Bills Digest no. 180 2006–07
Corporations Amendment (Insolvency) Bill 2007
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Financial implications
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Corporations
Amendment (Insolvency) Bill 2007
Date introduced: 31 May 2007
House: House
of Representatives
Portfolio: Treasury
Commencement: Various
commencement dates as outlined on page 28 of this Bills Digest.
The purpose of the Corporations Amendment (Insolvency)
Bill 2007 (the
Bill) is to implement a package of reforms to improve Australia’s
insolvency laws. There are six Schedules to this Bill and the amendments
to the Corporations Act 2001 by each Schedule deal with the following
reform themes.
- Schedule 1 seeks to improve outcomes for creditors
by:
- enhancing protection for employee entitlements,
- better informing creditor decisions,
- streamlining external administration, and
- facilitating pooling in external administration.
- Schedule 2 will implement measures to deter corporate misconduct.
- Schedule 3 has measures to improve regulation
of insolvency practitioners.
- Schedule 4 includes measures to fine-tune voluntary
administration in respect to:
- rights to property during administration, and
- liquidation following administration.
- Schedule 5 deals with miscellaneous amendments
including priority of administrative expenses in voluntary liquidation.
- Schedule 6 deals with transitional measures.
The Corporate Law Reform Act 1992 was the last occasion when major
reforms of Australia’s corporate insolvency laws occurred. This was to
implement the recommendations of the Harmer Report.(1)
On 12 October 2005, the Hon Chris Pearce, Parliamentary Secretary to
the Treasurer, released(2)
details of a
package of reforms titled Corporate Insolvency Reform to improve
the operation of Australia’s insolvency laws.(3)
The reform package stated that the reforms are specifically based on
the findings of 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
Corporate Voluntary Administration,
- the 2000 CAMAC Report Corporate Groups; the 2004 CAMAC Report Rehabilitation
of Large and Complex Enterprises,(4)
- the 2004 Parliamentary Joint Committee on Corporations and Financial
Services (PJC) Report Corporate
Insolvency Laws: A Stocktake and
- the 2004 Report of the James Hardie Special Commission of Inquiry.
The Australian Government’s response
to the PJC Report foreshadowed most of the measures in the Bill.
The Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, released
the draft Corporations Amendment (Insolvency) Bill 2007 and accompanying
draft regulations for public comment on 13
November 2006.The exposure draft Bill and regulations were intended
to implement the package of insolvency reforms announced by Mr Pearce
on 12 October 2005.
The exposure draft of Bill included a range of measures intended to modernise
Australia’s insolvency laws. The exposure draft regulations included changes
to the Corporations Regulations 2001 and the Australian Securities
and Investments Commission Regulations 2001. The
PJC inquired into the measures in the draft Bill and issued its report
and recommendations on 29 March 2007.
The measures in the Bill therefore implement the changes to insolvency
laws considered necessary after observing the experience of implementing
the recommendations in the Harmer Report over a period of nearly 15 years.
While the above information covers the broad background to the Bill,
the background to the measures dealt with in this Bills Digest will be
included with the main provisions of each Schedule to the Bill.
In the winding up of a company, the law confers a priority on employee
entitlements in section 556 of the Corporations Act 2001 (Corporations
Act). However, employee entitlements do not at present receive the same
measure of protection under the voluntary administration procedure in
Part 5.3A of the Corporations Act.
The object of the voluntary administration procedure is to provide a
relatively inexpensive procedure for a company which is unable to pay
its debts to enter into an arrangement with its creditors so that it could
save the company or the business, or in the event of a liquidation, to
maximize the return to creditors. Section 444A of the Corporations Act
requires the compromise or arrangement, by which the creditors agree on
the extent to which the company is to be released from its debts, to be
set out in a deed of company arrangement (DOCA). Subsection 444A(5) states
that the DOCA is taken to include the ‘prescribed provisions’, except
so far as it provides otherwise. Regulation 5.3A.06 states that the prescribed
provisions are those set out in Schedule 8A. It will thus be seen that
the prescribed provisions in Schedule 8A are not mandatory and the DOCA
may include provisions altering the priority that would apply in a liquidation.
Item 4 of Schedule 1 inserts proposed section 444DA
to give priority to eligible employee creditors. Proposed subsection
444DA(1) requires that a DOCA must contain a provision that any eligible
employee creditors will be entitled to a priority at least equal to what
they would have been entitled to on a winding up under sections 556, 560
or 561. However, proposed subsection 444DA(2) provides that the
rule in proposed subsection 444DA(1) does not apply if:
- eligible employee creditors at a meeting convened before the meeting
of creditors under section 439A, pass a resolution agreeing to the non-inclusion
of such a provision (proposed paragraph 444DA(2)(a)), or
- the Court makes an order under proposed subsection 444DA(5) approving
the non-inclusion of such a provision (proposed paragraph 444DA(2)(b))
Proposed subsection 444DA(5) states that the Court may
approve the non-inclusion of a provision protecting eligible employee
creditors if the Court is satisfied that the non-inclusion would be likely
to result in the same or a better outcome for eligible employee creditors
as a whole than would result from the immediate winding up of the company.
Proposed subsection 444DA(6) states that the Court may only make
the order under proposed subsection 444DA(5) on the application
of:
(a) the administrator, or proposed administrator,
of the DOCA; or
(b) an eligible employee creditor; or
(c) any interested person.
Superannuation contributions enjoy the same priority as wages payable
by a company in respect of services rendered to the company under paragraph
556(1)(e) of the Corporations Act.
Subsection 556(2) defines superannuation contribution as a contribution
by a company to a fund for the purposes of making provision for, or obtaining,
superannuation benefits for an employee of the company, or for dependents
of such an employee.
Section 52 of the Superannuation Guarantee (Administration) Act 1992
(SGAA) provides that in a winding up of a company, any superannuation
guarantee charge (SGC) payable by the company is, for the purposes of
payment, to have a priority equal to that of a debt of the company of
the kind referred to in paragraph 556(1)(e) of the Corporations Act. Section
52 does not deal with the priority of the SGC in a receivership, voluntary
administration or a DOCA.
The purpose of the SGAA is to ensure that employers make a minimum contribution
to a fund for the purpose of providing superannuation benefits to their
employees and on failure to do so to impose a SGC which is a debt due
to the Commonwealth. The SGC is imposed by the Superannuation Guarantee
Charge Act 1992(SGCA) as a debt due to the Commonwealth. The Commonwealth
thereafter distributes the SGC collected for the benefit of the employees
concerned to a nominated fund.
In Deputy Commissioner
of Taxation v Rathner [2004] VSC 352 it was held that unpaid
superannuation contributions and unpaid SGC in relation to those superannuation
contributions are separate and distinct debts. Further, in DP Excavation
& Haulage Pty Limited v Commissioner of Taxation [2005]
NSWSC 533, it was held that section 52 of the SGAA does not confer the
same priority on the SGC as superannuation contributions enjoy under paragraph
556(1)(e) of the Corporations Act.
