On 7 December 2014, the Commonwealth Government of Australia’s Financial System Inquiry (the Inquiry) released its Final Report, providing a blueprint for the future of the Australian financial system. The Inquiry, chaired by former Chief Executive Officer of the Commonwealth Bank of Australia, Mr David Murray AO, makes 44 recommendations to promote the efficiency, resilience, and fairness of the Australian financial system.
Relevantly for restructuring, insolvency and turnaround practitioners, Recommendation 36 of the Final Report invites the Australian Commonwealth Government to consult on possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty. Whilst acknowledging that Australia’s external administration provisions are generally working well, the Final Report recognises that further work is required to assess the potential benefit of:
- the introduction of “safe harbour” provisions for directors to encourage restructuring over external appointments; and
- the incorporation of elements of the United States Bankruptcy Code’s Chapter 11 restructuring framework
The Final Report also recommends reform of other complexities of Australia’s external administration regime, including the overlap of the external administration and bankruptcy processes, the deficiencies in the complaints and dispute resolution processes, and the inefficient use of technology.
In making its recommendations and observations, the Final Report commendably activates the landscape for stakeholder consultation and reform to further refine Australia’s external administration regime, tentatively paving the way for the potential strengthening shift towards a restructuring culture in Australia.
Background and context to the Inquiry
The Inquiry is the third wholesale inquiry into the Australian financial system of recent decades, following the Wallis Inquiry of 1996 and Campbell Inquiry of 1979. The Inquiry was commissioned by the Commonwealth Treasurer, Hon. Joe Hockey MP, to evaluate the Australian financial system and make recommendations on how it can most effectively assist the Australian economy to develop, be productive, and meet the financial needs of Australians.
For Australian insolvency practitioners, the Final Report arrives at a time when proposals for reform are very much at the fore, both in Australia and worldwide. In particular, the support for incorporation of certain elements of Chapter 11 of the United States Bankruptcy Code into the Australian regime continues to grow. In September this year, Mr Malcolm Turnbull, the Federal Minister for Communications, addressed the National Conference on Corporate Turnaround and Transformation, commenting that the most beneficial elements of Chapter 11 “would better equip companies facing difficulties but with genuine prospects of survival to find the least-costly resolution to their predicament. I have no doubt that chapter 11 is one of the reasons for the resilience of American capitalism …” Earlier in the year, Mr Greg Medcraft, the Chairman of the Australian Securities & Investments Commission, which acts as Australia’s primary corporate regulator, told a Commonwealth Senate Economics Legislation Committee his views on Chapter 11, stating “I have always been a supporter of it … I think it is far less harmful in terms of job losses and general destruction of value. So, certainly I think chapter 11 is a very good system ...”
In December 2013, Mr Clive Palmer, a Member of Commonwealth Parliament and businessman of circa $1 billion worth, said in his inaugural parliamentary speech that “the [Australian] government is the top petitioner of bankruptcy and liquidations, and as a result our businesses close, our employees lose their jobs and we lose out as a nation. … Find a better way, such as Chapter 11 in the United States.”
Chapter 11 continues to be a hot topic not only in Australia, but also in the very home of Chapter 11 itself, the United States. The Final Report was released in Australia only a day prior to the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 released its report following a major of Chapter 11. The review seeks to address the effects of increased complexities of debt and capital structures, and the expansion of secured and new breeds of lending, which have made restructuring under Chapter 11 more difficult and less effective.
Returning to Australia, the Commonwealth Treasury released only last month the exposure draft of the Insolvency Law Reform Bill 2014 (Reform Bill), which seeks to improve efficiency in insolvency administrations, enhance communication and transparency between stakeholders, promote market competition, bolster confidence in the profession, and reduce costs of regulatory compliance.
The release of the Reform Bill follows on the footsteps of the release in October of a discussion paper published by Australia’s professional body for insolvency practitioners and those working in the field of business reconstruction, namely the Australian Restructuring Insolvency & Turnaround Association (ARITA). ARITA’s discussion paper “A Platform for Recovery 2014 - Dealing with Corporate Financial Distress in Australia” (Green Paper) addresses, amongst other things, the continuing topical debates over the desirability of director “safe harbour” provisions, and whether characteristics of Chapter 11 ought to be reflected in the Australian context of reworked schemes and voluntary administrations; topics that have found themselves as the backbone of the recommendations made by the Inquiry’s Final Report.
The Final Report
The Final Report has come after some 6,800 submissions were made to the Inquiry from a range of stakeholders, and after hundreds of stakeholder meetings held within Australia and globally. Relevantly for insolvency and restructuring practitioners, the Final Report accepts that Australia’s external administration provisions are generally working well and do not require wholesale revision. The Final Report further notes that submissions to the Inquiry provided little evidence to indicate that the current Australian regime causes otherwise viable businesses to fail.
The Final Report acknowledges, however, that submissions to the Inquiry have highlighted six areas that warrant further consultation and possible reform, namely:
- elements of the United States Bankruptcy Code’s Chapter 11 insolvency framework have merit and warrant further consideration for incorporation into Australia’s external administration regime;
- directors seeking expert assistance to rescue distressed entities should be assisted by “safe harbour” provisions that protect them from liability for insolvent trading;
- ipso facto clauses that deem a company to be in default where there has been a “material adverse change” in its financial circumstances are further compounding a company’s financial distress and should be suspending from operating during restructuring;
- the overlap between external administration and bankruptcy processes, which affects smaller enterprises in which owners may face personal bankruptcy on top of the failure of their incorporated business, should be addressed;
- the complaints handling and dispute resolution processes in the external administration space could be improved; and
- the efficient use of technology could be further utilised.
The areas highlighted by the Final Report reflect the submissions made by ARITA to the Inquiry, and mirror the sentiments expressed by ARITA in its Green Paper, which invites discussion on the introduction of “safe harbour” provisions and the reworking of schemes of arrangements and voluntary administration, including a restriction on the exercising of ipso facto clauses.
The statements in the Final Report have reflected a softening of the tone that the Inquiry had expressed in its Interim Report released on 15 July 2014. In the Interim Report, the Inquiry expressed its reservations on Chapter 11 restructurings, stating it considered “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. Capital would be maintained in a business that is likely to fail, which would restrict or defer the capital from being channelled to more viable and productive enterprises. Adopting such a regime would also create more uncertainty for creditors by limiting their rights.”
The statements in the Final Report now embody a more progressive and consultative approach to future reform.
The Final Report makes commendable recommendations for further stakeholder consultation into reform of key areas of Australia’s external administration regime. Whilst the Final Report acknowledges that Australia’s regime is generally working well, it recognises there is room for improvement.
Going forward, the Commonwealth Treasurer has announced that the Commonwealth Government intends to consult with industry and consumers before making any decisions on the recommendations, with consultation to occur up until 31 March 2015. As the recommendations of the Final Report take effect, Australia’s leading insolvency and restructuring legal advisers Henry Davis York look forward to continuing to assist local and global clients with innovative and commercial solutions to large scale and complex external administration and distressed debt situations, as the insolvency landscape adapts to the complexities of an ever increasingly globalised corporate insolvency framework.