Overview of this submission

The terms of reference for the Inquiry are broad, encompassing “the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy”. While we applaud the PJC for framing the terms of reference so broadly, we respectfully consider that for meaningful reform to be achieved in this area, it will be necessary to conduct a comprehensive review of Australia’s corporate insolvency (and personal bankruptcy) laws with a consultation period of longer than 63 days and more than two public hearings.

34 years have now passed since the Harmer Report was tabled, following a 5-year inquiry conducted by the Australian Law Reform Commission. We consider, again with respect, that the community would benefit greatly from another root-and-branch review of insolvency law in Australia conducted by the ALRC or a similar body with the involvement of legal and insolvency practitioners, academics and others with direct experience in the many R&I situations that have been addressed in that 34-year period. In our view, this should be conducted as part of a Holistic “Root and Branch” Review of Australia’s R&I laws, systems and procedures. We use that term where applicable in the attached submission.

In our submission, the Holistic “Root and Branch” Review should seek to do what the Harmer Report did and consider all available options to reform Australia’s R&I laws, systems and procedures, ranging from “tweaks” to the existing regime to the potential enactment of new procedures that address the imperatives of the modern Australian economy and society.

In our view the principles and objectives of the Holistic “Root and Branch” Review should include, based on specific criteria and consultation both written and verbal at public hearings:

  • relevant economic and social developments in Australia, specifically recent ones given Australia’s experience with the Government responses to the COVID pandemic and the altered inflationary conditions;
  • a sober assessment of the efficacy of existing insolvency procedures, including voluntary administration and the small business restructuring procedure;
  • evidence of negotiated arrangements implementing restructures outside of formal insolvency, which in our view is increasingly common given the lack of alternative R&I procedures outside of insolvency;
  • a review of prospective reforms to bankruptcy and other personal insolvency procedures, which we consider has linked objectives to corporate insolvency law reform; and
  • the experience of reforms and R&I procedures implemented in relevant foreign jurisdictions, focusing specifically on the US, UK and Singapore, where in our view there are important learnings for prospective reform in Australia.

This submission

We welcome the opportunity to provide the PJC with our thoughts on some of the important issues the subject of the Inquiry, namely:

(a) in section 3, the role and effectiveness of voluntary administrations and schemes of arrangement;

(b) in section 4, insolvent trading safe harbours; and

(c) in section 5, trusts with corporate trustees.

The role and effectiveness of voluntary administrations and schemes of arrangement

Previous Schemes Consultation Paper

KWM prepared a submission[1] in response to the Treasury consultation paper dated 2 August 2021 entitled “Helping Companies Restructure by Improving Schemes of Arrangement” (Schemes Consultation Paper). Although the consultation process has now been completed, we note that no reforms in relation to creditors’ schemes of arrangement under part 5.1 of the Corporations Act 2001 (Cth) (Act) have been implemented and assume that the Government remains interested in the matters canvassed by the Schemes Consultation Paper.

For this reason:

  • this part of our submission largely references KWM’s submissions made in response to the Schemes Consultation Paper (directed at creditors’ schemes of arrangement, not members’ schemes of arrangement, unless otherwise specified); and
  • submissions made in the specific schemes consultation could be referenced and incorporated in the Holistic “Root and Branch” Review.

Hurdles in relation to improvements to schemes of arrangement

One of the most significant barriers to the use of the scheme of arrangement provisions is the onerous procedural and evidentiary requirements of the Act which do not reflect modern commercial practice (especially during a pandemic). There are other improvements that could be made to schemes of arrangement in Australia to reduce unnecessary costs and to improve efficiency, including a process for a simplified scheme booklet, as there is often a significant cost associated with this part of the scheme process.

We note, since the submission of the Schemes Consultation Paper, permanent changes have been introduced to allow for hybrid in-person and virtual meetings (ss 249R(b) and 252P(b)), and in some circumstances entirely virtual meetings (ss 249R(c) and 252P(c)). We consider this to be a positive step towards making schemes of arrangement more efficient.

A holistic approach to insolvency law reform

In our submission, schemes of arrangement are a long standing and important part of Australia’s corporate and restructuring landscape and great care should be taken in considering any reforms to the scheme of arrangement provisions in isolation.