Item 11 of Schedule 1 repeals section 52 of the
SGAA. Item 6 amends the Corporations Act to provide the same priority
to unpaid superannuation contributions as well as the SGC relating to
those contributions in the Corporations Act.
Item 4 of Schedule 1 also inserts proposed section 444DB
to the Corporations Act to enable the administrator of a DOCA
to determine whether the whole or part of a superannuation contribution
debt is admissible to proof against the company. It does this by requiring
that a DOCA must contain a provision to enable the administrator to make
that determination having regard to whether a debt by way of a SGC:
(a) has been paid, or
(b) is, or is to be , admissible to proof against
the company
and
(c) the administrator of the DOCA is satisfied
that the SGC relates to the whole or part of the debt by way of a superannuation
contribution.
If the administrator of the DOCA is satisfied that the whole or part
of a debt by way of a superannuation contribution is not admissible to
proof against a company because of the above considerations, then the
whole or part of the debt, as may be the case, is extinguished.
The proposed amendments avoid a duplication of claims being made in respect
of superannuation contributions by giving the administrator the power
to make a determination which will result in only the SGC being admitted
to proof against the company and extinguishing the related debt in respect
of the unpaid superannuation contribution.
Item 5 of Schedule 1 inserts proposed section 553AB
into the Corporations Act to enable the liquidator to extinguish whole
or part of a superannuation contribution debt when a related superannuation
guarantee charge is admissible to proof against the company.
When a person has made advances to a company to enable it to make priority
payments due to employees under section 556 of the Corporations Act, section
560 provides that that person (generally referred to as a ‘subrogated
creditor’) is entitled to the same priority in respect of the amount so
advanced as the recipient would have been entitled to if the payment had
not been made. The reader is referred to paragraphs 4.57 to 4.64 on pages
35 and 36 of the Explanatory Memorandum to the Bill where it sets out
the various issues that have arisen in relation to the rights of subrogated
creditors in the operation of section 560.
Item 9 of Schedule 1 replaces section 560 with proposed
section 560 to clarify these issues.
Part 2 of Schedule 1 includes a number of amendments to the
Corporations Act to address various issues in relation to administrators.
Broadly these are intended to:
- address concerns about the independence of administrators by requiring
them to declare any relevant relationships and declare any indemnities
that have been provided (items 16 to 24 and item 36),
- allow the Australian Securities and Investments Commission (ASIC)
as a party who may apply to a court for a review of the remuneration
of administrators (item 27),
- clarify that it is possible for an administrator to apply to a court
for remuneration to be fixed when creditors have not met (item 25),
- set out the factors a court must take into account in deciding whether
the remuneration of an administrator is reasonable (item 28),
- allow a liquidator to draw down a maximum of $5,000 where a liquidator
has called a meeting of creditors but failed to obtain approval for
remuneration because of a lack of quorum (items 29 and 32),
- remove the requirement to hold an annual general meeting of members
in a creditors’ voluntary winding up (item 37),
- provide the liquidator in a creditors’ voluntary winding up to either
convene a meeting of creditors or to lodge with ASIC a progress report
within the specified time (item 38),
- specify the details a progress report must contain such as an account
of the liquidator’s acts and dealings and the conduct of the winding
up in the preceding year, a description of the acts and dealings that
remain to be carried out by the liquidator and an estimate of when the
winding up is likely to be completed (item 40).
The amendments in Part 3 of Schedule 1 implement Recommendation
19 of the PJC Report which stated that the Australian Government should
consider alternatives to the advertising and gazettal requirements in
the Corporations Act.
The amendments in Part 3 of Schedule 1 remove various requirements
in the Corporations Act for advertising (items 58, 75, 80,
82, and 85).
However, the requirement in subsection 436E(3) of the Corporations Act
to give a notice of the first meeting of creditors by advertising in newspapers
in paragraph 436E(3)(b) will be retained by the insertion of proposed
subsection 436E(3A) by item 69.
Similarly, the requirement in paragraph 450A(1)(b) to advertise in newspapers
the appointment of an administrator is being retained and item 78
of Schedule 1 inserts proposed subsection 450A(1A) to provide
that a notice under paragraph 450A(1)(b) may be combined with a notice
under paragraph 436E(3)(b).
Item 75 of Schedule 1 whilst repealing the subsection 445F(2)
which requires advertising in newspapers inserts proposed subsection
445F(2) which requires written notice to be given to as many creditors
as reasonably practicable of the meeting of creditors to consider any
proposed variation or termination of a DOCA.
The above examples illustrate that the Bill repeals the requirement to
advertise in newspapers except where the policy requires it to be done
or substituted by written notice.
Recommendation 20 of the PJC Report stated that the Australian Government
should facilitate making technology and e-commerce options more available
to improve communication between administrators and stakeholders in external
administration.
Item 120 of Schedule 1 inserts proposed section 600G
to permit electronic notification where notices and other documents
are required to be sent under Chapter 5 of the Corporations Act which
deals with external administration. Proposed subsection 600G(1) lists
all the provisions in Chapter 5 where such electronic communication is
permitted. Notes have also been inserted to the relevant provisions of
Chapter 5 to indicate that a recipient of notices or documents may exercise
the option of requesting electronic notification under proposed
section 600G.
Proposed subsection 600G(2) provides that if a recipient nominates
a fax number, or electronic address, by which the recipient may be notified,
the notifier may give or send the notice or document by the nominated
method of communication. Proposed subsection 600G(3) permits a
recipient to nominate any other electronic means by which the notifier
may notify them.
Proposed subsection 600G(4) provides that if a recipient nominates:
(a) an electronic means (the nominated notification
means) by which the recipient may be notified that such notices and
documents are available, and
(b) the electronic means (the nominated access means)
the recipient may use to access such notices or documents
the notifier may give or send the document to the recipient by notifying
the recipient using the nominated means :
(c) that the notice or document is available,
and
(d) how the recipient may use the nominated access
means to access the notice or document.
Proposed subsection 600G(5) provides that a notice or document
sent to a fax or electronic address or by other electronic means is taken
to be given or sent on the business day after it is sent.
Proposed subsection 600G(6) provides that that a notice or document
sent under proposed subsection 600G(4) is taken to be given or
sent on the business day after the day the recipient is notified that
the notice or document is available.
The other changes which the amendments to the Corporations Act in Part
3 of Schedule 1 give effect to are listed below with references
to the items and detailed explanations in the paragraphs of the Explanatory
Memorandum (EM) to the Bill).
- The provisions requiring gazettal of matters relating to controllerships
will be repealed. The ASIC database will be the main source of information
regarding controllerships (items 65 and 66 – paragraphs
4.152 to 4.156 on pages 52 and 53 of the EM).
- Only managing controllers will be required to maintain separate bank
accounts instead of the current requirement that all controllers should
maintain separate bank accounts (items 53 to 57 – paragraphs
4.157 to 4.161 on pages 53 and 54 of the EM).
- Managing controllers will be required to report misconduct to ASIC.
On failure to do so the Court may, on the application of a person interested
in the appointment of the managing controller, direct the managing controller
to lodge such a report (items 59 to 64 - paragraphs 4.162
to 4.165 on page 54).
