User-pays funding model fuels debate

With the investigative and reporting work undertaken by registered liquidators providing a vital extension of the Australian Securities and Investments Commission (ASIC), it’s no wonder the new user-pays component of the Insolvency Law Reform Act (ILRA 2016) is fueling debate. Add graduated levies among the raft of reforms and you have a legislation that many believe will impact negatively on the industry – and see practitioners paying to undertake pro bono work.

Despite Australian Financial Security Authority (AFSA) Commissioner Hamish McCormick describing the ILRA reforms as “an important milestone in the rules governing insolvency in Australia”, ARITA Chief Executive John Winter begs to differ, calling it “overly complex… filled with errors… [and] vague in key places”.

“The ILRA does provide creditors with more powers in an external administration and increased compliance and regulation for liquidators and trustees,” says Jirsch Sutherland Partner Jimmy Trpcevski. “However, with any major changes to legislation, it is a challenging time in the profession and industry as these changes certainly streamline some processes but complicate others.”

Jimmy T.
Jimmy Trpcevski

While the second tranche of the ILRA which commenced on September 1 is designed to foster greater transparency in the industry and eradicate misconduct, there is a fear that it will unfairly punish small businesses and sole operators who will struggle to absorb the costs.

“In particular, we feel this will lead to unfair and high costs for liquidators that could eventually force liquidators out of the industry,” says Jirsch Sutherland Partner Trent Devine.

ASIC’s controversial user-pays Industry Funding Model

In a bid to recoup the estimated $8 million a year it spends on monitoring Australia’s insolvency industry, ASIC’s user-pays system requires that Australia’s estimated 700 registered liquidators comply with a number of changes, including:

  • Pay an annual fixed levy of $2,500 per year (not chargeable to job as an administration charge) starting in the 2017/2018 financial year – in addition to the $3,500 registration fee and $1,700 renewal fee due every three years
  • Pay a graduated levy based on the number of ‘entity metric events’ charged according to the number of:
    • Jobs on hand at start of financial year
    • New appointments accepted by the liquidator during the year
    • Published Notices Website (PNW) advertisements placed

Joint and several appointments will also have an ‘entity metric event’ for each appointee and, as a result, a notice of meeting on the PNW for a joint appointment will result in a charge to each appointee.

What happens if you don’t comply?

Failure to pay ASIC’s annual levy by the due date will incur a 20 per cent late payment penalty and, where a levy, shortfall penalty or late payment penalty remains unpaid for one year, liquidators could be deregistered and have their license suspended or cancelled.

Trent
Trent Devine

“Overall, we believe the new reforms will create unnecessary barriers to entry, reducing the number of expert insolvency practitioners, particularly in regional areas and small practices,” says Trent. “We believe the proper beneficiaries of regulation of insolvency practitioners are the creditors, which is why we advocated that levies should be recovered via a small additional charge on each annual company return or on a new annual solvency statement.

“Regardless, it’s early days and we, like many others in the industry, will be carefully watching to see what impact the changes will have and whether they have helped streamline processes.”