On 29 February 2016, the Insolvency Law Reform Bill 2015 received Royal Assent. The resulting Act, the Insolvency Law Reform Act 2016 (Cth) represents the most significant suite of reforms to Australia’s bankruptcy and corporate insolvency laws in twenty years and is an integral component of the Federal Government’s agenda of improving economic incentives for innovation and entrepreneurialism.

The new Act, which amends the Corporations Act, the ASIC Act and the Bankruptcy Act, poses significant implications for both personal and corporate insolvency practitioners by seeking to impose common rules for the conduct of administrations which are intended to improve efficiency, competition and consumer confidence in the insolvency profession.

Key reforms

The key changes introduced by the Act include:

  • A single category of practitioner for corporate insolvency which entails removal of the distinction between official and registered liquidators and alignment of liquidators’ professional standards with the regulatory framework applicable to bankruptcy trustees;
  • Reduction of professional experience requirements for corporate insolvency practitioners from 5 years to 3 years;
  • Harmonisation of registration requirements and disciplinary processes for corporate and personal insolvency practitioners, including:
    • Replacement of indefinite corporate insolvency practitioner registrations with a requirement to renew registrations every 3 years; and
    • Common deregistration and disciplinary procedures, including removing liquidators from the jurisdiction of the Companies Auditors and Liquidators Disciplinary Board and instead devolving primary responsibility for registration and discipline of liquidators to committees comprising representatives of ASIC, ARITA and a Ministerial appointee;
  • Significant increases in maximum penalties for reckless or intentional failures by a liquidator to maintain adequate and appropriate professional indemnity and fidelity insurance;
  • Significant changes to remuneration of insolvency practitioners, including:
    • Introduction of a statutory maximum default remuneration of $5,000 (increasing with CPI for appointments in financial years beginning on or after 1 July 2017) for corporate insolvency without the need to convene creditors’ meetings in assetless or low asset administrations and liquidations;
    • In the absence of any remuneration determination by creditors, the committee of inspection or the Court in relation to necessary work properly performed by an insolvency practitioner in connection with the external administration, the practitioner will only be entitled to reasonable remuneration for that work which must not exceed the maximum default amount;. 
    • Introduction of a requirement of creditor or court approval for subsequent reviews of practitioner remuneration;
  • Improvements to creditor rights and practitioner interactions with creditors, including:
    • Enabling creditors to remove a practitioner and appoint a replacement through an ordinary resolution, subject to the practitioner’s right to seek the court’s intervention to prevent his/her removal;
    • The abolition of mandatory creditor meeting and practitioner reporting obligations;
    • Creditors’ rights to make “reasonable” requests for information and records in connection with the external administration, requests which the practitioner is obliged to meet unless there are insufficient funds in the administration to meet the request;
    • The ability of ASIC and the Court to appoint a registered liquidator to review the performance of an incumbent insolvency practitioner;
    • The power of creditors, ASIC and the Court to appoint a cost assessor to review and report on the reasonableness of the remuneration and costs incurred during part or all of an administration;
    • Enabling liquidators to assign certain rights of action (such as in relation to voidable preference actions and other voidable transaction claims) to third parties, subject to provision of written notice to creditors of the proposed assignment and in the case of pending actions, obtaining leave from the Court.
  • Increased powers to ASIC to monitor and audit the conduct of administrations by insolvency practitioners, including:
    • The power to issue written directions to liquidators to comply with Corporations Act requirements to lodge documents or provide information within 10 business days after the direction is given;
    • The power to direct a liquidator not to accept any further appointments under Chapter 5 of the Corporations Act for a specified period, including in cases involving a liquidator’s failure to comply with ASIC directions;
    • Powers to suspend or cancel a person’s registration as a liquidator.

A set of Insolvency Practice Rules will be developed for the purpose of implementing a number of the reforms referred to above. At the time of writing, those rules have not yet been released in final form.

Further expected reforms

It should be noted that the new Act does not include the following reforms cited by the Federal Government in response to the Productivity Commission’s recent Report on Business Set-up, Transfer and Closure as key components of its National Innovation and Science Agenda:

  • Nullification of “ipso facto” clauses in contracts (whereby a party can terminate the contract upon an insolvency event affecting the other party) in cases where the company is implementing a restructure to address its financial difficulties;
  • Reducing the personal bankruptcy period from 3 years to 1 year, which is intended to incentivise the taking of entrepreneurial risks by facilitating earlier re-entry into commerce of skilled businesspeople;
  • Introduction of a “safe harbour” to shelter directors from personal liability for insolvent trading in cases where a director has engaged a professional restructuring advisor to assist in turning the business back towards financial viability.

Subject to the outcome of this year’s federal election, it is currently expected that a proposals paper in relation to these reforms will be released later this year, with legislation to be enacted in 2017.

Conclusion

The Insolvency Law Reform Act is a long-anticipated product of over five years of consultation with stakeholder groups as well as substantial executive and parliamentary deliberations such as a Senate Economics References Committee Report in December 2010 and an Options Paper and Proposals Paper released by the Federal Government in June and September 2011 respectively. In this sense, the final arrival of the reforms themselves will not come as a surprise. Nevertheless, we expect that the practical effect of the legislative amendments referred to above may yet deliver some surprises, particularly through the significant change it is expected to bring to Australia’s insolvency profession and the complexion and mix of insolvency-related litigation in Australia.

For example, the new right of creditors to pass an ordinary resolution for the removal of a liquidator is particularly significant. The requirement of an ordinary resolution, as distinct from the special resolution requirement contemplated in the Options Paper or even the need to seek prior approval from the Court, makes it much easier for creditors to remove a liquidator. This in turn may give liquidators pause for thought in considering and commencing claims on behalf of the insolvent company. This potentially gives rise to a concern that an unintended consequence of the reform will be a “chilling effect” on the robustness of liquidators’ efforts in gathering in the company’s assets for distribution among its creditors.

Accordingly, it remains to be seen how the reforms introduced by the Insolvency Law Reform Actwill interact with the further reforms to be introduced next year in promoting the government’s innovation agenda.