Australia: Insolvency Law In 2007 – Where Are We Headed?

Last Updated: 9 March 2007
Article by David Dowd

There have been a number of significant developments in the corporate and personal insolvency sectors over the past quarter. The Sons of Gwalia litigation has been resolved, at least as far as the Courts are concerned, the Bankruptcy and Superannuation Amendment Bill appears to have been given the green light by the Senate and the long awaited amendments to Chapter 5 of the Corporations Act have been released in draft.

In this, our first Insolvency Bulletin for 2007, we kick start the year with a comprehensive overview of where insolvency law is headed in 2007. We cover what many believe was the final chapter in the Sons of Gwalia litigation; we provide you with an update on the status of the Bankruptcy Legislation Amendment (Superannuation Contributions) Bill 2006 and we provide you with a nuts and bolts overview of the legislative changes proposed in the Corporations Amendment (Insolvency) Bill 2007.

Sons Of Gwalia

In our February 2006 Insolvency Update, we reported in detail on the Full Court of the Federal Court’s (Court of Appeal) unanimous decision in Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic1. An appeal of that decision has since been heard by the High Court.

To refresh your memory of the core issues in the case, we briefly revisit the facts and the Court of Appeal’s decision below.

The decision on appeal

The facts of the case are as follows:

  • Administrators were appointed to Sons of Gwalia Limited (SOG) and certain subsidiaries on 29 August 2004.
  • At the recommendation of the administrators, the creditors of each company in the group resolved that 'holding' Deeds of Company Arrangement (DOCAs) be entered into.
  • One of the purposes behind the holding DOCAs was to allow the administrators an opportunity to progress a test case which set out to consider the question of whether Mr Margaretic, and other shareholders in his position who may have been misled when buying their shares, were creditors, and therefore entitled to prove in the SOG administrations.

The key issue for determination by the Court of Appeal, was whether, in a consideration of section 563A2 of the Corporations Act 2001 (the Act), there is a distinction to be drawn between ‘subscribing shareholders’ (those who contribute to the initial capital of a company) and ‘transferee shareholders’ (those who purchase their shares on-market from an existing shareholder).

The Court of Appeal held that there was a distinction between the two classes of shareholder to the extent that a shareholder who acquires shares in a company from a true third party (referred to as a transferee shareholder), has a right to claim against the company, post insolvency, for losses arising out of the shareholder’s acquisition of shares. The Court of Appeal held that statutory provisions such as section 563A of the Act will not prevent claims by transferee shareholders for damages which flow from a claim for misrepresentation inducing the purchase of shares.

Issues on appeal to the High Court

The only issue initially agitated before the High Court was whether a claim by a transferee shareholder should be postponed to the claims of other creditors. That issue was argued on the footing that there remained no question as to whether such claims were provable debts, and that the remaining question was in what order such claims should rank; either ranked equally with all other unsecured creditors, or after other unsecured creditors claims have been met?

The parties were asked by the High Court to also make submissions on whether a transferee’s claim was a provable debt. In particular, whether it was a claim that arose before ‘the relevant date’?

Entitlement to claim under s553 of the Act

In order for a transferee shareholder to have a valid claim, the circumstances giving rise to the claim must have occurred prior to the relevant date. In this case, that was the ‘s513C date’ or the date on which the directors appointed voluntary administrators.

The issue for consideration was what is meant in s5533 of the Act by ‘debts or claims the circumstances giving rise to which occurred before the relevant date’ and how does that expression apply in this case?

In considering this issue, Hayne J (with whom Gummow, Heydon and Crennan JJ concurred), had reference to the following facts:

  • Mr Margaretic's claim was not a future or contingent claim or debt. It was a present and certain claim for damages.
  • It was the appointment of administrators to SOG that rendered Mr Margaretic's shares in the company worthless. Until that event, the shares had been traded on the ASX. Mr Margaretic's case was that the market was ill-informed due to SOG's failure to comply with disclosure requirements or as a result of misleading and deceptive conduct which occurred before the appointment of administrators.
  • The loss or damage claimed by Mr Margaretic was not apparent to him before the appointment of administrators.

Hayne J held that:

'The appointment of administrators so soon after Mr Margaretic bought his shares reveals that the shares he bought would have been judged by a properly informed market to be worthless when he bought them, and accordingly he suffered loss when he bought those shares.