- The inconsistency that exists at present across voluntary liquidation,
court-ordered liquidation and voluntary administration in regard to
the ability of practitioners to consent to a transfer of shares or an
alteration in the status of members of a company will be removed. Item
87 of Schedule 1 will remove the existing provisions regarding
the transfer of shares, and an alteration in the status of members in
a court ordered liquidation. Item 88 of Schedule 1 will
replace these with new provisions in proposed section 468A.
Similar amendments are made by items 92 to 94 to regulate
the transfer of shares or an alteration in the status of members during
a voluntary liquidation by proposed section 493A. Likewise,
items 7 and 8 of Part 1 of Schedule 4 make
amendments to effect similar changes for voluntary administration by
proposed section 437F (paragraphs 4.166 to 4.176 on pages 54
to 56 of the EM).
- At present a members’ scheme of compromise or rearrangement requires
a resolution passed by an ordinary majority of members present and voting
as well as a 75 per cent majority according to the voting rights attaching
to share capital. A court has no discretion to approve a scheme if the
resolution is not passed by both majorities. The amendments proposed
will give the court a discretion to approve a scheme where the resolution
is passed by the 75 percent majority voting rights attaching to share
capital (item 52 – paragraphs 4.177 to 4.181 on pages 56 and
57 of the EM).
- Amendments will remove doubts about whether corporate membership of
a committee of creditors and a committee of inspection is possible (items
70 to 72 and item 117 – paragraphs 4.182 to 4.189
on pages 56 to 59 of the EM).
- Subject to certain modifications the process for commencing a creditors’
voluntary liquidation will be streamlined to align it with the process
of putting a company into voluntary administration (item 91,
items 96 to 99, 102 to107 and 110 to
112 – paragraphs 4.190 to 4.203 on pages 59 to 61 of the EM).
- Creditors will be permitted to appoint a different person as liquidator
when a company proceeds from administration into liquidation or from
a DOCA into liquidation (item 22, 23 and 112
– paragraphs 4.204 to 4.210 on pages 61 and 62 of the EM).
- Provision will be made for multiple ‘joint’ or ‘joint and several’
appointments in liquidations and receiverships unless the resolution
of appointment provides otherwise (items 41 to 48,
67, 113 and 114 – paragraphs 4.211 to 4.223 on pages
62 to 64 of the EM).
- A number of changes will be made relating to changing the names of
companies under external administration to allow practitioners to be
able to change the name of a company where it is in the interests of
the creditors to do so (items 49, 50 and 121- paragraphs
4.224 to 4.234 on pages 64 to 666 of the EM).
- A discretion will be granted to ASIC to permit a public company exemption
from the requirement to hold an annual general meeting on an application
by an external administrator (item 51 – paragraphs 4.235 to 4.240
on pages 66 and 67 of the EM).
Item 133 of Part 4 of Schedule 1 inserts proposed
Division 8 titled Pooling, in Part 5.6 of the Corporations Act.
Proposed Division 8 provides for two types of pooling in the case
of liquidation of company groups, namely, voluntary pooling and court-ordered
pooling.
In the case of voluntary liquidation of a group of companies the liquidator
may make a determination under proposed section 571 that the winding
up be conducted on a pooled basis. The liquidator must submit that determination
to separate meetings of the ‘eligible unsecured creditors’ of each of
the companies proposed to be pooled under proposed subsection 574.
The pooling may proceed if the eligible unsecured creditors resolve to
approve the making of the determination under proposed subsection 577(1).
A resolution under proposed subsection 577(1) must be approved
by 75 per cent of the eligible unsecured creditors by value and 50 percent
by number of each of the companies in the group as required by proposed
subsection 577(2).
The consequences of a pooling determination are set out in proposed
subsection 571(2). It means that each company in the group is taken
to be jointly and severally liable for each debt payable and each claim
payable against each company in the group. Also, each debt payable by
a company in the group to any other company in the group is extinguished.
Further, each claim that a company in the group has against any other
company or companies in the group is extinguished.
A pooling determination takes effect under proposed subsection 578(1)
immediately after the resolutions approving the making of the determination
are passed.
If a pooling determination comes into force in relation to a group of
2 or more companies, proposed subsection 571(5) provides that
the order of priority applicable under sections 556, 560 and 561 of the
Corporations Act is not altered for a company in the group.
The reader is referred to paragraphs 4.246 to 4.259 on pages 68 to 71
of the Explanatory
Memorandum for other aspects of pooled determinations.
Proposed subsection 579E provides that a court may, by order,
if the court is satisfied that it is just and equitable to do so, determine
that a group of 2 or more companies is a pooled group for the purposes
of this section.
The just and equitable criteria, which the court must have regard to
before making a pooling order, are set out in proposed subsection 579E(12).
They are:
(a) the extent to which the company in the group
and the officers or employees of a company in the group were involved
in the management or operations of any other companies in the group,
(b) the conduct of a company in the group and the officers
or employees of a company in the group towards the creditors of any
of the other companies in the group,
(c) the extent to which the circumstances that gave
rise to the winding up of any of the companies in the group are directly
or indirectly attributable to the acts or omissions of: any of the other
companies in the group; or the officers or employees of any of the other
companies in the group,
(d) the extent to which the activities and business of
the companies in the group have been intermingled,
(e) the extent to which creditors of any of the companies
in the group may be advantaged or disadvantaged by the making of the
order,
(f) any other relevant matters.
The consequences of a pooling order set out in proposed subsection
579E(2) are the same as the consequences of a pooling determination
in proposed subsection 571(2) which was described above.
If a pooling order comes into force in relation to a group of 2 or more
companies, proposed subsection 579E(5) provides that the order
of priority applicable under sections 556, 560 and 561 of the Corporations
Act is not altered for a company in the group.
The reader is referred to paragraphs 4.260 to 4.268 on pages 71 to 73
of the Explanatory Memorandum for other aspects of pooled determinations.
Part 3 of the Australian Securities and Investments Commission Act
2001 (ASIC Act) provides the investigative and information gathering
powers of the Australian Securities and Investments Commission (ASIC).
Section 13 of the ASIC Act enables ASIC to investigate, as it thinks expedient
for the due administration of the corporations legislation, where it has
reason to suspect that there may have been committed:
- a contravention of the Corporations legislation or
- a contravention of the law of a State or Territory which concerns
the management or affairs of a body corporate or managed investment
scheme (MIS) or involves fraud or dishonesty and relates to a body corporate
or MIS or to financial products.
Section 536 of the Corporations Act gives ASIC the power to inquire into:
- any matter where it appears that the liquidator has not faithfully
performed his or her functions, or
- a complaint by any person with respect to the conduct of a liquidator
The Explanatory Memorandum to the Bill in paragraph 5.3 on page 75 indicates
why the existing investigating powers of ASIC may not be adequate to investigate
the actions of liquidators as follows:
5.3 However, it is not always clear that ASIC can use
the full suite of its compulsory powers in Part 3 of the ASIC Act for
the purposes of investigating the extent to which a registered liquidator
has satisfied the duties owed by them in various proceedings. Unlike
directors’ duties, the fiduciary duties of registered liquidators are
not codified in the corporations legislation.
