The Insolvency Practitioners Regulation Act 2019 –Mandatory Reporting Obligations
The Insolvency Practitioners Regulation Act 2019 (Act) was passed on 17 June 2019. Based on a recent MBIE Discussion Paper, the operative provisions of the Act will not come into force until June 2020.
When fully implemented, the Act will introduce licencing requirements for all insolvency practitioners and will also introduce the obligation on practitioners to report serious problems. Many liquidators already do this on a voluntary basis but, historically, it was not mandatory. This allowed directors to avoid much needed scrutiny by seeking out ‘friendly’ liquidators, who may be less inclined to report problems. The Act removes this escape for directors and company officers by imposing mandatory reporting obligations on liquidators.
While the intention behind the change is commendable, the Act’s terminology will leave many practitioners unclear on the extent of their obligations. The Act requires practitioners to report a company where there are reasonable grounds to believe a serious problem has arisen. A ‘serious problem’ is defined by section 60 of the Act as any of the following circumstances:
- The company, its directors, shareholders or officers committing an offence;
- A person who took part in the formation, administration, or management of the company being guilty of negligence, default, breach of duty in relation to the company;
- A past or present director breaching director’s duties in a material respect; or
- The company being managed in a way that has materially contributed to the company being insolvent (as described in s385 of the Companies Act 1993).
Unfortunately the Act uses ambiguous and, at times, inconsistent standards for what needs to be reported. For example, “material” breaches of director duties need to be reported, but there is no such limitation around negligence, default and offences. Does this mean that all instances of negligence or default, however immaterial, need to be reported? What offences need to be reported? Do parking tickets and overdue vehicle registrations need to be reported? These are not trivial questions, since a practitioner who fails to report a serious problem commits an offence and is liable to a fine not exceeding $10,000.
It remains to be seen just how much of an impact the obligation to report will have on practitioners’ costs, particularly where no funds are available from the company.