Australia: Insolvency Practice Schedule – enhancing the rights of a creditor in an external administration

Introduction

The Insolvency Practice Schedule (Corporations) Schedule (Schedule), which was introduced as a schedule to the Corporations Act 2001(Cth) (Act) in February 2016, will become fully operative in the next few months.

As at 1 March 2017, a portion of this schedule has become operative, primarily in relation to new registration, insurance and disclosure requirements for liquidators.

Part 3 of the Schedule will become operative on 1 September 2017, and will increase the role of the creditors in the in the conduct of an external administration of a debtor company by granting the creditors increased rights and powers which can be exercised against an external administrator who has been appointed in a liquidation, administration or under a Deed of Company Arrangement (External Administrator).

Set out below are some of the key powers afforded to creditors in an external administration which come into effect on 1 September 2017:

  1. Right to request information – s70-40 and s70-45

Creditors of the company will be able to request that the External Administrator provide information, produce a document or provide a report in respect of a matter relating to the external administration. This power can be exercised by an individual creditor, or by creditors as a whole.

The External Administrator will generally be required to comply with such a request within 5 business days, unless:

  1. the information, report or document is not relevant to the external administration;
  2. in complying with the request the administrator would breach his or her duties in the external administration; or
  3. it would otherwise be unreasonable for the External Administrator to comply with the request.

Further, in circumstances where a liquidator has been appointed to the company, the Insolvency Practice Rules (Corporations) 2016 (Rules) will require the liquidator to advise the creditors as to the likelihood of creditors receiving a dividend in the winding up within three months from the commencement of the liquidation.

These provisions establish a process for creditors to obtain information relevant to the external administration and as to their potential return in the winding up relatively early on in the external administration.

  1. Committees of Inspection – s80-15 to s80-70

All creditor's committees will be known as "Committees of Inspection".

Creditors will be afforded the power to resolve that a committee of inspection be formed to monitor and assist with the external administration process. The creditors can appoint and remove members of the committee of inspection by resolution, or (subject to some exceptions as set out in the Rules) as of right, where a creditor, or a group of creditors collectively, represent at least 10% of the outstanding company debt.

The committee of inspection can advise and assist the External Administrator, monitor the conduct of the administration and give directions to the External Administrator to which the External Administrator must have regard. While the External Administrator is not required to comply with such a direction, he or she will be required to provide the committee with the reasons for non-compliance.

Members of the committee may also seek specialist advice in respect of the conduct of the external administration, with the consent of the External Administrator or the Court.

The establishment of and powers granted to the committee of inspection may allow creditors greater oversight of and participation in the external administration.

  1. Application for Court Inspection – s90-10 to s90-20

The Schedule also appears to redefine the basis upon which a creditor can request Court review of the external administration, with a creditor being able to apply to the Court to make an inquiry into the external administration if the creditor has concerns as to the manner in which the administration is being conducted.

In making such an inquiry, the Court will have regard to whether the External Administrator is faithfully performing his or her duties, whether any action by or inaction of an External Administrator complies with the requirements of the Act, the Schedule and the Rules, or whether a party has suffered or is likely to suffer loss or damage due to such action or inaction.

The Court has broad powers to make orders in respect of such an inquiry, including determining any question arising in the external administration, removing the external administrator, or making orders for remuneration in favour of the company or its creditors.

Conclusion

On and from 1 September 2017, the above provisions of the Schedule will become operative and accordingly creditors will have extra powers at their disposal in terms of their participation in external administrations.

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