Item 1 of Schedule 2 inserts proposed subsection 13(3)
to the ASIC Act to enable ASIC to use its powers under Part 3 of
the ASIC Act to investigate the conduct of a registered liquidator where
ASIC has reason to suspect the liquidator :
(a) has not, or may not have, faithfully performed
his or her duties, or
(b) is not, or may not be, faithfully performing his or her duties.
Section 411 of Part 5.1 of the Corporations Act deals with the administration
of compromises or arrangements between creditors and members which a court
may approve under subsection 411(6) subject to such alterations or conditions
as it thinks fit.
The Explanatory Memorandum (EM) in paragraph 5.9 on page 76, states that
currently there is no provision for recovery of a loss or damage suffered
by a person as a result of a breach of an alteration or condition imposed
by a court under subsection 411(6). The EM also states that the desirability
of a mechanism to provide a court with broader powers to protect persons
who may be adversely affected by a proposal was highlighted in the James
Hardie report.
Item 2 of Schedule 2 inserts proposed subsection 411(6A)
to enable the Court to make such orders as it thinks fit where a body
contravenes an alteration or condition made by the Court in approving
a compromise or arrangement under subsection 411(6).
Proposed subsection 411(6B) provides that the Court may make either:
- an order that the body pay compensation of such an amount to the person
who has suffered a loss or damage as the order specifies, or
- in the case of an alteration - an order directing the body to comply
with the provision or provisions of the compromise or arrangement to
which the alteration relates and in the case of a condition an order
requiring compliance with the condition.
Proposed subsection 411(6C) provides that proposed subsection
411(6B) does not limit proposed subsection 411(6A).
On the application of a liquidator or provisional liquidator, the Court
has powers under section 486A of the Corporations Act to make a range
of orders to prevent an officer or related entity from avoiding liability
to a company. Paragraph 486A(1)(d) allows the Court to make an order
prohibiting an officer or employee of the company, or a related entity
of the company that is a natural person, from leaving the jurisdiction
or Australia without the Court’s consent.
The Explanatory Memorandum in paragraph 5.15 on page 77 points out that
in a case where an application to wind up a company has been made but
the winding up has not commenced, there will not necessarily be any liquidator
or provisional liquidator to make the application under subsection 486A(1)
The
amendments proposed by items 4, 5, 6 and 8
of Schedule 2 reorganise subsection 486A(1) and item 7 of
Schedule 2 inserts proposed subsection 486AA(2) to enable
a liquidator or provisional liquidator or ASIC to make application under
the reorganised subsection 486A(1) to the Court.
The power of a court to issue a warrant to arrest a person who is absconding
or who has dealt with property or books, in order to avoid obligations
in connection with a winding up is dealt with in section 486B of the Corporations
Act.
The Explanatory Memorandum at paragraph 5.24 on pages 78 and 79 states
that Cooper J in an unreported case took the view that the provision does
not give the court any express power to order the person remain in custody,
or make other orders.(5)
Item 10 of Schedule 2 inserts proposed Subdivision B
at the end of Division 3 of Part 5.4B to set out procedures relating
to section 486B warrants. Thus proposed section 489A sets out the
procedure for arresting a person subject to a section 486B warrant,
proposed section 489B provides that the Court must order that the
arrested person be remanded on bail, or remanded in custody or released
and proposed section 489C sets out the procedure on remand on bail.
The reader is referred to paragraphs 5.23 to 5.31 on pages 78 to 80 of
the Explanatory Memorandum for details of the procedures.
Section 533 of the Corporations Act requires the liquidator, who ascertains
in the course of winding up of a company that:
- a past or present officer or employee or a member or contributory
may have been guilty of an offence under a law of the Commonwealth,
or a State or Territory, and
- a person who has taken part in the formation, promotion, administration,
management or winding up of the company has misapplied or retained funds
or may have been guilty of negligence, default breach of duty or breach
of trust in relation to the company, or
- the company may be unable to pay its unsecured creditors more than
50 cents in the dollar
must as soon as practicable lodge a report with respect
to the matter to ASIC.
The Explanatory Memorandum in paragraph 5.34 on page 80 states that reports
are often lodged outside the time of two months given in ASIC guidelines
and sometimes reports are lodged years after the commencement of liquidation.
Such late lodgement results in it being too late to take remedial action.
Item 11 of Schedule 2 amends paragraph 533(1)(d) to require
the liquidator to lodge such reports as soon as practicable and in any
event within six months.
In Rich v Australian
Securities and Investments Commission [2004] HCA 42, the High
Court held that the banning and disqualification orders under sections
206 C and 206E of the Corporations Act were penalties.(6) In
consequence an affected person could invoke the common law privileges
protecting the disclosure of information that may expose a person to a
penalty in a banning or disqualification proceeding.
In simple terms the penalty privilege applies to prevent a defendant
(in proceedings for the imposition and recovery of a penalty) from being
compelled to produce documents/information which may ‘prove’ the defendant’s
liability to the penalty. In other words, the underlying principle is
that those who allege criminality should prove it.
ASIC is therefore precluded from obtaining discovery of documents in
proceedings seeking a banning or disqualification or licence suspension
or cancellation order.
Item 12 of Schedule 2 inserts proposed section 1349
to the Corporations Act to remove penalty privilege for a range of proceedings
under the Corporations Act or the ASIC Act or a proceeding in the AAT.
The key changes are set out succinctly in paragraphs 5.42 to 5.47 and
these are set out below for ease of reference.
5.42 The Bill will remove penalty privilege for proceedings
where a disqualification, banning, suspension or cancellation order,
or a declaration to that effect, is being sought. A person in such an
administrative, civil or criminal proceeding will not be entitled to
refuse or fail to comply with a requirement on the grounds that to do
so might tend to make the person liable for a penalty by way of a disqualification,
banning, suspension or cancellation order, or a declaration to that
effect. This will restore the longstanding provision that penalty privilege
does not apply to these types of proceedings.
5.43 The Bill will also remove penalty privilege in relation
to a person complying with a statutory requirement under the Corporations
Act or the ASIC Act on the grounds that to do so might tend to make
the person liable for a penalty by way of a disqualification, banning,
suspension or cancellation order, or a declaration to that effect.
5.44 The requirements that a person is not entitled to
refuse or fail to comply with in relation to the proceeding or other
statutory compulsion include:
- to answer a question or give information; or
- to produce a book or any other thing; or
- to do any other act whatever.
5.45 These requirements are deliberately wide so that
they will encompass any of the requirements ASIC could have imposed
on a person prior to the Rich decision when it was seeking such
an order and no other penalty. At that time, as penalty privilege could
not be claimed, a defendant could not rely on it to refuse to do any
act or fail to comply with any requirement. While these amendments do
not affect the High Court’s classification of these orders as penalties,
the removal of penalty privilege is limited to when ASIC is seeking
one of these remedies and no other penalties.
