Wanted: Regulation of pre-insolvency advisers

ASIC appears to have been quite active over the last few months.  Sydney Insolvency News reports the three year suspension of one liquidator’s registration by CALDB, an application for orders prohibiting two others from practising, and voluntary undertakings from another two practitioners.

The circumstances that the CALDB reasons (available here) describe are disappointing, but they do not make very interesting reading in their own right.  There was no controversy because everything was agreed: the issues, the facts, and the penalty.

What has more significance is the reason why there was so much agreement.  Much of a liquidator’s duties are set out in the Corporations Act: requirements to make public disclosure, maintain bank accounts, arrange for remuneration approval, and so on.  Those statutory requirements are supplemented by an ARITA Code of Professional Practice which sets standards not just for the work to be done, but critically, the documentation of that work.

For most of the issues dealt with in the CALDB decision it was pretty clear not just what should have been done, but whether the liquidator could show that it had been done.

Those standards are supported by a broader framework which includes:

  • ASIC powers to seek an audit of a liquidator’s accounts
  • Court power to undertake an inquiry into a liquidator’s conduct
  • New rules in the ILRA which will allow for the appointment of a ‘reviewing liquidator’ by ASIC or the Court. (Creditors may similarly appoint a reviewing liquidator by resolution, but only in relation to matters of remuneration and costs).
  • A statutory registration regime which assures the skills, experience, and professional indemnity insurance of those seeking entry into the profession
  • Processes by which registration can be suspended, or even revoked – forcing an exit from the industry if appropriate.

Altogether, it is quite clear that that there is now quite a comprehensive regime supporting the regulation of insolvency practitioners.

There is a clear contrast between the regime supporting the CALDB decision, and the complete absence of any regulatory framework governing the pre-insolvency adviser in the Asden Developments case,  whose client ended up a bankrupt after following his advice.  In Asden there was no investigation by a regulator, and therefore no consequences for the pre-insolvency adviser.  The adviser is now a bankrupt, but only because he was unable to pay back the large fee that was paid to him.  There is no restriction on his re-entry to the provision of pre-insolvency advice – even whilst he is a bankrupt.

None of this can be a criticism of ASIC.  ASIC is not the regulator of pre-insolvency advisers, because there no regulation of pre-insolvency advisers.

The potential customers of pre-insolvency advisers are those by definition seeking assistance at an extremely stressful and challenging time.  It must be extremely difficult for them to make an assessment of the quality (or even legality) of the advice that they have been given, by a self-proclaimed expert – but there should be no need.

Twenty years ago there was no such thing as a pre-insolvency advice industry.  It is an industry that has developed and grown, at the same time as the professional associations have lifted the standards of their members, and as ASIC has raised the bar on the regulation of liquidators.  Some (but not all) of those involved are the former registered liquidators and former solicitors no longer able to practice as such.  It is clear that the regulatory framework has been left behind.

The restructuring and turnaround profession needs to work hard to explain the problems, and advocate for an appropriate licensing and regulatory regime for the pre-insolvency advisers who currently operate without being subject to any scrutiny or review.

For comment on some other problematic advisers: “Non-mainstream advisers”

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