Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, MP)3 - Regulation impact statement
Background
3.1 The last major reform of Australia's corporate insolvency laws was undertaken following the 1988 review of those laws by the Australian Law Reform Commission (the 'Harmer Report'). Recommendations of this review were implemented in the Corporate Law Reform Act 1992 .
3.2 Since then a number of inquiries into the system have been conducted. In 2004, the Parliamentary Joint Committee on Corporations and Financial Services tabled a report, entitled Corporate Insolvency Laws: A Stocktake (the PJC Report). The report contained 63 recommendations for changes to Australia's insolvency system. The Corporations and Markets Advisory Committee (CAMAC) published a report on Corporate Voluntary Administration in 1998 (containing 60 recommendations) and a report on the Rehabilitation of Large and Complex Enterprises in 2004 (containing 49 recommendations). A 1997 Working Party inquired into the regulation of insolvency practitioners and recommended improvements to the regulatory framework.
3.3 These reports generally endorsed the current insolvency system but at the same time proposed measures to strengthen creditor protections and improve the efficiency of insolvency processes.
Consultation
3.4 Stakeholders from a wide spectrum of interests (insolvency practitioners, employee and business groups, the legal community, representatives of financial institutions, regulators, accounting bodies and members of the academic community) actively participated in these public inquiries and expressed support for reforms of insolvency laws.
3.5 On 22 March 2005 the Government announced that it would address corporate law issues raised by reviews of the insolvency framework in the context of developing an integrated set of proposals to improve the operation of Australia's insolvency laws. On 12 October 2005 the Government announced details of its package. The package has four key themes:
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- improving outcomes for creditors, including through:
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- initiatives to enhance protections for employee entitlements in insolvency proceedings;
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- initiatives to facilitate informed decision making by creditors;
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- initiatives to streamline external administration and reduce associated costs; and
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- allowing for the administration of related companies to be conducted as a single process .
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- deterring corporate misconduct, including through allowing ASIC a general power to investigate breaches of liquidators' duties and restoring the longstanding position that penalty privilege does not apply in disqualification proceedings (complementing the assetless administration initiative discussed below);
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- improving the regulation of insolvency practitioners by updating the registration regime administered by ASIC and introducing greater flexibility in disciplinary proceedings; and
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- finetuning the voluntary administration process, in recognition of market developments and experience with the process since its introduction.
3.6 Some of the proposals of the Government's insolvency package, notably an expansion of the range of the entitlements available to employees whose employment is terminated as a result of their employer's insolvency under the General Employee Entitlements and Redundancy Scheme (GEERS) and the introduction of an assetless administration fund, announced on 12 October 2005, are already in place.
3.7 An additional $62 million over four years was allocated for the introduction of four new GEERS enhancements:
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- assistance for underpaid wages in the three month period prior to the date of employer insolvency;
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- assistance that recognises a claimant's entitlement to notice of termination under their terms of employment;
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- coverage for employees who resign or whose employment is terminated up to six months prior to the date of their employer's insolvency; and
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- aligning the treatment of 'excluded employees' (directors and close relatives) with their treatment under the Corporations Act 2001 .
3.8 These enhancements to GEERS are included in revised GEERS Operational Arrangements, and apply to insolvencies that occur on or after 1 November 2005.
3.9 On 22 August 2006, the Minister for Employment and Workplace Relations announced a further extension to GEERS. The amount of unpaid redundancy pay available under GEERS has been doubled from eight weeks to a maximum of 16 weeks. This change is applicable to all GEERS claims made as a result of liquidations or bankruptcies that occur on or after 22 August 2006. This extension of GEERS brings it into line with the community standard for redundancy provisions now available in awards and agreements.
3.10 The Government has also allocated $23 million over four years to establish an 'assetless administration' fund and complementary enforcement programme by the Australian Securities and Investments Commission (ASIC). The fund will finance preliminary investigations by expert liquidators of companies, selected by ASIC, that have been left insolvent with little or no assets. The fund addresses a regulatory gap through more rigorous investigation of insolvent businesses. It aims to improve corporate conduct generally, and reduce the scope for phoenix activity. The fund is now in operation. As at 31 October 2006, ASIC has approved 132 applications for funding.