Proposed subsection 1349(4) has the effect that information (evidence)
discovered as a consequence of the abrogation of the penalty privilege
will be admissible in proceedings. The privilege will not be available
either in court proceedings or during the investigative stages of an inquiry.
The amendments limit the type of penalty proceedings to disqualification,
banning, suspension or cancellation order or a declaration to that effect,
and new subsection 1349(6) makes clear that ‘penalty’ also includes
‘forfeiture’.
The reader is referred to paragraphs 5.48 to 5.55 on pages 83 and 84
of the Explanatory Memorandum for a detailed explanation of the provisions
of proposed section 1349.
Currently, section 1284 of the Corporations Act requires a successful
applicant for registration as a liquidator to lodge and maintain with
ASIC a security for due performance of his or her duties as a liquidator
as determined by ASIC.
As the required securities, namely insurance performance bonds, are no
longer available the Explanatory Memorandum in paragraph 6.13 on page
87 states that ASIC has been waiving this requirement for many years.
Item 8 of Schedule 3 repeals section 1284 and substitutes
it with proposed section 1284 which will require a registered liquidator
or a liquidator of a specified body corporate to maintain adequate and
appropriate professional indemnity insurance and fidelity insurance to
cover for claims that may be made against the liquidator.
ASIC has a discretion under subsection 1291(1) of the Corporations Act
to cancel the registration of an official liquidator, who is on the Register
of Official Liquidators maintained under subsection 1286(2), at any time.
This provision does not extend to persons who are on the Register of Liquidators
maintained under subsection 1286(1).
Subsection 1292 (2) gives the Companies Auditors and Liquidators Disciplinary
Board (CALDB) the authority to cancel the registration of a liquidator
on the Register of Liquidators on an application made by ASIC.
The Explanatory Memorandum in paragraph 6.20 on page 88 states that when
a person becomes disqualified by reason of bankruptcy or disqualification
from managing corporations and where a person fails to maintain the insurance
required to cover their work as a registered liquidator, it is appropriate
that ASIC should have power to expeditiously cancel that person’s registration.
Item 10 of Schedule 3 inserts proposed section 1290A
to give ASIC the power to cancel the registration of a liquidator in the
circumstances referred to above without reference to CALDB.
The other changes made by the amendments to the Corporations Act in Schedule
3 regarding the regulation of liquidators are listed below with references
to detailed explanations in the paragraphs of the Explanatory Memorandum
(EM).
- Extending the prohibition on inducements for the referral of work
(items 1 to 3 and item 4 – paragraphs 6.1 to 6.4
on page 85 of the EM)
- Education criteria for registration as a liquidator (items 5
and 6 – paragraphs 6.5 to 6.9 on page 86 of the EM)
- Experience criterion for registration as a liquidator (item 7
- paragraphs 6.10 to 6.12 on pages 86 and 87 of the EM)
- Triennial statements to be replaced by annual statements (item
9 - paragraphs 6.16 to 6.18 on page 88 of the EM)
- Transfer of books (item 14 - paragraphs 6.23 to 6.25 on page
89 of the EM)
- Disciplinary proceedings – CALDB (items 11 to 13 –
paragraphs 6.26 to 6.33) on pages 89 and 90 of the EM)
The amendments in Schedule 4 are in three Parts. The titles of
these Parts with reference to items of Schedule 4 and
paragraphs of the Explanatory Memorandum (EM) are set out below.
Part 1—General (items 1 to 46 – paragraphs 7.1 to 7.148
on pages 91 to 115 of the EM)
Part 2—Rights to property during administration (items 47 to
59 – paragraphs 7.149 7.181 on pages 116 to 121 of the EM)
Part 3—Liquidation following administration (items 60 to 71
– paragraphs 7.182 to 7.227 on pages 122 to 129 of the EM)
As it is not within the scope of a Bills Digest to cover each item of
finetuning effected by Schedule 4, the more significant items from each
Part of Schedule 4 have been selected for comment.
Division 10 of Part 5.3A of the Corporations Act deals with the execution
and effect of a deed of company arrangement (DOCA). Subsection 444B(2)
provides that the company must execute the instrument within 21 days after
the end of the creditors’ meeting authorising the company to execute a
DOCA. Subsection 444B(5) states that the administrator must execute the
instrument before, or as soon as practicable, after the company executes
it.
Subsection 444B(6) states that when executed by both the company and
the administrator, the instrument becomes a DOCA.
Section 444F provides that the court may limit rights of a secured creditor
or owner or lessor in certain circumstances. Paragraph 444F(1)(a) states
that this section applies where it is ‘proposed’ that a company execute
a DOCA. There have been concerns that this section may apply from the
time that the administrator forms the view that it would be in the creditors’
interests to enter into a DOCA, which may be a point in time earlier than
when the creditors approve that a DOCA be executed.
To remove this doubt, item 28 of Schedule 4 is repealed
and substituted by proposed paragraph 444F(1)(a) to make section
444F apply from the time a meeting of creditors convened under section
439A resolve that the company execute a DOCA.
The reader is referred to paragraphs 7.1 to 7.7 on pages 91 and 92 of
the Explanatory Memorandum for further details of this amendment.
On the execution of a DOCA, section 444H of the Corporations Act provides
that the company is released from a debt only where the DOCA provides
for its release and the creditor concerned is bound by the DOCA.
Where third parties have guaranteed or indemnified a creditor against
loss for various debts owed by the company to creditors there is uncertainty
whether creditors’ rights under guarantees and indemnities are unaffected
on the execution of a DOCA.
Item 30 of Schedule 4 inserts proposed section 444J
which states that section 444H does not affect a creditor’s rights under
a guarantee or indemnity, thus removing the uncertainty.
The reader is referred to paragraphs 7.8 to 7.13 on pages 92 and 93 of
the Explanatory Memorandum for further details of this amendment.
The holder of a charge over the whole or substantially the whole of the
property of a company may enforce the charge without regard to the administration
within the ‘decision period’ under section 441A of the Corporations Act.
The ‘decision period’ as defined in section 9 is generally the 10 business
day period following notification to the chargee of the appointment of
the administrator. Business day as defined in section 9 means a day that
is not a Saturday, a Sunday or a public holiday or bank holiday in the
place concerned.
Item 1 of Schedule 4 will amend the definition of ‘decision
period’ in section 9 to allow 13 business days instead of 10 business
days.
The reader is referred to paragraphs 7.8 to 7.13 on pages 92 and 93 of
the Explanatory Memorandum for further details of this amendment.
The amendments by items 5, 6, 11 and 13 to
20 of Schedule 4 allow a longer time for holding the first
and second meetings of creditors and matters related to these meetings.
