10 January, 2018
The Australian insolvency profession is in the midst of significant reform and a jumble of government interventions.
Historically, insolvency in Australia has either been a boom or bust industry. The past two years has seen a significant reduction in both staffing numbers and insolvency appointments. Together with a number of Government initiated inquiries and a raft of new regulation, focus on the Australian insolvency profession is at an all-time high.
Australia has not endured a recession since the late 1980’s and apart from a small spike in insolvency appointments which occurred in 2008/2009 (something known as the global financial crisis which never really hit Australia), the insolvency landscape has ticked along.
Time for change?
The Australian insolvency framework, whilst largely adopted from the United Kingdom has been described as having some of the harshest penalties for insolvent trading and general failure in the world. Given this, and the fact that the last substantive insolvency reforms arose from the Harmer Report in the late 1980’s, it was inevitable that change was overdue.
Over the past 18 months, more than 10% of all legislation passed in Australia related specifically to the insolvency profession. For a country with a gross population of 24.5 million and less than 750 registered liquidators nationally, this
is significant reform on any measure and is illustrative of how over regulated such a small portion of the national population can be.
The reforms were announced by the Australian Government as part of the National Innovation and Science agenda with the intention of improving the existing bankruptcy and insolvency laws, moving the industry towards fostering a greater restructuring and rescue culture, encourage innovation and support creditor protection.
The insolvency reforms
The first tranche, the Insolvency Law Reform Act 2016 was introduced in stages commencing March 2017. It sought to harmonise both corporate and personal insolvency and modernise the corporate framework around registration, remuneration and regulation of practitioners.
Whilst the reforms, such as liquidator registration, have been successful, this legislation was split and delayed due to a lack of engagement and consultation with key stakeholders (including industry professional bodies). The most recent changes implemented in September 2017 to the insolvency practice rules (how insolvency appointments are administered and rights of creditors) remain largely complicated and unexplored. These reforms together with the proposed introduction of a ‘user pays’ system for insolvency practitioners administered by the corporate regulator, the Australian Securities and Investments Commission (ASIC), may have an unintended consequence of reducing the already small number of registered liquidators over the next 12 months.
The second tranche of reform introduced through Treasury Laws Amendment (Enterprise Incentives No.2) Act 2017 focusses on honest business restructuring and provides ‘safe harbour’ protection for directors from insolvent trading. Directors are provided protection from personal liability when they pursue efforts to develop “one or more courses of action” that are “reasonably likely to lead to a better outcome for the company” than administration. The reforms also render the majority of ipso facto clauses (automatic termination clauses where an insolvency event occurs) unenforceable if a company is undertaking a formal restructure.
Many of these news laws are yet to be tested, but have been designed to assist in striking the right balance between encouraging innovation and entrepreneurship and protecting creditors.
They have generally been well received, although these reforms are only likely to be utilised by companies with sufficient assets and resources available to engage those professionals with requisite skills and expertise. It remains to be seen how safe harbour will interact with the large listed entities and the continuous disclosure obligations and or whether or not this will impact future insolvency based litigation.
Bankruptcy and phoenix activity
Consistent with the Government’s approach to foster innovation, promote entrepreneurship and reduce the stigma and punishment of failure, changes have also been made to the length of bankruptcy terms. The Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was introduced to reduce the length of a bankruptcy from three years to one. Although not yet law, these reforms pose perhaps the single biggest change to our insolvency landscape.
The reforms aim to provide bankrupts with a fresh start, assist entrepreneurs to re-engage in business sooner and encourage people, who have previously been deterred by punitive bankruptcy laws, to pursue their own business. Whilst there is little doubt that these changes will promote a rescue culture, it remains to be seen whether the interests of creditors, or the prevailing market for credit will be protected.
Interestingly, the bankruptcy reforms seem inconsistent with the Government’s next proposed tranche of reforms concerning illegal phoenix activity. Phoenix activity is not defined; however, it concerns company directors and advisors incorporating new entities and transferring assets whilst leaving the original company with signi cant debts, denying creditors access to assets to meet the unpaid debts.
It is estimated that illegal phoenix activity costs the Australian economy up to $3.2 billion annually.
The ASIC has signalled its intention to crack down on serial phoenix directors and advisors. Given it will be possible for directors and advisors to declare themselves bankrupt and serve only a one year bankruptcy period, it’s hard to see how this will act as a major deterrent to stopping illegal and bad behaviour, nor is it likely to encourage creditors to take active steps in recovering unpaid debts.
Will it work?
Whilst each of the reforms proposed and introduced in Australia have been welcomed, at present, it’s dificult to see how they will all work together to interact and achieve the aims set out by the Australian Government.
Unfortunately, in the haste to implement reforms for the sake of the greater good, Australia is yet to strike the optimal balance between promoting risk taking, recycling capital, maintaining the integrity of our capital markets and protecting those creditors who find themselves at the forefront of corporate failure.
By Glenn Livingstone, Director and Registered Liquidator, PPB Advisory Sydney Australia.
For further information, please contact:
Ruth Stackpool-Moore, Director of Litigation Funding / Head of Harbour Hong Kong
ruth.sm@harbourlf.com
