Insolvency law reform bill/ Chief Justice Bathurst



The major insolvency reforms revealed in the exposure draft of the Insolvency Law Reform Bill are not proposed for introduction into the forthcoming winter sittings of federal parliament.

While that had lately been expected, given the absence of any indications of priority being given to the reforms, it is now confirmed by the government's release (undated) of the list of Bills that are proposed for introduction. 

While both the Insolvency Law Reform Bill, and also the Bankruptcy Law Amendment Bill, relating to the reform of debt agreements, are on the government list, neither are marked for introduction in these sittings. 

The IPA will keep members informed on progress of the reforms.

Members will be interested to read the comments of Chief Justice Bathurst, of the NSW Supreme Court, on aspects of the reforms, given at last week's national IPA conference in Sydney. 

(12 Apri
Chief Justice Bathurst
CHIEF JUSTICE OF NEW SOUTH WALES
SYDNEY
8 MAY 2013
1. When I first started practice - many years ago - there was a perception
that the task of a liquidator after being appointed was to do two things. The
first was to go down to the court registry and obtain a sealed copy of their
appointment. The second was to call their office from the registry
payphone and ask someone to bring round their car, with an axe and a
battering ram in the boot. They would then commence their duties by
going to the unfortunate company’s place of business, using the axe or
ram to break down the door and grabbing any cash, as well as the
business’ books, before they could be destroyed. In this way the
company’s assets were recovered.
2. One look at the program for this Conference demonstrates just how far
gone those days are - although the people I am jokingly referring to of
course did much more than break down doors, and had a knowledge of
insolvency law far surpassing that of most members of the legal
profession. 2
3. Over the next two days, you will hear from senior insolvency practitioners,
lawyers, economists and regulators. You will consider big issues - such as
the desirability of fundamentally reshaping Australia’s insolvency regime to
adopt a US Chapter 11 style procedure. You will also engage in detailed
analysis of complex matters relevant to day-to-day practice, through case
studies and a number of master classes.
4. By allowing practitioners to develop their expertise and to analyse current
and forthcoming developments in insolvency regimes, this conference
plays a tremendously important role in promoting the efficiency,
transparency and integrity of our insolvency regimes - to the benefit of all
participants. It is therefore my great pleasure to formally welcome you
today, and to congratulate the Insolvency Practitioners’ Association of
Australia for once again putting on such a valuable event.
5. One issue which will no doubt feature prominently in your upcoming
discussions is the forthcoming Insolvency Law Reform Bill. Some of you
will have been following the development of these reforms since the
original Senate Committee report was released in September 2010. I
understand you will be delving further into the detail of the Bill tomorrow,
with a keynote address by Greg Medcraft and a panel discussion featuring
a number of key stakeholders. 3
6. I cannot to hope to equal their expertise, nor indeed that of many of you
here today, in discussing the detail of the proposed legislationNonetheless, given the Bill’s significance - not only for insolvency
practitioners, but all those who interact with the industry, including lawyers
and the courts - I would like to use my time today to briefly consider some
aspects of the reforms.
7. I will largely confine myself to the proposed changes to corporate
insolvency. That is for two reasons. First, the harmonisation effort
underlying the Bill seems to have centred largely on amending the
corporate regime to more closely align with current bankruptcy law.
Second, as I am at least somewhat familiar with corporate insolvency, I
have a fighting chance of avoiding making a fool of myself in the coming
minutes.
8. Let me first say that many of the key themes of the reforms appear very
desirable. I have no doubt for example that a common set of Practice
Rules across bankruptcy and insolvency will minimise complexity for
insolvency practitioners, creditors and other stakeholders and therefore
reduce compliance and participation costs.
9. Changes to improve the control of creditors, including by allowing them to
remove and replace a liquidator at any time and across all types of
insolvency administration are also extremely welcome. Regardless of
whether a liquidator is complying with their legal duties, it is surely 4
desirable for the efficient and expeditious conduct of external
administrations that creditors are empowered to remove a practitioner who
no longer enjoys their confidence. That creditors often face significant
financial barriers in removing practitioners through the court process only
reinforces this point. I would add the caveat that this should not extend to
circumstances where one major creditor is able to use their power to
control the liquidator. I do not believe that sufficient attention has yet been
paid to avoiding this circumstance in drafting the proposed legislation.
10. However, I do have a number of questions about the Bill’s operation,
particularly in relation to the Court’s oversight of liquidations. When I
mentioned these queries to a colleague, he responded: “yes, but the thing
is you are thinking like a lawyer”. I felt quite sheepish. I can only ask that
you forgive me if I am adopting an overly legalistic perspective, as well as
the obvious self-interest in my focus.
