Insolvency law review

Dominic Cantone

dominic.cantone@oracleis.com.au

See the proposed changes and how they can affect your clients.

 

In July 2023, the Parliamentary Joint Committee (“PJC”) on Corporations and Financial Services tabled their final report to Parliament regarding corporate insolvency in Australia, aiming to address the effectiveness of Australia’s insolvency laws.

 

A summary of the findings of the PJC is as follows:

 

Recommendation:

 

Topic: Safe Harbour

 

Background: Insolvent trading Safe Harbour provisions were introduced in 2017 to provide a defence to company directors from claims that they traded a company whilst it was insolvent, where they acknowledge the company is facing financial difficulties and that they are working on a plan to save the company.

 

In 2021, there was a review of the Safe Harbour provisions, with most of the recommendations focused on simplifying the wording of the provisions to ensure they are accessible to more company directors.  Other recommendations included tightening the definition of who should be advising company directors about the Safe Harbour option.

 

Recommendation: The PJC recommends that the Government implement recommendations from the Safe Harbour Review, independent and likely in advance of the further review, and consider referring the remainder of safe harbour reform issues identified in this report to a comprehensive review.

 

Recommendation:

 

Topic: Small Business Restructuring and Simplified Liquidation

 

Background: The Small Business Restructuring (“SBR”) and Simplified Liquidation (“SL”) processes were introduced by the Federal Government in 2021.  The SBR process was intended to assist small businesses with resolving their financial stress, where the director remained in control of the company under the supervision of a Restructuring Practitioner, allowing time to put a proposal forward to creditors to pay off their liabilities within a period not exceeding 3 years.

 

Recommendation: The PJC recommends that as soon as practicable the Government consider and consult on potential reforms to the SBR and SL pathways.

 

Recommendation:

 

Topic: Voluntary Administration and Members’ Voluntary Liquidation

 

Background: A Voluntary Administration occurs when a director appoints an Administrator to take over the operations of the company if they company is in financial distress.

 

Recommendation: The PJC recommends that the comprehensive review consider the Voluntary Administration and Members’ Voluntary Liquidation pathways.

 

Recommendation:

 

Topic: Deregistered companies

 

Recommendation: The PJC recommends that ASIC collect and analyse data from an appropriately sized sample of voluntary and compulsory deregistrations, to provide greater visibility of the solvency status of deregistered companies.

 

Recommendation:

 

Topic: Registration of Small Business Restructuring Practitioners

 

Recommendation: The PJC recommends that the comprehensive review consider the requirements for the registration of Small Business Restructuring Practitioners to understand the reasons for the limited number of registrations to date.

 

Recommendation:

 

Topic: Registered Liquidators

 

Background: To become a Registered Liquidator, an applicant must be able to provide evidence they have in the five years leading up to their application, been engaged in at least 4,000 hours of relevant employment at a senior level.  A committee convened by ASIC will interview the applicant and may require they complete an examination.

 

Recommendation: The PJC recommends that the Government reform the experience eligibility requirements for Registered Liquidators, to address the inequity of the requirements and the gender imbalance in the population of Registered Liquidators.  Reforms could potentially include increasing the period over which experience is demonstrated or replacing part of the required hours with a competency-based exam.

 

Recommendation:

 

Topic: Insolvency practitioners – remuneration

 

Background: An external administrator of a company who is appointed after 1 September 2017 is entitled to a maximum default amount of renumeration if the renumeration is not determined by methods such as (depending on the type of appointment) a resolution of creditors, determination of a committee of inspection, determination by the count, or a resolution of the company at a general meeting.

 

If an external administrator’s remuneration is not decided by these methods, the current indexed default amount of remuneration is $6,127.

 

Recommendation: The PJC recommends that the comprehensive review include consideration of the remuneration of insolvency practitioners, including the extent to which public interest work carried out by liquidators for no or limited pay is sustainable and the impact of this on all stakeholders in external administrations.

 

Recommendation:

 

Topic: Insolvency practitioners – conduct

 

Recommendation: The PJC recommends that the comprehensive review include consideration of the operation, efficacy, and efficiency of the current independence requirements for insolvency practitioners, including whether the current requirements are achieving the policy settings that inform them and whether these policy settings are optimal and the advantages and disadvantages of formally separating the roles of advice and restructuring from formal appointments to liquidations and administrations.

 

Recommendation: 

 

Topic: Pre-insolvency advisors

 

Recommendation: The PJC recommends that the comprehensive review include consideration of the nature and extent of the harm posed by ‘untrustworthy pre-insolvency advisors’, and whether further regulation or enforcement measures are needed to address this issue.  The PJC further recommends that in the interim, the Government take prompt action to improve the regulation and active enforcement of pre-insolvency advisers.

