The Productivity Commission published its final report on Business Set-up, Transfer and Closure on 7 December 2015. A copy of the final report is available here.
The Productivity Commission has recommended the following specific reforms to Australia’s insolvency laws, with the expressed objective of providing a genuine opportunity to restructure economically viable companies or, if this is not possible, an efficient, effective and orderly process for winding up the company:
- Voluntary administration certification: An Administrator must certify, within one month of appointment, that he or she has reasonable grounds to believe that the company (or a large component entity of it that may emerge following a restructure) is capable of being a viable business in order for the administration to continue. If the Administrator cannot certify this, the Administrator is under a duty to convert the administration into a liquidation.
- Safe harbour defence for directors: A ‘safe harbour’ defence to insolvent trading be introduced. The final recommendation is that the directors appoint an appropriately qualified safe harbour adviser, who certifies that the company was solvent at the time of his or her appointment, and the directors be able to demonstrate that they took all reasonable steps to pursue a restructure. The defence applies for the period of the adviser’s engagement until implementation of the advice is complete. The appointment of the turnaround adviser would not be disclosed publicly.
- ‘Pre-positioned’ sales: Introduction of a ‘pre-positioned’ sale mechanism. The sale would be subject to review by the subsequently appointed external administrator. There is a presumption in favour of the validity of the sale if there are no related parties involved.
- Unenforceable termination clauses: ‘Ipso facto’ termination clauses be unenforceable if the relevant termination event is the occurrence of a scheme of arrangement or the appointment of a voluntary administrator. A supplier may apply to the court for an order that the contract be terminated if continuing supply will cause hardship.
- Scheme of arrangement moratorium: Introduction of a voluntary administration-style moratorium on creditor enforcement action during the formation of schemes of arrangement.
- Simplified ‘small liquidation’ process: A separate liquidation process be available for companies with liabilities to unrelated parties of less than $250,000. Liquidators for these assignments would be drawn from a pool of providers selected by tender to ASIC (and subject to review every five years).
- A review of receiverships: An independent review of the provisions of the Corporations Act 2001 relating to receivers and the practices of receivers in the market to be completed by 30 June 2017.
- COI equivalent for receiverships: Unsecured creditors may form a committee that has rights to “basic information” about the receivership, including the results of the sale process and details of proposed and actual costs and disbursements of the receivers. The committee would have standing to seek relief in respect of receivers’ fees. In respect of personal insolvency laws, the Productivity Commission recommended that the restrictions applicable to bankrupts are to apply for only one year, but the obligation to make income contributions to the estate continues for three years.
The safe harbour, unenforceable termination clauses and personal bankruptcy reforms were picked up in the Government’s Innovation Statement, which was announced on 7 December 2015. A proposal paper for these recommendations is expected in 2016, with a view to legislation passing in mid 2017. As to the balance of the recommendations (other than the recommended review into receiverships), there is no proposed time line or plan for progressing these and we expect it will be some time before any ultimate implementation.
Co-authored by Lachian Greig.
