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Focus: Senate reports on regulation of insolvency practitioners

20 September 2010

In brief: The transfer of responsibility for supervision of Australia's corporate insolvency regime, the introduction of a new licensing system for insolvency practitioners and changes to the regulation of practitioners' remuneration are just some of the reforms recommended in a recently released Senate Economics References Committee report on the insolvency profession. Partner Michael Ilott (view CV) and Law Graduate Jack Power look at the recommendations.

How does it affect you?

If the government elects to implement the recommendations of the Senate committee, then the insolvency industry will witness:

  • a more proactive supervisory body;
  • the introduction of an onerous licensing system for insolvency practitioners, and
  • stricter regulation of those practitioners' remuneration.

New insolvency regulator

The Senate report concludes that the current entity charged with the responsibility of supervising the Australian insolvency regime – the Australian Securities & Investments Commission (ASIC) – is overloaded by its immense portfolio and adopts too reactive an approach to regulation. Thus, the report recommends that the corporate insolvency arm of ASIC be transferred to the Insolvency and Trustee Services Australia (ITSA), to form the Australian Insolvency Practitioners Authority (AIPA).1 To ensure a more proactive approach to regulation under AIPA, the report recommends the establishment of a 'Flying squad' to undertake both random and targeted investigations into the conduct of practitioners.2

The Senate committee was also concerned about the lack of transparency in the Companies Auditors and Liquidators Disciplinary Board (CALDB) processes and, as a result, the report recommends that 'hearings, evidence and reasons' be made public unless otherwise ruled by the court.3

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New licensing system for insolvency practitioners

The report also recommends that the AIPA establish a licensing system for insolvency practitioners.4 The report states that such a system would allow flexibility in the review, suspension and cancellation of an insolvency practitioner's appointment, and enable the past conduct of practitioners to be considered when they are reapplying for a licence.5 The most significant components of the proposed licensing regime are:

  • An insolvency practitioner must have passed a written test administered by the AIPA and devised by an eight-person advisory panel before becoming eligible for a licence;6
  • Completion of the Insolvency Practitioner's Association of Australia's (IPAA) Insolvency Education Program to be a condition of the first licence renewal;7
  • AIPA may suspend an insolvency practitioner's licence if that practitioner does not renew his or her professional indemnity insurance upon notification by AIPA;8
  • AIPA may penalise an insolvency practitioner who does not hold professional indemnity insurance;9 and
  • AIPA may suspend a liquidator's licence if it believes that practitioner has overcharged.10

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Remuneration of insolvency practitioners

The report also acknowledges that the significance of insolvency practitioners' work warrants a proportionately high financial reward and recognises the dangers of attempting to set practitioners' fees. Nonetheless, the report makes several recommendations relevant to the remuneration of insolvency practitioners. Those recommendations are:

  • The pool from which such practitioners are selected be expanded to allow commercial lawyers with five years' experience and individuals who hold a MBA and have five years' commercial experience to be registered as a liquidator;11
  • The court be empowered to dismiss and replace a liquidator in either of the following circumstances: a 'vote of no confidence by a majority of creditors', or where the 'time based charging of the incumbent liquidator has not or will not result in a reasonable cost-benefit analysis to the Company';12
  • As mentioned above, the AIPA be able to suspend the licence of a liquidator that it suspects of overcharging;13 and
  • AIPA to cooperate with the IPAA and the Institute of Chartered Accountants to ensure that practitioners comply with the remuneration report template set out by the IPAA's code of Professional Practice.14

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Conclusion

The report concludes that ITSA should replace ASIC as the regulator of the insolvency industry, given the latter's ineffectiveness in discharging that responsibility. In addition, the report recommends that the new regulator establish a licensing system for insolvency practitioners, and outlines some of the requirements for receiving and maintaining a licence. Finally, the report makes several recommendations that could affect the remuneration of insolvency practitioners, including the AIPA's power to suspend the licence of a liquidator where it suspects that practitioner has overcharged. Currently, it is uncertain how many of the report's recommendations the government will implement. Allens, however, will continue to monitor and provide updates on the recommendations' progress.

Footnotes
  1. Recommendation 1.
  2. Recommendation 3.
  3. Recommendation 4.
  4. Recommendation 5.
  5. Senate Economics Reference Committee Report dated 14 September 2010 at 145.
  6. Recommendation 8.
  7. Recommendation 7.
  8. Recommendation 10.
  9. Recommendation 11.
  10. Recommendation 14.
  11. Recommendation 13.
  12. Recommendation 15.
  13. Recommendation 14.
  14. Recommendation 16.

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