The 1st September heralded the arrival of spring and with it came the long awaited changes to the Australian insolvency laws. The gestation period of these changes to the law has been tortured and lengthy and while it has resulted in many changes, in particular to the Corporations Act, the Insolvency Profession as a whole have been somewhat disappointed with the lack of substantive change and see this as a missed opportunity to really streamline, harmonise and improve both the personal and corporate insolvency regimes.
However these changes will impact on us all and we discuss below some of the more significant changes that will effect credit professionals.
Better Reporting & Increased Power for Creditors
One of the major thrusts of the law reform is to give greater powers to creditors and to provide them with more transparency in the insolvency process. Accordingly credit professionals can expect to see better and more frequent reporting albeit in a slightly different format than what they will have been used to seeing in the past. Creditors will be provided with a notice shortly after the appointment of the insolvency practitioner which will include:
• a Declaration of Independence Relevant Relationships and Indemnities (DIRRI);
• an initial remuneration notice which must provide an indication of the anticipated fees; and
• details of creditors' rights.
The report may also include details of how the liquidator proposes to have their fees approved (either by convening a meeting of creditors or via a written and mailed resolution).
Within 3 months of their appointment the insolvency practitioner must send a further report to creditors updating creditors on:
• the estimated amounts of assets and liabilities of the company;
• inquiries relating to the winding up of the company that have been undertaken to date;
• further inquiries relating to the winding up of the company that may need to be undertaken;
• what happened to the business of the company;
• the likelihood of creditors receiving a dividend before the affairs of the company are fully wound up; and
• possible recovery actions.
At any time when remuneration is being sought, a remuneration report must be provided to creditors setting out the remuneration and costs incurred to date and details of the work undertaken or to be undertaken if prospective remuneration is being sought. All remuneration must be capped.
Creditors meetings are not mandatory
As has been the case in bankruptcy matters for some years, meetings of creditors in liquidation matters will no longer be mandatory. What this means is that it will be up to the liquidator to determine if they feel a meeting is necessary. If they do not they will advise creditors of this in the initial notice to creditors sent shortly after their appointment. Should creditors believe a meeting should be convened they need to be aware of these rules:
• A liquidator must, unless it is unreasonable to do so, convene a meeting of creditors if within the first 20 days of the appointment they are requested to do so by a group of creditors or a single creditor who is or are owed at least 5% of the value of the debts outstanding
• If the request to convene a meeting of creditors is made outside of the first 20 Business days of the appointment then the liquidator must, unless it is unreasonable to do so, convene a meeting of creditors:
a) If greater than 10% but less than 25% in value of creditors request a meeting and meet the costs of the Liquidator for holding the meeting; or
b) If greater than 25% of the known value of creditors request a meeting; or
c) By a resolution of the creditors passed at a prior meeting held; or
d) Upon request by the Committee of Inspection.
If a Liquidator forms the view that the request for a meeting is unreasonable, they must inform the creditor why. Given the requirements surrounding meetings of creditors the value of the credit professional's network will be a very powerful tool when they are looking to meet the criteria necessary to require a meeting of creditors to be held.
Creditors will also have the right to:
• make reasonable requests for information and have it provided to them within 5 business days,
• give directions to the insolvency practitioner. The liquidator must have regard to the directions given but does not have to comply with the directions given
• resolve to replace the insolvency practitioner
• appoint another insolvency practitioner to review the incumbent insolvency practitioner's remuneration and costs
Changes to Committee of Inspections (COI)
COI members can now be elected by creditors by resolution, by a large creditor or group of creditors > 10% value or by an employee or employees >50% value. It is important to note that members of the committee or the creditor/s they represent cannot derive any benefit from serving on the COI nor are they allowed to purchase assets of the administration. Whilst not the apparent intention, it has yet to be seen if these prohibitions result in members of the committee being unable to trade with a liquidator should the liquidator be trading on the business.
Assignment of the Right to Sue
Insolvency practitioners are now able to assign their rights to sue. Therefore actions for recovery of preferences and other voidable transactions can now be sold to third parties. Insolvency practitioners are already being approached by various parties expressing interest in acquiring any actions the practitioner may have to sell. This could see an increase in the number of preference actions being run which previously may not have been run by liquidators who did not have the resources to fund the action. Now such actions will be able to be sold to a party who will then pursue the recovery from the creditor. Something certainly credit managers need to be aware of when faced with a claim for a preference recovery.
Safe Harbor & Ipso Facto Law Reforms
In addition but separate to the changes that came into effect on 1 September under the Insolvency Law Reform Act (ILRA), the safe harbor bill passed through the senate on 11 September 2017. The safe harbour reforms are part of the government's National Innovation & Science Agenda and it is hoped by their adoption it will drive cultural change amongst company directors by encouraging them to identify solvency issues early and while keeping control of their company
, take reasonable steps to facilitate the company's recovery instead of what was considered at times of prematurely placing the company into voluntary administration or liquidation. The safe harbor reforms are intended to create a "safe harbour" for company directors from personal liability for insolvent trading if the company is undertaking a restructure rather than a formal insolvency. In order to avail themselves of the safe harbour provisions however directors will ne
anges to contracts that also were passed by the senate on 11 September 2017 are expected to commence in July 2018.
ed to work with a suitably qualified restructuring professional while they strive to restructure the ailing company.
Concerns that these provisions will allow for the further spread of pre insolvency advisors and phoenix activity were not addressed by the government despite calls from ARITA and its members for the restructuring professional to be a qualified insolvency practitioner.
It is anticipated that the safe harbor laws will commence in the coming weeks while the ipso facto changes to contracts that also were passed by the senate on 11 September 2017 are expected to commence in July 2018.
Reduction of Bankruptcy Term Still on the Horizon:
Further reform is still on the agenda particularly in relation to the reduction in the length of bankruptcy from 3 years down to 1 year. While this has not been popular with the credit fraternity it is still seen by government as a positive and necessary part of encouraging entrepreneurs to take the risk of doing business in Australia and to also bring Australia's bankruptcy laws into line with other parts of the world.
On 12 September 2017 the Government announced what it called a "comprehensive package of reforms" to tackle the burgeoning problem of phoenix activity which it estimates costs the economy $3.2 Billion per year. The package will include the introduction of a Director Identification Number (DIN) in a bid to deter phoenix activity.
The DIN will identify directors with a unique number which will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities.
In addition to the DIN, the Government will consult in the coming weeks on implementing a range of other measures to deter and disrupt the core behaviors of those parties involved in facilitating phoenix behavior and those directors who partake in phoenix behavior. It's early days with this initiative but something definitely to be kept on the radar given the damage that is done on a far too frequent basis by phoenix operators. Certainly any action in this area is welcomed.
By Robyn Erskine & Adrian Hunter