Legal and ethical standards in corporate insolvency. By Elizabeth Streten ( 1st edition) (2024, Routledge, Abingdon/New York), 240pp, £135, ISBN 978-1-032-46246-2

Abstract

The last several decades have seen relatively rapid and innovative changes to the way that companies finance themselves, making the web of debt and credit ever more complicated and technical to unwind when a financial crisis occurs. This has required the modernisation of both global insolvency frameworks and the variety of skills and regulatory requirements for the insolvency profession. The insolvency profession has always been ahead of the game in developing processes to efficiently and effectively deal with financial distress, well in advance of legislative reform. Legislators and policy makers may have a lot to learn from the solutions devised by insolvency practitioners to deal with the modern problems presented by corporate financial distress.

The crises of the recent past, including the economic impact of the COVID19 pandemic, invited a refocusing on how the insolvency profession would deal with the rise of insolvency cases once the safety nets provided during the pandemic were pulled away. Elizabeth Streten of Queensland's University of Technology in Australia explores the modernisation of the insolvency profession and the regulation of its practitioners with a consideration of the challenges faced by the profession in achieving the best outcomes resolving financial distress. Insolvency practitioners have had to deal with a raft of reforms in response to the pandemic and the economic crises it precipitated globally, which called for an examination of the role and practice of insolvency practitioners with the shifts in insolvency practice in mind.

Legal and Ethical Standards in Corporate Insolvency aims to address the dearth of data and understanding of the corporate insolvency profession by examining the role and practice of corporate insolvency practitioner and the challenges that they encounter. This is done through deft comparisons through literature review and empirical studies to provide perspectives on this topic among a number of common law countries. It also provides detailed lessons from corporate insolvency practitioners' perspective and experience through an in-depth empirical analysis of the Australian profession.

Streten first provides a nuanced discussion of the confidence in corporate insolvency practitioners generally and over time, noting that the sophistication of modern recovery processes have led to extensive legal and ethical regulation of the industry to ensure competency and integrity. These requirements have aimed to helped to build confidence in the profession. However, recognising the growing complexity of businesses and corporate financial structures, along with the intertwined nature of the global financial markets, it is not surprising that there is a lack of understanding as to the realities of insolvency practitioner roles and legal obligations. Streten therefore observes that the absence of data in this area is a problem that ‘hinders the ability to properly determine appropriate and realistic standards for corporate insolvency practitioners’,1 justifying the research presented in the book.

Her introduction goes on to detail the nature, history and purpose of insolvency law, relying on its Australian roots in the United Kingdom and its historical development from ancient times through its introduction in England in the sixteenth century and its eventual evolution throughout the Commonwealth countries. Streten also provides a nuanced discussion of the purposes of insolvency law and the variety of sometimes competing objectives that different theorists emphasise. However, at the end of the day, whether the focus is creditor wealth maximisation or the communitarian socio-economic issues that are raised by financial distress, the role of insolvency practitioners remains the same.

Australia becomes the focus of an empirical examination in Chapter 4 under a phenomenological enquiry facilitating the systematic gathering of experiential material and thematising meanings embedded in that material.6 Streten notes that this methodological approach was well suited to analysing the shared experience of Australian corporate insolvency practitioners and their interaction with their regulation and regulators (ARITA).7 Qualitative interviews were undertaken from July to October 2017, which was a significant period for the Australian insolvency profession during which many disruptions had to be handled. Reforms were introduced that practitioners had to contend with in addition to their complex duties, independence obligations, and difficulties in the determination of remuneration claims. Deprofessionalisation along with the advance of digitalisation and globalisation presented further challenges at this time. The phenomenological research undertaken demonstrated insights in the data into the management of corporate insolvency practice in Australia during this important period of reform and transformation.8

Practitioner perspective within Australian corporate insolvency are showcased in Chapter 5 with details of the empirical phenomenological findings from the interviews undertaken and described in Chapter 4. Streten presents well formulated summaries for each key theme with examples drawn from the interviews undertaken. The broad thematic summaries will be provided here, but the detail from which these summaries are derived should most definitely be read in the book itself to get a full picture of the in-depth analysis that the author undertook to identify these themes and determine the key perspectives on them.

