The second tranche of the Insolvency Law Reform Act 2016 (Cth) (‘ILRA’) started on 1.9.17. Over the next week, I’ll be doing a series of short posts on specific aspects of the new law. This post discusses some important new concepts in the ILRA changes.

The ILRA introduces a new regulatory framework into Australia’s personal and corporate insolvency laws. I’ve previously dealt with several aspects of the ILRA, including:

• an overview of the ILRA;
• court powers;
• notification requirements;
• changes to voluntary administration;
• the new show cause notice power.

I’ve also previously written on the difficulties posed by the deferred commencement of the ILRA here and here.

Key concepts

This post will discuss some foundational concepts that practitioners will need to be mindful of when considering whether particular provisions of the new Insolvency Practice Schedule (IPS) and Insolvency Practice Rules (IPR) apply.

The IPS and IPRs are divided into Parts and Divisions, covering practitioner regulation and discipline (Part 2) which commenced on 1.3.17 and a range of insolvency practice matters in Part 3 (which commenced on 1.9.17), including remuneration (Division 60), funds handling (Division 65), reporting obligations (Division 70), creditor meetings (Division 75), committees of inspection (Division 80), directions from creditors (Division 85) and court powers (Division 90).

Not all of the provisions in these divisions apply to all forms of insolvency appointments however.

Bankruptcy key concepts

The IPS and IPR focus on the core concept of a ‘regulated debtor’. This is defined in IPS (Bankruptcy) s5-15 as:

(a)  a bankrupt; or

(b)  a person whose property is subject to control under Division 2 of Part X; or

(c)  a debtor under a personal insolvency agreement; or

(d)  a deceased person whose estate is being administered under Part XI.

The ‘regulated debtor’s estate’ is defined in IPS (Bankruptcy) s5-20 as the estate of a bankrupt (other than an estate under Part XI); the estate of a person under control under Part X Division 2; the estate of a debtor under a PIA in Part X or a deceased estate being administered under Part XI. So the estate of a debtor under a debt agreement in Part IX is not a ‘regulated debtor’s estate’.

A ‘trustee of a regulated debtor’s estate’ is then the trustee of a regulated debtor: see IPS (Bankruptcy) s5-25. There is thus a distinction drawn between a ‘registered trustee’ (a trustee who is registered under IPS (Bankruptcy) Part 2: see IPS (Bankruptcy) s5-5) and the narrower category of a ‘trustee of a regulated debtor’s estate’.

Provisions in IPS (Bankruptcy) and IPR (Bankruptcy) Divisions 20-50 apply to registered trustees, while provisions in Divisions 60-100 generally apply only to trustees of a regulated debtor’s estate. The concept of a registered trustee appears in IPS (Bankruptcy) as a consideration that the court may take into account when making orders under IPS (Bankruptcy) s90-15 (public confidence in registered trustees as a group) and jurisdiction to the AAT to review directions by the Inspector-General to registered trustees (IPS (Bankruptcy) s96-1) but is otherwise absent.

Key point: rules relating to remuneration, information required to be given to creditors, creditor meetings and committees of inspection and powers of creditors to remove trustees only apply to trustees of a regulated debtor’s estate. Similarly, the broad court powers under IPS Div 90 only apply to trustees of a regulated debtor’s estate as does the creditors’ power to remove trustees under s90-35.    

The other key concept is that of a ‘person with a financial interest in the administration of a regulated debtor’s estate’. This concept is used in the IPS (but does not appear in the IPRs), and gives standing to persons to seek particular orders from the court, such as orders:

• directing the trustee as to the handling of money or securities (IPS (Bankruptcy) s65-45);
• directing the Inspector-General to audit the annual administration return; administration books or books used to trade on the business (IPS (Bankruptcy) s70-20);
• undertaking an inquiry into the administration of a ‘regulated debtor’s estate’ (IPS (Bankruptcy) s90-10);
• under IPS (Bankruptcy) s90-15): see IPS (Bankruptcy) s90-20.

Lastly, the position of the Official Trustee in Bankruptcy should be noted. The IPS doesn’t automatically apply to conduct by the OT: IPS (Bankruptcy) s6-1. The following provisions in the IPS (Bankruptcy) apply to the OT:

• Division 70 Subdivision C (record keeping); Subdivision D (giving information to creditors); Subdivision E (other requests for information);
• Division 75 (creditor meetings);
• Division 80 (committees of inspection);
• Division 85 (directions by creditors);
• Division 90 Subdivision B (court powers of inquiry); Subdivision C (removal by creditors);
• s100-5 (assignment of choses in action).

Corporate key concepts

In a similar manner to bankruptcy, the IPS (Corporations) and IPR (Corporations) draw a distinction between registered liquidators and external administrators. A ‘registered liquidator’ is a liquidator who is registered under IPS (Corporations) Part 2 (see s5-5), while an ‘external administrator’ is defined in IPS (Corporations) s5-20 as a liquidator, provisional liquidator, voluntary administrator or deed administrator (with ‘external administration’ defined in s5-15 as liquidation, provisional liquidation, voluntary administration or a deed of company arrangement). Receivers and scheme administrators must be registered liquidators but are not ‘external administrators’.

Provisions in IPS (Corporations) and IPR (Corporations) Divisions 20-50 apply to registered liquidators, while provisions in Divisions 60-100 generally apply only to external administrators. The concept of a registered liquidator appears in IPS (Corporations) as a consideration that the court may take into account when making orders under IPS (Bankruptcy) s90-15 (public confidence in registered liquidators as a group) but is otherwise absent from Divisions 60-100.

Key point: rules relating to remuneration, information required to be given to creditors, creditor meetings and committees of inspection and powers of creditors to remove liquidators only apply to external administrators. Similarly, the broad court powers under IPS Div 90 and the power of creditors to remove a practitioner only apply to external administrators.    

The IPS (Corporations) also contains the concept of ‘a person with a financial interest in an external administration’. This is defined in IPS (Corporations) s5-30 as:

(i)  the company;

(ii)  a creditor of the company;

(iii)  an external administrator of the company;

(iv)  in a members’ voluntary winding up–a member of the company

This concept is used in the IPS (but does not appear in the IPRs), and gives standing to persons to seek particular orders from the court, such as orders:

• seeking court review of an external administrator’s remuneration determination (IPS (Corporations) s60-11);
• directing the external administrator as to the handling of money or securities (IPS (Corporations) s65-45);
• to audit the annual administration return; administration books or books used to trade on the business (IPS (Corporations) s70-20);
• undertaking an inquiry into the external administration of a company (IPS (Corporations) s90-10);
• under IPS (Corporations) s90-15): see IPS (Corporations) s90-20.

An application may also be made to ASIC to appoint a reviewing liquidator by a person with a financial interest in the external administration of a company: IPS (Corporations) s90-23. Applications for court orders in respect of a reviewing liquidator may also be made by a person with a financial interest in the external administration: IPS (Corporations) s90-28.

Conclusion

The changes brought about by the ILRA bring with them key concepts that underpin much of the rules and procedures operating in Part 3 of the IPS and IPRs for both bankruptcy and corporations. These concepts of ‘trustee of a regulated debtor’s estate’ and ‘external administrators’ are narrower categories than ‘registered trustees’ and ‘registered liquidators’. In particular, court powers in IPS Division 90 only apply to external administrators and trustees of a regulated debtor’s estate, while court power under IPS Division 45 apply to the broader category of registered liquidators and registered trustees.