3.11 The assetless administration fund and the enhancements to GEERS are not the only measures that can assist employees whose employment is terminated as a result of their employer's insolvency. There is also scope to improve the operation of insolvency laws and processes for the benefit of employees of insolvent businesses and other creditors.
The treatment of employee entitlements in voluntary administration
3.12 The PJC Report noted that the protection of employee entitlements in the circumstances of employer insolvency is an important public policy objective and it is appropriate for governments to explore options for better protecting such entitlements. While it recommended that the maximum priority proposal not be adopted, it made a number of recommendations to improve the standing of employee entitlements in the event of employer insolvency.
3.13 Business failures can have widespread and long lasting effects on stakeholders, particularly employees who commonly do not receive their full entitlements on their employer's insolvency. Employee entitlements generally comprise wages, annual leave, long service leave, sick leave, redundancy, notice and superannuation. The Productivity Commission has estimated that each year between 55,000 and 65,000 businesses cease to operate. Direct job losses resulting from business cessations are likely to account for, at most, between 9-10 per cent of total annual job losses. The majority of cessations, estimated to be around 80 percent, are 'solvent' failures. That is, the businesses in question cease operations without owing any debts or owing outstanding employee entitlements.
3.14 Empirical data on the extent of employees' losses is limited. In 2003 the ACTU estimated that around 19,000 employees lose up to $500 million in unpaid entitlements each year. The General Employee Entitlements and Redundancy Scheme (GEERS) provides a limited safety net for employees whose employment has been terminated because of an employer's insolvency. In 2004-05 $66.7 million was paid to employees under GEERS. In 2005-06 the total paid amounted to $49.2 million. The number of insolvent businesses totalled 912. The total number of recipients was 7,790. GEERS is fully funded by taxpayers.
3.15 In 2005, 7,277 companies entered external administration. Of these, 2,636 companies - approximately 36 per cent - entered voluntary administration. Introduced in 1993, the voluntary administration procedure replaced earlier arrangements that were considered to offer too limited scope for companies to trade their way out of difficulties.
3.16 In a winding up the law confers a priority on employee entitlements. The treatment of employee entitlements in a voluntary administration differs from that in a winding up.
3.17 The primary purpose of the voluntary administration procedure, set out in Part 5.3A of the Corporations Act 2001 (Corporations Act), is to provide a flexible and relatively inexpensive procedure that enables a company to suspend the payment of its debts, so that it can attempt a compromise or arrangement with its creditors aimed at saving the company or the business or, if that is not possible, maximising the return to creditors. If successful, the compromise or arrangement will be set out in a deed of company arrangement (DOCA), which binds the company and the creditors. If these attempts fail, the legislation facilitates the transition to winding up.
3.18 If the creditors decide to enter into a DOCA, the Corporations Act sets out what the deed must contain, although the requirements are flexible. The DOCA details the adjustment of the rights and obligations of creditors in relation to the company.
3.19 If a DOCA is recommended, the administrator must provide a statement setting out details of the deed. The DOCA must include some essential matters (such as the property to be available to pay creditors' claims, the duration of any moratorium period for which the deed provides, the extent to which the company is to be released from its debts, conditions for the deed to operate, the circumstances for termination of the deed, and the order of payment of creditors' claims).
3.20 In addition, the deed may include prescribed provisions (set out in Schedule 8A of the Corporations Regulations). One of the provisions is clause 4 of Schedule 8A, which provides that the administrator must apply the property of the company in the order of priority specified for a liquidation. It is not mandatory to include these provisions in every deed. The deed may make other provision including altering the priority that would apply in a liquidation. In practice, most deeds will apply the property of the company in the order specified for a winding up.
3.21 To address the possibility that some creditors may be unfairly treated by the meeting of creditors, or outmanoeuvred at the meeting, the law allows creditors who consider a particular deed oppressive or unfairly prejudicial or discriminatory to initiate proceedings in the Supreme Courts or in the Federal Court to have the deed overturned.