Practitioners also acknowledged that there are many pressures due to reform, disruption, and competition for work and although they adamantly declared that they would never engaged in unethical practices, there was willingness on occasion to bend or break the rules. This has been blamed on the significant changes to the profession and a general downturn in insolvency work.11

Practitioners were also asked to provide their perspectives on corporate insolvency stakeholders. In relation to the challenges that they encounter, of great significance are issues in convincing stakeholders of the value of corporate insolvency practitioners. Although there are extensive domestic legal and ethical regulations that insolvency practitioners must follow, there have been repeated concerns in relation to insufficient stakeholder confidence. There is a lack of understanding of the point of insolvency processes and the unpleasantness associated with it does not help where there are likely to be significant losses. This has led to a lack of trust and confidence in the profession that is difficult to change.12

In relation to managing poor public perception, creditors, media, directors, and regulators have often been blamed for practitioners' arguably poor standing in the eyes of stakeholders and the public. However, it was also acknowledged by some respondents that they had some obligation in trying to change the image of the profession as well. Managing unhappy stakeholders is not easy, with threats and mental health challenges making communication that much more difficult. Some encountered legitimately dangerous situations where physical harm was risked.13

Perhaps one of the most significant findings was the perceived disconnect between Australian corporate insolvency practitioners and their regulators (ASIC and ARITA) with some confusion in evidence through some of the responses as well. A general discord was identified in relation to poor execution of ILRA,14 the funding model of use-pay levy introduced to address ASIC's regulatory costs,15 the lack of funding assistance from ASIC,16 illegal phoenix activities promoted by pre-insolvency advisors,17 concern with ASIC's regulatory approach,18 and on average a lack of willingness for insolvency practitioners to engage with ASIC.19 A discord with ARITA was also identified in relation to the usefulness of the Code by some respondents, although a majority acknowledged it as a useful resources in their ethical decision-making.20 Concluding, Streten notes that a community expectation gap exists and that there are a number of reasons for that. In any event, this is where some work needs to be done to ensure that the Australian profession and its regulators can work together well for the benefit of all.

Streten concludes in Chapter 6 that there is certainly some impetus for change within the Australian profession and regulatory bodies, particularly due to the significant changes that occurred in 2017. These changes destabilised the profession, introduced uncertainty in practitioners of their changing roles, and challenged their sense of belonging, validity, and stability in their profession. Although changes were introduced ostensibly to improve the reputation of the profession, this has been in direct conflict with practitioners' professional identities due to the need to but reluctance to adapt their practices. The research undertaken and showcased in the book represents ‘new opportunities for reinvention’.21 However, there have been significant challenges in the process of transformation, which Streten provides a perspective on in her final chapter.

Fundamentally, she notes that reform may now be on the table, and recommends a look at a co-regulatory model as a form of governmentally monitored self-regulation. Other reforms that would better ‘ensure that the expertise of the profession is effectively being incorporated into regulatory decisions’ is also recommended. Finally, she recommends that there should also be reconsideration of the regulation of Australian insolvency practitioners by their professional bodies, which need to provide the services and assistance while also having confidence in their members. Streten argues that a co-regulatory approach, although potentially raising some conflicts, may be an economically effective regulatory model for Australia.22

Streten provides an excellent and detailed work that focuses on relevant theoretical perspectives along with the comparative and empirical work, it concludes with a highly perceptive analysis of the future direction of corporate insolvency regulation based on extensive analysis of relevant interviews of Australian insolvency practitioners. Legal and Ethical Standards in Corporate Insolvency by Beth Streten is certainly a worthy addition to any insolvency practitioner, academic, or policy maker's library.