The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has today announced a package of reforms to Australia's corporate insolvency laws.
The reform package contains a range of reforms directed at reducing the costs and complexity of insolvency administrations; improving communications with creditors; and reducing the potential for abuse of corporate insolvency law. The reforms will include the adoption of substantially all of the recommendations made by CAMAC in its Issues in external administration report.
The Government will also amend the Corporations Act to reverse the effect of the High Court's decision in Sons of Gwalia v Margaretic which determined that, in a corporate winding up, certain compensation claims by shareholders against the company were not subordinated below the claims of other creditors.
'Any direct benefits to aggrieved shareholders arising from non-subordination are outweighed by the negative impacts on shareholders generally as a result of restrictions on access to, and increases in, the cost of debt financing for companies,' Minister Bowen said.
'The Government also remains concerned that the Sons of Gwalia decision has the potential to further increase uncertainty and costs of associated with external administration.
'The decision has also been taken in light of the decision's potential negative impact on business rescue procedures.'
Minister Bowen also released a discussion paper on the operation of Australia's insolvent trading laws in the context of attempts at business rescue outside of external administration. The paper outlines possible options for reform.
'The Government is committed to ensuring that Australia's corporate insolvency laws are capable of meeting the challenges arising from the global economic downturn,' Minister Bowen said.
'Informal work-outs play an important role in business rescue and therefore the protection of the shareholders, creditors and employees of distressed businesses. The use of formal insolvency reorganisation procedures is not always appropriate.
'It is important that Australia's insolvency laws complement and assist the conduct of informal work-outs.'
Consultation process
The insolvent trading discussion paper contains an overview of the current insolvent trading laws; the options available to companies facing insolvency; and outlines the advantages and disadvantages of informal corporate work-outs.
The paper sets out three possible options: to maintain the status quo; to adopt a modified business judgement rule in respect of the director's duty to avoid insolvent trading; and to adopt a mechanism for invoking a moratorium from the insolvent trading prohibition while work-outs are attempted.
Interested parties are invited to make written submissions.
Submissions may be lodged electronically, by post or facsimile. Please direct submissions to:
Insolvent Trading Safe Harbour Options Paper
Corporations and Financial Services Division
The Treasury
Langton Crescent
PARKES ACT 2600
Fax: 02 6263 2770
Email: insolventtrading@treasury.gov.au
Telephone inquiries may be made by calling (02) 6263 3971.
The closing date for submissions is 2 March 2010. Further information on these reforms is available at www.treasury.gov.au.
19 January 2010
Attachment
The Safe-Harbour Discussion Paper
The discussion paper canvases a number of possible responses to concerns regarding the effects of insolvent trading laws on informal work-outs. Currently a company must maintain solvency in order to attempt an informal work-out outside of external administration.
Retention of the status quo
Under this option the law would continue to apply as it does now (subject to possible minor fine tuning). Adoption of this option may reflect that, while there may be costs arising from how insolvent trading laws affect informal work-outs, these may be justified by the benefits provided by the insolvent trading laws and the potential consequences that may result from any weakening of the prohibition against insolvent trading.
Adoption of a modified business judgement rule
Under this option, a modified 'business judgement rule' would operate so that directors would be considered not to have breached their duty not to trade whilst insolvent if:
- the financial accounts and records of the company presented a true and fair picture of the its financial circumstances;
- the director was appropriately informed by restructuring advice based on those accounts and records;
- it was the director's business judgement that the interests of both the company's creditors and members were best served by pursuing restructuring; and
- the restructuring was diligently pursued by the director.
Expressly invoked moratorium
Under this option, a company would inform the market, including existing creditors and potential new creditors that the company was insolvent and intended to pursue a workâout outside of external administration.
A moratorium would then apply, during which honest insolvent trading would be permitted.Creditors would be empowered to bring the moratorium to an end, by either passing a resolution or by obtaining a Court order.There would be restrictions on how long a moratorium could continue to apply.
The Insolvency Reform Package
In addition to reversing the effect of the Sons of Gwalia decision, the Government will implement reforms to:
- facilitate the electronic provision to creditors of creditor lists and align the relevant provisions for most kinds of corporate insolvency administration;
- provide certain information to owners of property in the possession of a company in external administration; streamline creditor meeting procedures; introduce voting on certain proposals without the need to hold creditors' meetings;
- mandate the requirement to notifying creditors of material breaches of Deeds of Company Arrangement;
- streamline the approval of provisional liquidator remuneration and the appointment of replacement external administrators in the event of a vacancy;
- empower the Australian Securities and Investment Commission (ASIC) to take and transfer possession of records in the event of a vacancy in external administrator;
- facilitate the future development of alternative methods of publication of certain insolvency related events;
- align the rules regarding disclosure of former names of a company between the different kinds of external administration; and
- reduce the regulatory burden upon insolvency administrations in relation to the provision of notices to creditors.
The reforms will also remove anomalies in respect of 'relation-back' and 'commencement' dates for liquidations; in order to eliminate the potential for manipulation of how far back corporate insolvency clawback provisions apply.
Additionally, the reforms will address a number of other minor technical and mechanical issues identified by the Insolvency Practitioners Association.