3.22 Insolvency law has long sought to protect employee entitlements in the event of the insolvency of the employer. It affords priority status to employee entitlements in liquidation and a receivership. Traditionally, the employee has been seen to be in a different bargaining position in comparison to other creditors and investors. The impact of an employer's insolvency is likely to be greater for employees as a group than for other creditors. Wages are likely to be the only source of income for employees, while other creditors have access to other sources of income. Employees are involuntary creditors. In negotiating the terms of their employment, they are rarely able to seek provision for protection against employer insolvency. In most circumstances tradespersons and independent contractors are able to write off bad debts and diversify their risk. Under the General Employee Entitlements and Redundancy Scheme (GEERS), employees are not entitled to benefits under the scheme if the DOCA does not include the priorities specified in the Corporations Act in relation to the entitlements to be paid to employees in a liquidation.
3.23 In its Report, the Parliamentary Joint Committee noted an instance where the priority had been altered in a DOCA to the disadvantage of employees and against the wishes of a substantial number resulting in ineligibility for GEERS entitlements. Though the incidence of such cases is small in comparison to the total number of companies entering voluntary administration, the consequences can be serious for affected employees. Employee creditors have rights of appeal but the cost of undertaking an appeal imposes a considerable burden on them, particularly where not all are in agreement or willing to contribute to the cost of proceedings.
3.24 The broad objective is to improve the operation and fairness of insolvency laws. In particular, the objective is to enhance the prospect of payment of employee entitlements in the event of employer insolvency and improve the standing of ordinary employees in voluntary administrations.
3.25 An option is to leave the voluntary administration procedure unchanged in relation to the priority of employee entitlements.
3.26 The PJC Report recommended that the Government amend the law to make it mandatory for a DOCA to preserve the priority available to creditors in a winding up, unless affected creditors agree to waive their priority. It recommended that creditors or the administrator should have the right to initiate court proceedings to have the deed upheld.
3.27 An option is to accept that recommendation. (The PJC Report made no comment on the size of any majority of affected creditors, whether it be 50 per cent, 75 per cent or unanimous, required to waive the priority.)
3.28 For practical purposes the creditors who stand to benefit from Option 2 are employees, as they are the only relevant class of creditors who are afforded priority status under the law. Affected parties include employee groups, other unsecured creditors, insolvency practitioners, other potential stakeholders in voluntary administrations and the Department of Employment and Workplace Relations (DEWR) (which has responsibility for the administration of GEERS).
Analysis of the impact of each option
3.29 Option 1 would preserve the flexibility of the voluntary administration procedure and allow insolvency practitioners the greatest flexibility in proposing DOCAs. Insolvency practitioners would prefer this option in order to maximise their opportunities to negotiate acceptable DOCAs with creditors and other potential stakeholders in insolvency administrations.
3.30 If the recommendation is not adopted in the form proposed (or in some other form), there will continue to be criticism of the law and the treatment of employee entitlements where DOCAs alter the priority of the entitlements of employees without their consent. It would place the onus on employees to challenge deeds where the priority was altered. There are legal costs for employees who choose to challenge a deed that displaces their priority.
3.31 The main argument in favour of Option 2 is that it would improve the standing of employees in the voluntary administration procedure. It would reduce the risk that employees' interests are not taken into account in negotiating a DOCA. A significant number of employees are potentially affected. Approximately 40 per cent of external administrations take the form of voluntary administrations.
3.32 Option 2 does not depart significantly from current practice (and other insolvency procedures which also recognise the priority of employee entitlements). It is a feature of the model DOCA set out in the Corporations Act. It is possible that the courts may take the view that the maintenance of the priority is an implicit feature of the voluntary administration procedure as it currently exists.
3.33 If a DOCA alters the priority of employee entitlements, the only option available to aggrieved employees is to initiate court action. This imposes a considerable burden on employees. The costs arising from court action would be borne by employees. There appears to be no decided case on the question on altering the priority of employee entitlements to the disadvantage of employees in a DOCA since the introduction of the voluntary administration scheme in 1993.
3.34 Increasing the protection of employee entitlements may be seen to reduce the flexibility of the voluntary administration procedure. It would be seen to limit the capacity of insolvency practitioners and/or stakeholders to conduct creditors' meetings and achieve a consensus as to the way forward - a DOCA or liquidation.
3.35 Under Option 2, employees may choose to waive their priority. It will thus still be possible for a DOCA to alter the priority if the circumstances warrant. It has been suggested that employees will never or very rarely choose to waive their priority. They will always prefer the company's liquidation (particularly given that GEERS assistance may only be available if the company is put into liquidation).
