence in the insolvency regime, and the potential for
stakeholder dissatisfaction from an insolvency, the role of an insolvency
ombudsman should be considered. It suggested that an ombudsman may be
appropriate as a separate layer of review of practitioner conduct, beyond that
maintained by ASIC, the IPAA and other professional bodies.
Significantly, the IPAA did not view the role for an insolvency ombudsman
as a complaints handling body. Nor would its role be to review the legally and
commercially based decisions of practitioners. Rather, in the IPAA's
assessment, the role of the ombudsman would be:
...more in terms of arbitration and facilitating better
understanding and education as to the complainants and bringing the requisite
parties together in a more productive way such that the issues can be
Mr Donald Magarey, Chairman of the CALDB, explained to the committee
that any proposal to establish an insolvency ombudsman must consider whether it
will have a purely investigative role or whether it will also adjudicate on
matters. He explained:
Someone has to do the work to investigate the complaint and
someone else has to do the work to decide on the complaint and make the orders.
Whether you make those the same person or whether you keep them separate—and if
you keep them separate, who they are; whether it is ASIC or an ombudsman or
some other organisation and you keep the board as the adjudicator function—you are
really trying to work out different ways to achieve exactly the same goal.
Interestingly, Mr Magarey considered that the IPAA could perform the role
of an ombudsman. He told the committee that given its knowledge of the
insolvency industry, and provided it is well resourced, the IPAA could deal
with complaints and concerns.
However, as the following chapter notes, a key advantages of an insolvency
ombudsman would be its independence from professional associations and the
The Accounting Professional and Ethical Standards Board told the
committee that an appropriate qualified ombudsman could identify quickly for
creditors whether a practitioners' fees and practices were reasonable. Ms Kate
Spargo, a Chairperson for the board, told the committee:
...if you say to an experienced insolvency practitioner, ‘Go
and have a look at meeting A, B and C and see whether it is fine, a bit dicey
or somewhere in the middle,’ they would be able to tell you very quickly. They
would say, ‘I think this all looks fine,’ or they would say, ‘We’ve got a
problem with these practitioners,’ because they are overdoing the work or
overdoing the fees or whatever. So an experienced person who knows what they
are looking for, and who remains current, would be of enormous idea—but not
someone who does not have that ongoing working knowledge and perception and
Voluntary administration and Chapter 11 Bankruptcy process
Both the Australian voluntary administration (VA) procedure and the
Chapter 11 Bankruptcy process in the United States have as their goal the
realisation of greater value through the restructuring of a distressed company
rather than its immediate liquidation.
Unlike Part 5.3A of the Corporations Act, however, the chapter 11
process allows business owners the opportunity and the time to reorganise and
restructure in order to pursue their long–term objectives (and not those of
The argument against the current system in Australia is that strict laws
on insolvent trading promote the early involvement of advisors. These advisors
identify the company's liability and recommend that as it is insolvent, an
administrator needs to be appointed. The business is handed over and, without
exploring the options to restructure, liquidation proceeds.
Some submitters to this inquiry flagged the possibility of Australia
adopting corporate insolvency legislation similar to the Chapter 11 process. The
following comment, from Mr Bill Doherty, gives a sense of this desire:
Surely the companies and their own accountants could come up
with a scheme like chapter 11 where they notify ASIC, ‘Hey, we are in trouble
here’, and allow them to trade up to the point. Then maybe you bring in a
liquidator when all that is required is the chopping and getting rid of
everything still, because that is all they do. There is no incentive for an
administrator to do anything else but chop the assets, take their fees, ‘See
you later. Next job, please.’
Professor Scott Holmes from the University of Newcastle recommended the
idea of a moratorium. He argued in his submission that under this arrangement:
Directors would be able to openly and expressly invoke a moratorium
from the duty not to trade whilst insolvent for the purpose of attempting a reorganisation
of the company outside of external administration. The moratorium would apply
for a limited period and would be subject to termination by creditors.
Professor Holmes argued that by involving creditors in the process, they
are aware of the risks to their own businesses. Before registering for a moratorium
period, the directors of the company will need a detailed business plan, with
clearly identified milestones and report back dates. The plan must be approved
by 75 per cent of creditors and registered with ASIC.