 

Recommendation:

 

Topic: Assetless Administration Fund

 

Background: The Assetless Administration Fund (“AAF”) was established by the Government and ASIC to fund the preliminary investigations and reports by Liquidators into the failure of companies with few or no assets, where it appears to us that enforcement action may result from the investigation.  The AAF was established with a focus on curbing illegal phoenix activity.

 

Recommendation:  The PJC recommends that the Government consider changes to the AAF to ensure that it is achieving its intended policy objectives.  It also recommends consideration of the merits of creating a ‘public liquidator’ for corporate insolvency.

 

Recommendation:

 

Topic: Public Interest Administration Fund

 

Recommendation: The PJC recommends that the Department of the Treasury consider assessing the potential benefit of the Public Interest Administration Fund proposed by the Productivity Commission in 2015, including the impacts of the required increase on the annual review fee for company renewals and either consider implementing the proposal, or provide that analysis to a comprehensive review.

 

Recommendation:

 

Topic: Statutory reporting obligations for insolvency practitioners

 

Background: Section 533 of the Corporations Act 2001 (the “Act”) requires that Liquidators report matters such as whether a past or present officer of a company may have been guilty of an offence, misapplied or retained money or property of the company, may be guilty of negligence or breach of duty, or whether a company may be unable to pay its unsecured creditors more than 50 cents in the dollar.

 

Recommendation:  The PJC recommends that the comprehensive review consider whether the current statutory reporting obligations for insolvency practitioners are best serving the integrity, efficiency, and efficacy of the Australian corporate insolvency framework, including (but not limited to):

 

  • the ability of ASIC to appropriately process, utilise and respond to initial statutory reports on current resources; and

 

  • the appropriateness of existing reporting thresholds, having regard to their regulatory value as well as the burden imposed on insolvency practitioners.

 

The PJC further recommends that in the interim, the Government and ASIC consider whether any timely changes can be made to the regulations on reporting thresholds, and ASIC’s response to insolvency practitioner reports.

 

Recommendation:

 

Topic: Insolvent trading

 

Recommendation:  The PJC recommends that the comprehensive review examine the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework.

 

Recommendation:

 

Topic: Australian Taxation Office

 

Recommendation: The PJC recommends that the comprehensive review analyse and make recommendations on the overall economic and social benefits and costs of Australian Taxation Office (“ATO”) relief to potentially insolvent companies in hard economic times, in the context of the impacts on the purposes of the insolvency system.

 

The PJC also recommends that the ATO consult, act on and publish model creditor guidelines, consistent with its model litigant obligations.

 

Recommendation:

 

Topic: Section 561

 

Background: Section 561 of the Act provides that where the non-charged assets of a company a in winding-up are insufficient to meet the entitlements owed to employees, then payment of such claims may be made in priority over the claims of a secured party in relation to a circulating security interest created by the company.

 

Recommendation: The PJC recommends that the comprehensive review consider the relative priority of employees, Liquidators, and secured creditors, including the priority over circulating assets under section 561 of the Act.  The PJC further recommends that this be a high priority topic for the comprehensive review.

 

Recommendation:

 

Topic: Fair Entitlements Guarantee

 

Recommendation: The PJC recommends that the government develop reforms to improve the framework designed to ensure the policy objective of access to the Fair Entitlements Guarantee (“FEG”) scheme as a scheme of last resort, both to prevent misuse by novel schemes of arrangement, phoenixing, and other practices and to ensure capture of all individuals with valid entitlements.

 

Recommendation:

 

Topic: Franchising

 

Recommendation:  The PJC recommends that the comprehensive review consider and report on franchising insolvency issues.

 

Recommendation:

 

Topic: Whittaker Review

 

Background: The Whittaker Review was a report by Bruce Whittaker QC, which provided 385 recommendations to the Attorney-General considering the drafting and operation of the Personal Property Securities Act 2009.

 

Recommendation: The PJC recommends that the government provide a formal response to the Whittaker Review which was completed in 2015.

 

Recommendation:

 

Topic: Unfair preferences/voidable transactions

 

Background: Unfair preferences usually involve transactions that discriminate in favour of one creditor at the expense of other creditors, and voidable transactions involve the payment of money, transfer of property or other transaction from the company’s assets to a related or unrelated third party that either occurs at a time when the company was insolvent or otherwise causes a detriment to the company.

 

Recommendation: The PJC recommends that the comprehensive review consider unfair preferences and voidable transactions as a core aspect of potential insolvency reform.

 

Recommendation:

 

Topic: Trusts

 

Recommendation: The PJC recommends that the government amends the Act to expressly clarify the treatment of trusts with corporate trustees during insolvency.

 

 

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