3.36 If the priority of employees is legislated for, employees as a group would never (or rarely) agree to waive their entitlements and would rather vote for liquidation. Employees are traditionally seen as the type of creditor who would be likely to prefer a DOCA to a liquidation, as it presents the prospect of some employees retaining their jobs.
3.37 Option 2 will not benefit other unsecured creditors. It will be possible for their rights to be modified to their disadvantage by a DOCA. It may have the effect of reducing the level of returns that may otherwise be available to unsecured creditors in a DOCA. It may be seen to further the inequitable treatment of unsecured creditors vis-à-vis employees in insolvency law.
3.38 Option 2 may impose a cost on companies entering voluntary administrations, in that it narrows the options open to companies and their administrators in negotiating solutions to their financial difficulties. To some extent, it may compromise the objective of the voluntary administration procedure, which is to provide an expeditious, uncomplicated, inexpensive and flexible procedure for addressing a company's financial difficulties. Company shareholders may be affected if strategies for resolving financial difficulties are restricted. However, it is creditor interests that are paramount in insolvency.
3.39 The problem received close consideration in the PJC Report. The results of any further consultation would be predictable. Non-employee stakeholders in corporate insolvencies would be opposed to mandating the priority of employee entitlements in DOCAs.
Conclusion and recommended option
3.40 In assessing the different options there are competing public policies to balance: the protection of employee entitlements and the desirability of encouraging business rescues wherever possible. The proposal favours the former policy over the latter.
3.41 Option 2 - mandating the priority of employee entitlements - has the advantage that it does not represent a significant departure from current practice. Other insolvency stakeholders are not unduly affected. Its impact is therefore limited. It gives recognition to an important public policy - the protection of employee entitlements. The current law imposes a considerable burden on employees in that it is predicated on an assumption that they will initiate potentially expensive court proceedings to challenge a DOCA that treats them unfairly. The flexibility of the voluntary administration procedure and the policy of encouraging business rescues are not unduly compromised by the adoption of option 2.
3.42 The recommended option is for the law to recognise that the priority of employee entitlements should be safeguarded in DOCAs but not necessarily in the precise terms proposed by the PJC.
3.43 The proposed approach is consistent with the manner in which creditors determine matters at creditors' meetings under the current law, providing flexibility for eligible employee creditors. An administrator will be able to propose a DOCA that does not observe the priority only if they first secure the agreement of a majority (by number and value) of affected creditors at a meeting of eligible employee creditors. Creditors as a whole would then conduct a vote on whether the deed should be executed at the section 439A meeting (the major meeting of creditors in a voluntary administration). The impact of the provision can be monitored by ASIC, which collects statistical data on external administrations, and Treasury in its oversight of the legislative scheme for corporate insolvency.
The treatment of the superannuation guarantee charge in external administrations
3.44 The PJC Report identified uncertainties about the interaction between the Superannuation Guarantee (Administration) Act 1992 (SGAA) and the Corporations Act. There is a lack of clarity as to how the Superannuation Guarantee Scheme is intended to operate in relation to employers that are under different forms of external administration. These uncertainties may have the result that employees are not receiving their full entitlement.
3.45 Neither the Corporations Act nor SGAA deals with the priority of the superannuation guarantee charge (SGC) in a receivership or a voluntary administration. Under the current law the only insolvency procedure in which the SGC is afforded a priority is in a winding up. As a result SGC payable to ordinary employees is not afforded the priority that applies to superannuation contributions in a receivership resulting in situations where employees do not receive their superannuation in the form of SGC as a priority.
3.46 If the law is amended to recognise that the priority of employee entitlements should be safeguarded in deeds of company arrangement as proposed above, the priority of superannuation and the SGC would need to be considered.
3.47 Under the Corporations Act there is a limit ($2,000) on the amount that can be paid to excluded employees as a priority in respect of wages and superannuation. Excluded employees include directors, their spouses including de facto spouses and relatives. It has been a long standing policy of insolvency law that priority is not afforded to debts or claims in respect of directors over $2,000.
3.48 The SGAA provides that in the winding up of a company any superannuation guarantee charge payable by the company is, for the purposes of payment, to have a priority equal to that of a debt of the company of the kind referred to in the Corporations Act. The above limit on debts or claims in respect of directors that attracts priority status is arguably not recognised in the SGAA.