In his verbal evidence to the committee, Professor Holmes emphasised the
need to given companies the option 'to work things through'. Instead of having
to get external advice they cannot afford, the company would be able to take
advice from appropriate professionals who are registered under the moratorium.
Concerns with the Chapter 11 model
Other submitters have expressed concern at further moves to facilitate
the reorganisation of an insolvent company. Mr Stephen Epstein SC noted in his
submission that while voluntary administration has become the most significant
form of insolvency administration, the Australian VA provisions are something
of a 'work in progress'. He noted that section 445 of the Corporations Act
was introduced in 2007 to constrain inappropriate use of creditor power in the
termination of a deed of company arrangement. In Mr Epstein's opinion:
The balance may now however, have swung too far in the
opposite direction—so the administrator of the deed can become indefinitely
entrenched in office. It is suggested that further amendment to the legislation
could be considered, perhaps in which a prima facie outer limit of 12 months is
prescribed as the maximum duration for which a deed administrator may hold
office, in the absence of creditors renewing that appointment.
This concern with the length of time that a deed administrator may hold
office is not new. The 2004 Parliamentary Joint Committee on Corporations and
Financial Services commented that most submissions that mentioned the Chapter
11 model were strongly against its introduction based on concerns with the company remaining in
the hands of the debtor and the length of the process. The PJC concluded it
...not persuaded to the view that an insolvency procedure
modelled on Chapter 11 of the US Bankruptcy Code is appropriate for the
Australian corporate sector. Nor does it consider that wholesale amendments to
the voluntary administration procedure to conform to Chapter 11 would have the
potential to make a significant improvement in outcomes that are presently
achievable under the VA procedure.
A 2000 Productivity Commission Staff Research Paper observed that the
available evidence suggested that the Chapter 11 model rarely established
viable businesses in the long run. It noted:
It may be economically and socially beneficial in that it
gives debtors a second chance and thereby encourages growth of the private
sector and the entrepreneurial class. On the other hand, there are moral hazard
problems associated with giving debtors immediately realisable second chances,
since it increases the potential returns from excessively risky behaviour.
Moreover, a creditor-oriented system, as in Australia, does not preclude the
continued involvement of the debtor. But the debtor would have to convince the
creditors that they were efficient custodians of the business. It is not clear
that debtors should be given second chances without a strong governance regime
outside their influence that would punish incompetent or self-serving
behaviour. The empirical evidence suggests that US chapter 11 proceedings
rarely establish long run viable businesses. Only around 6.5 per cent of
businesses emerge from chapter 11 as an ongoing entity. In comparison, the
Canadian system of reorganisation, which gives more emphasis to creditors’
rights, has a success rate ten times higher.
Mr Vanda Gould noted in his evidence to this committee that under
Chapter 11 receiverships in America, all creditors can be dealt with by
the court appointed person who manages the totality of the pool of creditors
and is responsible for the different priorities between them. He added:
Perhaps going to a chapter 11 is one step too far for us. I
would say that, in the Australian context, the big step forward would be to get
rid of receivers and managers.
Corporate responsibility and
The committee has not examined in any great detail the issue of
directors' corporate responsibilities and the problem of phoenix companies. It
does note, however, the importance of a corporate governance framework that
penalises insolvent trading (see chapter 4). There must be strong disincentives
to set up a company, send it into liquidation and then start again with a view
to evading taxation and employee entitlements. Businesses must not be allowed
to structure their arrangements through insolvency in a way that dishonestly
maximises personal wealth or creates an unfair competitive advantage.
In this context, the committee welcomes Treasury's November 2009
Proposals paper 'Action against fraudulent phoenix activity'. The committee
urges the government to consider carefully the paper's key options for reform
and to take action. Increasing the Tax Office's bond against anticipated income
tax liabilities from a director in cases where the ATO suspects phoenix
activity is a sound option.
The committee also supports the proposal to extend the director penalty regime
to cover liabilities such as the superannuation guarantee and indirect taxes
including the GST and excise tax.
Chapter 8 discussed concerns with the remuneration of insolvency
practitioners. The committee has received several suggestions during this
inquiry on how to improve the system for paying liquidators and administrators.
