Australian Corporate Lawyer - Autumn 2016

theAustraliancorporatelawyer
the availability of credit for companies. 17
Significantly, however, financiers retain the
ability to self protect under the reforms
by negotiating security for their loans and
exercising their security rights (which do
not require termination of a contract with a
company pursuant to an ipso facto clause)
upon insolvency.
Other insolvency reforms
The Productivity Commission also
makes a range of other reform
recommendations, including:
1. Allowing voluntary administration to
continue only if, within one month of
being appointed, the administrator
certifies there are reasonable grounds to
believe the company is capable of being a
viable business; 18
2. Preventing enforcement actions during the
formation of a scheme of arrangement; 19
3. Allowing directors to conduct ‘prepositioning’
work to sell a company or
parts of its business with the benefit of
various independence and contractual
review provisions absent from the United
Kingdom’s ‘pre-pack’ process; 20 and
4. Creating a streamlined ‘small liquidation’
process to minimise regulatory burdens
where few assets are at stake. 21
Stakeholders have generally supported these
reforms on the basis that they will achieve
greater efficiency in the insolvency process
and increase the rate of corporate and
business rescue.
The government should also consider other
amendments to promote those outcomes.
For example, creditors advancing funds to
a distressed company could be guaranteed
‘super priority’ over corporate assets and
secured creditors’ enforcement rights could
be restricted if creditors could be assured
of ‘adequate protection’ (thereby limiting
the impact on the cost and supply of credit).
Those mechanisms are already part
of the United States Chapter 11
reorganisation procedure.
While the Productivity Commission sensibly
recommended against the wholesale
adoption of a Chapter 11 restructuring
framework in Australia, due to excessive
costs, delays and cultural differences, 22 it did
recognise the merit in further investigating
the use of ‘certain components of the Chapter
11 system to achieve the desired reform
outcomes.’ 23 This is consistent with the
previous recommendations of the Financial
System Inquiry 24 and the Senate Economics
References Committee. 25
Concluding remarks
The government’s proposed insolvency safe
harbour and ipso facto reforms have received
widespread support from peak professional
organisations and practitioners as an effective
way to enhance the efficiency of Australia’s
insolvency laws and increase the likelihood of
rehabilitating distressed but viable companies
and businesses for the benefit of all corporate
stakeholders.
During the forthcoming public consultation
process, it is hoped the government will
also adopt additional reforms to voluntary
administration and schemes of arrangement
to further promote corporate and
business rescue.
With the impending fundamental change
to Australia’s insolvency regime, legal and
insolvency practitioners should have a
thorough knowledge of the government’s
proposed reforms, and remain actively
involved in the consultation and
implementation process over the next
18 months.
Footnotes
1 Agenda, 7.
2 Report, 319, 338-341, 373, 378-387, 394-398.
3 At that time, ARITA was known as the Insolvency
Practitioners Association of Australia (IPA).
4 Andrew Keay, ‘Directors’ Duties to Creditors: Contractarian
Concerns Relating to Efficiency and Over-Protection of
Creditors’ (2003) 66(5) The Modern Law Review 665, 681.
5 Corporations Act 2001 (Cth), ss 588H(5), 588H(6).
6 Corporations Act 2001 (Cth), ss 206A(1), 206B(3).
7 LCA, IPA and Turnaround Management Association, ‘Joint
Submission in Relation to Insolvent Trading Safe Harbour
Options Paper’, 2 March 2010, 8.
8 LCA Business Law Section, ‘Submission on Aspects of the
Productivity Commission’s Issues Paper – Business Set-Up,
Transfer and Closure, December 2014’, 20 February 2015, 3.
9 LCA, IPA and Turnaround Management Association, ‘Joint
Submission in Relation to Insolvent Trading Safe Harbour
Options Paper’, 2 March 2010, 3-4.
10 Australian Government, ‘National Innovation and Science
Agenda: Welcome to the Ideas Boom, Insolvency Reform
Fact Sheet’, December 2015.
11 Report, 386-387.
12 Report, 397-398.
13 Report, 383.
14 Report, 397.
15 Report, 398.
16 Report, 395-398.
17 See the concerns expressed by Australian Bankers
Association chief executive Steven Munchenberg after the
reforms were announced, cited in: Glenda Korporaal, ‘Big
Changes to Insolvency Law Planned’, The Australian, 8
December 2015.
18 Report, 377.
19 Report, 399.
20 Report, 388-392.
21 Report, 403-409.
22 Report, 370-372.
23 Report, 372.
24 Financial System Inquiry, ‘Final Report,’ November 2014,
266.
25 Senate Economics References Committee, ‘Performance
of the Australian Securities and Investments Commission,’
June 2014, 446-449.
26 VOLUME 26, ISSUE 1 – AUTUMN 2016