3.49 The PJC Report recommended that the Government clarify how the SGC is intended to operate in relation to employers in external administration.
3.50 The objective of the proposal is to clarify the status and priority of the SGC in a liquidation, a receivership and a voluntary administration. It aims to improve the recovery of employee entitlements in the event of employer insolvency.
3.51 It is necessary to clarify how the SGC should be treated in a receivership and a voluntary administration. There are no other feasible options in this regard.
3.52 In relation to the cap on debts in respect of directors that attracts priority status in external administrations, an option is to include SGC amounts in that cap. This would deliver the objective of consistent treatment of superannuation entitlements and SGC amounts. It would improve the likelihood of non-excluded employees receiving their entitlements.
3.53 An alternative option is to exclude SGC amounts from the cap. From a retirement incomes policy perspective it may be preferred that the SGC be excluded from this limit for the following reasons.
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- SG charge amounts do not necessarily relate to the period where the company became insolvent. Therefore, while the directors of a company have some control over how it operates, the SG charge may relate to periods where the company was solvent.
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- SG amounts represent compulsory community standard minimum amounts. Compulsory employer superannuation contributions are already subject to a maximum contribution limit, defined in section 15 of the Superannuation Guarantee (Administration) Act 1992 , which ensures that an employee's SG entitlement is not excessive.
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- Unlike the cap in section 556(1A) of the Corporations Act 2001 the maximum contribution limit is indexed to maintain its value over time. It is noted that the $2,000 cap in the Corporations Act has not changed in the last 15 years. This erosion of value over time could potentially significantly reduce the amount going towards a director's retirement savings in future years.
Analysis of the impact of each option
3.54 The primary argument in support of including SGC amounts in the $2,000 cap for excluded employees is that this would improve the recovery of employee entitlements for other employees in the event of employer insolvency.
3.55 In relation to the alternative option of excluding SGC amounts from the cap, it is noted that it has been a long standing policy of insolvency law that priority is not afforded to debts or claims in respect of directors (above $2,000). The balance of any debts payable to excluded employees falls for consideration as an ordinary unsecured debt in a liquidation. The arguments in favour of retirement incomes policy recede in importance in the circumstances of an insolvent administration in which there will be insufficient funds to pay the outstanding debts and a choice has to be made as to which debts are to be paid or paid in priority to other debts. The fact that the $2,000 cap which has not changed in the last 15 years can be addressed by increasing the cap from time to time. There have been no recommendations for an increase at this time.
Costs and expenses of mandating the priority
3.56 As SGC is a tax, excluding directors from the limit may reduce the amounts payable to the Commissioner of Taxation in external administrations. However, the great majority of these amounts are forwarded to employee's superannuation funds.
3.57 The Insolvency Practitioners Association of Australia has requested these amendments. It is unlikely that any other stakeholders in external administrations (apart from directors) would oppose the amendments.
3.58 The option of clarifying the status and priority of the SGC in a liquidation, a receivership and a voluntary administration is the only real option available at this time. The option of including SGC amounts in the $2,000 cap for excluded employees would appear to outweigh the other options.
3.59 The impact of the proposed amendments would be monitored by Treasury in light of statistical data on external administrations.
The registration of insolvency practitioners
3.60 The administration of corporate insolvencies is carried out by private sector practitioners. Insolvency practitioners may act as liquidators, provisional liquidators, receivers, receivers and managers, voluntary administrators, administrators of deeds of company arrangement or scheme managers. In 2005, 7,277 companies entered external administration. Insolvency appointments in 2005 totalled 11,758.
3.61 Under the law insolvency practitioners are required to be registered (as 'registered liquidators'). As at 4 October 2006 there were 743 registered liquidators in Australia. Not all registered liquidators are actively engaged in insolvency work. About 520 are actively engaged. There are two forms of liquidator registration. A person may be registered as an official liquidator or as a registered liquidator. Of the 743 registered liquidators, 448 were official liquidators. The Insolvency Practitioners Association of Australia (IPAA) has about 400 members. Not all registered liquidators are members of the IPAA - it is not a prerequisite to being a registered liquidator - but most active liquidators are. Registered liquidators are predominantly accountants and members of accounting bodies.
