Australia's Insolvency Law Is Changing

By Ian Walker

Posted: 19th February 2016 11:13

Australia's corporate and personal insolvency laws are facing a substantial series of changes to be made by the Insolvency Law Reform Bill 2015 (ILRB 2015).  The ILRB 2015 was introduced into Parliament on 3 December 2015, but does not relate to restructuring.  But there are more changes likely to occur, particularly in relation to turnarounds and the restructure of financially stressed companies.
 
On 7 December 2015 after the ILRB 2015 was introduced comments were made by Prime Minister Malcolm Turnbull as part of the Federal Government's Innovation Package, to the effect that there should be other reforms to Australia's insolvency law in order to encourage entrepreneurship and innovation. 
 
Insolvency Law Reform Bill 2015
 
This Bill has been introduced into the Parliament and has been considered by the House of Representatives and is due to be considered by the Senate.  The Senate has determined not to submit the Bill to any Senate subcommittee for the purposes of a review.  Once it is passed by the Parliament and receives Royal Assent, the majority of the legislation will start 12 months later.  It is currently likely to commence some time in 2017.
 
The ILRB 2015 contains a series of amendments to both the Bankruptcy Act, that covers personal insolvency, and the Corporations Act that covers corporate insolvency.  It introduces into each Act, a schedule, called either the Insolvency Practice Schedule (Bankruptcy), or the Insolvency Practice Schedule (Corporations).  It also makes further amendments consequential on the introduction of the Schedules to specific provisions of both the Bankruptcy Act and Corporations Act and a number of other pieces of legislation. 
 
The aim of the ILRB 2015 is to create common rules in both personal and corporate insolvency.  The new rules are intended to remove unnecessary costs and increase efficiency in insolvency administrations, to align registration and disciplinary frameworks, but also align a range of specific rules regarding the handling of personal bankruptcies and corporate external administrations.  The new rules are also intended to enhance communication and transparency between stakeholders, such as creditors, liquidators or administrators and to promote market competition based on price and quality.  There is also a major increase in the powers available to the corporate regulator ASIC to regulate practitioners in the corporate insolvency market
 
The reforms by the Bill are also intended to result in a net regulatory savings for insolvency practitioners as a result of compliance cost savings by reducing mandatory information provisions and requirement for meetings.  The forecast is that there will be a $50.1 million annual reduction in regulatory compliance costs.
 
Regulator and creditor control over insolvency practitioners
 
There is to be a new registration and disciplinary regime for liquidators.  Registration for corporate insolvency practitioners will initially be controlled by a committee organised by ASIC and conditions may be imposed on the registration of a practitioner.  There will be an application fee expected to be $2,200.  There will be a requirement for renewal of a registration every three years, subject to payment of a fee expected to be $1,700.  ASIC will also be empowered to take direct action against practitioners who breach their duties, or do not observe any conditions that apply to their registration.  ASIC will be able to suspend or deregister offending insolvency practitioners. 
 
Creditors will be given at their cost, the right to appoint a registered liquidator to carry out a review, of the insolvency practitioner's remuneration, or a cost or expense incurred by the insolvency practitioner in the administration.  ASIC will also be given the power to appoint a registered liquidator to conduct a review of matters in relation to the external administration conducted by the insolvency practitioner.
 
Insolvency practitioners are intended to be more responsive to creditors and improve overall confidence in the professionalism and competence of insolvency practitioners.  Creditors whether by resolution, or individually, are entitled to ask the insolvency practitioner for information, to provide a report, or to produce a document.  These requests must be complied with, unless what is requested is not relevant to the external administration, or would cause the insolvency practitioner to breach his or her duties in relation to the external administration.  ASIC is also given power to review why an insolvency practitioner has refused to provide material, a report, or a document, in response to a request from a creditor.  Creditors are also given the ability to resolve at a meeting for the removal of the insolvency practitioner and appoint a replacement. 
 
Changes to reduce costs in insolvency
 
There are a number of regulatory changes that provide cost savings for corporate insolvency practitioners.  These changes are not contained in the Insolvency Practice Schedule (Corporations) introduced by the Bill, but are the subject of direct amendments to the Corporations Act introduced by the Bill.  For example, currently s508 Corporations Act requires the liquidator in a members' voluntary or creditors' voluntary winding up that continues for more than one year, to convene a general meeting of the members or creditors within three months of the end of each year.  There is also a requirement in s508 for a report to be provided on the liquidator's acts and dealings and the conduct of the winding up.  The ILRB 2015 will repeal section 508 as well as Section 509 that requires a final meeting in a creditors' voluntary winding up.  Accordingly there will be no need for those meetings to be convened by liquidators, or annual reports which will save substantial costs in many insolvent administrations.
 
Recommendations for further changes to Australia's insolvency and restructuring laws
 
There are a number of recommendations, endorsed by the Prime Minister, made by the Productivity Commission, that if implemented would see a change to personal bankruptcy law and provide changes to Australia's restructuring law.  The recommended changes are contained in the Productivity Commission's report, 'Business Set-up, Transfer and Closure', a report publicly released on 7 December 2015. 
 
In the context of personal bankruptcy, the main change is to reduce the formal period of personal bankruptcy from three years to one year in order to reduce the stigma attached to bankruptcy.  The shorter period of bankruptcy is intended to encourage capable entrepreneurs to start new businesses where their initial ventures were unsuccessful on honest and legitimate grounds. 
 
Legal restructuring elements in the Australian corporate insolvency market will be enhanced by at least two of the Productivity Commission's recommendations. 
 
First, there will be a 'safe harbour' recommended by the Productivity Commission that would be used as a defence for company directors to liability for insolvent trading.  Insolvent trading can cause directors to have personal liability for losses suffered by creditors, due to liquidation, where the debt was incurred by the company when the company was insolvent.  The safe harbour defence zone can only be entered if the company is solvent, even though it is proximate to a specific circumstance of financial difficulty and needs to be restructured.  The safe harbour defence will require the directors of the company to appoint an adviser who is to provide restructuring advice designed to ensure the company's continued solvency and the ongoing viability of its business.  In terms of the defence for the directors who appoint the adviser, it will also be necessary for them to take the steps to complete the restructuring and then the defence will apply for the period from the adviser's engagement until the implementation of the restructuring advice is complete.  Also the company must stay solvent during the restructuring period.
 
The second major change relates to ipso facto clauses which allow contracts to be terminated on the basis of an insolvency event.  The termination of the contract can often bring the company's business to an end.  Ipso facto clauses will be made unenforceable while a company is in insolvent administration or undertaking a restructure through a scheme of arrangement. 
 
These recommendations are still to be prepared into a legislative form for consideration by the Parliament and the market and is likely to come out later this year if it is produced on behalf of the Commonwealth Government.
 
Ian Walker is one of Australia's leading insolvency and restructuring specialists.  He has been a partner of MinterEllison for 27 years.  MinterEllison is one of Asia Pacific’s leading law firms and operates in Australia, Hong Kong, mainland China, Mongolia, New Zealand and the United Kingdom through a network of integrated and associated offices.
 
Ian has more than 30 years' experience in security enforcement for all types of creditors, banking litigation, and insolvency, restructuring and work out issues.  Ian advises insolvency appointees including liquidators, receivers, administrators and deed administrators on creditors' rights, their powers and duties He also advises third parties affected by insolvency such as creditors and directors.  This includes advising company directors on the governance issues that face them when insolvency is imminent

Ian can be contacted on +61 3 8608 2607 or by email at ian.walker@minterellison.com


 
 

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