A summary of the reforms in relation to these meetings which is set out
in tables in paragraph 7.120 on pages 110 and 111 of the Explanatory Memorandum
is reproduced below:
| First meeting |
Current |
New |
| Timing of meeting |
5 business days |
8 business days |
| Notice of meeting |
2 business days |
5 business days |
| |
|
|
| Second meeting |
Current |
New |
| Convening of meeting |
21 or 28 days |
20 or 25 business days |
| Notice of meeting |
5 business days |
No change |
| Timing of meeting |
Within 5 business days after the end of
the convening period |
Within 5 business days before or after
the end of the convening period |
| Adjournment period |
60 days |
45 business days |
The reader is referred to paragraphs 7.112 to 7.126 on pages 109 to 112
of the Explanatory Memorandum for further details of these amendments.
It should be noted that items 9, 21, 24, 37
and 38 of Schedule 4 substitute business days for days.
The Explanatory Memorandum in paragraph 7.130 on pages 112 and 113 explains
that Part 5.3A of the Corporations Act currently uses two different types
of methodology for establishing periods or dates, namely, ‘business days’
and ‘days’, The change to ‘business days’ is being made for the adoption
of consistent terminology.
The other changes which the amendments to the Corporations Act in Part
1 of Schedule 4 give effect to are listed below with references
to the items and detailed explanations in the paragraphs of the Explanatory
Memorandum (EM) to the Bill).
- Right to terminate a deed: (items 33 and 34 – paragraphs
7.14 to 7.23 on pages 93 and 94 of the EM)
- Notification when deed wholly effectuated: (items 31, 32
and 35 – paragraphs 7.24 to 7.28 on pages 94 and 95 of the EM)
- Power to consent to a transfer of shares of the company: (item
8 – paragraphs 7.29 to 7.38 on pages 95 to 97 of the EM)
- Administrator’s right of indemnity: (items 22 and 45 –
paragraphs 7.39 to 7.48 on pages 97 to 99 of the EM)
- Deed administrator’s ability to sell the company’s shares: (item
29 – paragraphs 7.49 to 7.60 on pages 99 to 101 of the EM)
- Lodgement of accounts with ASIC: (item 10 – paragraphs 7.61
to 7.66 on pages 101and 102 of the EM)
- Reporting to creditors: (item 12 – paragraphs 7.67 to 7.69
on page 102 of the EM)
- Fundraising in administration: (item 46 – paragraphs 7.70
to 7.75 on pages 103 and 104 of the EM)
- Appointment of administrator by directors and chargees: (items
2 and 4 – paragraphs 7.76 to 7.91 on pages 104 to 106 of
the EM)
- Transition from liquidation to voluntary administration: (items
3 and 39 – paragraphs 7.92 to 7.101 on pages 106 and 107
of the EM)
- Stay and termination of a liquidation: (items 43 and 44
– paragraphs 7.102 to 7.107 on pages 107 and 108 of the EM)
- Application to replace administrator: (item 40 – paragraphs
7.108 to 7.111on pages 109 of the EM)
- Decision period for chargee to enforce a charge: (item 1 –
paragraphs 7.127 to 7.129 on page 112 of the EM)
- Conversion of ‘days’ to ‘business days’: (items 9, 21,
24, 37 and 38 – paragraphs 7.130 to 7.132
on pages 112 and 113 of the EM)
- Role of administrator and administrator of deed: (items 23,
25 and 26 – paragraphs 7.133 to 7.136 on page
113 of the EM)
- Notification that a company is subject to a deed: (items 41
and 42 – paragraphs 7.137 to 7.144 on pages 114 and 115
of the EM)
- Resolutions for removing an administrator: (item 7 –
paragraphs 7.145 to 7.148 on page 115 of the EM)
Section 440C of the Corporations Act provides that owners or lessors
of property used, occupied by or in the possession of the company cannot
take possession of the property or otherwise recover it, except with the
administrator’s written consent or with the leave of the Court.
Likewise, section 440B provides that a chargee cannot enforce a charge
on property of the company, except with the administrator’s written consent
or with the leave of the Court.
There is some doubt whether a person who has a lien or pledge over property
of a company will be entitled to retain possession of the property and
sell or otherwise enforce the lien or pledge during the administration
of the company.
Item 48 of Schedule 4 inserts proposed section 440BA
to provide that the holder of the lien or pledge may continue to possess
the property but cannot sell or otherwise enforce the lien or pledge,
except with the administrator’s written consent or with the leave of the
Court
Subsection 442C(1) of the Corporations Act provides that the administrator
of a company must not dispose of property of a company that is subject
to a charge or property that is used, occupied by or in the possession
of the company but of which someone else is the owner or lessor.
Subsection 442C(2) provides an exception where the disposal is in the
ordinary course of business of the company or with the written consent
of the charge, owner or lessor as the case may be or with the leave of
the court.
As there is some doubt whether the administrator may sell the property
subject to a lien, pledge or retention of title clause, the Explanatory
Memorandum in paragraph 7.154 on page 117 states that there is a need
to clarify the law and that the reforms need to strike an appropriate
balance between protecting the interest of the owner and security holder,
and facilitating the rescue of viable companies in the interest of other
creditors and stakeholders.
The amendments proposed by items 47 and 55 to 59
of Schedule 4 bring about the following reforms which are succinctly
stated in paragraphs 7.155 and 7.156 of the Explanatory Memorandum as
follows.
7.155 Section 442C of the Corporations Act will be amended
to provide that the administrator may sell property subject to a lien,
pledge or retention of title clause, in the ordinary course of the company’s
business, or with the written consent of the owner or security holder,
or with the leave of the Court. The amendments will also allow for a
chargee, lienee, pledgee, lessor or owner to apply to the Court for
an injunction if a proposed sale of the property would prejudice their
interests. The administrator will be provided a right of inspection
for property held under a lien or pledge, and a right to take possession
to sell such property in order to effect a sale. The purchaser of the
property would take clear title.
7.156 To protect the interests of the security holder,
the administrator will be obliged to retain the amount secured by a
lien or pledge, for payment to the holders of those securities, when
a power of sale is exercised over property subject to a lien or pledge.
The administrator will be required to act reasonably in exercising the
power of sale. Similar provisions will be introduced for property that
is in the possession of the company but owned by a third party due to
the operation of a retention of title clause.
The reader is referred to paragraphs 7.157 to 7.174 on pages 117 and
118 of the Explanatory Memorandum for details of the proposed amendments.
The amendments proposed above clarify that the holder of a lien or pledge
may not sell the property secured without the consent of the administrator.
Item 54 of Schedule 4 inserts proposed section 441JA
into the Corporations Act to clarify how the sale proceeds are to
be dealt with. Proposed section 441JA provides that the holder
of the lien or pledge is entitled to retain the sale proceeds where they
equal or fall short of the debt secured. Where the net proceeds falls
short of the debt secured, the holder of the lien or pledge will be able
to prove for the balance as an unsecured creditor.
However, where the sale proceeds exceeds the debt secured the holder
of the lien or pledge will be required to pay the excess to the administrator.
The other changes which the amendments to the Corporations Act in Part
2 of Schedule 4 give effect to are listed below with references
to the items and detailed explanations in the paragraphs of the Explanatory
Memorandum (EM) to the Bill).
- General moratorium for bankers’ liens and collateral lodged with clearing
- and settlement facilities (item 49 – paragraphs 7.168 to 7.172
on pages 119 and 120 of the EM).