Rather than continued piecemeal reforms targeted at perceived shortcomings (often carrying unintended consequences), it is submitted that a Holistic “Root and Branch” Review is warranted. Specifically:

  • we note that the previous such inquiry was the Harmer Report in 1988 which arose from shortcomings with the law and procedures as a result of significant economic and social changes, which saw an increase in the number of insolvencies at the time;
  • it is clear that analogous economic and social circumstances now exist, with the distortions and learnings gained by COVID-19 affecting the Australian economy and businesses, which is expected to generate further R&I activity and a need for creative and constructive means of resolving debtor and creditor rights;
  • it is also apparent that restructuring culture has moved on in the ~34 years since the Harmer Report, with a shifting focus on seeking to facilitate the ongoing trading of businesses as a going concern, where possible outside of formal insolvency procedures including through informal negotiated restructuring, rather than the enforcement of creditor rights and winding up; and
  • especially when compared to sophisticated foreign jurisdictions in the US and UK, Australia lacks equivalent “tools” to facilitate restructuring outside of formal insolvency procedures, specifically a lack of tailored “debtor-in-possession” (DIP) procedures which have repeatedly met with success and positive feedback from many interest groups overseas.

With this in mind, we submit that introducing reforms exclusively focused on schemes would misconceive:

  • the already effective operation of creditors’ schemes of arrangement, which balance debtor and creditor rights based on well-established and accepted common law principles;
  • the importance of the procedural alignment between the Australian and English scheme of arrangement systems, which enables the ongoing successful analogies and development between both countries’ common law;
  • the current predominant application of creditors’ schemes of arrangement by large corporations for highly specific restructuring purposes, including the conversion of syndicated debt to equity without unanimous consent;
  • the wider application for creditors’ schemes of arrangement for purposes such as settlement of prospective litigation (eg, Opes Prime) and to compromise wider classes of creditors (eg, Ovato), noting that these situations remain confined to large corporations, generally with significant syndicated secured debt exposures in the hundreds of millions (if not billions) of dollars; and
  • the demonstrated success of legislative reform for new restructuring procedures following COVID-19 in England, rather than interfering with the well-established creditors’ scheme of arrangement procedure.

We consider a holistic inquiry would also focus on:

  • whether any moratorium protections are required outside those which are available during the voluntary administration process;
  • whether reforms are required to facilitate rescue financing; and
  • whether any additional cross-class cram-down mechanisms are required to prevent out-of-the-money creditors undermining a restructure.

In our view, further consideration of the efficacy of schemes of arrangement could be incorporated within a Holistic “Root and Branch” Review, specifically as part of consideration of whether Australia should introduce one or more DIP procedures incorporating one or more of the DIP procedures used specifically in the US and UK. In our view, examples worthy of further consideration include Chapter 11 (US), Restructuring Plans (England), Company Voluntary Arrangements (England) and Judicial Management (Singapore).

Automatic moratorium

It is KWM’s submission that, in Australia, an automatic moratorium is not appropriate for creditors’ schemes of arrangement generally. Most creditors’ schemes of arrangement which have been proposed over the last 20 years have involved only limited classes of creditors and have rarely involved any compromise of trade creditor claims outside of a liquidation process. As such, an automatic moratorium was not required in respect of those creditors’ schemes and may have in fact been counterproductive to restructuring efforts by undermining creditor confidence in the companies undergoing schemes.

Additionally, the two existing forms of moratoria in the Act that apply to schemes are sufficient to achieve the objectives of the creditors’ scheme procedure:

(a) the ipso facto regime that stays the enforcement of rights under contracts which arise solely for the reason of the proposal of a creditors’ scheme of arrangement during the creditors’ scheme procedure;[2] and

(b) the Court’s power to order a moratorium.[3] This power has been successfully used to support companies seeking to restructure using the creditors’ scheme procedure and has been endorsed by academic commentary with which, for the purposes of this submission and our previous submission, we broadly agree.[4] We submit that it is not necessary to broaden this discretionary moratorium for the purposes of better achieving the objectives of the creditors’ scheme procedure.

As part of a more comprehensive review of the ipso facto and broader Australian restructuring procedures, consideration could be given to additional moratoria. However, this should not be limited to the quite confined ambit of creditors’ schemes which we consider are adequately served by the existing moratoria.

Change to current creditor voting thresholds – cross-class cram down?

In our submission, the current voting thresholds for creditors’ schemes (namely 75% in value and 50% in number of each class of creditors bound by the scheme) are appropriate.

