Defending the Insolvency Industry from Journalist Attack
Cornwall Stodart Corporate and Insolvency partner, Stephen Newman, has defended the insolvency industry in a hard-hitting and authoritative letter to The Australian newspaper.
He was responding to claims and assertions about the industry in an article by prominent financial journalist, Adele Ferguson, in the newspaper’s Weekend Business section on 12 January 2008.
Mr Newman, a member of the Insolvency Practitioners Association (IPA) and the Insolvency and Reconstruction Committee of the Law Council of Australia, pointed out the article, ‘Insolvency industry set for a boom’ was ‘spoilt by some unnecessary factual errors and unsupported statements’.
Mr Newman said Ms Ferguson, while highlighting the potentially precarious financial position many Australian businesses were facing as a result of the current credit crunch, unfortunately used her article as a platform to take a swipe at insolvency practitioners suggesting they were about to enjoy ‘boom times’.
In his letter, Mr Newman (SN) puts Ms Ferguson’s (AF) claims and assertions under the microscope and places them in their proper perspective. The major points for clarification are:
AF: Liquidators have an unrestricted ‘first charge’ on assets which means their fees are protected.
SN: It is incorrect to convey the impression liquidators have an unrestricted ‘first charge’ on assets and thereby their fees are always protected. Their rights are more restricted than that and they can, and do, miss out on recovering fees.
AF: Because of the ‘first charge’, liquidators can and do pursue expensive courses of action that keep them on the payroll.
SN: Most liquidators do not run expensive court cases for the heck of it or just to ‘keep them[selves] on the payroll’. They are much more professional than that. Just because an administration/liquidation is large and expensive does not automatically mean, as I think the article implied, that they are feathering their nests.
AF: Because liquidators do not need creditor approval for disbursements, they can rack up a lot of charges in disbursements and many do.
SN: While not providing any evidence disbursements are being ‘racked up’ or, more importantly, that this ‘racking up’ is unwarranted or a misuse of position, disbursements are out-of-pocket expenses incurred by third parties and not the liquidator, ie, they do not go into the liquidator’s pocket. Is Ms Ferguson saying disbursements are being racked up to benefit connections of the liquidator and not creditors or the administration generally?
AF: ASIC is responsible for the Corporations Amendment (Insolvency) Act 2007;
SN: The insolvency laws do not belong to the Australian Securities and Investment Commission (ASIC); it is just one of many stakeholders with an interest in Australia’s insolvency laws. The Corporations Amendment (Insolvency) Act 2007 is a creature of the Federal Parliament and not ASIC.
AF: The industry lacks regulation and is in dire need of an overhaul.
SN: The insolvency industry is well regulated which is not to say it is not in need of improvement. However, it is stretching it somewhat to say that it is in ‘dire need of an overhaul’.
AF: ASIC too often refers liquidators to the Companies Auditors and Liquidators Disciplinary Board (CALDB) instead of taking ivil or criminal action.
SN: Ms Ferguson suggests in her penultimate paragraph that the ‘industry’ - which from the preceding paragraph appears to be a reference to the Insolvency Practitioners Association - has the power to take civil or criminal action in case of a liquidator’s misconduct. Only ASIC has civil powers and only the Deputy Director of Prosecutions (DDP) has criminal powers. The IPA only has the usual disciplinary powers an association has over its members and cannot exercise the civil or criminal powers Ms Ferguson is apparently alluding to.
ASIC, in exercising its civil powers, has dealt with insolvency practitioners by appropriate civil court cases and the use of the Enforceable Undertaking mechanism. It is not right to say that ASIC ‘too often’ refers misconduct cases to the CALDB (assuming the use of ‘misconduct’ is not being used in a technical legal sense but in a journalistic sense) or that the CALDB invariably suspends for 12 months.
AF: The Federal Government needs to take action and overhaul the system for the sake of the economy.
SN: To say that the ‘Federal Government needs to take action and overhaul the system for the sake of the economy’ without more is just hyperbole. I would have appreciated hearing from Ms Ferguson what she thinks needs to be done and why/how such steps would benefit the economy.
