After almost a decade of deliberation and delay, the legislation to establish the new insolvency practitioners’ regime is on the brink of becoming law.
It will provide for tighter regulation, mandatory standards and stronger protections against abuse.
The Bills will be phased in progressively with full implementation by the end of June 2020.
At a glance
Areas of notable change include:
- a co-regulatory licensing system
- amended criteria for disqualification under section 280 of the Companies Act
- expanded interest statements
- further restrictions on related creditor voting
- new disclosure provisions for directors
- a requirement to report conduct by directors or management amounting to a “serious problem”, and
- new powers and duties for insolvency practitioners.
The changes will be implemented through the Insolvency Practitioners Regulation Act 2019, amendments to the Companies Act 1993 and the Receiverships Act 1993, and regulations which are yet to be published.
The transitional arrangements are complex.
The prescription by the Registrar of minimum standards for obtaining a licence and the accreditation of licensing organisations will come into force immediately.
Practitioners who are accredited at the time of the commencement will automatically be granted a four month transition in which to apply for a licence, with an additional approximately eight months for licence applications to be processed.
The other provisions will commence once regulations have been made, but no later than 12 months from enactment.
New licensing regime
The Registrar of Companies will be responsible for establishing and maintaining a public register of licensed insolvency practitioners. The administration costs will be borne by registered companies through a levy incorporated into annual return fees.
A person acting as an insolvency practitioner without a licence may be liable to a fine of up to $75,000.
Other features include:
- the Registrar will have discretion to grant accreditation to individuals or organisations (e.g. Chartered Accountants Australia & New Zealand) that will be responsible for issuing and administering licences and conducting disciplinary proceedings
- accredited bodies must issue a licence where the applicant meets the minimum standards (e.g. has the requisite qualification and is a fit and proper person – details to be prescribed by the Registrar)
- licensed practitioners must apply for a new licence at least every five years, and must satisfy ongoing competence requirements
- an insolvency practitioner without a licence will still be able to administer solvent liquidations provided they are a lawyer, an accountant, or a member of a recognised professional body, and
- scope for licensing overseas practitioners will be limited to Australian insolvency practitioners initially, although the Registrar will have the power to extend it to other jurisdictions with comparable insolvency regimes. Insolvency practitioners registered in Australia will be able to accept an engagement in New Zealand without being licensed here, provided they apply for a licence within 10 working days of appointment.
Amended criteria for disqualification
Section 280 of the Companies Act 1993 has been amended to:
- require that only licensed insolvency practitioners can be appointed to insolvent liquidations and voluntary administrations, and
- disqualify from appointment:
- a director of, or a person with a more than 5% interest in, a creditor of the company (within two years of the liquidation)
- relatives of certain disqualified persons, and
- any persons under a prohibition order.
The section will no longer disqualify persons or firms who, in the two years before the appointment, had a “continuing business relationship” with a secured creditor of the company.
This removes a significant difficulty as many practitioners’ firms had ongoing relationships with the trading banks and other secured creditors. It was also never clear whether suppliers holding ‘Retention of Title’ security interests were “secured creditors”.
The categories of persons to whom the “continuing business relationship” rule applies has, however, been expanded to include shareholders with a power to appoint or remove a director of the company (as opposed to just a majority shareholder).
Practitioners who have provided professional services to the company remain unable to act as liquidators or administrators, but a carve-out has been created for investigating accountants.
Lawyers, accountants, or members of a recognised body may administer solvent liquidations without an insolvency practitioner’s licence.
None of these restrictions will apply to the Official Assignee.
Expanded interest statements
Liquidators and administrators will be required to:
- prepare an interest statement disclosing any relationships that could reasonably be perceived as creating a conflict of interest, the nature of the conflict, and how the conflict will be managed, and
- update these statements every six months to capture any new information.
Further restrictions on related creditor voting
Under the new regime, an administrator or liquidator must disregard a related creditor’s vote at a creditors’ meeting, and the related creditor may then apply to the Court to have its vote counted.
This reverses the current position, which requires administrators and liquidators to apply to the Court to prevent a related creditor from determining the outcome of voting at a creditors’ meeting.
New disclosure provisions for directors
Under the status quo directors can declare that a liquidation is solvent without having to prove that the company is solvent. The new requirements are that:
- the board must declare that the company will be able to pay its debts in full within 12 months after the appointment of a liquidator
- a director who makes a declaration without reasonable grounds will be liable for a fine up to $10,000, and
- a solvent liquidation will become an insolvent liquidation if the 12 month deadline is not met.
These amendments are designed to ensure that solvent liquidations are dealt with quickly, and to deter directors from making false declarations.
Insolvency practitioners’ reporting requirements
Currently, practitioners’ duty to report offences is limited to specific statutes, and to report to the Registrar of Companies. Only these limited reports are protected by privilege.
The new Act expands protection for practitioners by providing for a broader range of reports to a broader range of regulators. Insolvency practitioners will be required to disclose “serious problems” to the Registrar, the Reserve Bank of New Zealand (in respect of a licensed insurer), the police and/or other body responsible for investigating the matter, such as the Financial Markets Authority. All such reports will be protected by privilege.
The new reporting requirements will not impose a positive duty on insolvency practitioners to investigate whether a serious problem has occurred, but a failure to report may result in a fine of up to $10,000.
A “serious problem” will be deemed to have arisen where:
- the company, or a past or present director, officer or shareholder of the company has committed an offence
- a person involved with the company has misappropriated company assets, or is guilty of negligence or breach of duty in relation to the company
- a past or present director has breached a directors’ duty in a material respect, and/or
- the company has been managed in a way that has materially contributed to the company’s insolvency.
Regulations will also require insolvency practitioners to report more extensively to creditors in initial and six-monthly reports on liquidations and receiverships.
New powers and duties for insolvency practitioners
A disposition of company property made in the period between service of a liquidation application and the High Court ordering the appointment of liquidators will be voidable unless the disposition was made:
- in the ordinary course of business of the company, or
- by an administrator or receiver on the company’s behalf, or
- under an order of the Court.
Expanded prohibition orders
The application of prohibition orders will be expanded to all forms of insolvency activities.
This is in contrast to the current arrangement whereby a prohibition order made in relation to one type of “insolvency activity” (process) does not prohibit a person from being involved in another type of “insolvency activity”. For example, a prohibition order against an administrator does not stop that person from accepting an appointment as liquidator.
Duties in relation to company money
Liquidators are already obliged to deposit the money of the company under their administration in a bank account to the credit of the company or in a general or separate trust account but, under the new Act, failure to comply may incur a fine of up to $50,000 or up to two years imprisonment.
Liquidators may still invest money not immediately required to meet any claims against the company in specified financial products.
Our thanks to Robert West for drafting this Brief Counsel.