In Singapore, a scheme can be approved despite a class of creditors not approving the proposed scheme. This mechanism is known as a cross-class cramdown. A cross-class cramdown is permitted where:

(a) a majority in number of the creditors to be bound by the arrangement and who were present at the relevant meeting agree to the arrangement;

(b) the majority in number of creditors represents 75% in the value of the creditors meant to be bound by the arrangement; and

(c) the Court is satisfied that the arrangement does not discriminate unfairly between two or more classes of creditors and is “fair and equitable” to each dissenting class (by reference to what they would otherwise receive in a winding up).

This mechanism is also a feature of UK’s new Restructuring Plan regime. The advantage of the cross-class cramdown is that it ensures that any creditors whose economic interests are not being prejudiced by the scheme do not hold up or prevent the approval of the scheme.

In Australia, the cross-class cramdown mechanism is available:

  1. in creditors’ schemes of arrangement in respect of shareholders’ claims (s 411(5A) of the Act); and
  2. by virtue of Part 5.3A of the Act as all creditors of a company vote together as one class in respect of any proposed deed of company arrangement.

In our submission, further consideration should be given to whether a cross-class cramdown is required in Australia with respect to voting thresholds for creditor’s schemes and, if so, what form that should take, particularly considering that any such reform has the potential to impact on availability of finance and to cut across important proprietary and security rights.

DIP funding

KWM submits that the availability of rescue financing to operational and financial restructures should be a focus of reform.

In Singapore, their scheme of arrangement provisions gives super-priority to “rescue financing” debts where debts are incurred by the company ensure its survival or if it would be a better realisation of the company’s assets than in a winding up.[5]

In Australia, debtor-in-possession (DIP) funding during the voluntary administration process faces several challenges. Under s 443A(1)(d) of the Act, administrators are personally liable for the “repayment of money borrowed”. This has effect “despite any agreement to the contrary” (s 443A(2)). Due to the unlimited liability, administrators typically seek orders from the Court prior to borrowing funds to limit their liability to the assets subject to the administrators’ s 443D statutory right of indemnity.

The need to seek these orders to limit personal liability causes two problems. First, it imposes additional costs on administrators, which, in effect are priority expenses of the administration and have priority over the claims of unsecured creditors. Second, it distracts and delays the administrators from exercising critical tasks at the beginning of an administration.

Further reforms to support DIP funding more holistically should be considered, not just in the context of creditors’ schemes of arrangements.

Other areas of improvement for administrations

(a) Administrator can consent to the creation of new security interests

Due an oversight in the drafting of s 588FL of the Act, security interests created post-administration, even with the administrators’ consent, automatically vest immediately upon creation (s 588FL(4)(b)). As a result, when seeking finance, administrators are required to seek orders under s 588FM extending the time for registration for the incoming financier’s security interest. This is an unnecessary distraction and cost in administrations. It is proposed that s 588FL be amended to allow administrators to consent to the creation of security interests post-administration.

(b) For larger administrations, time for holding second meeting of creditors be extended to 3 months from the appointment date

Administrators have just 20 business days (or 25 if Christmas holidays or Easter intervene) to convene the second meeting of creditors. The meeting is then required to be held within five business days of being convened. In larger and more complex administrations, it is inevitable that extensions are sought to the time for convening the second meeting. These applications are invariably granted by the Courts.

In view of this, it is proposed that in the case of companies whose debts exceed AU$10m or which have more than 100 creditors, the time for holding the second meeting of creditors be extended to 3 months from the appointment date of administrators. Whether a company satisfies this test would be determined by the administrators based on their review of the company’s books and records and consideration of proofs of debts received from creditors.

Administrators who required additional time could approach the Court for appropriate orders further extending the convening period.

(c) Ability to hold creditors’ meetings at any time

Section 439A(2) of the Act currently requires that creditors’ meetings be held “within 5 business days before, or within 5 business days after, the end of the convening period”. This limitation on the power of administrators to hold the second meetings of creditors at a time of their choosing is unnecessary and in our experience is invariably removed by Courts when granting extensions of the convening period.

It is proposed that administrators be permitted to hold second meetings at any time during the administration, or within 5 business days of the conclusion of the administration (noting that administrators are required to provide creditors with at least 5 business days’ notice: rule 75-225 Insolvency Practice Rules (Corporations) 2016 (Cth)).

