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Insolvency Law Reform – A new world for creditors after 1 September 2017

The Insolvency Law Reform Act 2016 (Cth) (ILRA) has introduced an extensive suite of changes to insolvency law. The reforms have been implemented in two tranches, the first of which commenced on 1 March 2017 and the second tranche of reforms commenced on 1 September 2017. As part of the reforms to insolvency law, the Commonwealth Government also introduced the Treasury Laws Amendment (2017) Enterprise Incentives Bill 2017 (Cth) (Bill), to include new insolvent trading safe harbour provisions and a restriction on the enforcement of ipso facto rights in certain circumstances. The Bill received royal assent on 18 September 2017.

Expansion of creditors’ rights – ILRA

One of the key features of the ILRA is to promote the role and rights of creditors in an external administration. This article will specifically consider the new rules relating to creditors’ rights to request information and meetings and to give directions to an external administrator.1 These changes commenced on 1 September 2017 and are set out in Part 3 to the Insolvency Practice Schedule (IPS), which has been inserted as Schedule 2 to the Corporations Act 2001 (Cth) (Act), and in Part 3 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPR).

An overview of some of the more significant changes are set out below.

Requests for information

Creditors may now, by resolution, request that an external administrator provide information, a report, or a document to the creditors.2 A similar request can also be made by an individual creditor. In each instance, the external administrator must comply with the request unless, among other things, the information is not relevant, the external administrator would breach his or her duties if the information was provided or if the request is otherwise not reasonable.3

An external administrator will need to subjectively determine if a request is unreasonable. What will constitute an unreasonable request is set out in sections 70-10(2) (if the request is made by an individual creditor) and 70-15(2) (if the request is made by resolution of the creditors) of the IPR, which include where an external administrator is of the opinion that:

  • Complying with the request will prejudice the interests of one or more creditors and that prejudice outweighs the benefits of complying with the request;
  • Legal professional privilege would attach to the information, report or document in a legal proceeding;
  • There is no sufficient property available to comply with request; or
  • The request is vexatious.

If a request is reasonable, the external administrator must provide the information, report or document within 5 business days of receiving the request, or at such later time as agreed with the person or body making the request.4

Meetings

The reforms also include important changes relating to creditor meetings. External administrators will now be able to convene a meeting of creditors at any time (in addition to the statutory meetings in an administration), or in the case of a members’ voluntary winding up, a general meeting of the company.

Furthermore, an external administrator must convene5 a meeting of the creditors if they are directed to by:

  • The committee of inspection;
  • Resolution of creditors;
  • At least 25%, in value of the creditors, where the direction is in writing; or
  • Less than 25%, but more than 10% in value of creditors, where the direction is in writing and security for the cost of holding the meeting is given to the administrator before the meeting is convened.
Directions by creditors

In addition, creditors may also give directions to an external administrator in relation to the external administration.6 The external administrator will need to have regard to the direction and if they do not comply with it, he or she must make take a written record of that fact and the reasons for not complying.

These reforms will have significant practical and procedural implications for both insolvency practitioners and creditors in the way that external administrations are conducted. Whilst the reforms will significantly enhance the rights and powers of creditors, we expect that they will, in several respects, also increase the compliance and regulatory burden on external administrators.

Insolvent trading safe harbour and ipso facto reforms

The new insolvent trading safe harbour protection provisions have commenced and it has been inserted as section 588GA to the Act. Section 588GA will provide a director with protection from an insolvent trading claim, if the director starts to develop one or more courses of action that are reasonably likely to lead to a better outcome for the company at a time where they start to suspect that the company is or may become insolvent. The provision sets out a number of factors that may be taken into account in working out whether a course of action is reasonably likely to lead to a better outcome for the company (including but not limited to obtaining advice from an “appropriately qualified entity”). Further, it is worthy to note there are also a number of factors that will disentitle a director from benefiting from such protection (including but not limited to circumstances where employee entitlements have not been met, taxation requirements and forms have not been complied with and certain other books, records and information have not been provided). In addition, a holding company will also be entitled to rely on the safe harbour provisions if the subsidiary company takes reasonable steps to ensure that section 588GA applies in relation to each of the directors of the company and the debt.

The Bill has also introduced a new stay on enforcement of ipso facto clauses that previously allowed a contractual party to terminate a contract when an insolvency event arose. So what does this mean? The new provisions will provide for the following:

  • A party will not be able to enforce an ipso facto clause if the other contracting party has entered into a compromise or arrangement agreement, a receiver or manager has been appointed over that company’s property or if an administrator has been appointed;
  • The stay will also apply to a right prescribed by regulation in relation to the company, or the company’s financial position, during the period of the company entering into a scheme of arrangement, administration or receivership; and
  • The period of stay is prescribed by the new legislation, which can be extended by order of the Court.

The ipso facto reforms will commence on 1 July 2018.  However, the reforms will not apply to an ipso facto right under a contract that was entered into before the commencement date.

It will be interesting to see how the safe harbour and ipso facto reforms will operate in practice. One of the clear expectations of the reforms is to encourage directors to implement turnaround and restructuring approaches when a company is insolvent or nearing insolvency without the stigma that naturally attaches in those circumstances. However, there are a number of uncertainties with the new changes and we will see, in particular, what findings will come out of the independent review of the safe harbour protection, which the Minister must cause to be undertaken as soon as practicable after the 2 year period from the commencement date (being the day after royal assent was given).

This article was written by Vesa Prekazi, Associate, in our Melbourne office.

Publication Editor: Grant Whatley.

1IPS, s70-40
2IPS, ss70-46 and 70-47 are similar provisions which deal with members’ rights to request information in a members’ voluntary winding up.
3IPS, ss70-46 and 70-47 are similar provisions which deal with members’ rights to request information in a members’ voluntary winding up
4IPR, S70-1(2)
5Unless the external administrator is a provisional liquidator or the external administrator is the administrator of the company under administration
6IPS, s85-5

Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.