December 14, 2023

Submissions to Consultations for the Improvement of the Australian Insolvency Industry

SV Partners is committed to shaping the landscape of insolvency and related legal frameworks to drive efficiencies and improve outcomes for all stakeholders. Our team have recently submitted three critical responses to Government consultations which may have substantial implications on the insolvency industry.

Our submissions addressed the three key consultations below:

  • Personal Insolvency Consultation – Short term reform opportunities to improve the personal insolvency system;
  • Consultation Paper 372 – Guidance on Insolvent Trading Safe Harbour Provisions – Update to RG 217; and
  • Public Consultation on the Government’s Response to the Statutory Review of the PPSA 2009

Personal Insolvency Consultation:

As a firm, SV Partners conducts one of the highest rates of personal insolvency appointments in Australia.

Our submission to the Attorney-General’s Department with respect to the Personal Insolvency Consultation addresses several key points regarding proposed changes to Australia’s Personal Insolvency legislation. We offer the following insights:

1. Bankruptcy Threshold:

SV Partners does not support the proposed increase in the bankruptcy threshold from $10,000 to $20,000. We believe that such a small increment is unlikely to have a significant impact on the insolvency regime due to the self-regulating nature of the process. We are also of the opinion that there is a need to consider various factors such as the impact on body corporate managers, lending activities, and the cost to the Australian Financial Security Authority (AFSA) in implementing this change.

2. Response Time to Bankruptcy Notice:

SV Partners opposes extending the debtor’s response time from 21 to 28 days. We believe that this extension may not make a substantial difference in debtor behaviour and argue that creditors’ rights need to be balanced with debtor considerations.

3. Reduced Record Period on the NPII:

SV Partners supports the proposal to reduce the permanent record period on the National Personal Insolvency Index (NPII) to seven years for bankruptcies. We view this change as a positive step, provided appropriate safeguards are in place, particularly concerning “serial bankrupts.” There is also the need for cultural changes in lending institutions regarding how former bankrupts are handled.

In summary, SV Partners believes in the importance of balancing the rights of creditors and debtors and suggest that the proposed changes may have limited impact on the insolvency regime, urging a broader consideration of potential consequences.

Consultation Paper 372 – Guidance on Insolvent Trading Safe Harbour Provisions – Update to RG 217:

In our view, the draft updated RG 217 serves as a valuable resource for specialist relevant professional advisers and Directors of medium-to-large businesses, subject to specific suggested amendments. However, we do not believe it is applicable to micro or small-to-medium businesses (SMEs) or non-specialist relevant professional advisers.

Our key recommendations include:

1. Broad Awareness Campaign:

The Australian Securities and Investments Commission (ASIC) should conduct an extensive awareness campaign targeted at SMEs to help Directors gain a better understanding of their legal obligations and rights, particularly in situations involving potential insolvency or financial difficulties.

2. Legal Design Theory (LDT):

The submission suggests that ASIC should embrace LDT to create a modern and user-friendly guide for SMEs on topics related to insolvent trading and Safe Harbour. LDT focuses on making legal information more approachable, readable, and understandable for the general public. ASIC is encouraged to create precedent checklists and handouts that can be readily adopted by professional advisers and SMEs. These resources would serve as practical tools to help stakeholders better understand and implement ASIC’s proposed four Key Principles.

3. Clarity on Advisers:

ASIC should employ stronger and unambiguous language when defining what constitutes an appropriate adviser to provide advice to companies or Directors facing financial challenges or seeking safe harbour protection. This clarification aims to prevent the misinterpretation of the criteria, ensuring that unqualified or unreliable advisers are not considered suitable.

4. Additional Insolvency Indicators:

Our submission suggests the inclusion of extra insolvency indicators to supplement ASIC’s existing list, which is commonly used by professionals. These additional indicators can enhance the accuracy of identifying potential insolvency issues.

5. Emphasizing Individual Application of Safe Harbour:

ASIC should underscore that the concept of Safe Harbour applies individually to each Director, not solely to a collective group of Directors. This emphasis highlights the importance of Legal Professional Privilege (LPP) and ensures that each Director is aware of its significance when using the Safe Harbour provisions.