(d) DOCA gets ipso facto protection

Ipso facto protection is extended by the Act to administrations, but not deeds of company arrangement (DOCAs). This oversight means that a fresh and unconstrained termination right arises from the execution of a DOCA, providing contractual counterparties of a company in administration with considerable leverage, even if the company is otherwise fully compliant with the terms of the contract. This in turn can complicate restructuring efforts, particularly where the contract in question is a key source of revenue.

Given that a fundamental purpose of the ipso facto reforms was to assist the restructure of companies, this is a material oversight and should be remedied and ipso facto protection extended to rights triggered by reason of the execution of a DOCA.

(e) Clear laws against DOCA ‘vote-buying’ by preferring certain creditors

In our experience, there is a growing trend of DOCAs discriminating against particular creditors or classes of creditors. While this may be acceptable in certain limited circumstances (eg, ongoing business-critical suppliers receiving a superior outcome), it appears to be increasingly used to entice creditors with smaller claims (eg, under $10,000) to vote in favour of the DOCA proposal in order to secure the requisite 50% of votes by number (with approval of the DOCA proposal then assured either via related party votes or the administrator’s casting vote).

It is proposed that the Act be amended to expressly prohibit discrimination between unsecured creditors absent the administrators being satisfied that there was a clear commercial benefit to the company (eg, securing ongoing supply from a business-critical supplier). Further, this benefit would need to be expressly disclosed by the administrators to creditors in the creditors’ report.

(f) Improved powers to unwind DOCAs with creditors’ trusts

A DOCA coupled with a creditors’ trust provides administrators with an important restructuring tool which can be deployed to unlock significant stakeholder value, especially in the case of listed companies.

However, the ability to immediately effectuate a DOCA and settle the deed fund within a creditors’ trust for distribution to admitted creditors, also presents challenges. In particular, Part 5.3A of the Act presently lacks any mechanism for dealing with these structures, because the DOCA will have been fully performed and terminated and the deed administrators retired, creating jurisdictional and practical difficulties in unwinding the DOCA if considered appropriate by the Court.

It is proposed that Part 5.3A be amended to include express powers for the Court to make appropriate orders to regulate and potentially unwind creditors’ trust DOCAs to ensure a clear avenue of recourse for any creditors who may wish to seek the Court’s assistance in relation to these types of DOCAs.

Insolvent trading safe harbours

Previous submissions and papers

KWM has been interested in this topic since the early stages of the public consultation and debate regarding the desirability of some reshaping of the “insolvent trading” laws. We have published a number of articles and papers which we respectfully request should be taken into consideration in the context of the current review as we note that no reforms to the safe harbour laws have been implemented and we assume that the Government remains interested in these matters:

(a) Let’s Optimise the Opportunity for Reform: KWM responds to the Turnbull Government’s proposed insolvency laws;

(b) National Innovation and Science Agenda: Improving Corporate Insolvency Law: King & Wood Mallesons submission;

(c) The dialogue is changing yet is the law enabling the practical change directors need?;

(d) Safe Harbour: A Realignment of Interests;

(e) Safe Harbour – Impact on Directors' Decision Making;

(f) Spotlight On: Safe Harbour; and

(g) Out Of The ‘Safe Harbour’ and into the ‘Dry Dock’.


For the purposes of these submissions, and in addition to one other issue, our previous submissions and papers have been noted below to aid the PJC’s review. Broadly, we consider that:

(a) the introduction safe harbour has had a positive impact on the attitude of directors and has introduced a re-alignment of interests as directors see themselves less distracted by personal exposure in hard times, enabling them to focus their attention on remediation measures;

(b) the ‘trading debts link’ to safe harbour that arose during the temporary COVID-19 moratorium makes good policy and practical sense, and should be reintroduced into the safe harbour laws on a permanent basis;

(c) we believe that a review of the insolvent trading laws should consider elevation of the safe harbour laws into the statutory regime regulating directors’ duties generally; and

(d) we consider that there needs to be clearer guidance provided in the Act as to the specific applicability of the voidable transaction provisions, and in particular, unfair preferences. We submit that that guidance should lean towards suspending the ‘unfair preference’ laws for those transactions entered into, or given effect to, for the purposes of exploring remediation options, and effected on the advice of an ‘appropriately qualified entity’.

In any event, we consider that the safe harbour laws have had a positive impact as the policy behind safe harbour is to balance against the historical policy behind insolvent trading laws, which is that limited liability corporations should not be used as vehicles to raise credit where the directors of those companies cannot maintain a reasonable expectation that the credit will be discharged when due.

