Following on from the Murray Enquiry, the Productivity Commission has also recommended some structural changes to Australia’s insolvency laws.
The recommendations for reform made by the Productivity Commission (Commission) in its latest report (Business Set-Up, Transfer and Closure) released in 2015 seek to remedy several perceived deficiencies in Australia’s insolvency regime. While our current insolvency laws operate reasonably well, the efficacy of the restructuring process in Australia has been hindered by negative perceptions and risk aversion, long timeframes for corporate liquidations and onerous reporting and appeal processes. The recommendations of the Commission, if introduced into legislation, will significantly improve the efficiency and success of the restructuring and insolvency process in Australia for the benefit of both the profession and community.
ARITA must be given much of the credit here for its thought leadership, with many of the Commission’s recommendations consistent with proposals made by ARITA.
The following are some of the changes Australia can possibly expect to see if the Australian Government accepts the recommendations of the Commission.
The Commission has suggested reform of the process of voluntary administration so as to encourage, rather than stifle, economic activity. At present, the culture, incentives and legal framework relating to voluntary administration are said by the Commission to hinder the effectiveness of the regime as a genuine restructuring mechanism.
In order to provide economically viable companies with a genuine opportunity for restructure, the Commission has recommended introducing laws requiring an administrator to certify, within one month of being appointed, whether they have reasonable grounds to believe the company is capable of being a viable business. If the administrator is of the view that restructure is not possible, the administrator should be under a duty, enforceable by ASIC, to convert the administration into liquidation.
Earlier entry into a formal restructuring process through a more balanced, group-focused process will not only enable restructuring while there are still assets, time and scope to achieve a successful outcome, but also reduce the stigma of external administration and provide a clearer signal of the role of voluntary administration.
The Commission has also recommended that provision be made for pre-positioned sales of insolvent businesses. By amending s 439A of the Corporations Act 2001, preparatory work for the sale of assets can be done in advance and completed just prior to a formal insolvency appointment. Small companies can then use those sales as a low-cost means of restructure, and assets can be realised for market value in a non-distressed sale. This recommendation for reform interacts with (but is not limited to) the use of the safe harbour defence, with the Commission predicting use of pre-positioned sales in the normal course of business.
Moratorium on enforcement during schemes of arrangement
The Commission has recommended introducing a moratorium on creditor enforcement during the formation of schemes of arrangement so as to align with the process of voluntary administration. Further, the Commission has suggested that courts should have the power to lift all or part of the moratorium in circumstances where its application may lead to unjust outcomes. This recommendation is intended to facilitate restructure, while balancing the interests of creditors and debtors.
Given the bulk of insolvencies in Australia arise from small companies with small liabilities, the Commission has recommended the introduction of a ‘small liquidation’ process for companies with liabilities to unrelated parties of less than $250k. In the context of small companies, directors are often owners and guarantors of the company’s liabilities and are far less likely to seek to restructure due to the stigma of voluntary administration. This increases the likelihood of insolvent trading and causes the company to incur further debts, exhausting the opportunity for restructure and draining the company of assets available for distribution upon liquidation. A streamlined liquidation scheme has been recommended, with the liquidator drawn from an ASIC panel of approved independent liquidators determined through a competitive tender process.
Regulatory burdens would be minimised with an appropriate level of investigation based upon the liabilities at stake, including limited pursuit of unfair preference claims to those within 3 months of insolvency and of material amounts. A streamlined insolvency process for small companies is intended to avoid the time and expense involved in winding up companies with few or no recoverable assets, with liquidators of small companies able to apply to ASIC to cover payment of fees from the Public Interest Administration Fund (currently the Assetless Administration Fund).
The Commission has also recommended that following the implementation of its proposed insolvency reforms, ASIC should produce a Regulatory Guide to assist small businesses facing financial difficulties.
Receivership Inspection Committee
The Commission has recommended giving rights to a committee of inspection to obtain information from a receiver about the receivership process in order to promote greater interaction with affected stakeholders and improve the transparency of the receivership process. The committee would include unsecured creditors, employees and government authorities who have opted to be kept informed about basic information such as the proposed process, results of the sale process and details of the proposed and actual costs and disbursements associated with the receivership.
However, the Commission has acknowledged that the role of a receiver, unlike an administrator or liquidator, is to act between the company and a secured creditor. As a result, the Commission has suggested that receivers should not be required to perform any searches, advertising or due diligence to actively contact creditors.
Director Identity Numbers
Also included in the recommendations is a proposal that company directors hold a Director Identity Number. The Commission has suggested that s 117 of the Corporations Act 2001 be amended to require a director to provide an identification number at the time of registration of a company, which will enable the monitoring of director registration, including detection of disqualified or fraudulent directors to recognise and prevent ‘phoenix’ activity.
Exclusion period for bankrupts
Finally, the Commission has recommended reform of the ‘exclusion period’ and associated restrictions on bankrupts. Currently, a bankrupt individual is precluded from acting as a company director and is restricted in terms of access to finance, employment opportunities and overseas travel for three years.
The Commission has suggested that if no malfeasance has occurred, the exclusion period should be reduced to one year, although the trustee and courts would retain the power to extend this period. The Commission maintains, however, that the bankrupt individual must continue to make excess income contributions to the trustee for a period of 3 years. Reducing the exclusion period is intended to lessen the stigma attached to bankruptcy and encourage entrepreneurs to start new businesses, while still preserving regulatory oversight to prevent abuse of the bankruptcy process.
Improvement and Confidence
Overall, the Commission’s recommendations intend to improve the timing and effectiveness of the insolvency and restructuring process, promote economic activity, reduce stigma and strike a balance between expedience and orderly investigation. It is expected that the recommendations will engender confidence in the system for business owners, creditors and practitioners.