- Clarifying the injunction power allowing a court to prevent enforcement
(item 53 - paragraphs 7.173 to 7.175 on page 120 of the EM)
- Clarifying the powers of a court to allow the enforcement of a charge
(items 51 and 52 - paragraphs 7.176 to 7.181 on pages
120 and 121of the EM)
To clear the uncertainty about priority of post-DOCA creditors where
a liquidation follows a DOCA, item 67 of Schedule 4 will
amend section 556 of the Corporations Act by inserting proposed subsection
556(1A) to provide that the priority afforded to post-DOCA creditors
under paragraph 556(1)(a) only applies to expenses:
- incurred by the administrator of a DOCA, and
- relating to a debt or claim admissible under section 553(1A) for
debts incurred during a DOCA,
if the administrator is personally liable for the expenses.
The reader is referred to paragraphs 7.149 to 7.152 on page 116 of the
Explanatory Memorandum for further details of the proposed changes.
Division 12 of Part 5.3A of the Corporations Act deals with the transition
to creditors’ voluntary winding up and section 446 deals with the administrator
becoming the liquidator in certain circumstances.
There is no requirement at present for the creditors to be given an updated
report if an administration or DOCA proceeds to liquidation. In consequence,
a liquidator who takes over from an administrator is handicapped without
a report on the affairs of the company at the point of takeover.
Item 63 of Schedule 4 inserts proposed section 446C
to provide that the liquidator may require the submission of a report
about the company’s affairs at a date specified in a written notice from
an officer of the company. An officer of a company is defined in section
9 to include an administrator or an administrator of a DOCA.
Proposed subsection 446C(7) requires the liquidator to lodge a
copy of the report with ASIC within 7 days of receipt of the report.
Proposed subsection 446C(10) provides that the failure to comply
with a notice to submit a report on the company’s affairs is an offence
of strict liability.
The reader is referred to paragraphs 7.210 to 7.222 on pages 126 to 128
of the Explanatory Memorandum for further details of the proposed changes.
The other changes which the amendments to the Corporations Act in Part
3 of Schedule 4 give effect to are listed below with references
to the items and detailed explanations in the paragraphs of the Explanatory
Memorandum (EM) to the Bill).
- Priority for borrowings during administration (items 60 to
62 – paragraphs 7.188 to 7.196 on pages 122 and 124 of the EM).
- Uncommercial transactions during voluntary administration and deed
of company arrangement (item 68 – paragraphs 7.197 to 7.203 on
pages 124 and 125 of the EM).
- Period of challenging voidable transactions (items 69 and
70 – paragraphs 7.204 to 7.209 on pages 125 and 126 of the EM).
- Priority of costs of making winding up application (item 65
– paragraphs 7.223 to 7.227 on pages 128 and 129 of the EM).
Section 512 of the Corporations Act provides that all proper costs, charges
and expenses of and incidental to the winding up (including the remuneration
of the liquidator) are payable out of the property of the company in priority
to all other claims.
Section 513, a provision of Part 5.6 which deals with winding up generally,
states that except so far as the contrary intention appears, the provisions
of the Corporations Act about winding up apply in relation to the winding
up of a company whether in insolvency, by the Court or voluntarily.
Subsection 556(1), which is a provision of Part 5.6 also deals with the
determination of priority of amount payable in a creditors’ voluntary
winding up.
To resolve what may appear to be a duplication of provisions, the Explanatory
Memorandum in paragraph 8.2 on page 131 states that section 512 is no
longer necessary.
In consequence, item 7 of Schedule 5 repeals section 512.
Part 2J.1 of the Corporations Act deals with share capital reductions
and share buy-backs. Division 1 deals with reductions in share capital
not otherwise authorised by law.
Subsection 256B(1) states that a company may reduce its share capital
in a way that is not otherwise authorised by law if the reduction:
(a) is fair and reasonable to the company’s shareholders
as a whole,
(b) does not materially prejudice the company’s ability
to pay its creditors, and
(c) is approved by the shareholders under section
256C,
If this provision is used to cancel partly-paid shares it would appear
that creditors will be prejudiced as the company would have cancelled
a right to claim monies from the holders of partly paid shares which would
add to the pool of assets available to the creditors. The Explanatory
Memorandum in paragraph 8.10 on pages 132 and 133 states that there was
some discussion of the issues arising from the interpretation of this
provision in the context of the James Hardie inquiry.
Item 5 of Schedule 5 inserts proposed subsection 256B(1A)
which states that to avoid doubt, a cancellation of a partly-paid share
is taken to be for consideration.
The Explanatory Memorandum states in paragraph 8.11 on page 133 that
the effect of this amendment is that the share cancellation process in
section 256B(1) can only be used to cancel partly-paid shares if the cancellation
does not materially prejudice the company’s ability to pay its creditors.
We might add that while this comment in the Explanatory Memorandum relies
on paragraph 256B(1)(b) being an overriding provision, there is scope
for the view that a cancellation of partly-paid shares must also pass
the test that the reduction is fair and reasonable to the company’s shareholders
as a whole as provided in paragraph 256B(1)(a).
Item 1 of Schedule 6 adds Part 10.9 to the Corporations
Act. This Part is titled: Transitional provisions relating to the Corporations
Amendment (Insolvency) Act 2007.
Proposed section 1480 gives the application dates for the introduction
of the amendments made by various items in Schedule 1 as well as
transitional arrangements.
Proposed section 1481 gives the application dates for the introduction
of the amendments made by various items in Schedule 2 as well as
transitional arrangements.
Proposed section 1482 gives the application dates for the introduction
of the amendments made by various items in Schedule 3 as well as
transitional arrangements.
Proposed section 1483 gives the application dates for the introduction
of the amendments made by various items in Schedule 4 as well as
transitional arrangements.
Sections 1 to 3 of the Act commences on the day on which it receives
the Royal Assent as stated in Column 2 of table item 1 in the table to
clause 2 of the Bill (the table).
The commencement dates of the items in the various Schedules are given
in the table and it is set out below.
It will be noted that table item 1 adds that anything in this Act not
elsewhere covered by this table also commence on the day on which the
Act receives the Royal Assent.
The Explanatory
Memorandum to the Bill in paragraph 2.10 on page 4 states that there
is no financial impact from implementing the measures in the Bill.
The important role played by an effective and transparent corporate insolvency
regime in the modern Australian economy was described by the Hon. Chris
Pearce on 10 November
2006:(7)
Australia’s corporate insolvency regime is a critical
part of our economic infrastructure. Insolvency law underpins the system
of financial and contractual relationships that enable trade and commerce
to take place.
A modern credit-based economy needs predictable, transparent
and affordable means for enforcing secured and unsecured credit claims.
A well-designed insolvency system helps business to obtain financing
more easily and at a lower cost.
Insolvency laws and processes also complement the general
body of rules governing directors’ duties, as they provide a set of
incentives and sanctions that guide the behaviour of directors during
the life of a company.
