In December last year, the federal government unveiled its Innovation Package with twenty-four measures aimed at revitalising innovation in Australia. As part of this $1.1 billion dollar package, a number of changes to insolvency laws have been proposed under the Insolvency Law Reform Bill 2015 (the Bill).
In February 2016 the bill passed the Senate without amendment and is therefore likely to become the Insolvency Law Reform Act 2016. The effective date of the new legislation is not yet known, however many are predicting a commencement date of 1 July 2017.
The Bill has a number of consequences for all insolvency practitioners, both corporate and personal, and promises to implement various reforms to align the three “R”s, registration, regulation and remuneration. For instance, the Bill proposes amending legislation such as the Corporations Act 2001 and the Bankruptcy Act 1966 to create a set of common rules, reduce cost, increase efficiency and stimulate competition in the practice and regulation of administrations and boost confidence in the professionalism and confidence of insolvency practitioners.
Further, the Bill aims to promote improved collaboration between the Australian Financial Security Authority (AFSA) and the Australian Securities and Investments Commission (ASIC).
The Australian Restructuring Insolvency and Turnaround Association (ARITA) has welcomed the announcement of the reforms to the insolvency regime as part of the innovation statement.
The Main Changes – Practitioners
Some of the major changes for insolvency practitioners are:
- Registration of Practitioners: Increased alignment between registrations of corporate and personal insolvency practitioners. Corporate practitioners will no longer have indefinite registrations and must be renewed every three years, similar to that of a personal practitioner.
- Surveillance of Practitioners: Increased surveillance and audit powers of the Australian Securities and Investments Commission in relation to the review of conduct of corporate practitioners. Similar to that already undertaken by the Australian Financial Security Authority in respect of personal insolvency administrations.
- Remuneration of Practitioners: The introduction of a statutory minimum for remuneration of liquidators to remove the existing need to hold creditors’ meetings in assetless or low asset administrations.
The Main Changes – Processes & Creditors
Some of the major changes to creditors and the insolvency process in general are:
- Mandatory Meetings: Mandatory default creditors meetings and practitioner reporting requirements will be removed to allow flexibility depending on the type of the particular administration.
- Rights of Creditors: Increased rights of creditors to protect their interest during the course of an administration. As an example, creditors will now be in a position to propose a resolution to replace the incumbent liquidator without the need for applying to the Court. However, the Bill does provide the practitioner protection by allowing the Court to review the decision made by creditors. Creditors will also be able to appoint an independent specialist to review the performance of the incumbent practitioner.
- Requests for Information: The Bill allows creditors, by resolution at a meeting, to make a request for information about the external administrations. This could include the production of records or the provision of information that is “reasonable”. It is noted that a “reasonable” request does not apply when there are insufficient funds in the administration.
- Ipso Facto Causes: “Ipso Facto” clauses currently enable one party in a contractual agreement to terminate the agreement on the insolvency of the other party. This often leads to the end a company’s business and subsequently results in liquidation. Under the new changes, a company facing financial issues will have the ability to appoint an advisor to arrange new credit facilities to address any short term cash flow problems, resulting in the nullification of the ipso facto clauses, achieving a more beneficial outcome.
- Assignment of Statutory Courses of Action:Currently rights of action such as unfair preference claims and other voidable transactions, can only be brought by a liquidator. The Bill allows for liquidators to now assign the right to a third party, with the following limitations:
- The Liquidator must give written notice of the proposed assignment to creditors; or
- If the action has already been commenced, the Liquidator must seek approval of the Court to assign the course of action.
The Main Changes – Bankrupts/Directors
Some of the major changes to directors and bankrupts are:
- Default Bankruptcy Periods: The current personal bankruptcy period is three years and one day from the date that the Statement of Affairs is filed. The proposed changes will reduce the stigma attached to bankruptcy and encourage bankrupts to re-enter the business arena. Reducing the bankruptcy period to one year aims to facilitate the rescue and rehabilitation of business people. However, it is unclear whether the expected amendments will apply retrospectively to existing bankrupts or be applicable for new bankrupts following the implementation of the changes. It is expected that the Trustee will still have the existing power to extend the bankruptcy period for up to eight years when an objection to discharge is lodged.
- Personal Liability Safe Harbour for Directors: Under the current laws, directors who continue to trade when under financial distress may be liable for an insolvent trading claim, despite doing so in the hopes of reviving the business. The Bill introduces a defence where directors would be protected from an insolvent trading claim, if they engage a qualified restructuring advisor to assist in the process.
The Bill represents the first substantial changes the insolvency regime in the past twenty years and it is still possible that further amendments and subsequent changes will need to be made following the implementation of the Bill.