The Hon Joe Hockey announced the final terms of reference for a new financial system inquiry on 20 December 2013.  The purpose is to examine how the financial system could be best positioned to meet Australia's evolving needs and support Australia's economic growth.

An interim report was released on 15 July 2014.  Section 3 discusses potential changes to the current external administration regime in Australia. 

Submissions were received that Australia should look to adopt a Chapter 11 style regime that is similar to the Chapter 11 provisions applying in the United States.  A key difference between Chapter 11 and voluntary administration is that under Chapter 11 operational control remains with management, subject to Court supervision, rather than insolvency practitioners taking over the running of the business and company. 

The Committee has come to the view that Chapter 11 has rarely enabled businesses to continue as going concerns in the long term.  It considers that adopting such a regime would be costly and could leave control in the hands of those who are often the cause of a company’s financial distress.

Reforms Proposed by the Inquiry

The Committee seeks further comment on retaining the current external administration regime and instead, rather than widespread structural reform, implementing the proposals suggested by the Commonwealth Government in 2012 to reduce the complexity and the cost of external administration.  These proposals are set out in the exposure draft of the Insolvency Law Reform Bill 2013.  Key proposals contained in the exposure draft include the following:

  1. There will be a single class of practitioner in corporate insolvency.  The class of ‘official liquidator’ will be removed.  

  2. Applications for registration as a liquidator or trustee will be considered by a committee convened by the appropriate regulator and the regulators will have the power to deregister or suspend a practitioner directly without referral to a committee on certain objectively determinable grounds.

  3. All insolvency practitioners will be required to lodge an annual return, setting out generic information about the practitioner, as well as a return setting out information on each administration undertaken by the practitioner during the financial year.

  4. Practitioners will be required to comply with reasonable requests for information from creditors relating to an external administration.

  5. Resolutions of creditors will be able to be made via circular resolutions without the need for holding a meeting.

  6. ASIC and the Court will have a new power to appoint a registered liquidator to undertake a review and report on all or part of an external administration.

  7. Creditors, ASIC and the Court will have the power to appoint a costs assessor to assess and report on the reasonableness of the remuneration and costs incurred during part or all of a corporate external administration.

  8. Creditors may resolve to remove an insolvency practitioner and appoint a replacement at any stage of an external administration without recourse to the Court.  The Court may only reinstate the practitioner’s appointment where it is satisfied that the removal was an improper use of power (for example, an attempt to prevent, delay or frustrate an action being taken against a group of creditors under Part 5.7B of the Corporations Act).

  9. ASIC will be given a power to direct that a meeting of creditors be held.

  10. ASIC will be given a power to disqualify directors who fail to provide a RATA without reasonable excuse (until the RATA is provided, completion of the external administration or after 3 years, whichever is earlier).

  11. An insolvency practitioner will be empowered to assign to a third party statutory rights of action arising out of the Corporations Act that vest with the practitioner (or company) during an external administration.

Comments on Proposed Reforms

Since the above reforms were originally proposed by the previous Labor Government it is not clear whether these changes will be adopted by the Liberal Government in their current form or whether they could be subject to further amendment.  It should also be noted that the Inquiry’s views contained in the interim report are still subject to further public consultation before a final report is produced.  

These suggested reforms do not deal with the key issue that under the existing regime it is extremely difficult to reconstruct companies efficiently and expeditiously.  This has a major impact on employees, creditors, shareholders and the economy generally.  A more wide spread solution needs to be found, which makes it easier to reconstruct businesses.  The American system may be a step too far in Australia, but our existing system requires an overhaul if more companies are to be provided with a chance to be reconstructed, continue in business and provide greater returns to participants. 

Submissions are requested by the Inquiry on the contents of the interim report by Tuesday, 26 August 2014.  For information on how to make a submission, please refer to the financial system inquiry website.  A copy of the full financial system inquiry interim report can be accessed here.