It follows that although the agreed facts demonstrate that the appointment of administrators reduced the value of Mr Margaretic’s shares to zero, his claim is one the circumstances giving rise to which occurred before the administrators’ appointment. Had the facts upon which Mr Margaretic now relies been known then, they would have been known to the whole market, not just him, and he would have had the same claim he now makes. His knowledge of the relevant facts bears only upon whether he makes a claim; his knowledge of those facts does not bear upon whether he has a claim. His claim is of a kind that is within s553 of the 2001 Act.

Does s563A of the Act operate to postpone the claim?

Having established that Mr Margaretic’s claim falls within the scope of s553 of the Act, the final issue for consideration by the High Court was whether the claim was made by Mr Margaretic in his capacity as a shareholder.

This issue was framed as whether there is ‘a debt owed by a company to a person in the person’s capacity as a member of the company, whether by way of dividends, profits or otherwise.’ The majority held that in this case, the answer to this question was ‘no’ because Mr Margaretic’s claim was not one owed by a company to a person in the person’s capacity as a member of the company.

It was ultimately held that in the present case, the obligation Mr Margaretic sought to enforce was not an obligation the Act creates in favour of a company’s members. The obligation Mr Margaretic sought to enforce was rooted in the contravention of the prohibition against engaging in misleading or deceptive conduct and the company’s consequential liability to suffer an order for damages or other relief.

The majority held that claims of this nature are not claims ‘owed by a company to a person in the person’s capacity as a member of the company’. For those reasons, it was held that s563A of the Act does not apply to the claim made by Mr Margaretic.

As a result of this decision, Mr Margaretic and others in his position are entitled to claim in the administration as a creditor for loss suffered as a result of the depletion in the value of their shares in SOG.

What does it all mean?

Despite the hype generated by the succession of decisions handed down in this case, in our view, they do little more than reconcile the provisions of the Act with a well established principle of insolvency law. Namely, that a shareholder who purchases shares ‘on market’ (as opposed to being a subscribing shareholder) may claim in the administration of an insolvent company for losses suffered as a result of a default by the company (the most common being misleading or deceptive conduct) in relation to the purchase of the shares. Such claims have never been regarded as claims ‘owed by a company to a person in the person’s capacity as a member of the company’.

The only ‘new’ law to arise from this case is the finding by the majority of the High Court that sections 553 and 563A of the Act do not inhibit such a claim being made by a shareholder. All previous Australian cases on this issue had considered the provisions of the Corporations Law4 or earlier corporations and bankruptcy legislation.

Commercial ramifications

Some commentators have suggested that the cost of lending will now increase as a result of uncertainty in the balance sheets of corporate borrowers, and the potential for large quantities of shareholders to claim in the event of insolvency. At the risk of over-simplifying the issue, the fact that shareholder’s claims of this nature will rank with other unsecured creditors should be of little concern to secured lenders. It is trade creditors, and other unsecured providers of credit (including the ATO) which should be wary of shareholder’s claims.

Perhaps one factor contributing to the hype is the referral by Chris Pearce, the Parliamentary Secretary of the Treasurer, to the Corporations and Markets Advisory Committee (CAMAC) for advice on the impact of the SOG decision. Mr Pearce has asked CAMAC to consider three issues which may be summarised as follows:

  • Should shareholders such as Mr Margaretic be entitled to participate in an insolvency proceeding as an unsecured creditor?
  • If so, are there reforms to the Act that would facilitate the effi cient administration of insolvency proceedings in the presence of such claims?
  • If so, are there any reforms to the statutory scheme that would better protect shareholders?

We will keep you posted.

Corporations Amendment (Insolvency) Bill 2007

The Corporations Amendment (Insolvency) Bill 2007 (the CA Bill) represents a comprehensive overhaul of Chapter 5 of the Corporations Act 2001 (the Act). The exposure draft of the CA Bill spans 154 pages of proposed amendments and is accompanied by a 101 page Explanatory Statement. Much of our review of the CA Bill is presented in point form to enable all of this material to be covered in sufficient detail.

Background to the CA Bill

The CA Bill represents the first major overhaul of Australia’s insolvency laws for over a decade and is designed to ‘modernise Australia’s insolvency laws’.