These range from various forms of price setting, to a market-based tendering
process, to further improving the disclosure and itemising of fees.
Fee setting and pricing control
As chapter 8 noted, the 1982 UK Cork Report recommended that the
remuneration of the practitioner should be fixed by the creditors' committee. It
noted that this could be on a percentage basis or otherwise but the creditors
must take into account the time, complexity, risk and effectiveness of the job,
as well as the value of the assets sold. The Report also noted that where the
creditors and the liquidator are unable to agree, the remuneration should be
fixed by the Department of Trade.
In similar vein, a few submitters to this inquiry have proposed that
scale rates should be reintroduced for registered liquidators and bankruptcy
trustees. One submission noted that this was the case in the late 1990s, before
the IPAA abolished the rates. The submitter argued that each staff member
should have pre-requisite education and experience for each scale rate.
The schedule of fees would be reviewed annually by agreement between ASIC, the
IPAA and the CPA.
Another submitter observed that in their reports to creditors, voluntary
administrators quote an arbitrary figure for future fees. The submitter argued
that unless there is a Committee of Creditors appointed, the liquidator will be
able to draw any future fee they like provided there are funds in the bank. He
claimed that fee decisions are often based on cash available from the various
bank accounts that the administrator controls.
The submitter proposed that the insolvency profession be abolished, because
'their primary focus should be to act on behalf of creditors, and not to base
jobs on what potential cash flow they can earn'. Short of this, he suggested
that assignments must be completed within the agreed timeframe with Directors.
If there is clearly no likelihood of any return to creditors from an external
administration, 'the company should go straight into liquidation'.
Carlovers Carwash (see chapter 5) argued that the insolvency industry
should be restructured so that it is 'effectively run by the government'. It
recommended that ASIC should tender insolvency work on a fixed price basis and appoint
a practitioner to put the company into voluntary administration. The practitioner
would recommend a deed of company arrangement or a liquidation, which would be sanctioned
by ASIC and put to a vote of creditors. Carlovers also argued that ASIC should
hold the casting vote and should choose the lawyers and independent experts.
Professor Scott Holmes of the University of Newcastle doubted the
efficacy of the hourly fee system. He argued that consideration should be given
to fixed or capped fee models, which are linked to the value of assets under
In this context, Professor Holmes proposed that the voluntary
administrator should provide creditors with a 'baseline value' for the business.
This value should be reviewed by an independent administrator and the values
for material assets certified by an accredited industry valuer. He suggested
that if in the course of the administration the voluntary administration seeks
to dispose of an asset at a value less than 20 per cent of the valuation, a
formal creditors meeting is required to approve the sale.
A set fee for 'no asset' jobs
This inquiry also raised the possibility of a tiered system whereby assetless
administrations could be handled through a separate procedure with different
fee scale to those jobs where assets are involved. The IPAA commented that this
type of system would require the government to perform assetless
administrations, similar to ITSA's role in assetless personal bankruptcies.
Other submitters argued that, notwithstanding the unique nature of the
market for insolvency professionals in Australia, price control by government
will not be effective in reforming the fee system. Rather, they claimed that
the key is to create more competition for appointments.
Mr Nicolas Bishop proposed a round robin or random allocation of
administrators, with ASIC assigning three administrators to any given case.
Under this system, creditors will choose one administrator out of the three (by
vote), at the first meeting. He envisaged that this will force the administrators
to pitch their service to the creditors, who will make their decision on a
range of factors including value for money and the practitioner's reputation.
Mr Bishop suggested that there should be some financial compensation for
the losing administrators in the tendering process, provided they have met 'minimum
hurdles'. Further, creditors' committees should be given the option of a 'No
Broadening the base
The other option for increasing industry competition and putting
downwards pressure on fees is to broaden the recruiting base for insolvency
practitioners. Mr Geoffrey Slater, a barrister, proposed amending section
1282(2)(a)(ii) of the Corporations Act to enable registration of an
Australian Legal Practitioner with an least five years' post admission
experience and at least 10 Corporations Act matters involving corporate
Better disclosure on fees
The other option to improve the fee system is to continue to improve
disclosure. Professor Holmes suggested that the voluntary administrator should
provide a report on fees to creditors on an agreed regular basis. He proposed
that this report should conform to the format provided in the IPAA Code of
Mr Jeffrey Knapp, an accounting academic at the University of New South
Wales, argued in his submission that overcharging by insolvency professionals could
be curbed if there was a requirement for timely accrual based accounts. He
emphasised that these accounts must disclose the amount of professional fees in
the same way that auditors' accounts are lodged.