On the other hand, the aim of safe harbour is to encourage directors to seek advice earlier on how to restructure and save financially distressed but viable companies, rather than entering into administration or liquidation prematurely to avoid personal liability.

Notwithstanding the delicate line that must be tread, advisers working with boards of companies in circumstances of financial hardship are at least starting to see directors less distracted by thoughts of personal exposure and more focused on the exploration of remediation options. We are seeing directors following the safe harbour pathway. Whether this supports better outcomes for creditors will emerge over time. In theory, creditor outcomes should improve.

A balance between insolvent trading exposure and general fiduciary duties

There is a perception of Australia as a relatively ‘risky’ place to sit on a board. Indeed, the insolvent trading prohibition in section 588G of the Act and how it interacts with general directors' duties only reinforces this sentiment.

The insolvent trading laws impose, in effect, a strict duty on directors to place an insolvent company into administration. That means that, in time of financial distress (even if not necessarily amounting to ‘insolvency’) the focus of directors’ attention naturally turns to whether or not the company is insolvent and whether administrators should be appointed.

Though we submit that an aversion to risk is not necessarily a bad thing for directors, in our view safe harbour re-sets the balance between directors’ insolvent trading exposure, on the one hand, and their general (fiduciary) duties on the other.

Safe harbour provides directors with an opportunity to first query whether there are any options available to the company to optimise the situation rather than jumping to a conclusion that the company should be placed into administration.

In our submission, safe harbour has had a positive impact on the attitude of directors and has introduced a re-alignment of interests as directors see themselves less distracted by personal exposure in hard times, enabling them to focus their attention on remediation measures.

Trading debts link

We have previously published submissions that speak to the ‘trading debts link’. That is, the introduction of the temporary COVID-19 moratorium in 2020 utilised the concept of trading debts to enliven safe harbour principles. In effect, the temporary reform automatically linked trading debts to the general safe harbour test, which is that debts incurred directly in connection with the course of action being pursued are effectively exempted from the insolvent trading prohibition.

Based on our experience in practice during the temporary COVID-19 moratorium, we consider that:

(a) the trading debts link had a marked effect on the comfort levels of directors who made the decision to continue to cause their companies’ businesses to trade in the ordinary course during the difficult circumstances experienced in the early stages of the pandemic in Q1/Q2 2020; and

(b) directors in that position were more easily able to appreciate the very important link between continuing to trade the company’s business as a going concern, and obtaining a better outcome for the company’s creditors than an immediate administration or liquidation;

In our submission, and as a result, the trading debts link is something that makes good policy and practical sense, and should be, in our submission reintroduced into the safe harbour laws on a permanent basis.

For the avoidance of doubt, we note that debts which are incurred outside the ordinary course of the company’s trading do not, and should not, benefit from an automatic link to the safe harbour principles. In our view, the incurrence by companies of these debts in circumstances of financial difficulty continue to require an increased level of scrutiny in light of the heightened risk - for example, entry into significant new contracts and drawing on term debt.

Elevating the insolvent trading laws to general director duties

After observing the development of the safe harbour regime over the last 2 years, we would take it a step further and elevate the statutory insolvent trading concepts so that they become part of the general duties of directors.

The introduction of safe harbour was a first step away from a concept of insolvent trading as a strict, stand-alone aspect of director misconduct, separately regulated within Part 5.7B of the Act, and towards a concept which recognises the desirability of avoiding (or minimising) insolvent trading as being simply an aspect of directors’ general duties which are owed to the company, properly regulated within Part 2D.1.

It is not at all clear why directors’ duties should be tied to the difficult concept of ’insolvency’. This appears to only create complication and confusion for both those seeking to comply with the law and those seeking to enforce it. Financial distress, and even insolvency, is just one of the possible experiences in the life-cycle of a company.

If a corporate entity is viewed, as it should be, as an amalgam of a wide array of stakeholders (shareholders, directors, employees, suppliers, lenders, customers … even the community at large), rather than just creditors, then it can readily be seen that the burden on directors should be governed by the very flexible, yet comprehensive, general statutory and common law duties.

In our submission, the so-called safe harbour regime would simply become an aspect of the business judgment rule found in section 180(2) of the Act. That is, if no reasonable person in the position of the director would have failed to prevent the ongoing incurrence of debts, because there was no reasonable basis to expect those debts would be repaid when due, and that was not a rational risk to take based on an existing plan which was genuinely designed and intended to improve the overall outcome for the company, then a breach of duty to the company has occurred.

