The Insolvency Law Reform Act 2016 (Cth) (‘ILRA’) remakes the rules on creditor committees in insolvency (called ‘committees of inspection’ or COI). This post will explain the new law and comment on the increased role and powers given to COIs.
What are committees of inspection?
COIs have been a feature of common law insolvency systems since the mid-19th century. They are comprised of representatives appointed by the general creditors to advise on and assist with the insolvency practitioner’s conduct of the insolvency administration. They are given a narrow range of decision-making powers, usually involving approval of remuneration and approval of certain actions by the insolvency practitioner. However, they have not traditionally had the power to control the insolvency practitioner, with the IP able to bypass the COI by going to the general creditors’ meeting or to the court for approval. This may be contrasted with the significant role that they are given in some foreign insolvency systems. For example, in US Chapter 11 bankruptcy the official unsecured creditors committee has independent reporting obligations, a statutory obligation to monitor and standing to challenge the debtor-in-possession in court proceedings. In large Ch 11 cases multiple creditor committees may be formed to represent different stakeholder groups.
The ILRA has rewritten the rules relating to COIs by replacing the appointment specific rules for liquidations, voluntary administration and bankruptcy with a new consolidated and largely harmonised regime in Division 80 of the Insolvency Practice Schedule and Insolvency Practice Rules for bankruptcy and corporations.
When are they used?
In bankruptcy, COIs are used in ‘a regulated debtor’s estate’, which is defined in s5-16 of the IPS (Bankruptcy) as the estate of a bankrupt, the estate of a deceased person under Part XI, the estate of a debtor under a PIA, or a person whose property is controlled under Part X Div 2. COIs are not used in Part IX debt agreements.
In corporate insolvency, COIs are used in liquidation and voluntary administration (which are designated as ‘external administrations’ under IPS (Corporations) s5-15) and not in receivership or schemes of arrangement.
Of course, there is nothing to stop an ad hoc creditors’ committee being formed to assist with a receivership or scheme. The support of such a group is likely to be useful if a court application is made seeking directions or some other order to assist the insolvency practitioner: see for example, Corporations Act 2001 (Cth) s424 (for receivership).
The purpose of COIs
The ILRA includes a new harmonised statutory purpose for COIs under both bankruptcy and corporate insolvency. This is found in IPS s80-35 in both bankruptcy and corporations, which sets out the functions of the committee as:
- to advise and assist the trustee/external administrator;
- to give directions to the trustee/external administrator;
- to monitor the conduct of the administration of the estate/external administration of the company;
- such other functions as are conferred on the committee by this Act;
- to do anything incidental or conducive to the performance of any of the above functions.
The statement of a statutory purpose of the COI is new for bankruptcy and liquidation over the pre-ILRA provisions, and the inclusion of a specific purpose of monitoring and directing the administrator is new over the pre-ILRA voluntary administration provisions. This suggests that the government’s intention is for creditors to take a more active role in monitoring insolvency administrations and to act as a gatekeeper for the insolvency practitioner. This is consistent with the range of new powers that creditors are given to request information, documents and reports from the insolvency practitioner under IPS Div 70 (ss70-40, 70-45). COIs are given similar powers under IPS s80-40.
Who can serve on COIs?
COIs are appointed by a resolution of the creditors under IPS s80-15. This may include a resolution passed by the creditors without a meeting under IPS s70-40 and IPR s75-130. Membership of the committee is open to persons who are authorised representatives of a creditor of a company in external administration or a regulated debtor, or a representative of the Commonwealth if a FEG claim has been made or is likely to be made: IPR s80-5. The inclusion of a specific eligibility for a FEG representative is new.
The ILRA changes also include the power for a ‘large creditor’ and employees to appoint a specific representative to the COI. A large creditor is one that is owed at least 10% of the value of the creditors (or a group of creditors representing at least 10% of the value): IPS s80-20. Employees owed at least 50% in the value of entitlements owed to or in respect of employees are also given a right to be represented on the committee: s80-25. The methods for appointing members of the committee under ss80-15, 80-20 and 80-25 are mutually exclusive so that, if a creditor votes for one method of appointment, they cannot also vote for the other.
A COI may act by a majority of its members, but cannot act unless a majority is present: IPR (Bankruptcy) s8-5(5); IPR (Corporations) s8-5(6).
ASIC and the Inspector-General may attend meetings of COIs for companies in external administration and regulator debtor’s estates (respectively): IPS s 80-65.
The powers of COI
One of the primary powers of a COI is the power to approve a remuneration determination under IPS Div 60, although the trustee or external administrator may also seek approval from the creditors or from the court.
A COI may direct the trustee or external administrator to convene a creditors’ meeting under IPS s75-15(1)(a), and the trustee must comply unless the direction is not reasonable. The grounds upon which a direction to convene a meeting may be held to be unreasonable is in IPR s75-250 (for both corporations and bankruptcy).
A COI can also request that the trustee or external administrator provide information, reports or documents under IPS s80-40, which must be complied with unless they are not relevant to the regulated debtor’s estate or external administration, would involve a breach of duty by the trustee or external administrator or the request is unreasonable: IPS s80-40(2). Grounds that are unreasonable are set out in IPR s80-15.
COIs may give directions to a trustee or external administrator under IPS s80-35, but they while they must have regard to the directions they are not bound to follow them (IPS s80-35(2)). The trustee or external administrator who does not comply with the directions must record reasons for doing so: IPS s80-35(3).
The committee may obtain advice or assistance, but must obtain permission of the trustee or external administrator before doing so: IPS s80-50. The court may make an order that an expense was not incurred by the person as a member of the committee: IPS s 80-50(3). This is presumably aimed at constraining the expenses that committees may incur, which may be given priority in bankruptcy and liquidation.
COIs are given a new power to make applications to the court for orders in relation to the administration of a regulated debtor’s estate or to an external administration of a company: IPS ss90-10, 90-15, 90-20. This is a significant new power which supports the new statutory monitoring function of the COI.
Duties of members of COIs
Members of COIs stand in a fiduciary relationship with the general body of creditors. This is reinforced by IPS s80-55, which prohibits members of the committee from directly or indirectly deriving any profit or advantage from the regulated debtor’s estate or the external administration of the company. There are various exceptions, including if the creditors (with the exception of the creditor represented on the committee) approve by resolution, or where the benefit or advantage is provided by statute, or approval is given by the court. The prohibition does not apply to payments by the trustee or external administrator to their staff or service providers: IPS s80-55(6). If a large creditor appoints a representative to the COI then they will be prohibited from directly or indirectly purchasing any part of the property of the company, unless the creditors resolve to allow it (with the large creditor’s vote excluded), or with leave of the court: IPS s80-60.
The court may inquire into the conduct of a COI, and may make such orders as it thinks fit to ensure the proper conduct of the committee: IPS s80-70. We should also note the broad powers of the court under IPS Div 45 (for registered liquidators and trustees) and Div 90 (for regulated debtor’s estates and external administrations).
The ILRA changes to the role and powers of COIs give further responsibilities to COIs and establish them as formal gatekeepers of the insolvency administration. The experience in US Chapter 11 bankruptcy is that often large creditors are reluctant to take on the responsibilities of serving on the committee, given the confidentiality and fiduciary restrictions that come with the role. Recent large insolvencies such as Arrium have involved actively engaged creditor committees, however in smaller matters, where returns to creditors are low or nil, there is an economic disincentive for creditors to spend resources serving on a COI. Giving FEG and employees a direct representative may help with this.