“Unfortunately, the Banking Royal Commission wasn’t asked to look at the role of insolvency practitioners, and that was a missed opportunity.”
“Often, the investigating accountants become the liquidators, so it’s in their interests to recommend liquidation because they get another gig.”
Kate Carnell, Small Business Ombudsman
Last Thursday on October 10, the Small Business Ombudsman announced a statutory inquiry, to be known as the Insolvency Practices Inquiry, “to investigate if current insolvency practices achieve the best possible outcome for small and family businesses in financial trouble”. It will be assisted by a reference group, chaired by former senator John Williams, who took a lead role in the 2010 senate inquiry into the regulation, registration and remuneration of liquidators.
The terms of reference document issued by the Ombudsman makes it clear that a major focus of the Inquiry will be IPs, the industry standards that govern their practices, their costs, and how practitioners decide the optimal process and manage conflicts of interest said to arise from them “undertaking several stages of an insolvency”.
Significantly, small businesses that have faced financial difficulties and been restructured or wound up are invited to “share their stories” by completing an online survey with the Inquiry. It may be apprehended that selected case studies will then be the subject of detailed examination by the Inquiry.
To assist our clients to understand the Inquiry, in case one or more of their matters becomes the subject of detailed examination, we provide the following short summary:
Terms of reference of Inquiry
The Inquiry will examine the following:
- The existing insolvency system through the experience of small businesses;
- The degree of transparency of the governance structures, processes and costs of practitioners involved in the insolvency process including legal experts, valuers, investigating accountants, administrators, receivers and liquidators;
- How the insolvency of a small or family business may lead to bankruptcy for the owners; and
- How the established framework impacts the practices and fees of insolvency practitioners.
The Ombudsman has coercive powers under the relevant legislation to require a person to provide information and documents. Legal professional privilege can be claimed and maintained when responding to a statutory notice.
A notice issued by the Ombudsman can require the insolvency practitioner recipient to:
(a) provide a statement to the Inquiry that sets out information identified as relevant to the Inquiry; and/or
(b) produce documents in the IP’s possession relevant to the Inquiry.
It is a punishable offence to fail to comply with the written notice unless the person does not have the information or documents required, or has been unable to obtain the requested information and documents despite taking all reasonable steps available.
The Ombudsman will report on an interim basis in December, with a final report in February 2020.