New Zealand: Australia proposes insolvency law rewrite

Brief Counsel
Last Updated: 19 January 2016
Article by Michael Arthur, Michael Harper, Daniel Kalderimis, Hamish Foote and James McMillan
Most Popular Article in New Zealand, February 2016

Australia has an Insolvency Law Reform Bill in Parliament and plans for more change further down the track in the form of recommendations from the Australian Productivity Commission, which the Australian Government has signalled it will adopt.

These developments will be of interest to New Zealand insolvency practitioners, company directors and creditors. We summarise the proposed changes and comment briefly on the possibility of similar reform in New Zealand.

Insolvency Law Reform Bill

The Bill, introduced to the House on 3 December 2015, provides for procedural reforms to align the regulation, registration and remuneration of insolvency practitioners in both corporate and personal insolvencies. They include:

  • changes to the registration systems for corporate and personal insolvency practitioners so that they are more mutually consistent
  • a statutory minimum default remuneration amount for liquidations
  • increased rights for creditors, including the ability to appoint an independent specialist to review the performance of an insolvency practitioner, and
  • further surveillance and audit powers for the Australian Securities and Investments Commission (ASIC) in relation to the conduct of insolvency practitioners.

The Bill, which will be supported by Insolvency Practice Rules, is likely to be passed this year. A copy is available here.

Productivity Commission report

The inquiry concluded that a wholesale change to the corporate insolvency regime, such as the adoption of a "chapter 11" framework, is neither justified nor likely to be beneficial. However it has recommended specific reforms, two of which the Federal Government has committed to introducing:

  • a safe harbour for directors from liability for insolvent trading if they appoint a restructuring advisor to develop a turnaround plan, and
  • making "ipso facto" clauses, which allow contracts to be terminated because of an insolvency event, unenforceable if a company is undertaking a restructure.

The Government has said that the current laws require reform because they "focus too much on penalising and stigmatising business failure".

Other reforms proposed by the Commission include:

  • a new "small liquidation" process for companies with unrelated creditors of less than $250,000
  • protections making it more difficult for liquidators to tip over "pre-pack" sales
  • extending the ipso facto reform to schemes of arrangement
  • requiring voluntary administrators to certify within one month of appointment that a company, or a large "component entity of it", can be restructured. If no certification is given, the VA must become a liquidation
  • reducing the default exclusion period and restrictions on bankrupts from three years to one year. The obligation to repay debts to continue to be required for three years or until discharge, and
  • creating a unique "director identification number" for directors to help monitor phoenix transactions.

It has also suggested a review of the receivership procedure and the appointment of a committee of unsecured creditors to oversee the conduct of a receivership. A copy of the Report is available here.

The Government has said that it will consider all of the Commission's reform recommendations and that it will deliver its formal response this year.

When will the changes take effect?

Not for some time. A proposal paper will be released in the first half of the year but legislation to effect the changes through amendments to the Corporations Act is not expected until mid-2017.

Our comments

This marks the first serious re-think of Australian insolvency law in over 20 years. We understand that the safe harbour and ipso facto reforms are well understood and accepted by the Australian market. The Australian Restructuring Insolvency & Turnaround Association (ARITA) has welcomed the Federal Government's announcement.

Many aspects of the reforms require further debate. The Federal Government has said that "...if a business gets into trouble, the operators and owners [should] have a real opportunity to get themselves out of it".

Few would disagree with this statement, but the restructuring opportunity must be balanced against the primary purpose of insolvency law, the protection of creditors. If this objective is not to be undermined, there must be limits on the leeway available to directors before an insolvency practitioner is appointed. Perhaps this is why one of the pre-requisites of the safe harbour defence is certification of solvency when a restructuring advisor is appointed.

In our experience, directors often wait too long before seeking formal turnaround advice. If the safe harbour reform became part of New Zealand law, it may encourage directors to seek early advice. We would expect most New Zealand insolvency practitioners to embrace the opportunity to do more restructuring work, rather than featuring as the proverbial "ambulance at the bottom of the cliff".

For directors, the safe harbour defence would be a welcome counter-point to recent changes to the Companies Act that have criminalised director conduct.

If the safe harbour and ipso facto reforms work well in Australia, we would expect them to eventually become part of New Zealand law. However, such changes could be some time away. If our government were to consider similar reforms, the starting point should be revision of the under-used and poorly understood VA regime. There is potential to make this procedure much more useful for businesses and creditors alike.

We will cover potential reforms in a further article this year. In the meantime, we will continue to monitor Australian developments with interest.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Michael Arthur
James McMillan
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