November 29, 2017

Australian Insolvency Law Reform Promoted as a Win for Creditors, but is it really?

At times, businesses will face difficulties in collecting monies owed from recalcitrant debtors and may need to rely upon liquidators or external administrators to assist us and other stakeholders.

At times, businesses will face difficulties in collecting monies owed from recalcitrant debtors and may need to rely upon liquidators or external administrators to provide assistance. According to the recent release of the SV Partners Commercial Risk Outlook Report, some 7,681 business in the top 5 industries are currently most at risk of financial failure within the next 12 months. This means there is a good chance you already have had, or may in the future have, to deal with one of your debtors entering some form of external administration.

According to the Federal Minister for Revenue and Financial Services, Mrs Kelly O’Dwyer, the Insolvency Law Reform Act 2016 (Cth) (ILRA) changes are supposedly designed to (amongst other things) improve your standing and power (as a creditor) in the external administration of a corporation or regulated debtor (formerly known as a bankrupt).

Let’s imagine that you are an unsecured creditor1 of a company that has voluntary placed itself into Liquidation and is insolvent. You receive a notice advising you the assets of this company are insufficient to pay all unsecured creditor debts’ in full and the Liquidator does not know how much you may receive or when, but is likely to know within three months.

What new powers does the law, post-reform, give you, as an unsecured creditor?In relation to the first power, it appears to be identical however, post-reform it is now more difficult to remove a liquidator in a CVL as more than 5% of the total value of creditors (excluding related party creditors) must have collectively requested the meeting to remove the liquidator.

*With respect to the two new apparent powers of creditors to request a meeting and give directions, these also are not as they seem, as:

  • to request a meeting, there must be > 10% but < 25% of the known value of creditors collectively requesting the meeting be held for a reasonable purpose and creditors bear the cost of holding this meeting; and
  • creditors can provide directions to liquidators, however, the liquidator is under no obligation to comply with them.

As demonstrated above, the law reform has not increased the rights or power of creditors, especially the most powerless group, being unsecured creditors; as they still have no standing to affect the outcomes of a liquidation.

This specific reform, the ILRA5, has impacted the insolvency industry by:All that the law reform does, in essence, is increase red tape and penalise the ethical liquidators, who meet their obligations and communicate with creditors when appropriate and commercial. The outcome for creditors, is likely to be a reduction of any potential dividend.

These new ILRA laws came into effect on 1 September 2017, however, time will tell whether its stated purpose will actually benefit creditors, or whether they will only add to the administrative burden and costs of the appointee.

If you have any questions about these upcoming ILRA changes and how they may impact you, please contact Matthew Hudson or Nicky Lonergan on our confidential assistance telephone number 1800 246 801.

Further reforms to come into force in the immediate future: Safe Harbour and Ipso Facto Bill 2017

12 September 2017, the House of Representatives passed the amended Treasury Laws Amendment (2017 Enterprise Incentives No.2) Bill 2017 (Cth) (the Bill), which allows for the provision of:

  • ‘safe harbour’ protections for directors, which provides a carve-out from the insolvent trading provisions in ss 588G and 588M of the Corporation Act. At this stage, a number of key pieces of information have yet to be released to the market by the Federal Government, however, what we do know is that in order to rely upon the safe harbour provisions, the director must (at the very least):
    • engage an ‘appropriately qualified adviser’ to develop and implement a turnaround/restructuring plan for the company;
    • pay all superannuation and employee entitlements (or at least provision for);
    • meet director’s duties (ss 180-185 of the Corporations Act)
    • meet all ATO reporting obligations; and
    • maintain company records to a level that is adequate; and
  • the stay of ipso facto clauses, which would prevent debtors of failed companies from automatically terminating contracts or cease trading. This potentially gives turnaround advisors and insolvency practitioners a greater opportunity to attempt to save or restructure failing companies.

SV Strategic Solutions (an affiliated brand of SV Partners) have prepared comprehensive material on the proposed safe harbour changes and are able to assist you in navigating the complexities of restructuring your business. Contact one of our expert advisors on 1800 246 801 for further information.

1 Unsecured meaning you hold no security over any company assets
2 As the new laws are slightly different for creditor rights and powers depending on the type of appointment we have specifically used CVL for demonstration purposes
3 Corporations Act 2001 (Cth) (CA)
4 Insolvency Practise Schedule (Corporate) 2016 (IPS-C)
5 Insolvency Law Reform Act (2016) (ILRA)
6 At the same time the ILRA was introduced, the ASIC Funding Model commenced placing a high additional levy on liquidators under the guise that this industry should pay to be regulated by ASIC.

Article written by Matthew Hudson, SV Partners Brisbane.

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