Insolvency News July 2007

Debt agreements and changes to the Bankruptcy Act
Corporate Insolvency

Corporate Insolvency

The Parliamentary Secretary to the Treasurer, Chris Pearce MP, introduced the Corporations Amendment (Insolvency) Bill 2007 into Parliament on 13 November 2006. The Bill aims to improve Australia’s insolvency laws . It is intended to introduce efficiency and the cost effectiveness of insolvency processes, strengthen the rights of employees, and enhance the capacity of creditors to maximise their returns. Unlike the proposed Bankruptcy Act amendments to Part X Arrangements which also covers individuals, this Bill deals purely with corporations.

The main amendments are set out below.

Protection of employee entitlements in Deed of Company Arrangement;
Administrators will have the power to transfer shares or alter the status of members, allowing the administrator to sell the company shell and create further returns for the creditors
A ‘Statement of Independence’ is to be provided to creditors when giving notice of the first meeting in administration
A requirement by Administrators to provide a declaration of relevant relationships and a declaration of indemnities to the creditors
Provision for creditors to select a new liquidator if the company proceeds from administration to a creditors’ voluntary liquidation;
Power to ASIC to apply to the Court for a review of the remuneration of the administrators and deed administrators;
Additional notice of meetings to creditors in voluntary administration;
Cost reducing proposal eg. Reducing advertising requirements
In certain circumstances allowing notification to creditors to be sent electronically
Changes allowing creditors voluntary liquidations to commence almost immediately, overcoming the present difficulty of utilizing the Creditor’s Voluntary Liquidation regime where the Taxation Office has issued Directors’ Penalty Notices
Proposed changes allowing for pooling the administrations of a series of insolvent companies in a group
Clarification of the current position – where creditors rights under a guarantee are not extinguished when creditors resolve to execute a Deed of Company Arrangement;
Where a company has changed its name within six months of an
Administration, the former name is to be disclosed;
Improve the regulation of insolvency practitioners by introducing more regular reporting requirements, requiring adequate insurance to be held and providing greater flexibility to the Companies Auditors and Liquidators Disciplinary Board.

It is proposed that the new legislation will be introduced in Parliament and enacted later this year. The date of commencement will be advised as soon as it hand. See schedule below as drafted by the Parliamentary Secretary, Chris Pearce MP.

Corporate Insolvency Reforms - Summary

Significant reforms

Improving outcomes for creditors (Schedule 1)

Part 1 - Employee entitlements

Clarify status and priority of the Superannuation Guarantee Charge in liquidation, receivership and voluntary administration
Mandate priority of employee entitlements in a deed of company arrangement
Clarify the rights of subrogated creditors

Part 2 – Better informing creditor decisions

Greater disclosure of relationships that may give rise to a conflict
Greater disclosure of basis of remuneration proposals put to creditors

Part 3 - Streamlining external administration

Rationalise requirements to publish notices
Allow for electronic communication with creditors
Remove obstacles to putting a company into creditors voluntary liquidation

Part 4 - Pooling

Facilitate pooling in liquidation

Deterring corporate misconduct (Schedule 2)

Grant ASIC a general power to investigate liquidator conduct
Remove uncertainty about the orders a court may make to prevent company officers and other persons avoiding liabilities
Restore longstanding position that penalty privilege does not apply in disqualification proceedings (a key remedy for phoenix companies)

Improving regulation of insolvency practitioners (Schedule 3)

Extend the prohibition on offering inducements to insolvency practitioners
Update registration requirements by: recognising all forms of external administration; requiring insurance; and requiring annual reporting to ASIC.
Introduce greater flexibility into Companies Auditors and Liquidators Disciplinary Board processes (allowing pre-hearing conferences, a 90-day delay in orders taking effect, and the publication of reasons for decisions).

Significant reforms

Fine-tuning voluntary administration (Schedule 4)

Part 1 - General

Clarify the effect of a deed of company arrangement (DOCA) on secured creditors and third party guarantors
Clarify the circumstances in which a DOCA may be terminated for breach
Require notification to ASIC when a DOCA is finalised
Extend the administrators’ right of indemnity to all liabilities properly incurred in the conduct of the administration
Require administrators to lodge accounts with ASIC (as for other forms of external administration)
Extend the obligation for administrators to disclose to creditors information that is known to the administrator and which would assist the creditor in making an informed decision about the future of the company
Introduce a reduced disclosure regime for debt for equity swaps in administration
Extend the timeframe for the first and second meetings of creditors
Clarify the processes for moving from liquidation to voluntary administration (stay of liquidation, appointment of administrator)

Part 2 – Rights to property during administration

Clarify the effects of a DOCA on property subject to a lien, pledge or retention of title clause
Clarify the circumstances in which a charge might be enforced

Part 3 – Liquidation following administration

Clarify the priority of debts incurred during an administration or DOCA
Introduce a requirement for an updated ‘report as to affairs’ where a company moves from administration to liquidation