Recapping Recent Developments in Bankrutcy and Insolvency

Thursday 9 June 2016 @ 12.24 p.m. | Corporate & Regulatory | Trade & Commerce

Recently, the period for submissions to the Treasury Department's, "National Innovation and Science Agenda - Improving bankruptcy and insolvency laws" paper closed (on 27 May 2016). The paper has been one of a number of recent developments in the area of insolvency and bankruptcy which has for many years not altered radically and, as some commentators have indicated, is possibly now in need of a conceptual as well as technical overhaul.

Recent Productivity Commission Report

Late last year (December 2015) the Productivity Commission delivered its "Business Set, Transfer and Closure" report and on the questions of insolvency, company restructuring, directors liability and general practice and the following key points were made by the Commission.

In considering whether Australia should go down the road of a US Chapter 11 style approach to corporate insolvency the report found that:

"Some specific reforms to Australia's corporate insolvency regime are warranted, but a wholesale change to the system, such as the adoption of the United States "chapter 11" framework, is neither justified nor likely to be beneficial."

As to when voluntary administration should be available the report suggested that formal company restructuring through voluntary administration ". . . should only be available when a company is capable of being a viable business in the future".

On the question of directors liability and insolvent trading the report considered the idea of a ". . . safe harbour" defence indicating the it should be introduced so as to ". . .  allow directors of a solvent company to explore, within guidelines, restructuring options without liability for insolvent trading".

Overall, the report considered that a simplified liquidation process should be introduced ". . . to reduce the time and expense of winding up businesses with few or no recoverable assets".

Further, with respect to directors, it was indicated that:

  • "[all] directors should be required to obtain a director identification number";
  • the default exclusion period and restrictions on bankrupts in relation to access to finance, employment and overseas travel should be reduced from 3 years to 1 year, with the trustee and courts able to extend this period to prevent abuse; and
  • the obligation to repay debts should continue to be required for three years or until bankruptcy is discharged.

Recent Legislation

The Insolvency Law Reform Bill 2015 (Cth) was introduced into the Federal Parliament in early December 2015 and is now Act No 11 of 2016, having received the Royal Assent on 29 February 2016. As yet, the legislation has not fully commenced, and, with the election, is not likely to commence until the latter part of 2016.

The Act, as we have reported previously, formed part of the Australian Government’s strategy to modernise and strengthen the nation’s insolvency and corporate reorganisation framework, introducing major changes to insolvency law in areas such as insolvent trading and default periods for personal bankruptcies.

Briefly the Act amends the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001 and the Bankruptcy Act 1966 to create common rules:

  • removing unnecessary costs and increase efficiency in insolvency administrations;
  • aligning the registration and disciplinary frameworks that apply to registered liquidators and registered trustees;
  • aligning a range of specific rules relating to the handling of personal bankruptcies and corporate external administrations;
  • enhancing communication and transparency between stakeholders;
  • promoting market competition on price and quality;
  • improving the powers available to the corporate regulator to regulate the corporate insolvency market and the ability for both regulators to communicate in relation to insolvency practitioners operating in both the personal and corporate insolvency markets; and
  • improving the overall confidence in the professionalism and competence of insolvency practitioners.

Ongoing National Innovation Paper

The Treasury Department's, "National Innovation and Science Agenda - Improving bankruptcy and insolvency laws" paper closed (on 27 May 2016). In respect of insolvency and bankruptcy, the paper, being about innovation, suggest a cultural change in how we view insolvency and bankruptcy and makes note of the fact that:

". . . more often than not, entrepreneurs will fail several times before they achieve success. To create an ecosystem that enables these entrepreneurs to succeed will require a cultural shift.Our current insolvency laws put too much focus on penalising and stigmatising the failures. With these measures in place, bankruptcy and insolvency laws will strike a better balance between encouraging entrepreneurship and protecting creditors."

The Paper considers three measures to improve bankruptcy and insolvency laws, which it states as:

  1. reducing the current default bankruptcy period from three years to one year;
  2. introducing a 'safe harbour' for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company; and
  3. making ‘ipso facto’ clauses, which have the purpose of allowing contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.

The proposals paper sought the views of the public on how best to implement these measures in order to encourage Australians to embrace risk, learn from mistakes, be ambitious and experiment to find solutions. It will be interesting to see  what is made of the submissions on the paper and the final recommendations coming from it. 

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