7. Clarity on “Reasonably Likely”:

The submission suggests that ASIC should provide clearer guidance on the interpretation of the phrase “reasonably likely” in the context of leading to a better outcome under section 588GA(1)(a) of the Corporations Act 2001. The existing explanation in RG 217.75 is insufficient, particularly for SMEs and general readers.

8. Reminder on Insolvent Trading Safe Harbour Report:

ASIC should remind the relevant Minister of the Final Report into the Review of the Insolvent Trading Safe Harbour, which was issued nearly two years ago. Despite the government’s agreement with most of the recommendations in the report, no amendments have been made to section 588GA of the Corporations Act 2001 since its incorporation approximately six years ago.

These recommendations collectively aim to improve the clarity, accessibility, and effectiveness of ASIC’s guidance, particularly in assisting SME Directors in navigating complex financial situations and complying with their legal obligations.

Public Consultation on the Government’s Response to the Statutory Review of the PPSA 2009

SV Partners has taken the lead in crafting a comprehensive submission to the Attorney-General’s Department regarding the Personal Property Securities Act (PPSA). While expressing partial support for the Whittaker Review, we highlight disagreements with certain proposed government changes. Notably, SV Partners oppose the removal of the ABN requirement for trust registrations and the easing of Purchase Money Security Interest (PMSI) recognition over commingled goods.

We also expressed support for maintaining priority liens for external administrators, streamlining the registration process, and calling for a thorough review of the interplay between Section 340 of the Act and priorities afforded to the Fair Entitlements Guarantee (FEG) under the Corporations Act.

SV Partners has offered a detailed and considered response to the Whittaker Review and the subsequent government-proposed reforms. While acknowledging some areas of alignment with the proposed changes, we have expressed significant reservations and concerns regarding certain key aspects of the reform agenda. This comprehensive response seeks to provide insights into our perspective, reflecting our nuanced stance on these crucial matters.

After nine long years of development, the government provided stakeholders less than two months to submit their feedback. SV Partners, like many other stakeholders, finds this timeframe to be inadequately short, particularly considering the depth and complexity of the proposed reforms.

Key points which we have provided recommendations to include:

1. PPS Interest Registration:

One of the contentious points revolves around the requirement to register Personal Property Security (PPS) interests. The government proposes shifting from the existing framework, which requires registration against the Australian Business Number (ABN) of a trust, to registration against the Australian Company Number (ACN) of the Trustee. SV Partners opposes this change, with a preference for retaining the current ABN-based registration requirement. We believe the ABN-based system offers greater clarity and ease of use in identifying PPS interests associated with trusts.

2. PMSI Creditors Registration:

The proposal to remove the requirement for Secured Creditors to tick the PMSI button on the register is another point of contention. SV Partners stands in opposition to this change, suggesting that maintaining the PMSI button requirement is more prudent. Preserving this requirement ensures that creditors clearly indicate their PMSI status, fostering transparency in the registration process.

3. Recognition of PMSI Creditors:

We have expressed our concerns about the government’s intent to make it “easier” for PMSI Creditors to be recognised over commingled goods. While the government’s objective is to simplify the process, SV Partners anticipates that this change could potentially introduce additional complexities. Our apprehensions underscore the need for careful consideration when adjusting established legal frameworks.

4. Priority Liens for External Administrators:

SV Partners aligns with the government’s proposal to allow external administrators to retain priority liens over Secured Creditors. This position is reflective of the importance of providing External Administrators with the tools necessary to efficiently manage insolvency proceedings. We recognise the value of maintaining this priority, as it facilitates the orderly distribution of assets during insolvency proceedings.

5. Streamlining the Registration Process:

SV Partners welcomes the government’s intention to streamline the registration process. Recognising the inefficiencies and complexities that can be associated with registration, we view any reform in this domain as a positive step. Simplifying registration procedures can benefit all stakeholders involved in the process.

6. Review of Circulating Assets Definition:

In addition to specific reforms, SV Partners advocates for a comprehensive review of the interplay between the statutory definition of circulating assets under section 340 and the priorities afforded to the FEG under the Corporations Act. This recommendation underscores the importance of carefully examining the relationship between these elements to ensure a fair and equitable distribution of assets in insolvency scenarios.

As the reform process unfolds, SV Partners will continue to provide input with the intention of shaping the final outcomes, influencing the direction of corporate regulatory reform in Australia.

Article written by Matthew Hudson (Associate Director) – Brisbane

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