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How will a two-tiered insolvency regime work?

The insolvency regime may have changed, but practitioners will still play an important role, whether it is upskilling or guiding clients in distress towards the right solutions.

Gary Anders | December 2020

From 1 January 2021, new laws come into effect that will totally reshape Australia’s corporate insolvency landscape.

The changes will enable financially distressed but viable small businesses with less than A$1 million in liabilities to continue operating once they have appointed what is effectively a brand-new class of insolvency practitioner.

Known as registered small business restructuring practitioners, they will be responsible for developing business restructuring plans, identifying creditors, and assisting them in making informed decisions around recouping funds.

The federal government has recently released the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 which details the framework for restructuring plans, who can become a registered small business restructuring practitioner, and their powers.

The role of accounting practitioners

The federal government has stipulated that restructuring practitioners will need to be independent of the businesses they act for and registered to solely work in the small business insolvency area.

They will not be permitted to act in an accounting role for businesses but will be expected to work with a business’s appointed accountant during the restructuring process to determine its financial position.

Accountants will, in fact, continue to play an important role in identifying whether business clients are in financial difficulty and, when warranted, guiding owners towards the appointment of a small business restructuring practitioner.

The mechanics of the small business restructuring role now appear to be in place and clearly define the regulations and pathway to becoming a restructuring practitioner.

They will operate within the framework of the Corporations Act governing insolvency practitioners, including registered liquidators.

“We had urged that the regulatory oversight, the registration, and disciplinary procedures associated with this new second tier of insolvency practitioner should operate through the existing systems for registered company liquidators under the Corporations Act,” CPA Australia’s policy adviser, environmental, social and governance, Dr John Purcell FCPA, says.

Restructuring practitioner eligibility

Becoming a registered practitioner is to be managed by a committee process that reviews all applications. The committee will be made up of the Australian Securities and Investments Commission (ASIC), a nominee from the Australian Government, and an existing licensed insolvency practitioner.

Applicants must be a certified public accountant (either a member of CPA Australia, Chartered Accountants Australia and New Zealand, or the Institute of Public Accountants), must clearly carry appropriate levels of professional indemnity insurance, meet continuing education standards, and be subject to disciplinary arrangements.

In addition to being a recognised accountant, a person who wishes to be registered to perform only as a restructuring practitioner for a company or restructuring plan must demonstrate a capacity to perform satisfactorily the functions and duties of a registered liquidator.

“It has, in effect, created this two-tiered system. Insolvency practitioners and the subcategory of a registered liquidator, who is only able to operate as a small business restructuring practitioner,” Purcell says.

Voluntary administration ‘lite’

Insolvency practitioners Brooke Bird insolvency partner Robyn Erskine FCPA, describes the new regulations as similar to a voluntary administration.

“We probably would refer to it as a ‘VA lite’ in so much as there’s perhaps not quite a lot of the hands-on requirement that a full VA brings,” Erskine says.

“As to who is going to seek registration to be a small business restructuring practitioner … the role could see qualified accountants who are not currently registered liquidators who may be interested in exploring this type of work without necessarily doing the full suite of insolvency work.

“However, this type of work is not for the feint hearted because they will need to know insolvency laws and regulations  you won’t be able to discharge your duties as a small business restructuring professional.”

Erskine says those wanting to work in the insolvency sector need to understand the responsibilities and pressures that come with the job.

“You are dealing with people in distress and they can at times act out of character,” she warns. “They can look at someone else to be the scapegoat, and sometimes you’re caught in the middle of that. 

“You need the type of personality where you can take that on board and not have it impact you personally.”

Education and training

Purcell says the challenge now is for the professional bodies to start “getting their heads” around the processes of upskilling a cohort of their members to specialise in this new form of business insolvency arrangement.

“It recognises that accountants have particular skills around cash flow management, business analysis, and can make sound business assessments as to the capacity of a small business to be restructured,” he says.

“But, at the same time, they are going to have to be upskilled – as will existing registered company liquidators – to be able to do this new form of external administration arrangement.

“We are going to have to bring about a situation where those individuals are going to have to demonstrate that they can do that type of work [and be trained to do it].

“These are legal arrangements in that they involve negotiating a legal agreement amongst creditors for a restructuring of debt,” says Purcell.

CPA Australia also notes that insolvency matters are very complex and proposed actions and solutions by the government in this space are evolving, even more so in the period when temporary relief measures lapse. 

Members providing advice to clients must be appropriately qualified and competent to provide advice on any insolvency and insolvency-related matters and that professional legal advice is sought there needed.