11. Now, of course, I am aware that the recently released Exposure Draft is
just that – a draft. Everyone, including the relevant government
departments, would no doubt agree that further work is needed before the
Bill is introduced into Parliament, both in relation to consequential
amendments and to iron out certain anomalies. In those circumstances, I
will resist the urge to be boringly fastidious – some might say anal
retentive – and go through the Bill with a fine tooth comb to pick out
problems. Except to say that I became very confused when the Draft
started referring to paragraphs of the Corporations Act, rather than 5
sections.1
 Sorry – I had to get that off my chest. You can’t be surprised by
a little bit of nit picking. After all I am a judge.
12. To be slightly more constructive, I do think that one of the outstanding
challenges in relation to the reforms is determining their “architecture” – or
in other words how they will fit into existing corporations and bankruptcy
law. The Exposure Draft indicates that the Insolvency Practice Rules will
be inserted as schedules to the Corporations and Bankruptcy Acts.
However it is as yet largely silent on the consequential amendments,
which I understand are still being drafted. A number of issues should be considered in finalising these further amendments.
13. First, it is imperative that sweeping repeals do not undermine the integrity
of the corporate insolvency regime. For example, the Government’s
proposal paper, which formed the background to the Bill, states that in
relation to Court oversight, the “proposed reforms would consolidate into a
single provision… the various provisions which empower persons to seek
review of an insolvency practitioner’s conduct in various kinds of
insolvency administration.”2
 The explanatory material suggests that this
may extend for example to the Court’s power to supervise administrators
under Part 5.3A and to give directions to liquidators in compulsory winding
1
 Insolvency Law Reform Bill 2013 (Exposure Draft) sch 2, pt 3.
2
 Australian Government, “Proposals paper: A modernisation and harmonisation of the
regulatory framework applying to insolvency practitioners in Australia (December 2011) at
[172]. 6
ups.3
 This raises at least three possibilities in relation to consequential
amendments.
14. First, there could be a general revocation of the Court’s specific powers of
supervision, including those contained in Part 5.3A. As regulatory change
for the sake of it is not desirable, this, in my view, is only justifiable if those
powers are found not have been operating effectively. Personally, I am not
aware of any pressing need to amend them. Second and most undesirable
would be that the new and old provisions remain in force alongside each
other. This would give rise to difficult issues of reconciliation, including in
determining the extent to which the earlier sections had been impliedly
repealed. Third, express provision could be made that the new provisions
do not apply to Part 5.3A, or are not intended to restrict or enlarge the
Court’s powers in respect of that Part. A similar provision in relation to the
scheme of arrangement provisions in section 411 would be desirable in
those circumstances.
15. Second, consideration should be given to whether jurisprudence
interpreting current corporations and bankruptcy legislation will be
applicable to new analogous provisions. To take just one example, section
17-5, which provides for Court oversight of liquidators, is expected to
replace section 536 of the Corporations Act. Will cases interpreting section
536 be relevant to the new 17-5? In Hall v Poolman for example, a number
of factors were held to be relevant to the Court’s discretion to make an
3
 Consultation Explanatory Document, Insolvency Law Reform Bill 2013 (Primary
Amendments) at 14. 7
order that a liquidator was not fully discharging his or her duties in
pursuing certain litigation.4
 To what extent will discretionary considerations
of this nature affect the interpretation, not only of section 17-5, but also the
Court’s similar power under Division 32 to inquire and make orders in
relation to external administrations – a power that specifically
contemplates orders in relation to the costs of a court action pursued by
the liquidator?5
16. Similarly, is the Court’s power of inquiry under these provisions subject to
a jurisdictional precondition that there is a sufficient basis for concluding
that the liquidator’s adherence to their duties requires investigation?6
 Or is
it more analogous to the Court’s power under section 563(3) of the
Corporations Act to require the liquidator to answer any inquiry in relation
to the winding up?7
 Or neither?
17. It may well be that I am grasping at analogies where none exist. However,
if no guidance is provided as to whether new rules are intended to mirror
or be informed by existing provisions directed to similar conduct, this is an
issue that will have to be worked out before the courts - inevitably at the
cost of parties to the liquidation. Achieving a maximum of clarity and
certainty in this regard should therefore be a priority for all those involved
in the ongoing preparation of the Bill.
4 Hall v Poolman (2009) 254 ALR 333 at [116] – [186].
5
 Insolvency Law Reform Bill 2013 (Exposure Draft) sch 1, s 32-20(4)(c)
6 Hall v Poolman (2009) 254 ALR 333 at [56]-[60]
7
 Ibid at [105] 8
18. In addition, the substance of the proposed reforms will raise new issues
for court supervision of liquidations. I will briefly consider three.
19. First, the amendments provide that in making orders under both sections
17-5 and 32-20, the Court may take into account “public confidence” in
registered liquidators as a whole. As a side note, it is interesting that no
similar provision applies in relation to the deliberations of the committee