3.62 Insolvency practitioners are granted extensive powers over debtors and their assets and are subject to fiduciary duties in relation to the assets they control, including duties to act impartially, to avoid conflicts of interest and to act in good faith and for proper purposes. They must exercise the highest standards of honesty, competence, skill and diligence and ensure that the law is applied effectively and impartially. They must be appropriately qualified and have the knowledge, experience and personal qualities that will ensure insolvency proceedings are efficiently conducted and there is confidence in the process. They are supervised by ASIC and the Companies Auditors and Liquidators Disciplinary Board (CALDB).
3.63 The role of insolvency practitioners has been the subject of comment and suggestions for reform in a number of reports beginning with the Harmer Report (1988) and the Trade Practices Commission 'Study of the Professions' (1992). In 1997 a government Working Party issued a comprehensive report on the regulation of insolvency practitioners (Review of Insolvency Practitioners). More recently the Parliamentary Joint Committee on Corporations and Financial Services in its 2004 report 'Corporate Insolvency Laws: a Stocktake' (the PJC report) and the Corporations and Markets Advisory Committee (CAMAC) in its reports on 'Corporate Voluntary Administration' (1998) and the 'Rehabilitation of Large and Complex Enterprises' (2004) have examined the role of insolvency practitioners and recommended reforms.
3.64 The problem is that some insolvency practitioners are not independent and are not exercising the high standards of honesty, competence, skill and diligence required of them or performing their duties efficiently and impartially.
3.65 Some of the key issues that have been raised in the abovementioned reports (and in the media and in ministerial correspondence) in relation to insolvency practitioners include:
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- the independence of practitioners;
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- the selection of administrators;
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- the remuneration of practitioners;
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- criteria for initial registration; and
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- ongoing criteria for registration.
3.66 The objective is to enhance the independence and competence of insolvency practitioners and ensure that insolvency practitioners maintain the capacity to adequately and properly perform the duties and functions of registered liquidators on an ongoing basis.
3.67 One option is to leave the law unchanged.
3.68 A second option is to remove altogether the requirement to register as a condition of practice as an insolvency practitioner.
3.69 A third option is to retain the current registration system and adopt targeted amendments and enhancements of the current regime for insolvency practitioners to address specific concerns that have been identified. The operation of the system could be improved with the following amendments:
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- improve the quality and reliability of information available to creditors in considering the appointment of insolvency practitioners;
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- update the experience criteria for initial registration of practitioners;
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- strengthen the ongoing requirements for registration;
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- prohibit the offering of inducements to directors or other persons to obtain appointments; and
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- introduce more flexibility for creditors to replace administrators.
3.70 The independence of practitioners could be enhanced by amendments that require the disclosure of relevant relationships and allowing creditors to appoint a different person as liquidator when the administration ends and the company proceeds into liquidation and when a deed of company arrangement ends and the company proceeds into liquidation.
3.71 Ongoing requirements for registration could be improved by amendments to make the requirement for insolvency practitioners to lodge a security for the due performance of duties more flexible by permitting other forms of insurance to be provided, to replace the triennial reporting requirement with an annual reporting requirement, to allow ASIC to cancel the registration of practitioners where matters do not require the consideration of the CALDB (where a practitioner becomes disqualified by reason of bankruptcy or becomes disqualified from managing corporations, or fails to maintain the insurance required to cover their work as a registered liquidator) and to require practitioners to transfer files on suspension or cancellation of registration.
3.72 A fourth option is to introduce a licensing regime in place of the current registration regime, such as the occupational licensing regime for providers of financial services. The United Kingdom has a type of licensing regime for insolvency practitioners. Features of a licensing regime could include:
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- Requiring the regular renewal of licenses, to facilitate regular monitoring of matters such as compliance with continuous education standards and maintenance of practice capabilities;
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- Providing for the cancellation of licenses at an administrative level (without seeking the approval of CALDB);
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- Provide for the conditional issuing of licenses;
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- More active monitoring of insolvency practitioners by ASIC; and
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- Ongoing obligations to perform adequately and properly the duties of a registered liquidator, to remain a fit and proper person, to comply with conditions of registration prescribed by the regulations or ASIC, to maintain professional skills, to maintain adequate practice capacities, to notify ASIC if practitioners become disqualified from registration, to lodge annual statements and to maintain arrangements for compensation for loss.
