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,
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- Hon Chris Pearce, MP, Parliamentary Secretary to the Treasurer,
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- Moran, Susannah. 2007,
One.Tel case resumes as bill hits $30m , The
Australian, 29 January 2007, p. 5.
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Insolvency reforms lift scrutiny , The Australian Financial
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Insolvency reforms lift scrutiny , The Australian Financial
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Anthony Housego and Bernard Pulle
14 June 2007
Bills Digest Service
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