Answer ... Insolvency law in Australia is largely statute-based, governed by the Corporations Act 2001 (Cth). The relevant corporate insolvency provisions are prescribed in Chapter 5 of the act. Further, there are specific insolvency-related provisions in the Insolvency Practice Schedule (Corporations) in Schedule 2 of the act, along with the Insolvency Practice Rules (Corporations) 2016 detailing specific procedures in the event of external administrations.

Pursuant to the Corporations Act, an Australian company is taken to be ‘insolvent’ if it cannot pay its debts when they are due and payable. In the assessment of insolvency, there are generally two accepted tests: the cash-flow test and the balance-sheet test. The cash-flow test, which is the primary test, examines whether a company has sufficient resources available to pay all liabilities when they become due and payable. The balance-sheet test acts as a secondary measure assessing whether a company’s total assets exceed its total liabilities.

If a company falls within the above definition and is insolvent, the Corporations Act provides an insolvent company with a range of options via Chapter 5. These insolvency procedures can include;

• voluntary administration;
• a deed of company arrangement;
• a scheme of arrangement;
• receivership; and
• liquidation.

In addition, insolvency practitioners in Australia must be cognisant of the Personal Property Securities Act 2009 (Cth) (and its associated Personal Property Securities Register), which governs the Australian security interest regime.

Answer ... To assist insolvency practitioners with recognition, cooperation and relief in cross-border insolvency matters, the Australian government introduced the Cross-Border Insolvency Act 2008 (Cth). The Cross-Border Insolvency Act prescribes the UNCITRAL Model Law on Cross-Border Insolvency by giving it the force of law in relation to bankruptcy, along with corporate insolvencies pursuant to Chapter 5 of the Corporations Act (except for receiverships and winding-up procedures not involving insolvency law).

The UNCITRAL Model Law has been adopted in a broad range of countries, including Australia, New Zealand, Canada, the United States, Singapore, South Korea and the United Kingdom. Within the jurisdictions to which it applies, the Model Law provides a process for creditors and their representatives to request and receive assistance from foreign courts in relation to foreign insolvency proceedings.

In addition to the above protocols, in Australia, the Corporations Act specifically provides for:

• the winding-up of foreign companies pursuant to Section 583 of the act, whereby an Australian court can wind up a foreign entity. In addition, pursuant to Section 601CL(14) of the Corporations Act, an Australian court may make an order for a local (ancillary) winding up of a registered foreign company that is currently being wound up in its home jurisdiction/place of incorporation; and
• the provision of court-to-court assistance in cross-border insolvency matters pursuant to Section 581 of the act. This provides that an Australian court may request a foreign court to aid an Australian liquidator in respect of an external administration matter involving an Australian company. An Australian court may also issue a letter of request to foreign courts under Section 581(4) of the act. In addition, pursuant to Sections 581(2) and 581(3) of the act, Australian courts must assist in respect of ‘prescribed countries’ (or may assist for non-prescribed jurisdictions) certain foreign courts in respect of external administration matters.

Answer ... While there are no specific regimes that apply to certain sectors or industries, legislative changes in Australia in December 2020 introduced provisions to simplify the restructuring and liquidation process for small to medium-sized enterprises (SMEs) – that is, entities with debts of less than A$1 million. The simplified business restructuring (SBR) process that was introduced aims to streamline the formal legislative regime and the associated procedural requirements involved to preserve value for SMEs.

This SBR process is debtor driven, with the directors of SMEs appointing a restructuring professional to assist with preparing a restructuring plan for the company. Any plan will involve the proposed compromise of creditor claims (which is required to be voted on by creditors), to allow the SME company a chance to continue to trade profitably into the future. The directors/business owners also remain in control of the company throughout the SBR process (in contrast to a voluntary administration). In addition, during this process:

• there is a moratorium in respect of creditor claims being enforced as against the SME; and
• the investigations programme and creditor distribution process is truncated (in comparison to the standard formal liquidation procedures prescribed by the Corporations Act).

Answer ... The general belief is that Australia’s insolvency framework is very creditor friendly, as opposed to the US Chapter 11 bankruptcy process which is a ‘debtor-in-possession’ model.

This is evident through the strong rights and priority generally afforded to secured creditors in the event of an insolvency (please see questions 2.1 and 2.2), with certain exceptions in place for employee entitlements and circulating security interests. In addition, both secured and unsecured creditors can play a very active role in the external administration process, including voting to determine a company’s future. These decisions are also often made with little to no court involvement or consultation.

An important characteristic with respect to the external administration process in Australia is that the powers of a company’s directors are suspended while an administration process is conducted, with the control of the insolvent entity and its operations passing to an independent insolvency practitioner (ie, a registered liquidator).

The general belief for removing the insolvent debtor’s director(s) is that it allows a company breathing space while the independent appointee works to achieve the best outcome for all stakeholders of the insolvent entity (eg, employees, creditors, investors, regulators, statutory bodies) – whether that be through:

• facilitating the continued operation and restructure of the business; or
• working to achieve the best financial return to secured and unsecured creditors of the company from the sale of its assets.

Answer ... Australian insolvency law is based on the English model of insolvency, which utilises the external administration process. In this regard, the legal framework is well established and the external administration options available under the Corporations Act are frequently utilised by:

• company directors when they anticipate that their company is or may become insolvent;
• secured lenders in enforcing their security; and/or
• unsecured creditors taking steps to wind up a company with respect to unpaid debts.

Changes were made to the Australian insolvency legislation in 2017 via the Insolvency Law Reform Act 2016 (Cth). These changes featured the insertion of the Insolvency Practice Schedule (Corporations) into Schedule 2 of the Act and the Insolvency Practice Rules (Corporations). Most of these reforms amended certain statutory reporting requirements and further empowered creditors in an external administration, including in relation to making information requests and removing an insolvency practitioner from office.

Further significant legislative reforms introduced two additional amendments to the Australian insolvency landscape in 2017 and 2018:

• a new ‘safe harbour’ regime for company directors providing a defence against liability from insolvent trading (see question 6.2); and
• ‘ipso facto’ protection for companies that appoint an administrator, receiver and manager or commence a creditors’ scheme of arrangement against ipso facto clauses in contracts that allow for the immediate termination or a variation of rights if an insolvency event occurs. The ipso facto regime is discussed further in question 3.5.