By way of example, the ’reasonably likely’ test should give way to something more akin to the rational belief test set out in the business judgment rule in section 180(2) of the Act.

There would of course be criminal liability for reckless or intentionally dishonest contravention (section 184) and minimal re-crafting of Part 2D.1 would be necessary to introduce these concepts.

The question then begs, what work would be left for the specific insolvent trading laws currently found in Part 5.7B of the Act? We remain of the view that there may still be a place for a very specific prohibition against a director allowing a company to incur a debt in circumstances where no reasonable basis exists to believe that the specific debt so incurred would be repaid in accordance with its contractual terms. The policy against corporations being used, in effect, as instruments of fraud, remains a sound one. However, we expect that this field could also be covered in Part 2D.1 and specifically section 184.

Unfair preferences

A final issue that should be considered in the Inquiry is the role unfair preferences play with respects to debts incurred whilst a company is in safe harbour.

The Act does not specifically address the interaction between the voidability of transactions entered into, or given effect to, in the relation back period which were entered into as part of a safe harbour plan.

In our submission, safe harbour would be unable to achieve its ultimate objective if transactions entered into, or given effect to, during safe harbour for the purposes of exploring remediation options were liable to be set aside as a voidable transaction.

It follows that if the purpose of safe harbour is to balance the rigidity of the insolvent trading laws, then the ‘unfair preference’ laws should not in turn maintain an inflexible regime unable to be remedied by the safe harbour provisions.

In any event, we consider that follow the inquiry into corporate insolvency in Australia, there needs to be clearer guidance provided in the Act as to the specific applicability of the voidable transaction provisions.

Trusts with corporate trustees

Previous Trusts Consultation Paper

KWM prepared a submission[6] in response to the Treasury consultation paper dated 15 October 2021 entitled “Clarifying the Treatment of Trusts under Insolvency Law” (Trusts Consultation Paper). Although the consultation process has now been completed, we note that no reforms to the treatment of trusts under insolvency law have been implemented and assume that the Government remains interested in the matters canvassed by the Trusts Consultation Paper.

Accordingly, this part of our submission largely reiterates the submissions we made in response to the Trusts Consultation Paper. It firstly identifies a number of issues associated with any wholesale reform to the law of trusts as it relates to insolvency, before providing answers to the following discrete, practical questions raised by the Trusts Consultation Paper:

(a) Should the insolvency practitioner’s power of sale of trust assets be legislated or automatic subject to a contrary order by a Court?

(b) Should there be any changes to the current position on how assets are to be distributed in the winding up of a trust?

(c) How should the law be amended to protect insolvency practitioners’ rights of remuneration and reimbursement of fees?

Initial hurdles to reform

First, it is unclear to what extent any reform can even occur at a Commonwealth level. As it currently exists, trust law is regulated at a state level.[7] Whilst the Commonwealth retains its power under section 51(xvii) of the Constitution to make laws with respect to bankruptcy and insolvency, the jurisdictional issues that will inevitably arise in the regulation of insolvency of corporate trusts must be considered. It is further noted that any specific legislation addressing insolvency in the context of corporate trusts will sit alongside, and not over the top of, the general law and state trustee legislation. As such, any suggested changes to the regulation of corporate trusts in insolvency must maintain coherence with the general law and state regulation. There is no utility in wholesale change to insolvency law at the Commonwealth level if the end result is increased incoherence in the regulation of trusts generally. The High Court has on a number of recent occasions, albeit typically in the context of the law of remedies, emphasised the need to ensure coherence in the law.[8] As such, coherence should also be at the forefront of any consideration of law reform.

Second, care must be taken in any reform not to change fundamental principles of trust law. For example, any changes should not have the effect of undermining or materially modifying the trustee’s duty to beneficiaries. Any insolvency reform which shifts the duty of a corporate trustee to creditors, for example, risks fundamentally undermining the institution of the trust. At front of mind of any reform to the law of trust should be the purpose of a trust and its core function as a vehicle to protect beneficiaries. Whilst its use as a corporate form cannot be ignored, it ought not to become the focus where the effects of reform will flow to non-corporate trusts.

