Insolvency law reform: New age or missed

opportunity?

Jason Harris

Associate Professor, UTS Faculty of Law

Jason.Harris@uts.edu.au

Outline

Basic features of Australian insolvency law

The narrative of insolvency law reform

The history of insolvency law reform

Comparative perspectives

Current law reform project-the ILRA 2016

Potential future law reform

2

Australian insolvency law Bifurcated system

Bankruptcy Act 1966 (Cth) (personal)

Corporations Act 2001 (Cth) Ch 5 (corporate)

Separate regulatory agencies (AFSA and ASIC)

Separate departments (Treasury: corp; A-G: bankr)

External administration not debtor in possession

Compare US Chapter 11; CCAA (Canada)

Formal collective appointments:

Bankruptcy (personal)

Liquidation (corporate)

Alternatives:

Pt IX (debt agreement); Pt X (PIA) (bankruptcy)

Voluntary administration and schemes of arrangement (corporate)

Primacy of secured debt (receivership) 3

Recent Inquiries

Insolvency Law Reform Bill 2012,14,15 (exposure drafts)

Insolvency Law Reform Act 2016 (Cth)

Senate Economics Committee: ASIC Report

Parliamentary inquiries into construction, agribusiness insol, loan impairments

ARITA Green Paper: A Platform for Recovery

Financial System Inquiry

Whittaker Review of the PPSA

Productivity Commission draft report

There is a lot of reviewing/reporting/discussion, although not a lot of actual law reform

Challenging parliamentary environment

Crowded policy agenda (FOFA, Tax Review, Super)

Main parliamentary leader on insolvency (Sen Williams) has a professional regulation focus

4

Context of the Discussion

Considerable public debate concerning role and

regulation of insolvency practitioners (IPs)

Insolvency industry has reputation of having some

cowboys/criminal activity/money laundering/

‘colourful identities’

Concern about phoenix companies

ASIC has received criticism as regulator

Regulation of IPs involves several bodies

Charging practices of IPs criticised

Independence of some IPs has been criticised

Creditors feel disempowered

So why are we having this debate now? 5

Senator John ‘Wacka’ Williams

(Nat, NSW)

“It’s just bloody outrageous”

-quote to SMH 1.4.10

6

The narrative of insolvency reform

(Alex Hawke-Assistant Treasury)

it is clear that the level of confidence in the insolvency industry needs

to be improved. Insolvency practitioners received the lowest rating for

perceived integrity in the latest survey of ASIC's stakeholders.’

A key aim of the bill is to restore confidence in the insolvency

profession by raising the standards of professionalism and competence

of practitioners, and identifying and removing 'bad apples' from the

profession more swiftly.

‘proactive surveillance of corporate insolvency practitioners’

‘unjustifiably expensive or poorly-performing practitioners’

‘the need to protect consumers of insolvency services’

‘improving practitioner standards with flow-on effects to practitioner

performance’

(Senator Williams)

There have certainly been some nasties in this industry

I think that their charges are outrageous… the liquidator seems to get

the lot with their fees

7

The (recent) history of insolvency reform

Harmer Report, General Insolvency Inquiry (ALRC) 1988

Corporate Law Reform Act 1992

Voluntary administration (Pt 5.3A)

Repeal of official management (Pt 5.3)

Bankruptcy amendments 2002-2005

Corporations Amendment (Insolvency) Act 2007

Since 2000 more than 30 inquiries that have made

recommendations on insolvency-still waiting for

implementation

8

Comparative perspectives England

Enterprise Act 2002

Administration, restricting receiverships

Rise of pre-pack administrations

Small Business, Enterprise and Employment Act 2015

Reducing creditor meetings

Reform pre-pack requirements

Europe

European Commission 2014 (‘new approach to business rescue’)

Germany 2012

Spain 2012, 2014

South Africa (Business Rescue Act 2008)

Current/pending reviews: Singapore, Hong Kong, USA

9

The changing narrative

Static or falling appointment numbers

Lack of large scale receiverships, VAs

Arrium and Dick Smith excepted

Push in Australia (and elsewhere) for early intervention

and turnaround/restructuring

The stigma of insolvency

Avoiding termination clauses

Changing nature of business:

Values depend less on fixed assets and more on people and

service contracts

Increasing secondary debt market in Aust

Increasing role of distressed funds in Aust

Sankaty and Oaktree local offices

Fragmentation of senior lending groups

Push for early intervention, restructuring, reorganisation

10

A snapshot of corporate insolvency

1326, 11%

678, 5%

1126, 9%

2932, 24%

6273, 51%

Insol appt 14-15

VA

Rec

Controller

Court liq

CVL

11

Co Exad appointments-ASIC Series 2

9314

12689

14056

12726

0

2000

4000

6000

8000

10000

12000

14000

16000

FY00-01 FY05-06 FY09-10 FY14-15

Total CVL Court liq VA Rec and Cont12

DOCA and VA appointments ASIC statistics (Series 2)

DOCA appt down from 7% of all corp insol appt in FY00-

01 to 2.6% of all appt in FY12-13 (3% in FY14-15)

DOCA appt were:

28% of VA in FY00-01

32% of VA in FY09-10

28% of VA in FY14-15

VA appt down from 25% of all corp insol appt in FY00-01

to 10% of all appt in FY12-13 (same in FY14-15)

Total corp insol appt up from FY00-01 (9,314) to FY14-15

(12,726) 36% increase

13

VA and DOCAs

2363

1657 1644

1326

672 541

418 376

0

600

1200

1800

2400

3000

FY00-01 FY09-10 FY12-13 FY14-15

VA

DOCA

14

A snapshot of personal insolvency

17163

10911

214

Bankruptcy Act appointments

Bankruptcies

Debt ag (Pt IX)

PIA (Pt X)

15

Appointments under Bankruptcy

25611

27351

36539

28288

23902

22299

27509

17163

1223

4866

8427

10911

486 186 603 214 0

5000

10000

15000

20000

25000

30000

35000

40000

FY00-01 FY05-06 FY09-10 FY14-15

Total Bankruptcy Pt IX Pt X16

Trends in personal insolvency

Total bankruptcy appointments down from 30822

(FY12-13) to 28288 (FY14-15) (down 9%)

Formal bankruptcies down from 68% of total (FY12-

13) to 61% of total (FY14-15)

Debt Agreements up from 31% of total (FY12-13) to

38.5% (FY14-15)

PIA halved as a proportion of all appointments to

.5% (from 294 to 214) (FY12-13 compared with

FY14-15) 17

Current law reform: ILRA 2016 (Cth)

Attempt to harmonise personal and corporate insolvency

Similarly numbered ‘Insolvency Practice Schedule’ into each Act

Insolvency Practice Rules (not yet released)

‘External administrator’ regulation rather than appointment focussed regulation

Consolidated rules for creditor meetings, reporting, court powers

Major over hall of corporate insolvency practitioner regulation

Mirroring of bankruptcy practitioner regulation

Reciprocal banning/disqualification between bankr and corp insol

Dramatic increase in regulator disciplinary powers

Request information and update information

Show cause notice

Attend creditor meetings

Removal of CALDB power

Reshaping relationship between IPs and creditors

Redesign of reporting obligations

18

The present: practitioner regulation

Registered liquidators (s 1282)

44% work in small or medium practices of 9 partners or less

Official liquidators for court appointment

Compare O/S insolvency practitioners (lawyers and

accountants)

Must have studied equivalent of 3 years

accounting and 2 years commercial law

Court has power to inquire into liquidator, VA,

receiver

Court may remove liquidator, VA, receiver

ASIC may lodge application with CALDB (s1292)

CALDB may suspend or cancel registration

No obligation to renew registration

ASIC increasingly use undertakings 19

The present: practitioner regulation

Insolvency practitioners belong to:

ARITA (approx 85%)-Code of Professional Practice (3rd ed)

CAANZ; CPA; IPA- APES 330

Increasing judicial focus on practitioner remuneration

Anti-hourly rates; focus on ad valorem percentages

Proportionality

Re Independent Contractor Services (Aust) P/L (No 2)

[2016] NSWSC 106

Regulatory focus on independence

Referral relationships

Pre-insolvency advisors and phoenix activity

20

The future: practitioner regulation

(enacted-ILRA 2016)

Registration (licensing) IPS Division 20

No more official liquidators

Renewable every 3 years

Refer application to committee (ASIC, Min, Industry appointees)

May be subject to conditions and limitations on roles (eg rec only)

Adequate insurance levels

Ongoing professional development requirements

(pending)

Educational requirements (university study in insolvency?)