Mr Ron Coomer argued in his submission that while insolvency
practitioners claim they are only charging their scheduled rates, there is a need
for a more efficient process. He suggested that Form 524 be modified to make
insolvency practitioners report to ASIC the asset surplus or deficiency of a
company excluding their fees.
Better information on fees
As Chapter 8 mentioned, ASIC is currently undertaking a remuneration
project. ASIC's Chairman told the committee that the aim of the project is:
...to improve the information that is available to creditors
and their rights in relation to remuneration. It is looking at issuing a
regulatory guide on what at least ASIC would consider as reasonable
remuneration. It is looking at whether we can make use of external cost
assessors in particular surveillances that we may undertake in relation to the reasonableness
ASIC noted in its submission that as part of its forward program, it
aims to obtain statistical data from practitioners to allow an assessment of the
relationship between asset recoveries, remuneration charged and returns to
creditors. The results will be made available to creditors and the market (see
Chapter 7 of this report canvassed the various options to improve and
reform the registration of corporate insolvency practitioners. This section
briefly summarises these options.
Broadening the base
As noted earlier, if the policy objective is to encourage greater
competition in the insolvency profession, the obvious option is to amend
section 1282 of the Corporations Act to broaden the qualifications for registering
as a practitioner. Mr Slater supports eligibility for legal practitioners.
His argument is not only that a broader recruiting base would break the current
monopoly rents that the profession currently enjoys, but that insolvency
professionals require quasi-judicial skills.
A licensing system
Several witnesses favour a licensing scheme in preference to a
registration system. The argument here is that licenses offer more flexibility
for the regulator to review, suspend and cancel a practitioner's appointment. The
IPAA argued that licenses would enable terms and conditions to be applied so
that the regulator can judge how a practitioner performs. Licensing would also
facilitate a reapplication process whereby a practitioner's past conduct can be
taken into account.
A panel interview
A panel interview, in addition to the current processes to register as
an insolvency practitioner, was mooted by several witnesses. ITSA currently
conducts these interviews, ASIC is currently considering the option, and the
IPAA and the Institute of Chartered Accountants both support the idea. The
rationale for an interview is that a face to face discussion enables more to be
gleaned about the applicant's character. ITSA currently interviews as part of
its licensing process.
A written exam
The committee is aware that if a person does not present well at an ITSA
interview, the Service may require the applicant to sit a written examination.
There is no written test required to become a registered liquidator. Mr
Geoffrey Slater told the committee that both the United Kingdom and the United
States have a written exam to register an insolvency practitioner. As chapter 7
noted, he argued the need for a closed-book exam such that applicants have to
prove their understanding of the concepts behind equitable principles and
Some submitters favoured a registration or licensing system whereby
practitioners qualify for particular types of insolvency work. Depending on
their skills and experience, they would be assigned to jobs of a particular
size and complexity. As noted above, a licensing system would be best suited to
this stratified approach.
Professional indemnity insurance
Chapter 7 observed that there is lack of effective monitoring of
corporate insolvency practitioners' PI insurance. ASIC currently checks PI
insurance through practitioners' annual statements, but there is a lag between
the time these are completed and when they are viewed by ASIC. Again, the
contrast is with ITSA's system whereby trustees' PI insurance is checked upon
registration, annually and upon renewing their license every three years.
A key option for reform is to require insurance companies to notify the
regulator as soon as an insolvency practitioner's PI insurance lapses or
expires. The regulator would require the practitioner to update his or her
insurance within a short period and, failing that, will have their license
This chapter canvassed various options to reform the regulation,
registration and remuneration of the insolvency profession in Australia. They
are by no means a complete list, but they do reflect the evidence given to the
committee by submitters and witnesses. The following chapter gives the
committee's views on these matters and makes several recommendations.
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