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?
REMUNERATION FRAMEWORK FOR INSOLVENCY PRACTITIONERS. INTEGRITY OF THE FEE SETTING PROCESS.
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 http://insolvencyresources.com.au/blog/2010/05/24/retaining-books-and-records-post-liquidation/