Last, there are limits to the extent of codification of law in this area. The law of trusts is incredibly dynamic, not least due to attempts to use and adapt trusts to constantly changing circumstances.[9] Attempts to codify trust law have been limited[10] and typically focused on specific types of trusts such as superannuation trusts.[11] As such, whether insolvency reform can be codified in the context of trusts remains unclear.

Power of sale

In our submission, facilitating a power of sale to be exercised by insolvency practitioners should be streamlined. One method for achieving this suggested in the Trusts Consultation Paper is express permission in legislation. Inclusion of provisions which provide for an insolvency practitioner to administer the trust assets is sensible for a number of reasons outlined below. It would be pragmatic (and reflect the reality of insolvencies of corporate trustees) to implement a system whereby, subject to a contrary order by a Court, the same insolvency practitioner should be able to administer both the company, and the assets and liabilities attributable to any trusts for which the company is trustee.

A review of recent decisions relating to insolvency practitioners’ applications to exercise their power of sale over trust assets shows the Court’s willingness to grant these orders without any real hesitation. The orders sought and the nature of applications appear relatively formulaic in this regard. For example, the orders sought in these applications take a very standard form:

1. “Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) that the Liquidators are justified and acting reasonably in proceeding on the basis that:

(a) [Company] carried on business in its capacity as trustee of the [Trust]; and

(b) all assets and undertakings of [Company] are properly characterised as property held by [Company] in its capacity as trustee of the Trust.

2. Pursuant to [Relevant Section] of the Trustee Act that [Company] shall have the power to act as trustee of the Trust in accordance with terms of the Trust Deed and to deal with, hold, apply and/or distribute the Trust Property in accordance with Parts 5.5 and 5.6 of the Corporations Act.

3. Pursuant to section 90-15 of Schedule 2 of the Corporations Act that the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that they can deal with, hold, apply and/or distribute the Trust Property in accordance with Parts 5.5 and 5.6 of the Corporations Act.

4. Under section 1318 of the Corporations Act and/or [Relevant Section] of the Trustee Act that the Liquidators be relieved from any liability for:

(a) having dealt with or realised the Trust Property;

(b) having made payments from the proceeds of any such realisations,

between the date of their appointment as administrators of [Company] and the date of this order.

5. Pursuant to section 90-15 of Schedule 2 of the Corporations Act that the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that:

(a) the liquidators are entitled to be paid from the Trust Property their remuneration, costs and expenses properly incurred in preserving, realising or getting in the Trust Property, or in distributing the Trust Property, or in conducting the administration and liquidation of [Company]; and

(b) the remuneration and expenses include the remuneration, costs and expenses of and incidental to this application and are to be paid in accordance with the priority specified in section 556(1) of the Corporations Act.”

The Court has even made comments about these applications and the orders sought, describing them as ‘unremarkable’.[12]

So long as insolvency practitioners prove to the Court that they have undertaken investigations to understand the nature of the business, including whether it operates solely as a trustee, the number of trusts it administers, and the nature of any claims, the Court is willing to grant the orders sought. In our experience, this level of investigation is conducted very early in an administration by insolvency practitioners and as such, the Court is not imposing a difficult barrier in the place of granting the orders sought.

The cost for these types of applications may exceed $30,000. This includes costs associated with solicitors’ fees, barristers’ fees, and Court fees. In our experience, this preparatory work culminates in proceedings which do not typically exceed 1 hour.

Our submission is that given the formulaic nature of these applications and the significant costs involved, the process ought to be streamlined. The Treasury has previously suggested this could be achieved through inclusion in legislation and in our submission, this method for streamlining the process is sensible.

Asset distribution in winding up of a trust

In our submission, there is no need to introduce a statutory order of priority in the winding up of a trust. This is because much of the ambiguity around distribution of assets in the winding up of a trust has been clarified in recent case law. The position established in the case law also reflects a normatively sound position and as such, no change is needed by way of statutory intervention.

Two key cases have together clarified the treatment of asset distribution in the winding up of a trust. The leading authority now is the High Court’s decision in Carter Hold Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 268 CLR 524 (Re Amerind). Prior to the High Court’s decision in Re Amerind, the key authority was the Full Federal Court’s decision in Jones v Matrix Partners Pty Ltd (2018) 260 FCR 310 (Jones).