3.73 Affected persons are:
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- registered liquidators; and
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- stakeholders who have an interest in the outcomes of external administrations, including creditors, directors and shareholders.
Analysis of the impact of each option
3.74 Leaving the law unchanged would not result in any additional costs for practitioners or require additional resources for the regulator. The current law provides an adequate supervisory framework. While the focus of the current regime is on initial registration, a practitioner's status as a registered liquidator may be suspended or cancelled by the CALDB on the application of ASIC if it considers that a practitioner has failed to carry out their duties or is otherwise not a fit and proper person to remain registered.
3.75 In the longer term a failure to respond to some of the concerns about the regulation of insolvency practitioners may erode public confidence in the insolvency process. Concerns about the professionalism and the lack of independence of practitioners are commonly expressed by stakeholders in corporate insolvencies in submissions to the public inquiries and in the media. Criticisms include:
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- the increasing popularity of the voluntary administration process (which may be conducted by registered liquidators) and the resultant decline in the number of court liquidations (which may only be carried out by official court appointed liquidators) has brought about an 'ambulance chasing mentality' on the part of some insolvency practitioners;
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- the appointment as an administrator under the voluntary administration procedure does not ensure independent administrators in every case. Conflicts of interest tend to arise by reason of the appointment of the administrator by incumbent management;
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- the existence of improper relationships between administrators and other parties;
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- the 'partial' exercise of casting votes by administrators.
3.76 Concerns have also been expressed about the lack of on-going requirements for registration. The law does not require practitioners to meet ongoing obligations to retain their registration such as an obligation to maintain professional skills or continuing education. Practitioners retain their registration notwithstanding that they may not have taken up insolvency appointments for some years or have maintained professional skills or education. However, ASIC is able to address a failing by a registered liquidator by making a formal application to the CALDB.
3.77 In some jurisdictions there is no registration or licensing system for insolvency practitioners. In New Zealand and Hong Kong any natural person (with some exceptions regarding bankruptcy, insanity and relationship to the company) may act as a liquidator. In the United States, in reorganisation cases (including out-of-court restructurings and Chapter 11 bankruptcy cases) the company's existing management generally administers a restructuring with the assistance of insolvency counsel and financial advisers. There is no regulatory body which oversees the qualification of these restructuring professionals, however there are voluntary certification mechanisms.
3.78 Removing the registration requirement in Australia (as in New Zealand or Hong Kong) or relying on voluntary certification only (as for restructuring professionals in the United States) could increase competition in the industry, resulting in a reduction in administration costs. This approach would rely on market perceptions and reputation to test the qualification and experience of practitioners, providing stronger incentives for improved performance and reduced cost. Practitioners would not be subject to registration costs, the costs of maintaining their practices to a sufficient standard to meet statutory obligations for continuing registration and the costs of maintaining security for the performance of their duties.
3.79 If registration requirements are repealed and any person allowed to carry out external administrations, some creditors may have difficulty in deciding who to select as an external administrator. They may not be able to assess whether a person seeking to act as an external administrator possessed the qualifications, skills and/or experience needed to enable him/her to carry out that role. There is a risk that unqualified persons or creditors themselves might seek to undertake the functions of an external administrator without the knowledge or skills that are necessary for the discharge of such functions. The consequences of poor administrations may impact severely on creditors.
3.80 Creditors do not determine external administrators in every insolvency procedure. Methods for the appointment of external administrators differ depending on the procedure involved. In a voluntary administration an administrator may be appointed, and the procedure commenced, by the company itself (that is the board of directors), by its liquidator or provisional liquidator or by a creditor who is entitled to enforce a charge on the whole, or substantially the whole of a company's property and the charge has become and remains enforceable. In other procedures such as a liquidation or a receivership a creditor or creditors may nominate the liquidator. A registration system provides a mechanism to improve confidence about the ability and integrity of practitioners.
3.81 There are concerns commonly expressed by stakeholders about some issues where the law has failed to move with market developments. In recent years creditors and other stakeholders in corporate insolvencies have expressed concerns about the lack of independence and impartiality on the part of insolvency practitioners. Concerns have been expressed about the mode of appointment of administrators, the disclosure of relationships that might be relevant in deciding whether to replace an administrator, the offering of inducements for the referral of work, the registration requirements for external administrators, ongoing obligations to maintain professional skills or undertake continuing education, limitations on the ability of creditors to remove administrators or liquidators, and the desirability of a code of ethics for insolvency practitioners. The adoption of targeted amendments to address these concerns would be an appropriate response to issues raised in recent reviews of the insolvency framework, improving the efficiency and cost effectiveness of insolvency proceedings without introducing transitional costs or new compliance obligations.