convened by ASIC to consider disciplinary action against practitioners.8
20. As I understand it, one of the primary objectives of this amendment is to
allow the Court to make an order directing a practitioner to stand aside
from an external administration in cases where there is a prima facie case
of wrongdoing but a disciplinary investigation initiated by ASIC has not yet
concluded.9
 The reform responds to delays which occurred in the Ariff
case.10
21. I am by no means opposed to the Court considering public confidence in
the system as a whole when supervising liquidators. A reform of this
nature does however hold implications. First, in the circumstances I have
just outlined, questions of fairness to the practitioner will arise. In
determining whether or not a prima facie case exists, a court will inevitably
have to adjudicate – at least at that level – on the issues raised in the
disciplinary proceedings. Currently, courts commonly adjourn civil
8
 see Insolvency Law Reform Bill 2013 (Exposure Draft) sch 1, s 16-65.
9
 Australian Government, “Proposals paper: A modernisation and harmonisation of the
regulatory framework applying to insolvency practitioners in Australia (December 2011) at
[175.1]
10 Australian Securities and Investments Commission v Ariff [2009] NSWSC 829. 9
proceedings to await the outcome of such disciplinary proceedings. This
would, of course, frustrate the intended operation of the provision. It will be
interesting to see how courts grapple with this challenge, particularly in
light of the obligation to act in accordance with the dictates of justice when
making case management orders, including orders staying proceedings.11
22. Further, while the legislative intent behind the reform may be directed to a
particular situation, the provision itself is broad. A consideration of public
confidence in the system may well require courts to alter their approach to
many matters commonly arising in liquidations. It is perfectly conceivable
for example, that this factor could affect the assessment of whether and
when it is permissible for a liquidator to engage in speculative litigation that
is financed by a litigation funder.
23. Second, the new provisions providing for Court supervision contain
divergent standing requirements. Section 17-5 is extremely narrowly
framed, allowing the court to make orders only on the application of the
registered liquidator or ASIC. By contrast, sections 32-15 and 32-20, which
overlap significantly with 17-5, provide that the Court may inquire and
make orders on the application of any person with a “financial interest” in
the external administration. The same broad standing requirement can be
found at other points in the Exposure Draft.12 This divergence raises the
possibility that Division 32 could be used as a way to circumvent the much
11 Civil Procedure Act 2005 s 58.
12 see for eg Insolvency Law Reform Bill 2013 (Exposure Draft) sch 1, s 22-20. 10
narrower requirements in 17-5. I also question whether such an expansive
standing requirement is desirable for the efficient conduct of liquidations.
24. You may think I am doing exactly what I said I would not do – going
through the Bill and criticising details. However these questions are
important and they relate to a broader issue, which I do not think the Bill
has yet grappled with. That is the appropriateness of allocating
supervisory responsibilities to the Court, ASIC and industry bodies, and of
conferring on each of them concurrent but different powers of
investigation, supervision and regulation. Such an approach may be
thought to bring undue complexity and uncertainty to the regulatory
process. It is generally the role of Courts to determine allegations of
wrongdoing in adversarial proceedings and to supervise the actions of
regulators. The desirability of more direct involvement by Courts in the
administration of liquidations is a matter deserving serious consideration.
25. There is one final matter I would like to mention. The abolition of the
category of official liquidator has been flagged as an intended reform,
which may create unintended difficulties. Currently, to become registered
as an official liquidator, a practitioner must give an undertaking to ASIC
that they will not refuse consent to act in a court winding up solely because
the company does not have sufficient funds to cover their anticipated
professional costs. In the absence of such an undertaking – which I doubt
very much would be obtained from all registered liquidators – it may be
difficult to find liquidators to act in liquidations where the company has little 11
or no funds. I note for example that only a couple of weeks ago, the
Federal Court made an order dividing some 187 external administrations
amongst Victoria’s official liquidators.13 This was necessary because the
liquidator who had been administering them had resigned. In the absence
of the category of official liquidator it may be difficult for courts to act in
such circumstances.
26. These are only a few of the many challenges which will no doubt arise as
a result of the contemplated reforms. I would stress again - this does not
mean change is undesirable. As I have said on other occasions, regulation
can have a positive role to play, provided it is clear and its provisions can
be efficiently applied.
27. Each of you has a significant role to play in this regard and it is therefore
extremely apt that the title of this year’s conference is “Forging the Future”.
I wish you all the best in your important deliberations, as you contribute to
the future of this and other important issues over the next two days. Thank
you once again for your invitation and kind attention. It my great pleasure
to declare this conference formerly open.