The reforms are based on recommendations arising from the following reviews and inquiries into the corporate insolvency framework:

  • The 1997 Review of the Regulation of Corporate Insolvency Practitioners.
  • The 1998 Corporations and Markets Advisory Committee (CAMAC) Report on Corporate Voluntary Administration.
  • The 2000 CAMAC Report on Corporate Groups.
  • The 2004 CAMAC Report on Rehabilitation of Large and Complex Enterprises.
  • The 2004 Parliamentary Joint Committee on Corporations and Financial Services (PJC) Report on Corporate Insolvency Laws: A Stocktake.
  • The 2004 Report of the James Hardie Special Commission of Inquiry.

Four local ‘themes’ plus cross border model law

Four ‘themes’ emerged from these reviews:

  • Improving outcomes for creditors.
  • Deterring corporate misconduct.
  • Improving the regulation of insolvency practitioners.
  • Finetuning the voluntary administrations regime.

In addition, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency will be adopted.

The ‘finer points’ of these reforms are examined below.

The finer points

The major amendments proposed under each of the four themes are:

Improving outcomes for creditors

  • Enhanced protection for employee entitlements
    • The priority available to employees in a winding up will be preserved under a DOCA unless employees agree to waive their priority or the Court makes an order approving the non-application of the priority.
    • The Court can waive employees' priority under a DOCA if it offers them the same or a better outcome than they would receive in a winding up.
  • Improved information to creditors

Conflict of interest declaration

    • Administrators required to declare any 'relevant relationships' and indemnities in a declaration to be delivered to creditors with the notice of first meeting of creditors.
    • Ongoing obligation to update declarations if administrator becomes aware of an additional relationship.
    • Declaring a relationship will not cure any confl ict of interest, even if creditors approve the appointment.
    • Creditors will have the power to appoint a different liquidator while the automatic appointment of administrator or deed administrator as liquidator will be maintained where no alternate liquidator is proposed.


  • ASIC to have power to apply to Court for a review of administrator's remuneration.
  • When reviewing remuneration the Court will be required to consider:
    • Extent to which work was reasonably necessary.
    • Period during which work performed.
    • Quality and complexity of work.
    • Any extraordinary issues.
    • Level of risk or responsibility involved.
    • Value and nature of any property dealt with.
    • Whether required to deal with liquidators or receivers.
    • Number, attributes and behaviour of creditors.
    • If remuneration ascertained on a time basis: time taken in performing the work; market rates of remuneration; whether total remuneration is capped.
    • Any other relevant matters.
  • Administrators must provide a report, to be no more than two pages for routine matters, setting out 'suffi cient information' to enable creditors to assess remuneration as 'reasonable'.
  • Remuneration can be approved by a committee of inspection/creditors.
  • Separate resolution required to approve remuneration after a company enters into a DOCA.
  • Where a meeting fails to achieve a quorum, creditors are taken to have authorised $5000 remuneration.
  • Removal of unnecessary procedural requirements:
  • The requirement to publish notices will be removed except where strong policy rationale exists.
  • A facility will be introduced to allow external administrators to send notices electronically.
  • Administrators and liquidators in both voluntary and court-ordered liquidations, will have the power to consent to a transfer of shares if satisfi ed that it is in the best interests of creditors.
  • Liquidators, administrators and deed administrators will be permitted to apply to ASIC to change a company's name without the need for a special resolution of members.
  • Requirement to hold AGM's can be dispensed with by approval from ASIC on application by an external controller.
  • Statutory pooling to facilitate the external administration of related companies:
  • A statutory pooling mechanism will be introduced to enable pooling in both voluntary administrations and liquidations.

Voluntary Administration

  • For pooling to occur, all companies in group must be in administration or subject to DOCA and be: related entities; or jointly liable for one or more debts; or own or operate property jointly.
  • Will not treat creditors of all companies as if they were creditors of the group nor will it give creditors the right to enter into a single DOCA.
  • Regime will allow pooling proposal to be made during an administration and deed administration.
  • Administrator will make decision to pool, creditors consent will be sought, if a creditor objects, the administrator can approach Court for orders.
  • Subject to the administrator's power to vary, companies in pool will be taken to be jointly and severally liable for all debts of the group and all inter-company debts extinguished.
  • Transition can be made to creditors voluntary winding up upon resolution to wind up being passed at consolidated meeting of creditors.
  • Pooling will not affect rights of external secured creditors.