3.82 Targeted amendments which address concerns that have been identified in recent reviews would increase public confidence in the insolvency process and strengthen creditors' ability to select, and negotiate with, insolvency practitioners.
3.83 Targeted amendments that are proposed by this option (see above) would not give rise to any budgetary implications, unless the Government was to make a separate decision to increase ASIC's enforcement activities in this area.
3.84 A move to a licensing regime could lead to a better balance between initial registration requirements and ongoing requirements. Providing ASIC with greater resources to monitor practitioners could improve the speed and efficiency of enforcement actions. The shift to a licensing regime would facilitate regular monitoring of matters such as compliance with continuous education standards and maintenance of practice capabilities and enhance practitioner accountability. It would improve the efficiency and speed of the regime, and ensure CALDB's resources were directed at more serious conduct matters.
3.85 The costs of introducing a licensing model for some 450 active insolvency practitioners may outweigh its benefits. More active monitoring of insolvency practitioners by ASIC would impose costs on government to ensure that new requirements are enforced, with the extent of the implications determined by the features of the licensing model adopted. Practitioner compliance costs would increase and be passed on to creditors in the form of higher fees. This option would combine investigatory and decision-making functions in one body (ASIC) in relation to matters with potentially significant impacts on individual practitioners.
3.86 Public inquiries that have examined the regulatory regime for insolvency practitioners include the 1997 Report of the Working Part on the Regulation of Insolvency Practitioners, the 1998 report of CAMAC on Corporate Voluntary Administration in 1998, the 2004 report of CAMAC on the Rehabilitation of Large and Complex Enterprise and the 2004 report of the Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake . Insolvency practitioners and their representatives were consulted in the development of recommendations in these reports. Amendments to address these concerns have been made available for public consultation, including consultation with practitioner representative bodies.
Conclusion and recommended option
3.87 A registration system provides a mechanism to improve confidence about the ability and integrity of practitioners. That system can be improved through targeted amendments. Option 3 is the preferred option. It addresses the concerns raised by stakeholders, imposes minimal new burdens on insolvency practitioners, enhances practitioner accountability, improves the supervisory framework administered by ASIC, enhances the capacity of creditors to choose independent administrators, and raises no new budgetary costs.
3.88 Option 1 fails to respond to the issues raised in the abovementioned reports that have been the subject of a number of recommendations (the independence of practitioners, the selection of administrators, the remuneration of practitioners, criteria for initial registration and ongoing criteria for registration.). Option 2 would pose risks for creditors. Registration has the benefit that it ensures insolvency practitioners are well qualified, experienced, are members of self regulatory associations (CPA Australia and ICAA) that impose professional standards of practice and have satisfied ASIC that they are capable of performing the duties of a liquidator and are otherwise fit and proper persons. Option 4 (a licensing model) would impose significant new burdens on practitioners and require increased resources on the part of the regulatory authority to supervise a licensing regime. The relatively lower costs associated with option 3, compared to the higher costs of a licensing model, make option 4 less attractive than option 3.
3.89 The current provisions of the law provide ASIC with flexibility to revise requirements regarding such matters as ongoing training and other capability requirements and do not need to be fundamentally altered. Policy Statement 186, released in September 2005, details how ASIC tailors its approach to the requirements for registration to reflect current insolvency practice, the nature of the work of registered liquidators, and its experience in administering the provisions. The legislative framework is complemented by self-regulatory oversight of the Insolvency Practitioners Association and professional bodies. The current law allows ASIC to initiate disciplinary proceedings before the CALDB where a registered liquidator has, among other things, failed to carry out or perform adequately and properly the duties of a liquidator or is otherwise not a fit and proper person to remain registered as a liquidator. Appropriate sanctions may be imposed.
3.90 After taking effect as provided for by the amending legislation, the administration and enforcement of the new legislation will be monitored by Treasury, ASIC and the insolvency profession. No specific review is proposed.