Changes to Australia's corporate insolvency laws being implemented during the course of 2017 under Insolvency Law Reform Act 2016 (Cth) ("INLA") are designed to increase the powers of creditors in cases of insolvency.

The new changes will impact both the application of the Corporations Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth) and will be implemented in two stages, the first having come into effect on 1 March 2017 and the balance from 1 September 2017.

The major purpose of the changes has been identified as the following:

1. to improve the public confidence in the insolvency profession through better regulation of practitioners;

2. to achieve improved harmonisation between corporate and personal insolvency regimes; and

3. to encourage participation in the insolvency process by creditors through improved access to information; and The major changes in the legislation which will affect creditors include the following:

Increased access to information From September 2017

the INLA provides a direct ability for creditors to request access to information or books and records from Liquidators. This includes the production of reports the ability to convene creditors meetings.

Within five (5) business days of receiving a "reasonable" request from a creditor a practitioner isrequired to provide the creditor the information and or records requested. This period can be extended by written notice or agreement between the parties. If the practitioner believes the request to be “unreasonable” they need to provide a written response to the creditor outlining the reasons why they consider the request “unreasonable”.

The INLA provides a list of circumstances in which a request will be potentially deemed “unreasonable” which includes:

- complying with the request would prejudice the interests of a creditor or a third party;
- that the information is subject to legal professional privilege or provision of the documents would be a breach of confidence;
- that there are insufficient funds in the matter;
- that the information has already been provided; or  
- that the request is vexatious having been made within 20 days of a previous request.

In the event that the information is not supplied or the request is deemed “unreasonable” the creditor may apply to the Australian Securities & Investments Commission (“ASIC”) for assistance. Where ASIC directs the practitioner to provide the records requested, failure to comply will result in disciplinary action against the practitioner. In addition to the above the INLA will require Liquidators to provide a report to creditors within 3 months of appointment outlining investigations carried out to date and documenting the likelihood of a dividend to creditors in the liquidation. Practitioners will also be required to issue creditors with reports within 20 days of their appointment outlining their rights in the insolvency estate, including to convene meetings, request information and review the practitioner’s remuneration.

Nick Combis

Power to convene meetings

From September 2017 creditors will be able to direct Liquidators to convene a meeting of creditors either by resolution of creditors, through a committee of inspection or if written request is received from sufficient creditors. The Liquidator must comply with all such “reasonable” requests. The necessary percentage of creditors required to request a meeting is lower within the first 20 days of the appointment with as little as 5% of creditors holding the total outstanding debt being required to request the meeting. 

Removal of external administrators

At any meeting of creditors it may be resolved to remove and replace the existing external administrator. Such meetings can occur following 5 business days’ notice and the proposed replacement appointee must provide a Declaration of Independence, Relevant Relationships and Indemnities (“DIRRI”) to be issued with the notice of meeting. Any replaced external administrator has the right to make an application to Court to seek reappointment. These changes increase the ability of creditors to make replacements as the existing insolvency legislation only allows removal at certain meetings of creditors.

Review of remuneration

Creditors will have the power to pass a resolution at a meeting to appoint a Registered Liquidator to conduct a review of the remuneration of an incumbent practitioner from September 2017. Any such review will be limited to the 6 months prior to the appointment. The scope of the appointment and the fee for the work can be negotiated between the creditor and the reviewing Liquidator. The costs of the review will form part of the expenses of the external administration, subject to a resolution of creditors.

ASIC or the Courts may appoint a reviewing Liquidator to review any other matter of the conduct of an external administration including the decisions made by practitioners to sell assets or pursue various lines of recovery.


Committees of inspection

The INLA will increase the powers available to Committees of Inspection (“Committee”) to direct an external administrator to do certain acts or take certain recovery actions.

While an external administrator will not automatically be bound to enact the recommendations of the Committee, they must produce a written response as why they believe the Committee’s directions to be incorrect. Committees can resolve that a member obtain external advice in relation to the external administration, which allow the engagement of a third party practitioner or other expert to provide some oversight on aspects of external administrations.

Costs of this external advice will be expenses of the administration in the event that either court or the Administrators consent is provided. Large creditors (those with more that 10% of the total outstanding debt) may automatically appoint a representative to any Committee. The INLA has also changed the rules for membership to Committees to ensure that the creditors are the Committee members and not the individuals nominated thus removing the need for new nominations if a representative departs the employment of a creditor.


Assignment of legal actions/ rights to sue

From 1 March 2017 Insolvency Practitioners are permitted to sell or assign the personal rights of action held by Insolvency Practitioners to third parties. This includes rights of action against recipients of preferences, voidable transactions and other matters identified as a result of  the Liquidator’s investigations. This change has been designed to improve the prospects of a return to creditors and allow for the finalisation of insolvency estates faster and is similar to the existing insolvency structure operating in the United Kingdom.

Creditor or Court approval of any assignment will be required where there is a compromise of the debt due to the company or the arrangement is to extend beyond three (3) months. In effect, this is likely to apply to most assignments of proceedings. An increased emphasis will therefore be placed on creditors to review any proposal brought to them by a practitioner to sell or assign legal recoveries.

Creditors will need to weigh whether the prospect of any upfront payment for legal proceedings is sufficient compensation for the minimised risk and recovery time associated. The practical effect of this change is difficult to quantify. While a market for litigation funding has existed for some time, there currently is no independent market for the acquisition of the actions contemplated by these changes. Parties who are the target of such actions may find that the acquiring third parties are better resourced and more motivated to pursue actions than Insolvency Practitioners. 

Further changes The structure of the INLA will allow for a more flexible framework with many of the new changes taking the form of insolvency rules and procedures. This is intended to mean that changes to the operation of the Corporations Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth) will be possible following ministerial input and decree rather than requiring fresh legislation to be drafted and enacted by parliament.

In 2016 the government released an addition proposal paper regarding the introduction of Safe Harbour arrangements to allow for increased restructuring and turnaround in the Australian insolvency market. Additionally the proposal paper flagged the removal of ‘ipso facto’ clauses designed to prevent or hamper the ability of a company subject to external administration from successfully maintaining its current business operations. No bill has been introduced to implement these changes however a discussion paper has been released and legislation is expected to be introduced later this year or 2018. 

About the Author

*Nick Combis is an expert insolvency practitioner with over 25 years’ experience, specialising in both corporate and personal insolvencies from the time he completed his tertiary studies. Nick has been actively involved in more than 4000 voluntary administrations, liquidations and bankruptcies covering a diverse range of businesses and industries. His proactive approach to his work results in an ability to effectively manage risk and deliver quality results in an efficient, cost effective manner.

About VINCENTS 

Established for more than 25 years Vincents is an Australian firm of accounting experts and business advisers specialising in assurance & risk advisory, business advisory, corporate advisory, financial advisory, forensic services and insolvency & reconstruction.

 

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