Insolvency Law Reform Act 2016- A carrot and stick approach to the Insolvency System

After more than two years in the making, the Insolvency Law Reform Act (“ILRA”) has finally passed into law with a commencement date expected early in 2017.  As many of the industry would (or should) be aware, the ILRA comprises the latest series of reforms prompted largely by a perceived lack of integrity and transparency in the Insolvency system[1]. In this regard, the ILRA introduces an increased regulatory regime – particularly directed at corporate Insolvency Practitioner’s (“IP”) and provisions empowering creditors and other relevant stakeholders to take action against IP’s suspected of serious misconduct. In line with the Government’s recent innovation drive, the ILRA also sees significant reductions of the administrative burden imposed on corporate IP’s – particularly in respect of unfunded administrations.

The majority of the new regulations introduced by the ILRA appear to target the smaller, firms that engage in unconscionable conduct such as, acting dishonestly and acting in self-interest to the detriment of creditors and/or their appointed Company.  In this regard, ASIC has been granted significant further powers rivalling that of the Inspector-General in Bankruptcy ergo: to issue ‘show cause’ notices when it suspects a breach of the Act on the part of a Liquidator. The intention here appears to be to streamline the process for removing corrupt and otherwise comprised Liquidators from the system.

Interestingly, it appears that many of the proposed changes with the ILRA have been adapted from the ARITA Code of Practice, which represents the self-regulation of the insolvency system. Clearly there is a lack of confidence in the current, largely self-regulated system in Corporate Insolvency, which the government is seeking to replace with the heavy monitoring and regulation current present for Bankruptcy Trustees.

Creditors have also been empowered to act if they are not satisfied with the conduct of an administration. Again, in line with existing Bankruptcy law, IP’s are now obliged to:

Call a meeting should a significant creditor request same.

Provide information, documents or even reports to creditors, upon request or following a resolution; furthermore

Creditors can also now appoint another registered Liquidator to examine the conduct of the relevant IP- particularly in regards to their claimed remuneration.

Should creditors be wholly dissatisfied with the conduct of an IP, they will now also able to vote to remove a practitioner by resolution, when previously court proceedings were required (aside from specific initial meetings).

These reforms shift some of the burden of enforcement away from regulators and further empowers creditors to hold IP’s to account when they suspect misconduct. Concerns have been raised amongst industry groups regarding the potential misuse of this additional power allocated to creditors, however based on outcomes in personal insolvency (where these powers have been available for years), it has not resulted in substantial disruption to the system in the majority of cases.

On a happier note, the ILRA has also included several substantive reductions in the administrative burden on IP’s, particularly in regards to low-asset administrations. Some of the changes include:

Removal of mandatory initial and final meetings in voluntary liquidations;

Allowing resolutions to be passed without a physical meeting;

Removing the requirement for annual meetings/reports in voluntary liquidations;

Permitting the publishing of information using electronic media, such as websites;

Allowing IP’s to draw a prescribed minimum amount of remuneration without requiring a meeting of creditors.

IP’s will be able to ‘assign’ (sell) their statutory rights to commence proceedings.

The net result of these changes should be to drive down the costs involved in liquidating low or zero-asset companies. The ability of an IP to sell their statutory rights is also an interesting change; although it remains to be seen what parties will be interested in purchasing such rights.

Overall the ILRA is a positive step for the insolvency system which has been subject to criticism of late – largely as a result of a few bad apples spoiling the bunch.

 

 

[1] Report 430 – ASIC Regulation of registered corporate insolvency practitioners: January to December 2014