The options paper follows findings in a Senate inquiry last year revealing that while complaints against disgraced liquidator Stuart Ariff, who almost single-handedly triggered that Senate inquiry, were flooding in from 2005, no court action was taken against him until 2009 when ASIC banned him for life from acting as a liquidator, handed him a $4.9 million compensation order and then bankrupted him under a further $11 million of claims.
Ariff was jailed for fraud in September this year. The criminal charges related to $1.18 million transferred from HR Cook Investments between 2006 and March 2009. Many of the charges on which he was convicted related to intention to defraud HR Cook, which had been solvent when he was appointed. Other charges related to making false statements in the company’s half-yearly accounts filed with the regulator.
Improving outcomes
The Treasury paper canvasses promoting a high level of professionalism and competence by practitioners, enhancing transparency and improving communication and taking steps to ensure increased efficiency in insolvency administration. One of the most critical proposed changes is removing the discipline of registered liquidators from the Companies Auditors and Liquidators Disciplinary Board (CALDB) and transferring that to a new committee system. “This would achieve greater alignment between the corporate and personal insolvency systems, and promote greater consistency of outcomes for practitioners,” the paper says.
Significantly, the paper also rejects as “simply impractical” the Senate committee’s recommendation to transfer ASIC’s corporate insolvency arm to the Insolvency and Trustee Service Australia (ITSA). It argues that the removal of corporate insolvency from the corporate regulator’s ambit would result in corporate insolvency losing its important connections with other parts of ASIC, such as in relation to major corporate administrations, regulation of insolvent trading and of director and corporate misconduct that may have been engaged in leading up to, or during, an insolvency event.
The committee advocated regulating personal bankruptcy and corporate insolvency under one body. To some extent, the Treasury paper seeks to address this by envisaging a better alignment between the two but it still upholds ASIC’s role in the insolvency regime.
[breakoutbox][breakoutbox_title]Senate inquiry into the regulation of insolvency practitioners[/breakoutbox_title][breakoutbox_excerpt]Senate Economics References Committee’s September 2010 report, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, delivered 17 recommendations to change the system and was scathing in its criticism of ASIC.[/breakoutbox_excerpt][breakoutbox_content]The Senate Economics References Committee’s September 2010 report, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, delivered 17 recommendations to change the system and was scathing in its criticism of ASIC. Apart from recommending the stripping of ASIC’s powers, it called for imposing a penalty on insolvency practitioners who operate without personal indemnity insurance, allowing the regulator to suspend a liquidator’s licence if overcharging had occurred, getting the Law Reform Commission to investigate harmonising personal and corporate insolvency, set up a ‘flying squad’ to investigate insolvency practitioners, having all insolvency practitioners paying a licensing fee and getting the three major accounting bodies to establish a fidelity fund to ensure that creditors are insured for fraud and wrongdoing.
It also implied that there seemed to be a growing problem with rogue insolvency practitioners. It noted there had been a spike in the number of complaints against insolvency practitioners to ASIC from 352 in 2007/08 to 633 in 2008/09. While some told the committee that Ariff was one of the ‘bad apples’, others claimed it reflected systemic weakness and regulatory failure. The committee expressed concern that the regulator is slow and unresponsive in handling complaints. It noted that ASIC had taken a long time to identify Ariff as a practitioner that needed to be investigated, despite receiving notifications about him back in 2005.
A mix of outdated regulatory structures, the regulatory culture within ASIC and the various competing priorities for ASIC’s time and resources were suggested as factors, while the report noted that “the strategic priority of managing the domestic and international implications of the Global Financial Crisis has consumed much of ASIC’s time and resources”.[/breakoutbox_content][/breakoutbox]
More regulation needed
Insolvency specialist Associate Professor Christopher Symes from the University of Adelaide’s law school says ASIC is definitely struggling under its workload and unable to give insolvency much priority.
“ASIC have had too much put on their plate and the regulation of insolvency practice has been a relatively low priority – in fact insolvency seemed to drop off the ASIC radar for a while a few years back,” Professor Symes says. “There is good logic t o combining ASIC’s corporate insolvency with ITSA’s personal insolvency. Firstly, pretty much all registered trustees in bankruptcy will also be registered liquidators so if there is a poorly performing or ‘at risk’ professional they are regulated and disciplined once. Secondly, there is some crossover of the actors, for example directors who have been inside the insolvent company and then are made bankrupt through the calling in of personal guarantees and these are going to be part of the focus of the insolvency practitioner’s work and the regulator’s control.
“Essentially, I think it’s time to pool the expertise of insolvency regulators and then properly fund the agency.”
Professor Symes says he does not believe the regulation through professional bodies and disciplinary processes is adequate. “While disciplinary matters can be a part of a professional body’s activities, it cannot be a major part and they rarely will have enough resources to deal with detailed investigations. For this reason, discipline of some professionals like medical professionals is done by government-funded bodies.
“The Insolvency Practitioners Association is a relatively small body and there are about 700 registered liquidators so it is inappropriate to expect it to perform like an accounting professional body with a 20,000 strong membership base. The present regulation of insolvency practitioners does not require them to be a member of any professional body so putting all regulation of disciplinary matters onto professional bodies does not cover the field,” he says.
He says more regulation is needed, suggesting an Insolvency Ombudsman funded by government be set up, with one important role being the collection of information to inform the process of reform in this area. “I think an annual report is required for each registered liquidator showing their activities, including the number of appointments, fees, professional education undertaken, time taken to complete appointments, commonality of relationships with directors inter alia.
“There is also need to reinforce the flying-visit practice inspections and monitoring with profiling of practices with the greater risks.
“It may be time we looked at the regulation of specialisations so that we regulate insolvency practitioners who do mainly corporate rescue as Registered Administrators and separately register Registered Liquidators.”
