Has Insolvency Law Reform Backfired?


by Paul Gidley26.06.17

Changes to personal and corporate insolvency law, courtesy of the Insolvency Law Reform Act 2016, may result in greater compliance and additional costs, without guaranteeing outcomes will be any better.

While recent reforms that provide for greater creditor involvement in the liquidation process are embraced by all as good, the execution may fall far short of expectations.

Much of the Insolvency Law Reform Act 2016 – effective within two tranches, 1 March 2017 and 1 September 2017 – was in response to a handful of highly vocal creditors who felt let down over the misconduct of jailed rogue insolvency practitioner Stuart Ariff in 2010.

As a result, what these new provisions have done is unfairly tip the regulatory pendulum towards creditors at the detriment of the country’s 600-plus external administrators.

For starters, what these new provisions do is empower creditors to ‘sack and replace’ a liquidator. Without the previous provision for legal action, what’s concerning is that the lower threshold for creditors to remove an external administrator will only expose the process to abuse.

Secondly, a resolution to remove an external administrator will need the support of a majority in both number and in the value of creditors.

What’s clearly of concern is the brevity creditors’ have for using this resolution in a manner that was clearly well beyond its primary intention. For example, it’s conceivable that it could be deployed tactically by creditors or proxies of targets of investigations to remove or distract the external administrator – in addition to other legal strategies – designed to exhaust the resources available.

While it remains to be seen, it’s highly likely that the Insolvency Law Reform Act 2016 includes new provisions that creditors have little interest in using. Should that be the case, heavy-handed reforms have done little more than apply a blowtorch to external administrators when only a light touch was necessary.

As a case in point, while creditors have the capacity to take a greater role in monitoring and ensuring liquidators conduct themselves in a manner they’re comfortable with, there’s no guarantee they’ll have any interest in doing so.

If the net-effect of Insolvency Law Reform Act 2016 results in insolvency practitioners being at the disposal of creditors, then it’s possible that everyone ends up worse off than before.

New regulations tend to overlook the fact that the collective nature of the formal insolvency administrations is firstly about providing for the orderly realisation of assets and a rateable distribution of the proceeds to all creditors.

However, what new regulations do by default is heighten the potential for misuse by related party creditors or creditors who are themselves legitimate targets for inquiry by external administrators.

Indeed, few if any external administrators will argue with creditors requesting information, reports and documents by way of resolution at a meeting of creditors.

However, what’s often overlooked is that in an attempt to explain why certain information, reporting or documentation isn’t relevant – to avoid a potential breach of duties – external administrators’ will run up costs that creditors will end up paying for.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.

If you or your clients seek future advice on Law Reform changes or expertise in any area of insolvency. Please do not hesitate to contact us.