  • Similar to pooling regime under voluntary administration however, provides for two separate methods of pooling:
    • Voluntary pooling.
    • Court ordered pooling.
  • Voluntary pooling only available where creditors in liquidation unanimously consent.
  • Court can order pooling if just and equitable, despite creditor objection.

Deterring corporate misconduct

  • Compulsory powers to investigate liquidators' conduct
    • ASIC will be empowered to investigate liquidators conduct generally, including suspected breaches of fiduciary duty that are not codifi ed where 'reasonable' suspicion of breach exists.
  • Privilege in proceedings for disqualification or banning orders
    • In response to the High Court's decision in Rich v Australian Securities and Investments Commission,5 the privilege against exposure to a penalty in relation to proceedings for disqualifi cation, banning, suspension or cancellation will be removed where no other penal or pecuniary penalty is sought.
    • Removal of these provisions will allow ASIC to obtain discovery of documents and use material obtained during an investigation in 'relevant proceedings' where that is presently not possible. Relevant proceedings include hearings before the CALDB.
    • The timing for the lodgement of s533 reports by liquidators dealing with offences committed by offi cers, employees or the company will be required to be lodged within 6 months as opposed to 'as soon as practicable'.

Improving the regulation of insolvency practitioners

  • The prohibition on inducements for appointments will be widened beyond external administrators to capture 'any person'.
  • The education and experience criterion for registration of liquidators will be tightened.
  • Statements by liquidators will be required to be lodged annually not triennially.
  • ASIC will have the power to cancel the registration of a liquidator on grounds of bankruptcy, disqualifi cation or conviction for serious criminal offence without referral to CALDB.
  • CALDB will be given greater flexibility in its processes and with respect to the penalties it may impose.

Finetuning the voluntary administration regime

  • Clarification of existing provisions in the Act
    • The Act will be amended to improve clarity, including in relation to: Court's power to bind secured creditors; creditors and administrator's right to terminate a DOCA; mandatory notifi cation to ASIC about effectuation of a DOCA.
  • Transfer of shares by administrator
    • Administrators will have the power to consent to a transfer of shares in a company in administration if in best interests of all creditors.
    • Prospective transferor or transferee of shares can still apply to Court where administrator refuses consent.
    • Similar provisions will be introduced to deal with alterations in the status of member's interests.
  • Administrator's right of indemnity
    • Administrator's right of indemnity against the assets of the company will be extended to cover liability for conversion of property the subject of a lien, pledge or retention of title clause.
  • Lodgement of accounts with ASIC
    • Introduction of requirement for administrators and deed administrators to lodge accounts with ASIC every six months.
  • Meeting timeframes
    • There will be a transition from 'days' to 'business days' for determining all meeting dates in a voluntary administration, in addition to a general extension of the timeframes, as follows:


Current Timeframe

Proposed timeframe

First meeting

5 business days

8 business days

Notice of first meeting

2 business days

5 business days

Second meeting convening period

21 or 28 days

20 or 25 business days

Notice of second meeting

5 business days

No change

Adjournment period

60 days

45 business days

Cross Border Model Law

In addition to these amendments to the Act, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency will be adopted. The Model Law will be enacted separately.

The Model Law has been formulated in recognition that some external administrations have international aspects that would benefit from insolvency laws that provide rules of jurisdiction, recognition of foreign judgments, cooperation among courts in different countries and choice of law principles. The Model Law provides for:

  • Foreign insolvency administrators to have direct access to courts and other relevant authorities.
  • A process for obtaining recognition of foreign insolvency proceedings opened in accordance with internationally recognised standards of jurisdiction.
  • A moratorium or stay in every country where the debtor has assets.
  • No discrimination between creditors, regardless of the nationality, residence or domicile of the parties concerned.
  • Courts and administrators to cooperate in international insolvency proceedings, with the goal of maximising the value of the debtor's worldwide assets, protecting the rights of the debtor and creditors, and furthering the just administration of the proceedings.