The need for an effective insolvency regime has also been highlighted
by a number of high profile corporate collapses in the recent past, including:
- the collapse of the HIH Insurance group in March 2001, which had far
reaching adverse consequences for individuals, businesses and government.
The final
report of the HIH Royal Commission estimated that, on formal winding
up in August 2001, HIH had debts of between $3.6 billion and $5.3 billion,
making it one of, if not the, largest corporate collapse in Australian
history. By October 2006 the Commonwealth Government had paid out $490
million through the government-funded HIH Claims Support Scheme. By
that time over 15 000 applications had been received (see here);
- the $1.7 billion failure of One.Tel in June 2001. Legal and investigative
costs associated with the One.Tel collapse were recently estimated by
one newspaper article as exceeding $30 million;(8) and
- a more recent spate of property company collapses, including the Westpoint,
Fincorp and Estate Property groups.
ASIC’s insolvency appointment statistics set out below suggest
that a considerable number of companies enter external administration
annually. This highlights the need for a more effective and transparent
corporate insolvency regime.
| |
2003 |
2004 |
2005 |
2006 |
2007a |
| Companies entering external administration b |
6661 |
6618 |
7277 |
7737 |
2225 |
| Insolvency appointmentsc |
11 042 |
10 823 |
11 758 |
12 486 |
3461 |
Notes: aFigures for 2007
cover the period January to April; bNumber of companies entering
into a form of external administration for the first time. ASIC advises
that a company will be included only once in these statistics, regardless
of whether it subsequently enters into another form of external administration.
The only exception occurs where a company is taken out of external administration,
for example as the result of a court order, and at a later date re-enters
external administration. cASIC’s Insolvency Appointments statistics
show the number of insolvency appointments recorded, categorised by type
of appointment. As a company can be under more than one form of insolvency
administration at any one time and can progress from one type to another,
a company can be included in these statistics more than once. For this
reason, the number of insolvency appointments will always be greater than
the number of companies going into external administration for the first
time.
Source: ASIC
insolvency statistics (2003, 2004, 2005, 2006, 2007)
The Bill contains a number of measures aimed at providing greater scrutiny
of insolvency practitioners. These include provisions which require practitioners
to declare prior advisory and other relevant relationships and to provide
more timely information on fees.
The issue of declaring practitioner interest was discussed in detail
in submissions and in the Corporate
Insolvency Laws: A Stocktake, the report of the Joint Committee
on Corporations and Financial Services (PJC). For example (p. xx):
Problems about the lack of independence of external administrators
were commonly expressed in submissions and confidential evidence received
by the Committee into the conduct of particular administrations… The
Committee considers that a statement of independence which would disclose
professional, personal or business relationships between the administrator
or his/her firm and the company or its officers, members or creditors
would be an important factor not only to improve the perception of independence
but encourage actual independence. It would alert creditors to any possible
conflict of interests that the administrator may have and assist them
at their first meeting in considering whether or not to remove the administrator.
The level of practitioner fees was also a prominent area of concern expressed
in submissions to the PJC. The PJC’s final view was that, while a legislatively
prescribed schedule of fees would be anti-competitive, greater and more
timely disclosure in relation to the basis of fees was required.
There have been a number of comments from insolvency practitioners in
relation to these changes. For example, Mr Michael Hughes,
a member of the Insolvency Practitioners Association of Australia (IPAA)
national committee, stated:
What is capturing everyone’s attention are the declarations
of relevant relationships that have to be made at an early point. It’s
very important that creditors see that there is independence in practitioners.
This reform will make all practitioners turn their mind to this issue.(9)
Mr John Melluish, president of the IPAA,
also stated that:
The existing legislation is now out of context… These
amendments represent 15 years of clean-up.(10)
The changes set out in the current Bill in relation to disclosure of
prior relationships also appear broadly in line with the best
practice guidelines of the IPAA released in 2003.
The Regulation Impact Statement (RIS) which is included in Chapter 3
of the Explanatory Memorandum considered two options in relation to the
priority of employee entitlements in voluntary administration. These are
included in paragraphs 3.26 and 3.27 on pages 10 and 11 of the Explanatory
Memorandum.
Option 1 was to leave the voluntary administration procedure unchanged
in relation to the priority of employee entitlements.
Option 2 was the PJC Report recommendation that the Government amend
the law to make it mandatory to preserve the priority available to creditors
in a winding up, unless affected creditors agree to waive their priority.
The PJC also recommended that creditors or the administrator should have
the right to initiate court proceedings to have the deed upheld.
The RIS at paragraph 3.42 on page 13 concludes that the recommended option
is for the law to recognise that the priority of employee entitlements
should be safeguarded in DOCAs but not necessarily in precise terms proposed
by the PJC.
The measure in the Bill will enable creditors as a whole to vote against
the inclusion of a priority for employee entitlements in a DOCA. There
is provision in the Bill for any dispute between creditors as a whole
and eligible employee creditors in relation to the recognition of priority
of employee entitlements to be resolved by a Court on the application
of the administrator, or an eligible employee creditor or any interested
party. The Court may approve the non-inclusion of a provision protecting
eligible employee creditors if the Court is satisfied that the non-inclusion
would be likely to result in the same or a better outcome for eligible
employee creditors as a whole than would result from the immediate winding
up of the company.
The measures in the Bill appear to have struck a balance between competing
public interests, namely, enhancing protection of employee entitlements
and providing greater flexibility to the voluntary administration procedure
to enable businesses to tide over temporary difficulties. The RIS concludes
that the impact of the measures in the Bill in relation to recognition
of the priority of employee entitlements in a DOCA be monitored by ASIC
and the Treasury.
- Australian Law Reform Commission, General
Insolvency Inquiry (ALRC36), 1988, generally referred to as
the Harmer Report after the Commissioner in charge of the Inquiry
Mr. Ron Harmer.
- The Hon Chris Pearce, MP, Parliamentary
Secretary to the Treasurer,
Pearce
Announces Insolvency Reform Package, Press Release, Canberra,
12 October 2005.
- The Treasury, Insolvency
Reform Package, 12
October 2005.
- Corporations and Markets Advisory Committee (CAMAC),
Rehabilitating large and complex enterprises in financial difficulties,
Report 2004.
- ASC v Greig Ronald
Heilbronn (No.
G 302 of 1995, Fed No. 27/95, Federal Crt of Australia
in Qld.
- [2004] HCA 42..
- Hon Chris Pearce, MP, Parliamentary Secretary to the Treasurer,
address to the Insolvency Practitioners Association of Australia, Corporate
Insolvency: Looking to the Future, 10 November 2006.
- Moran, Susannah. 2007, ‘One.Tel
case resumes as bill hits $30m’, The Australian, 29 January 2007, p. 5.
- Zempetakis, Helene. 2007, ‘Insolvency
reforms lift scrutiny’, The Australian Financial Review,
9 February 2007,
p. 70.
- Zempetakis, Helene. 2007,
‘Insolvency
reforms lift scrutiny’, The Australian Financial Review,
9 February 2007,
p. 70.
Anthony Housego and Bernard Pulle
14 June 2007
Bills Digest Service
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referral.
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