Whilst there is no doubt that prior to these decisions there remained significant doubt about the distribution of trust assets in insolvency, an investigation into the Court’s treatment of the two key authorities reveals that the principles have been consistently applied and little ambiguity remains in most scenarios. Whilst there does exist some academic commentary which critiques the extent to which these decisions have actually clarified the law, the main argument is that many of the principles arise in obiter comments.[13] Whilst this is not disputed, the argument remains academic given lower courts have applied these principles without much hesitation.

The judgments in Jones and Re Amerind have been cited approximately 80 and 60 times, respectively. A detailed consideration of a sub-set of these cases highlights how courts, particularly single-judge Federal Courts and State Supreme Courts, have understood the principles arising from both cases.

The principles can be summarised as below:

(a) the trustee’s right of exoneration is not held on trust for the beneficiary. Instead, it is held legally and beneficially for the trustee;

(b) the trustee’s right of exoneration takes priority over the proprietary rights of the beneficiary;

(c) the distribution of assets upon a sale of trust property follows the principles in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, that is, where there are multiple trusts which share a common trustee which goes insolvent, the assets from a trust can only be used to discharge liabilities for that trust;

(d) the distribution of trust property where the trustee is a corporate trustee is to follow the priority regime in the Act 2001 (Cth); and

(e) liquidators of an insolvent trustee cannot access the trust property without an order from the Court.

The treatment of the key authorities by lower courts effectively answers the questions on this topic that were raised by the Trusts Consultation Paper and it is submitted that the result is normatively sound. There already exists a statutory order of priority in the winding up of a trust and it is the same as which exists for corporations under the Act. In fact, this was one point on which all judges in Re Amerind agreed.[14]

Further, the High Court’s discussion of the normative justification for the reason is accepted as sound. In summary, the High Court’s stance on the justification for applying the statutory waterfall for priorities can be traced to public policy reasons. As Bell, Gageler and Nettle JJ asserted, ‘it would be perverse if the Act operated to deny employee creditors a particular priority over the holders of a circulating security interest solely for the reason that the company which employed them was, perhaps even unknown to the employees, trading as a trustee’.[15] In our submission, this argument is correct. Particularly in the Australian landscape in which so many businesses operate using a trust structure, in the absence of a statutory register of trusts as exists for personal property securities, it is extremely difficult for lay persons, including employees, to appreciate the differences and consequences arising from this corporate structure. As such, if only for consistency, there is no reason to depart from the statutory waterfall in the context of corporate trusts.

Importantly, this is not to say that the priority regime in the Act is without flaw but rather that those flaws infect all corporations regardless of structure. Any flaws that Parliament or the Court wishes to fix should be changes for all corporate structures. If the statutory distribution is to change, its impact will automatically flow to corporate trusts given the High Court’s decision in Re Amerind. Proposed changes to the statutory waterfall generally are beyond the scope of this submission.

Insolvency practitioners’ remuneration and reimbursement

In our submission, the main issue relating to insolvency practitioners’ remuneration and reimbursement has been clarified. Whilst prior to Re Amerind, there were a number of disputes about whether insolvency practitioners were entitled to remuneration in priority to other creditors,[16] the High Court’s endorsement of the application of section 556 of the Act to distribution of assets of trusts has clarified their priority.

One issue which remains yet to be clarified is whether ‘the right of exoneration, and by extension remuneration of an insolvency practitioner, extends to all work carried out in the administration of an insolvent trustee, regardless of whether such work is referrable to the trust property’.17 However, in our submission, this is a discrete question to be answered by the Court once it is required, and ought not to be interrupted through statutory intervention.


  • Section 415D of the Corporations Act 2001 (Cth). Given its recency, the ipso facto moratorium has not been subject to any reported Court decisions.

  • Timothy Bost, ‘Smooth Sailing for Directors: Using the Safe Harbour to Restructure Insolvent Companies in Australia’ (2020) 28 Insolvency Law Journal 69, 90.

The terms of reference for the Inquiry are broad, encompassing “the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy”. While we applaud the PJC for framing the terms of reference so broadly, we respectfully consider that for meaningful reform to be achieved in this area, it will be necessary to conduct a comprehensive review of Australia’s corporate insolvency (and personal bankruptcy) laws with a consultation period of longer than 63 days and more than two public hearings.

Industrial relations and employment regulation have been centre stage recently, with the Federal Government pushing ahead to pass its Fair Work Legislation Amendment (Secure Jobs, Better Pay) Bill 2022 (Cth) (Secure Jobs Bill) before the year ends.