The Turnbull Government’s much-heralded ‘Innovation Statement’ was released yesterday. It contained wide-ranging statements on reforms aimed at fostering innovation across a number of sectors in the Australian economy.

One important reform area is in Australian corporate insolvency law.

Corporate insolvency law reform timetable

The Innovation Statement includes important content for the reform of Australia’s corporate insolvency laws. It is part of an ongoing reform exercise which has followed this timetable to date:

Click here to view the table.

Following the ILRB released last week and the Innovation Statement yesterday, this indicative timetable has been set:

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Comment

The Government has chosen to take a “baby steps” approach to the reform of Australia’s corporate insolvency laws, rather than tackling the substantive reforms in this session of Parliament.

In terms of substantive reform, the ILRB is largely a side show. The main event is outlined in the Innovation Statement and in the boxed sections of the PC Report. 

In the Innovation Statement, the Government has now committed itself to two very important reforms of Australia’s corporate insolvency laws, both of which are canvassed at length in the PC Report and a number of submissions made to the Productivity Commission.

The ‘ipso facto’ and ‘safe harbour’ reforms are well understood and accepted by the market as being supportive of restructuring and turnaround activity. There is still a raft of detail to work through in those two reforms, but they are a positive step and consistent with the Government's innovation agenda.

The balance of the reforms recommended in the PC Report will now be subject to a further "proposal paper" and consultation process. 

To a large extent, this will repeat the process just completed with the PC Report for a number of substantive reforms. We trust that the new consultation will be open to other reforms and submissions not part of the PC Report, as part of a wholesale review of Australia’s corporate insolvency laws and regime.

Productivity Commission report recommendations

The PC Report became public yesterday morning and is a wide-ranging and informative document. The PC Report reform recommendations for Australian corporate insolvency laws can be summarised as follows:

Click here to view the table.

Implications

The Innovation Statement confirmed that ‘safe harbour’ and ‘ipso facto’ reforms will form part of the Australian corporate insolvency landscape in future. However, many aspects of those reforms will require further debate. Also, it remains to be seen whether the other recommendations in the PC Report will be adopted by the Government in future reforms.

Two elements of the additional PC Report recommendations in particular will attract contentious debate.

The role of insolvency practitioners

The first is the expanded role for insolvency practitioners in key areas of the procedures if reformed as proposed by the PC Report:

  • As restructuring advisers appointed by directors pre-insolvency to attract the 'safe harbour' protections.
  • Certifying that companies can be “viable businesses” during the voluntary administration procedure.

There will be a variety of views regarding this and the attendant costs to the restructuring process.

The role of receivership

The second is the review and prospective reform of the receivership procedure.

The Harmer reforms enacted in 1993 added a statutory duty of receivers to take reasonable care when selling property under section 420A of the Corporations Act 2001 (Cth). However, the powers of receivers appointed under Australian security instruments have remained largely untouched since then.

The Productivity Commission’s Issues Paper opened a debate on whether receivers’ powers should be qualified and subject to additional oversight. One of the draft recommendations in the Issues Paper was introducing a duty of receivers “to not cause unnecessary harm to the interests of creditors as a whole” and to curtail the exercise of receivers’ control powers outside the normal course of the company’s business to a vote of unsecured creditors.

The backlash against these proposed reforms was sufficiently strong to encourage the PC Report to water down its proposals for receivership reform. In place of that is a recommendation for a separate independent review of the procedure which may yet result in receivership reform being back on the agenda. The future role of receivership in Australia may remain under scrutiny as part of the ongoing reform debate.

The process from here

In initiating the Productivity Commission process and incorporating the consultation with industry into its legislative reforms, the Government has put corporate insolvency law reform firmly on the legislative agenda. It seems that genuine reforms to Australia’s restructuring and insolvency regime, long overdue, are now within reach.

The Innovation Statement acknowledges the breadth of the future reform task required in corporate insolvency. In addition to the commitment to ‘safe harbour’ and ‘ipso facto’ reform, the Government has now committed to considering “all” of the recommendations made in the PC Report.

The Government has committed to a timetable for the introduction of future reforms, which is outlined on the Turnbull Government’s National Innovation and Science Agenda (NISA), published at http://www.innovation.gov.au/. This allows room for further consultation and debate with industry, and a significant lead-in time which is invaluable for genuine, substantive reforms. There are other reforms which may also be incorporated into this extended debate, including in relation to takeover, FIRB and taxation which could lend further support to the Australian restructuring environment.