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Insolvency Regulation proposals: casting a careful Eye

IN THIS COLUMN WE GIVE SPACE TO OUR GUEST BLOGGER WHO GOES BY THE AVATAR OF ‘THE EYE’. He also writes for the Insolvency Law Bulletin (LexisNexis). Here he reflects on the Christmas reading provided by the Government’s response to its consultation on Insolvency Practitioner Reform (Treasury,15  December 2011), and subjects a well-known journalist’s instant reaction to careful scrutiny. These are the personal views of The Eye.

” Refugees, tax and insolvency practitioners are not often associated, except that they both provide ready copy for the populist parrots of the press, and politicians. Just as we are being “invaded”, as one newspaper put it, by refugees, and being subjected to other frightening incursions, and being subjected to tax “slugs” and “skyrocketing” charges, so also are creditors and others being gouged by insolvency practitioners, over-serviced and delayed, confronted with opacity and abuse, and subjected to gross misconduct. It’s not the directors, the aggressive banks and preferred creditors, the devious debtors and conspiratorial spouses, and others who were implicated in the insolvency that we should fear, it’s the insolvency practitioner. Let’s have a look at one press article, by Adele Ferguson in the Fairfax press of 15 December 2011. The Senate inquiry into liquidators apparently released a “damning proposals paper into the industry and the ineffectiveness of the regulator”. One can’t see too much damning in the Senate report, not when one of its recommendations was that there be an entrance examination to become a practitioner. And it must be “closed book”, the Senate accepting advice of a lawyer that this was necessary in order to stop students simply parroting their Nutshell books, or even more worthy texts. This is one insight into the Senate’s thinking … But there is the “real issue”, Ferguson tells us, ominously. ASIC was “asleep at the wheel”. (This is a well worn journalist’s phrase, perhaps past its prime, but then many of this journalist’s words are – like rogue, bombshell, cosy monopolies busted open to competition, a system spiralling out of control, and worse). Yes, asleep or dozing ASIC may have well been, and in response, the government has unfortunately decided not to set up a full time insolvency regulator. But a review of ASIC’s latest annual report, and of ITSA’s, shows the actual number of complaints against practitioners, and of those, how many are found valid. The courts have their fair share of unsuccessful challenges to alleged practitioner misconduct. It helps to read around one’s topic, rather than parroting government reports. And we have to agree with our journalist’s list of systemic issues in insolvency: • conflicts of interest – certainly a significant obligation and one often tested in the courts, a most recent example being Viropoulos v Falcon G.T. Pty Ltd [2011] NSWSC 1509. The court refused the application to remove the practitioner. • fee gouging – apparently meaning overcharging, even though all gouging must be approved by creditors or the court. The Senate report’s recommendations about this were tame. For those interested, a close review of a practitioner’s remuneration, in the hundreds of thousands, is determined in Joe & Joe Developments, 20 September 2011, NSW Supreme Court. • over-servicing – yes, all those statutory obligations of a practitioner, under long unreformed 19th century law. Practitioners must give notice by newspaper for example, at $2000 a go. • protracted settlements – yes, settling an insolvency claim against someone who has made off with company assets can be protracted, and claims can be complex, and defended. Defendants just will not hand over the money. • lack of transparency – an interesting one, though opaque in its meaning in the insolvency context. There is a large amount of reporting to the creditors and the world expected of a practitioner. This is one reason for the substantial lessening of the reporting obligations in these reform proposals. • conflicts of interest, again! – just for emphasis? • abuses of power – indeed, a real no-no for anyone, including the press, but rarely upheld against liquidators under court scrutiny; • gross misconduct – also no good, for anyone, again not often upheld. Certainly Ariff was guilty of some of these, and he is in gaol. The last major finding of practitioner misconduct before that was probably Edge, in 2007, and then some cases in past law reports. And finally, Ferguson thinks there are “too many loopholes”. Yes, all loopholes must be closed, as a matter of principle, and urgently, just as white collar crime, according to Senator John Williams, must be done away with. Then our journalist offers a “frinstance”, by-passing some useful legal analysis. Frinstance, the government thinks that creditors should have the power to remove a liquidator but it is to be weakened, alarmingly, according to our journalist, by the ability of the practitioner to apply to the court to prevent their own removal. Insolvency law goes back some centuries and requires some appreciation of the deviousness of its stakeholders. Creditors being sued by the liquidator for recovery of ill-gotten moneys may well vote to remove that liquidator, but the law thinks sensibly in responding to that, even if others don’t. Wise Justice Clyne said in Crawford’s case back in 1943 that “there is probably no reason why, when a trustee who is honestly and properly carrying out his duties, should not be removed from his office if the creditors so desire, but, when creditors make improper and unfounded allegations against a trustee to secure or justify his removal, and the conduct of these same creditors leads to the strongest suspicions that their reason for having the trustee removed is a desire to help an important shareholder of a company which is a creditor, the Court should interfere”. And other Judges have since decided accordingly. As to other frinstances, yes we need better education of many professionals, including insolvency practitioners, and others …. And a “fee cap is long overdue”. Some know capped fees have been around for a long time. The decisions in Aliance and Wenkart are but two one may read. But, alarmingly, the cap can be raised. The courts don’t find that of concern: Paul’s Retail Pty Ltd v Morgan [2010] NSWCA 217. And why should it be raised? Construction companies can provide an estimate of their jobs, and if they get the estimate wrong, they wear the cost, we are told. Having quantity surveyors, engineers and builders review a building project before estimating a price is very different from taking an appointment to an insolvent company. The appointment is taken cold – practitioners must be independent – and absconding directors and bankrupts are often not fulsome in their assistance to the new practitioner. Trying to price such work and indeed it is often best not to. And finally, our journalist has counted 9 insolvency law reviews in 20 years, and only now is the government getting around to implementing reforms recommended in the 1988 Harmer Report. The lack of attention to insolvency reform has hampered insolvency administrations for a long time. The law reform process – whether it be law in relation to refugees, tax or insolvency – requires input from those who can give considered and unemotional attention to what can be complex issues. The Eye 15 December 2011 Further readings of the author, for those interested in thinking: • Articles by The Eye, in the Insolvency Law Bulletin, LexisNexis • Australian Insolvency Management Practice, Murray Taylor, CCH, in particular newsletter 138 • Keay’s Insolvency, Murray Harris, LBC, 2011, Ch 21.”

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