Published submissions on regulation of insolvency practitioners

 ASIC, Insolvency practices, Official Inquiries, Regulation, Treasury Options paper 2011  Comments Off on Published submissions on regulation of insolvency practitioners
Aug 182011

Public responses to the Australian Treasury’s options paper titled “A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia” have been published on the Treasury website.  Click HERE to see them. There were 22 public submissions.

My own submission focused on the following 3 issues raised by the government:

QUESTION re STANDARDS FOR ENTRY INTO THE INSOLVENCY PROFESSION.  Are there any concerns with changing the academic requirements to remove the greater emphasis placed upon accounting skills over legal skills, while retaining a minimum level of study in each?

MY SUBMISSION > Yes.   1.  The current emphasis in the academic requirements of liquidators is not on “accounting skills” (as the Options Paper states) but on accounting studies.  Such studies teach important aspects of business activity, including budgeting, economics, business management, break-even analysis, financial ratios, business finance, costing methods, stock control, valuations, auditing, and taxes.  2.  A liquidator or other external administrator is likely to require a solid understanding in these aspects of business, particularly in trade-on situations.  3.  The present system, under which lawyers provide legal advice to liquidators as required, works well.  It brings fresh, independent, expert minds to bear when needed, which enhances the integrity of external administration regimes.  Would a liquidator whose professional qualification is that of a lawyer seek advice from another lawyer and give it the same status?


MY SUBMISSION > When the Options Paper refers to “clients” (of the insolvency practitioner) (para 162) it says that this term is used to refer to “creditors and/or members, depending upon the nature of the relevant insolvency administration”.  This seems to me to be a huge oversimplification which hides some important elements present in many insolvency administrations. 

In a voluntary corporate insolvency appointment the liquidator or administrator appointed at the first instance is engaged by the directors.  So, especially in the case of small enterprises, the liquidator or administrator will tend to think of the directors or, perhaps the directors’ accountant or lawyer, as his/her client.  The insolvency practitioner is approached by the directors (directly or indirectly) to assist with a problem that they have.

In such a case the liquidator’s fee is likely to be set by the directors or their advisers.  For example, the company’s lawyer or public accountant will contact two or more insolvency practitioners and ask them for advice on what to do and a “quote” on a fee – essentially a “fixed” fee – to carry out the work. 

The competition that keeps down insolvency administration fees occurs at this point.  It is, in fact, a tender process.  The winner, once appointed, then has the task of convincing those who have the power to approve or cut the fee (the creditors) that the fee is reasonable.  In this scenario, that tends to be the nature of the insolvency practitioners relationship with creditors.

 Often overlooked in discussions about the fee setting process in insolvency administration is the downside of competition.  Although a tender process keeps fees down, what is the cost to the integrity of our insolvency laws?  An analogy of sorts exists in the building industry, where fierce competition has encouraged quotes that are only achievable by the use of fake contracting agreements (to reduce employment costs), the fraudulent retention of tax monies, and the use of phoenix companies.  In the insolvency industry the push for cheap fees is likely to encourage tasks being cut, and the easiest tasks to cut are those to do with the investigation and reporting of offences and misconduct. 

 Inquiries and discussions about fees (including the discussion in the Options Paper) usually overlook the fact that our laws and our regulators charge and entrust liquidators with being part of the white-collar police force.  The amount of work liquidators are expected to carry out in this area – in investigations, collecting evidence, reporting and prosecution support – is considerable.  If liquidators do not meet this obligation, the insolvency laws are not enforced.  Through regulatory guides and the like the ASIC has almost “privatized” the enforcement of insolvency laws.  And, where the liquidator does this work, creditors often pay for it.  “Justice” has become another important client for the liquidator to consider.  Lower liquidation fees could be achieved, and justice might be better served, if a much greater part of this function was handed back to the ASIC or given to another government-funded police force.

QUESTION re FUNDS HANDLING AND RECORD KEEPING.  Are there other record keeping, accounting, audits and funds handling rules that should be mandated for personal and corporate insolvency, in addition to those that currently exist?

MY SUBMISSION > Yes.  I believe that the current law which allows liquidators in a creditors voluntary liquidation to destroy their own records of a liquidation soon after the winding up is finalized ought to be repealed.  Sec 542(1) contains the phrase “all books of the company and of the liquidator”.  The reference to the books of the liquidator should be removed.  For more comments see 


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Aug 102011

The Insolvency Practitioners Association of Australia (IPA) has suggested that solvent companies pay a fee to fund the liquidation of small assetless companies.  The proposal is that this new pool of funds be used to pay a set fee to liquidators who are willing to do the work.

The IPA’s proposal is made in its July 2011 submission to the Treasury, in response to an Options Paper on regulation of insolvency practitioners. 

This fund would be in addition to the existing Assetless Administrations Fund (AAF).  The problem with the AAF is that it is not open to liquidators of assetless companies unless and until they have conducted preliminary investigations and made preliminary reports to the Australian Securities and Investments commission (ASIC), and then only for the purpose of paying for additional investigations and reports by liquidators where it appears that directors ought to be banned or prosecuted.

 The IPA is the professional body covering over 85% of registered insolvency practitioners in Australia.  In its submission, forwarded this week to members, it says:

 “Currently there is no process for an assetless insolvent corporation to be wound up in the absence of a director or creditor able and prepared to indemnify the practitioner’s remuneration. In the case of a court liquidation, practitioners are required to conduct the administration with no prospect of remuneration.

 We recommend the establishment of a fund to have practitioners wind up small assetless corporations, on the basis of a set fee available either to all providers, or to a panel of willing providers **, and with the ability for the practitioner to apply to the current assetless administration fund if their work identifies the likelihood of offences. (** As an example, under the regime operating in Hong Kong, practitioners bid for work of this kind quoting a fixed fee for the administrations they would undertake.)

 This scheme could be funded via a levy imposed at the time of initial company registration, or by a small annual fee charged on every corporation. The large number of corporations at any  time means that the annual fee could be very low and still provide adequate funds for the operation of the scheme.

 There are very low barriers to the formation of a corporation inAustralia, and every corporation in the economy benefits from the health and reliability of the insolvency regime. While the frequency of insolvent administration is very low, any corporation has the potential to enter the insolvency regime at some future point. It is therefore reasonable that the costs of administering assetless insolvent corporations be born equally by corporations across the economy.   

 An alternative approach would be for ASIC to administratively deregister such companies without a formal insolvency process. (But) In our opinion, this option would encourage poor corporate behaviour.  By ensuring that a company is left with no assets in the event of insolvency, a director might seek to avoid any investigation into the failure of the company and any possible breach of duties.

 The recommended approach ensures that a minimum level of investigation is done which can lead to further applications for funding in the event that offences or recoverable transactions are identified. 

 Such initial funding to wind up these companies would also:

 •   Ensure protection of employees’ rights by allowing employees to access the GEERS scheme (or any such replacement arrangement); (GEERS is the General Employee Entitlements and Redundancy Scheme, administered by the Department of Education, Employment and Workplace Relations)

 •   Provide a deterrent to poor corporate behaviour by directors, though this needs to be supported by a proactive corporate regulator; and

 •   Assist ASIC to identify directors who should be banned from continuing in such a role. “


The IPA submission – which is 36 pages long and seems to respond to all the issues and questions raised in the Options Paper – will be published, along with all other public submissions, in a few weeks. 


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