The Model Law has received almost universal endorsement from leading practitioners and academics around the world. Some examples of the views on the Model Law are that it:

  • 'will help alleviate the current difficulties arising when attempts are made to effect rescue of an ailing enterprise in more than one jurisdiction' - Canada.
  • '[offers a] reasonable equilibrium between the ideal of a single international insolvency and the protection of local creditors' interests within a foreign insolvency' - Switzerland.
  • '[is] a signifi cant contribution to the effort to solve the international problem of insolvencies' - Chile.
  • 'is ambitious and measured. Ambitious because [it] seeks to propose to States common rules for the treatment of international insolvencies... Measured, because the rules do not require States to introduce profound legislative changes...' - France.
  • 'represents perhaps the most important step taken thus far in trying to achieve a truly international framework for cooperation in insolvencies, in contrast to the limitations of uniquely domestic legislation as well as previous efforts on a regional scale, not all of which have met with success.' - Malaysia. 6

We will keep you updated on progress with the CA Bill and any changes in the provisions which result from its passage through the Senate.

Bankruptcy Superannuation Legislation Update

On 7 December 2006, the Senate referred the Bankruptcy Legislation Amendment (Superannuation Contributions) Bill (the Bill) to the Standing Committee on Legal and Constitutional Affairs (the Committee), for inquiry and report by 8 February 2007.

The proposed amendments to the Bankruptcy Act 19667 (the BA) will apply to all superannuation contributions made on or after 28 July 2006, and are designed to:

  • Allow trustees to recover superannuation contributions made prior to bankruptcy with the intention of defeating creditors on grounds similar to those found in s121 of the BA.
  • Allow trustees to recover contributions made by someone other than the bankrupt for the benefi t of the bankrupt where the bankrupt's main purpose in participating in the scheme was to defeat creditors.
  • Overcome the effect of the High Court's decision in Cook v Benson8 by ensuring that ‘consideration’ given by the trustee of a super fund will be ignored in determining whether a contribution can be clawed back.
  • Allow a Court to consider the bankrupt's historical super contribution pattern to assist in identifying 'out of character' contributions.
  • Give the Official Receiver certain powers to assist in freezing super funds.9


Despite writing to over 160 organisations and individuals, the Committee received only 15 submissions including from The Institute of Chartered Accountants in Australia, CPA Australia, Insolvency and Trustee Service Australia, and Superannuation Australia.

The Committee published its report on 8 February 2007. The report states that the majority of submissions expressed strong in-principle support for the Bill and its objectives, especially as a means to remove the Cook v Benson loophole.

However, some submissions suggested that certain provisions may warrant minor technical amendment to improve their practical operation or to avoid unintended consequences. Some of the proposed amendments include:

  • Delaying the commencement of the substantive provisions until 1 January 2008 to allow implementation of necessary administrative changes.
  • Allowing the trustee of a super fund to pay out a certain amount, net of fees, charges and taxes to a trustee or the Official Receiver instead of paying out an entire fund and claiming back these amounts.
  • The introduction of a threshold limit for protection of superannuation from creditors as a consequence of the abolition of the pension Reasonable Benefit Limit from 1 July 2007 under the Federal Government's Simplifying Superannuation reforms.

Committee views and recommendations

The Committee stated in its report that:

  • There was widespread support for the Bill.
  • The Bill represents a balanced approach between the interests of bankrupts and the interests of creditors.
  • Many of the issues raised by the proposed amendments are of a relatively minor nature and will be resolved once the Bill is implemented.

The Committee made one recommendation - that the Senate pass the Bill.

We will update you further once the Bill has been passed.


1 [2006] FCAFC 17

2 s563A of the Act provides: ‘Payment of a debt owed by a company to a person in the person’s capacity as a member of the company, whether by way of dividend, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.’

3 s553(1) of the Act provides ‘[Pre-relevant date debts admissible] Subject to this Division, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.’ 4 See Soden v British & Commonwealth Holdings Plc [1998] AC 298 and Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15

5 [2004] HCA 42

6 Paul J. Omar, (2000, May). ‘International Insolvency Co-Operation: The UNCITRAL Model Law’, Malayan Law Journal

7 In addition to the Payment Systems and Netting Act 1998 and the Proceeds of Crime Act 2002

8 [2003 HCA 36. In Cook v Benson, the High Court ruled that super entitlements rolled over to other super funds by Mr Benson, who subsequently became bankrupt, could not be clawed back by his trustee in bankruptcy because the transfer was deemed to be supported by valuable consideration and therefore not subject to recovery by creditors.

9 Source: Explanatory Memorandum for Bankruptcy Legislation Amendment (Superannuation Contributions) Bill

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    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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