Insolvency Practice Rules may require this

User pays regime for registered liquidators

Increasing rego fee from $300 to >$8,000

Licensing fee of potentially $12,000 (tiered for smaller firms)

21

The present: IPs and creditors

Different rules for each appointment type

Creditors approve remuneration

Court can also approve/review remuneration

Creditors can seek court inquiry into conduct of IP or

seek court order to remove IP

Creditors can challenge IP decision in court under s 1321

Liquidator must ‘have regard to’ directions of creditors

Difficult to remove IP once appointed

In VA creditors can only remove at first meeting

Creditors can seek to be appointed to ‘committee of

inspection’

IP does not need creditor permission to sell assets

22

The future Disciplinary action

No more CALDB-disciplinary committee (Div 40)

ASIC can suspend or cancel (limited grounds);

committee can suspend or cancel

if rego cancelled can’t reapply for 10 years

ASIC can issue show cause notice (s40-40)

ASIC can direct IP to give information, correct

information, give documents; obligation to

correct information

ASIC can give direction not to accept further

appointments (s 40-15)

Industry association can report members to ASIC

23

The future

Role of the court

Shifting from appointment specific provisions to new

IPS Div 90

Abolish s 1321 (replace with broader court powers)

s447A remains in Pt 5.3A

New general court inquiry provision (s 90-5); or on appl by

creditor, ASIC or an officer of co (s 90-10)

General court power to make appropriate orders (s 90-15)

Application by persons in s 90-20

Court or ASIC may appoint a reviewing liquidator (s90-23)

Creditors may also appoint, but limited to costs and

remuneration (s 90-24)

24

The future

Relationship with creditors

New rules on creditor meetings (Div 75)

Creditors may remove external administrator (s

90-35)

New role for committees of inspection (Div 80)

Request information (if reasonable)

Request a report (if reasonable)

Seek court orders (by authorising a creditor

member)

Obtain external advice (charged as a cost of the

committee)

Seek reviewing liquidator 25

Future reforms: announced

1. Reduce personal bankruptcy to 1 year

default

2. Introduce safe harbour for directors for

insolvent trading:

A. Safe harbour defence

B. Carve out/presumption against liability

Role of restructuring advisor?

3. Make ipso facto clauses void on

appointment of IP

Innovation Statement (7.12.15)

26

Productivity Commission Reforms Findings:

The current culture, incentives and legal framework around voluntary administration inhibit its effectiveness as a genuine restructuring mechanism

Wholesale change of insolvency law is not warranted-Ch 11 rejected as a model

VA required to certify 1 month after appointed where co can be viable business and if not convert into liquidation (Rec 14.1)

Introduction of pre-positioned sales (Rec 14.3)

Moratorium for creditors’ schemes of arrangement (Rec 14.6)

Introduction of ‘small liquidation’ process (Rec 15.1)

Can only be used if books and records are accurate

Can use a pre-positioned sale process (Rec 14.4)

ASIC should produce a new Reg Guide on small business liquidation and restructuring (Rec 15.7)

Rename AAF to Public Interest Administration Fund and fund small liquidations where assets insufficient (Rec 15.2)

Greater reporting obligations on receivers regarding sales (Rec 15.4)

Allow a committee of inspection to challenge receiver fees

27

Other reforms?

Receivership under focus

Insolvency of trusts reform

Insolvency ombudsman

Insolvency Panel

Consolidated Insolvency Act?

US Chapter 11 bankruptcy? 28

QUESTIONS?

29