Insolvency law reform bill: Implications for insolvency practitioners

27 January 2016

On 3 December 2015, the Federal Government introduced the Insolvency Law Reform Bill 2015 (Bill) into parliament. The Bill is a continuation of ongoing review and reform of the regulatory framework for personal and corporate insolvency.

The aim of the bill is to amend the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth) (together, the Acts) with a view to:

  • Harmonising the legislative obligations on insolvency practitioners in relation to registration, discipline and procedural rules for personal bankruptcies and corporate external administrations;
  • Reducing costs and inefficiencies in insolvency administration;
  • Enhancing communication and transparency between practitioners, creditors and other key stakeholders;
  • Promoting competition amongst insolvency practitioners; and
  • Increasing the powers available to both regulators.

Below we highlight some of the significant changes contemplated by the Bill, being:

  • Increased alignment between corporate and personal insolvency registration framework;
  • Increased regulatory powers of the corporate regulator;
  • Increased alignment of the procedural rules for personal and corporate insolvencies;
  • Improving creditor oversight and engagement; and
  • Practitioner remuneration.

In addition, we will also review the Federal Government’s recently announced National Innovation and Science Agenda in relation to proposed personal and corporate insolvency reforms.

Some Key Areas of Amendment
Alignment of corporate and personal insolvency registration framework

The Bill proposes to remove the current distinct personal and corporate insolvency registration, deregistration, disciplinary and maintenance of registration regimes and replace them with common set of provisions.  Some of the key proposals include:

  • A single class of practitioners for corporate insolvency (although some registrations may be conditional or restricted);
  • A lowering of the experience requirements for registration for corporate insolvency from 5 years to 3 years;
  • A removal of indefinite registrations with insolvency practitioners required to renew their registration every 3 years;
  • An aligned deregistration and disciplinary process based on the existing Bankruptcy Act provisions; and
  • Establishing an aligned committee to receive disciplinary referrals from the relevant regulator with a mandate to provide sanctions including suspension and deregistration.
Increased powers of the Australian Securities and Investments Commission (ASIC)

The Bill aims to ensure that regulators are empowered to conduct practitioner reviews along with individual administration reviews. To achieve this, the Bill proposes to increase the ability of regulators to audit practitioners while conducting administrations. The regulators will also be able to share information between one another in relation to practitioners, as well as to relevant stakeholders, where a practitioner would otherwise be authorised to do so.

Improving the alignment of procedural rules

With a view to harmonising the procedural rules governing personal and corporate insolvency, the Bill proposes to align the rules regarding the handling of funds, record keeping and audit requirements. The Bill also contemplates reproducing the record destruction rules from corporate insolvency in personal insolvency, however the timeframe of 7 years (as opposed to 5 years for corporate insolvency) will be maintained. The proposals also include imposing strict liability offences on practitioners for the late-banking of funds, withdrawal of funds without appropriate authority and the failure to bank funds into the correct account. The increase in the penalties for these offences is aimed at creating a genuine deterrent for failing to comply with a practitioner’s obligations.

Improving creditor oversight and engagement

The proposed amendments to the ability of creditors to obtain information and influence the approach taken in an administration are significant for both insolvency practitioners and creditors. The general approach appears to be reducing administrative and cost burdens on insolvency practitioners, while providing greater power to creditors. Of particular note is the following:

  • The alignment of the obligations on insolvency practitioners to respond to reasonable requests for information from creditors/members/debtors in liquidations, voluntary administrations, deeds of company arrangement, bankruptcies, controlling trusteeships and personal insolvency agreements;
  • Creditors would be able to pass resolutions imposing reasonable reporting requirements in relation to an administration;
  • Removal of mandatory reporting requirements (including annual and final reporting to creditors, and initial, annual and final meetings of creditors); and
  • Creditors in all forms of administration are empowered to remove a practitioner through an ordinary resolution, with insolvency practitioners retaining the right to apply to the Court to prevent removal.
Practitioner remuneration

The Bill also seeks to amend the laws relating to practitioner remuneration, including the assessment of practitioner remuneration. The key amendments include:

  • Limiting the ability of insolvency practitioners to seek prospective approval of their remuneration to a capped fee, with subsequent revisions to the remuneration requiring creditor resolution or Court order;
  • Establishing a statutory minimum default remuneration for corporate insolvency (as already exists for personal insolvency) without having to attempt to hold a meeting to approve fees that failed to be approved due to a lack of a quorum; and
  • ASIC or the Court will be empowered to appoint a cost assessor to assess the reasonableness of the remuneration of all or part of an administration. Cost assessors will be entitled to access insolvency practitioner records (timesheet, diaries etc) as well as administration records to assist in their assessment.
Innovation Agenda Insolvency Reforms

On 7 December 2015, the Prime Minister announced the Federal Government’s National Innovation and Science Agenda with a view to fostering innovation and removing the associated fear of failure. As part of the Agenda, a number of insolvency law reforms were proposed, namely:

  • Reducing the current default bankruptcy period from three years to one year;
  • Introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restricting adviser to develop a turnaround plan for the company; and
  • Making ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.

While there is limited detail in relation to the above proposed reforms (a proposal paper is to be released in the first half of 2016 with legislation to be introduced in 2017), it is clear that the proposed amendments will result in a reduction on the emphasis of protecting creditors where a turnaround is possible.

This article was written by David O’Farrell, Partner.

Subscribe to HWL Ebsworth Publications and Events

HWL Ebsworth regularly publishes articles and newsletters to keep our clients up to date on the latest legal developments and what this means for your business.

To receive these updates via email, please complete the subscription form and indicate which areas of law you would like to receive information on.

Contact us