Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, MP)6 - Improving regulation of insolvency practitioners
Extending the prohibition on inducements for the referral of work
6.1 Section 595 of the Corporations Act prohibits persons offering inducements to members or creditors of a company to secure an appointment as an external administrator. Concern has been expressed that this prohibition is unnecessarily narrow. Examples of persons that were not covered by the prohibition include directors, providers of professional services (for example accounting firms and legal firms) and associates of such persons.
6.2 The Bill will prohibit inducements being offered to any person or entity with a view to securing an appointment as an external administrator.
6.3 Items 1, 2 and 3 of Schedule 3 will amend subsection 595(1) of the Corporations Act to broaden the prohibition on the offering of inducements to secure an appointment as an external administrator. The proposed amendments seek to apply the principle that the appointment of an external administrator should not be influenced by the offering of inducements by anyone to anyone else.
6.4 Item 4 makes a consequential amendment to paragraphs 595(1)(a), (b), (c), (d) and (e).
Education criterion for registration as a liquidator
6.5 Only persons registered by ASIC as liquidators under the Corporations Act may be appointed as external administrators for certain types of proceedings.
6.6 Subsection 1282(2) of the Corporations Act sets out educational qualifications required to become a registered liquidator. Subparagraph 1282(2)(a)(i) sets out one of three alternative requirements as being membership of certain named or prescribed professional bodies. The other alternatives are holding a degree representing a course of study involving the study of accountancy and commercial law (subparagraph 1282(2)(a)(ii), or other qualifications or experience that ASIC considers equivalent (subparagraph 1282(2)(a)(iii)).
6.7 It is proposed to delete the provision stating that the education criterion is satisfied if a person is a member of a named or prescribed professional body. ASIC will still have power to recognise membership of such a body as an alternative form of qualification by forming an opinion under subparagraph 1282(2)(a)(iii) that membership of a body is equivalent to the educational qualifications in subparagraph 1282(2)(a)(ii).
6.8 Item 5 will repeal subparagraph 1282(2)(a)(i), which provides membership of certain named or prescribed professional bodies is an acceptable qualification for the purposes of one of the elements required for registration as a liquidator.
6.9 Item 6 will make a minor consequential change to subparagraph 1282(2)(a)(iii).
Experience criterion for registration as a liquidator
6.10 Paragraph 1282(2)(b) of the Corporations Act provides, as a criterion for registration as a liquidator, that ASIC is satisfied as to the experience of the applicant in connection with the winding-up of bodies corporate. Insolvency practice under Chapter 5 of the Corporations Act includes many activities other than those involving the winding-up of bodies corporate. Particularly given the prominence of the voluntary administration procedure in modern insolvency practice, it is desirable that experience in all types of external administration be taken into consideration when ASIC considers an application to register an insolvency practitioner.
6.11 The proposed amendment to the Corporations Act will allow ASIC to take into consideration experience in all types of external administration under Chapter 5 of the Corporations Act when processing an application for registration of an insolvency practitioner.
6.12 Item 7 will amend paragraph 1282(2)(b) of the Corporations Act to require that ASIC be satisfied as to the experience of an applicant for registration in connection with 'externally-administered bodies corporate' instead of with 'the winding up of bodies corporate'.
Professional indemnity insurance
6.13 Section 1284 of the Corporations Act requires that registered liquidators maintain with ASIC a security for the due performance of their duties. The required securities (insurance performance bonds) are no longer available, and in practice ASIC has been waiving this requirement for many years. Existing practice is for professional indemnity insurance and fidelity insurance to take the place of such securities.
6.14 The proposed amendment to the Corporations Act will require registered liquidators to obtain and maintain professional indemnity insurance and fidelity insurance to cover their work as licensed practitioners.
6.15 Item 8 will repeal section 1284 of the Corporations Act which requires a registered liquidator to maintain with ASIC security for the performance of their duties as a liquidator. In its place a substitute section 1284 will require a registered liquidator, or a liquidator of a specified body corporate, to maintain adequate and appropriate professional indemnity insurance and adequate and appropriate fidelity insurance.
