ILRA: New Court Powers

The Insolvency Law Reform Act 2016 (Cth) consolidates the powers of the court into two primary divisions of the new Insolvency Practice Schedule.

This is my third note on aspects of the new Insolvency Law Reform Act (ILRA) and the scope of the new Insolvency Practice Schedules (IPS) entered into Schedule 2 of the Bankruptcy Act 1966 (Cth) and Schedule 2 of the Corporations Act 2001 (Cth). The earlier posts can be found here and here.

This post looks at the new consolidated court powers under the IPS in Division 45 and Division 90. It is important to note that only Division 45 commences on 1.3.17, with Division 90 set to commence on 1.9.17.

Under the pre-ILRA law, the court was given a range of powers under appointment specific provisions in both the Corporations Act and the Bankruptcy Act. For example, the power of the court to inquire into the conduct of liquidators, receivers, and voluntary administrators is contained in separate but similarly worded provisions (namely: ss536; 423; 447E). A similar situation occurs with applications for court directions and for the review of remuneration.

Under the new IPS the powers of the court are consolidated into two new divisions: Division 45 and Division 90. These divisions serve different purposes and commence at different times (1.3.17 and 1.9.17 respectively). One important point to note here is that the scope of the provisions is very different, and this based on a central feature of the IPS. The distinction is between orders in relation to a registered liquidator and orders in relation to an external administration. A registered liquidator is someone registered under Division 20 as a liquidator who can act as a:

  • liquidator and provisional liquidator
  • a voluntary administrator
  • a deed administrator
  • a scheme administrator
  • a receiver or receiver and manager.

It is possible for a practitioner to be registered as a liquidator who can only work as a receiver or receiver and manager: Insolvency Practice Rules (Corporations) 2016 (Cth) s20-1; ASIC RG 258 [258.3].

‘External administration’ as defined under the IPS (Corporations) is not as broad as these categories, as it does not include schemes of arrangement or receivership: IPS (Corporations) ss5-15 (def of external administration); 5-20 (def of external administrator).

Similarly in bankruptcy, the IPS (Bankruptcy) draws a distinction between a ‘regulated debtor’s estate’ and the ‘trustee of a regulated debtor’s estate’.  IPS (Bankruptcy) s5-15 defines a regulated debtor as a bankrupt; a person whose property is subject to control under Division 2 of Part X; a debtor under a personal insolvency agreement; or a deceased person whose estate is being administered under Part XI. A trustee of a regulated debtor’s estate does not therefore include a debt agreement administrator.

Division 45 (from 1.3.17)

IPS (Corporations) s45-1(1) provides that ‘The Court may make such orders as it thinks fit in relation to a registered liquidator’. See the same provision for registered trustees in bankruptcy in the IPS (Bankruptcy). The court may make orders on its own initiative (IPS s45-1(2)) or on an application by the registered liquidator or ASIC for corporate insolvency and the registered trustee or the I-G in bankruptcy for personal insolvency (IPS s45-1(3)).

The factors that the court may take into account are listed in s45-1(4) which are all concerned with the professional conduct of the liquidator/trustee and the effect of their conduct on others, ‘including including the effect of that action or failure to act on public confidence’ in registered liquidators/trustees as a group. The ARITA Code of Professional Practice and APES 330 (for non-ARITA members) will no doubt be important benchmarks for assessing whether the conduct of practitioners meets acceptable standards, just as they are important for assessing conduct resulting in a ‘show cause notice’ under IPS s40-40.

The court is also given the power to make orders under s45-5 with respect to costs associated with a matter considered by the court, including that the liquidator/trustee be personally liable for costs or that they not reimburse the costs from the estate.

The power to ‘make such orders as it thinks fit in relation to’ a trustee or liquidator seems very broad and could potentially cover a a wide range of circumstances, and yet the provision sits immediately after Division 40 which is concerned with disciplinary action, and commences at the same time as the regulation and discipline of practitioners (1 March) instead of commencing when the practice administration provisions (in IPS Part 3) commence (on 1 September 2017). Could a liquidator or trustee apply for s45-1 orders for directions, or for a limitation on their personal liability, or for approval to compromise a creditor’s claim? That leads us to Division 90.

Division 90 (from 1.9.17)

Division 90 of the IPS is divided into multiple subdivisions:

  • Subdivision A (Guide)
    • s90-1
  • Subdivision B (Court power to inquire and make orders)
    • s90-5 (Court inquiry at its own initiative)
    • s90-10 (Court inquiry on application of creditors etc)
    • s90-15 (Court may make such orders as it thinks fit in relation to the ‘external administration’/ ‘administration of a regulated debtor’s estate’). The application for this order is made under s90-20.
    • s90-21 (IPS (Corporations)) (Meetings to ascertain wishes of creditors or contributories).
  • Subdivision C (Review by either another registered liquidation or by the I-G in bankruptcy)
    • ss90-22 to 90-29 (Corporations); ss90-21 to 90-22 (Bankruptcy)
  • Subdivision D (Removal by creditors)
    • s90-35

Division 90 therefore provides a range of powers of the court to make such orders as it thinks appropriate, which will include directions and inquiries into the conduct of a particular matter. In corporate insolvency these new provisions will replace the existing s1321 of the Corporations Act after 1.9.17, although that provision also covers receivers and so a new s599 will be inserted into the Act to allow for appeals against decisions of receivers, who are not ‘external administrators’ and hence Div 90 does not apply to them.

Other court powers

This post does not include court powers in relation to practitioner remuneration (Div 60); creditor meetings (Div 75) or for committees of inspection (Div 80). These will be covered in a future post.

Conclusion

The ILRA reforms will make significant changes to the provisions relating to court orders under both the Corporations Act and the Bankruptcy Act, but most of those changes won’t start until 1 September 2017. Until then, we wait to see how broadly the courts will interpret the new Division 45 powers.

 

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