Insolvency Law Reform Bill - harmonisation not radical reform

In brief

The Federal Government has released its package of reforms to Australia's personal and corporate insolvency laws. Included is a draft Bill that proposes to streamline the regulatory framework applying to insolvency practitioners with the aim of increasing efficiency in external administrations and boosting confidence in the competence of practitioners. Partner Chris Prestwich, Senior Associate Angela Martin and Lawyer Kaelah Ford report on some of the key features of the Bill.

Background

The draft Insolvency Law Reform Bill 2014¹ (the Bill) proposes to implement reforms previously released in the Federal Government's proposals paper, A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia, released in December 2011.

The proposed reforms come in the wake of a number of inquiries into Australia's insolvency laws, including the 2010 Senate Economics References Committee report into The regulation, registration and remuneration of insolvency practitioners in 2010 (the Senate Inquiry Report). The Senate Inquiry Report recommended merging the corporate insolvency functions of the Australian Securities and Investments Commission (ASIC) with the bankruptcy functions of the Australian Financial Security Authority (AFSA) to form a new regulator that would govern both sets of laws.

While the Federal Government has not accepted this recommendation, it has recognised the need for harmonisation and alignment of the two regimes. The amendments proposed in the Bill are designed to achieve that aim, introducing parallel provisions to the Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth) for the regulation of trustees and corporate insolvency practitioners respectively. This Focus covers the aspects of the Bill that deal with insolvency administrations under the Corporations Act.

Key proposed amendments

The bulk of the key reforms in the Bill apply to 'external administrators' (defined as liquidators and administrators) and will not apply to receivers and managers.

Liquidator may assign causes of action under the Corporations Act

Under the proposed laws, practitioners will have the right to assign statutory rights of action under the Corporations Act that vest with the practitioner (or company) during an external administration, to a third party.

Currently, rights of action such as unfair preference claims must be brought by the liquidator and, accordingly, cannot be assigned. However, it has been held that claims for breaches of directors' duties can be assigned by a liquidator.²

It is now proposed that practitioners will be able to assign any right to sue that is conferred on them by the Corporations Act, with the following limitations:

• Before assigning any right, the external administrator must give written notice to the creditors.
• If the relevant action has already been commenced, the external administrator must seek court approval to assign the right.

It is currently common practice for liquidators to seek litigation funding for unfair preference claims. This amendment will provide greater flexibility for liquidators and funders, allowing a simple assignment of such claims in exchange for payment.

However, it will remain the case that any claims that a company has for misleading and deceptive conduct cannot be assigned by a practitioner – that is because the relevant legislation does not allow for an award of damages not suffered by a party to the proceeding.

Removal of liquidator by creditors

Under the Bill, it is proposed that creditors will have the power to remove an external administrator of a company and appoint another, by resolution at a meeting of creditors.

Under the existing laws, there are only limited circumstances in which practitioners may be removed or replaced, for example at the first or second meeting of creditors in a voluntary administration, or by order of the court in a liquidation. As it stands, creditors have very limited powers to deal with liquidators who they want to replace without incurring the costs of going to court to have them removed. For example, in the One.Tel liquidation,³ it was a number of years before creditors were successful in obtaining a court order for the removal of the special purpose liquidator.

If removed by the creditors, under the new proposals, the former external administrator may subsequently apply to the court to be reappointed and the court may grant this application if satisfied that the removal was an improper use of the powers of one or more creditors.

The Bill, however, does not provide guidance on what an 'improper purpose' would be, though in the context of the parallel provision in the Bankruptcy Act for removal of a trustee, the Explanatory Material to the Bill states that it would be inappropriate for a creditor to seek the removal of a trustee to prevent him or her from investigating the financial relationship between the creditor and the debtor.⁴

Reasonable requests for information

Under the new laws, creditors will be able to make requests for information from the practitioner about the administration or liquidation. Creditors may, by majority resolution, request the external administrator to give information, provide reports, or produce a document to the creditors. These rights are in addition to the existing obligations of practitioners to provide reports to creditors in specific types of administrations, such as voluntary administration.

Practitioners must comply with all 'reasonable' requests for information. A request will not be reasonable where there are not enough funds to comply with the request, or the request is vexatious or would unfairly prejudice the administration. This amendment is designed to balance a creditor's right to information with the costs that will result from complying with such requests.

Remuneration of external administrators

The Bill also proposes amendments to the existing remuneration regime under the Corporations Act. It is proposed that the amount of remuneration will ordinarily be set under a determination of the creditors. If no remuneration determination is made, the administrator will be entitled to a 'reasonable amount', with a maximum limit of $5000.

Where the creditors make a determination on a time-cost basis, it is proposed that the determination must include a cap on the amount of remuneration that the external administrator is entitled to receive. This reform may create some difficulties for practitioners, particularly for complex administrations where it is often difficult to estimate the likely length and cost of the process. However, the Bill does provide for more than one determination to be made for any given external administration.

Other proposed amendments include:

New registration requirements for liquidators, including the introduction of mandatory insurance requirements and education standards.

The grant of powers to ASIC, the court and creditors to appoint external reviewers and costs assessors to report on the external administrator's remuneration, costs and other matters.

A prohibition on practitioners directly or indirectly deriving a profit or advantage from a transaction, or accepting gifts or benefits (which essentially codifies the requirements for external administrators not to improperly use their position as company officers).

Conclusion

If passed in its current form, the Bill is likely to impact the way in which practitioners pursue causes of action. Creditors will have greater rights to information from administrators and liquidators. In addition, trustees and practitioners will be subject to greater scrutiny by ASIC and AFSA. Overall, the proposed amendments, however, are aimed at harmonisation and alignment rather than substantive reform and reflect a general desire for greater transparency in insolvency administrations.

Some of the changes proposed in the Bill are particularly interesting in light of the recent Financial System Inquiry (FSI). The FSI released its interim report in July 2014, and suggested, among broader comments on the effectiveness of Australia's insolvency regime, that an option for narrowing ASIC's mandate could include moving insolvency functions to AFSA – a proposal that the Federal Government has rejected outright in the Bill.