Triennial statements to be replaced by annual statements
6.16 Section 1288 of the Corporations Act requires a registered liquidator to lodge a statement with ASIC every three years. This requirement is no longer considered adequate given the significant changes that may occur over a three year period and the affect that such changes may have on the suitability of a person for continued registration.
6.17 The amendment will replace the requirement for a triennial statement with a requirement for a more detailed annual statement.
6.18 Item 9 will amend subsection 1288(3) to replace the requirement for a triennial statement with a requirement for an annual statement.
Cancellation of registration by ASIC
6.19 Section 1291 of the Corporations Act provides ASIC with a broad discretion to cancel the registration of an official liquidator. Under section 1292, cancellation of the registration of liquidators is by application to the Companies Auditors and Liquidators Disciplinary Board (CALDB).
6.20 Where a person becomes disqualified by reason of bankruptcy or disqualification from managing corporations, and where a person fails to maintain the insurance required to cover their work as a registered liquidator, it is appropriate that ASIC should have power to quickly cancel that person's registration without reference to CALDB. It is considered that such matters do not warrant a reference to CALDB due to the relatively objective nature of each matter.
6.21 The amendment will allow ASIC to cancel the registration of a liquidator in the aforementioned circumstances.
6.22 Item 10 will insert a new section 1290A to provide for ASIC cancelling the registration of a liquidator in the stated circumstances.
6.23 The Corporations Act does not specifically provide for the transfer of documents associated with an external administration upon the cancellation or suspension of the registration of a practitioner. In the absence of such a provision, there exists a possibility that a person whose registration is cancelled or suspended might fail to transfer documents to a replacement liquidator or administrator. Such failure might impose additional costs, or create additional delays, in relation to an external administration that was being conducted by a person whose registration is cancelled.
6.24 The amendment to the Corporations Act will create an obligation for a practitioner to transfer books related to an external administration to a replacement practitioner upon having their registration cancelled or suspended.
6.25 Item 14 will amend the Corporations Act to provide for the transfer of books related to external administration of an externally administered body corporate when the registration of a liquidator is cancelled or suspended.
Disciplinary proceedings - CALDB
6.26 CALDB may suspend or cancel a practitioner's registration if it is satisfied that the person has failed to lodge triennial statements, has ceased to live in Australia, has failed to carry out or perform adequately and properly the duties of a registered liquidator, or is otherwise not a fit and proper person to remain a registered liquidator.
6.27 Where ASIC's application to CALDB relates to a liquidator's failure to adequately or properly carry out or perform his or her duties, CALDB may admonish or reprimand the person or require the person to give an undertaking to refrain from certain conduct. The Bill will provide CALDB with greater flexibility in its processes and in respect of the penalties that it may impose.
6.28 CALDB will be given the power to conduct a pre-hearing conference involving only the Chairman, for the purpose of determining certain procedural matters. This change will avoid the cost and delay of having more than one member of the board attend for the purpose of deciding timetabling matters.
6.29 CALDB will be given greater flexibility to publish the reasons for its decision. Section 1296 of the Corporations Act requires that CALDB provide the person who is the subject of disciplinary proceedings with written reasons for its decision. The publication of these reasons will promote transparency in decision-making and will bring CALDB into line with other bodies that undertake disciplinary functions, such as the Administrative Appeals Tribunal.
6.30 CALDB will be given an express power to delay the effect of its decisions for a period of up to 90 days. This is in accordance with existing practice of the board, which allows for the orderly transfer or completion of a liquidator's ongoing work.
6.31 Item 11 will amend the Corporations Act to provide for a pre-hearing conference with only the chairperson of CALDB to consider timetabling matters, determine when submissions are to be made to the Board, when evidence is to be brought before the board in relation to the matter and give directions as to the procedure to be followed with respect to the hearing.
6.32 Item 12 will amend the Corporations Act to provide CALDB with the ability to publish its decisions and reasons for decisions on the internet, or otherwise.
6.33 Item 13 will amend the Corporations Act to provide CALDB with the ability to give effect to its decisions at a point in time up to 90 days after providing a practitioner with notice of the decision.