Developments to be aware of 4 min read
2023 emerged as a dynamic year for corporate insolvency. Characterised by an increase in companies entering external administration and the release of Australia's first comprehensive review into insolvency law in over three decades, this article provides an overview of the key developments in corporate insolvency in 2023.
Key statistics
- Figures released by the Australian Securities and Investments Commission (ASIC) show that, compared against data from December 2022 and a base level (being the average of data from December 2017, December 2018 and December 2019), in the financial year to December 2023:
- all forms of external administrations, save for court appointments, saw an increase in numbers;
- all industries, save for arts and recreation services, saw an increase in external administrations;
- the number of monthly external administrations were consistently higher; and
- of the States and Territories, Tasmania saw the greatest increase with external administrations increasing five-fold.
- In addition, nearly one-third of external administrations were in the construction industry, followed by the accommodation and food services industry. This is largely consistent with the data from 2022.
Legal developments
- In February 2023, the High Court handed down two important decisions concerning insolvency law and practice :
- Metal Manufactures Pty Limited v Morton [2023] HCA 1 (Morton); and
- Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 (Badenoch).
In Morton, the High Court unanimously concluded that set-off under s553c of the Corporations Act 2001 (Cth) (Act) is not available to a creditor against a liquidator in answer to a claim for recovery of an unfair preference.
In Badenoch, the High Court held that, contrary to standard industry practice and various decisions of lower courts, the Act does not incorporate the 'peak indebtedness rule' (which held that a liquidator was entitled to nominate any point in the continuing business relationship, within the relation-back period, as the beginning of the 'single transaction' for the purpose of s588FA of the Act). Instead, the first transaction that forms part of a continuing business relationship is either the first transaction after the beginning of the relation-back period or the date of insolvency, or if the relationship started after either of these dates, the first transaction after the beginning of the continuing business relationship - whichever is later.
- In July 2023, the Parliamentary Joint Committee on Corporations and Financial Services released its report into corporate insolvency in Australia. With 28 recommendations, the report concluded that Australia's corporate insolvency system is too complex, hard to access and unnecessarily costly. To address the shortcomings of Australia's corporate insolvency system, the report noted that there is a need for an independent and comprehensive review that addresses the system as a whole. However, in the interim, the report identified certain reforms to address clear and broadly recognised failings in the current law while the broader review is established. These immediate actions included implementing the recommendations of the 2022 Safe Harbour Review, reforms to simplify the small business restructuring pathway and improving the insolvency process for trusts. More information on the recommendations made in the report can be found in this Insight.
- Also in July 2023, contracts agreements or arrangements that were entered into prior to 1 July 2018 and which are varied, novated or assigned after 1 July 2023 became subject to the ipso facto prohibitions.
Looking ahead to 2024
Based on the data published by ASIC, we anticipate that the number of external administrations will remain high. A number of factors play into this, including increased input costs, inflationary pressures and of course the flow-on effects from temporary government intervention implemented as a result of the COVID-19 pandemic.
In addition, following the Parliamentary Joint Committee's report on corporate insolvency in Australia, we expect 2024 will see some of the immediate action recommendations implemented.
Should you wish to discuss further, please do not hesitate to contact one of our experts.