Insolvency law update – May 2018

This is one of my regular updates on where things are at in the insolvency law and practice world in Australia – one year bankruptcy, ASIC, safe harbour, practitioner discipline, INSOL and UNCITRAL, conferences, UK and NZ, and gift cards, Mossgreen, and more.

Personal insolvency

The law reform in relation to the one-year period of bankruptcy and Part IX debt agreements remains on hold while the government considers the recent recommendations of the Senate Committee. Whether, when the law commences, the sky falls in, we will have to wait and see.

Ipso facto and other changes

Ipso facto changes under the Corporations Act are due to commence by 1 July 2018 – section 451E and following, with their interesting drafting – whether a company has come or is under administration, relating to the company coming, or possibly coming, under administration – and the responses to the draft regulations and the Ministerial declarations in support are due to Treasury by 11 May. Other regulations required by those new provisions remain pending.

Other laws

There remains in parliament other pending reforms to the Bankruptcy Act, and tax and whistleblower laws, and the government is yet to respond to submissions on the various phoenix reforms that it raised for consideration in the context of SME insolvency, including that of a government liquidator.

Conferences, events

INSOL International’s conference was held in New York last week – 30 April – 1 May – and no doubt those attending will relay the important matters discussed there back to those at home.

This coming week, 7-11 May, UNCITRAL Working Group V – Insolvency, is meeting, also in New York, progressing to resolve the recognition of foreign insolvency judgments, corporate groups and MSME insolvencies. The UNCITRAL Co-ordinating Committee Australia (UNCCA), newly chaired by the Hon Justice Neil McKerracher, is represented at the WGV session. Australia itself does not send a representative.

The UNCITRAL annual Conference in Canberra on 25 May will include discussion on the recognition of foreign insolvency judgments, among many other international law issues.

From New Zealand:

  • the RITANZ annual conference is being held from 9-11 May in Auckland. Gabriel Moss QC is speaking, and there is a presentation on comparative Australian insolvency law, among many other sessions.
  • Meanwhile, the new RITANZ Code of Professional Practice for insolvency practitioners commences on 1 July 2018.
  • The Insolvency Practitioners Bill remains before the NZ parliament with a potential regulatory regime being introduced like that of the UK.
  • Other insolvency reforms are also pending.

ARITA has its NSW/ACT conference on 7 June.

Rosie Traill has her insolvency ‘boot camps’ in Sydney on 19 June, Melbourne 21 June, and Brisbane 26 June – independence declarations, remunerations, trusts, s 439A reports, voidable transactions, and more.

The Association of Independent Insolvency Practitioners (AIIP) has its inaugural two-day conference on 28-29 June in Canberra, covering pre-packs, safe harbour, and FEG recoveries.

The INSOL International Academics’ Colloquium is convening in London from 11 to 13 July 2018.

On 17-18 September is the Forum for Asian Insolvency Reform – FAIR, organised by INSOL International and the World Bank Group, being held in Bangkok, Thailand.

ARITA’s national conference is on 24-25 October in Sydney.

Rosie Traill’s bankruptcy conference is being held on 3 December with her intensive workshops the following day.

IAN (the eminent Insolvency Academics Network) is likely to convene in Wellington NZ in December.

UK Code, pre-packs and more

As to the UK, the review of its insolvency code in respect of independence and remuneration remains pending – questions being considered include the loosening up of referral fee restrictions, in particular where there is a benefit to the estate, and the payment of commissions for the introduction of insolvency appointments, possibly with new requirements surrounding disclosure.

The government review of pre-packs is proceedings and reforms are being considered.

Insolvency Practitioners

The last of the discipline processes under the old system was determined in Joubert v CALDB [2018] AATA 944.  The new discipline system under Division 40 of the Schedules does not contemplate a regulator bringing before a committee a large volume of conduct issues, which in the Joubert case went back to conduct in 2009.

A decision under Division 40 in bankruptcy was given in Thomson. Sydney Insolvency News reports that ARITA has expelled Ozem Kassem from its membership, and now Joubert.

ARITA remains to decide on the matter of Macks following the 2017 appeal decision in Viscariello v Macks. As to the significance of that decision, see the article by Associate Professor Jason Harris Insolvency practitioners’ duties: Macks v Viscariello in the latest Insolvency Law Bulletin [2018) 19.1.

Mossgreen

This matter is back in court on 8 May having had a second creditor’s meeting on 4 May 2018.  The ABC reports that the company has been put into liquidation but that creditors

“refused to pay BDO [the firm of administrators] for their work. It is estimated Mossgreen had about $2.4 million left when it went bust. The administrator has spend more than $1.6 million in four months, leaving less than $800,000 for creditors. BDO will now likely seek a court order to ensure they are paid from the Mossgreen coffers”.

The law still requires the court to decide on liquidators’ remuneration claims in such cases, not ASIC.  In personal insolvency, the regulator – AFSA – has the authority to decide the amount allowed.

Papers

Justice Ashley Black of the NSW Supreme Court gave a recent paper – Recent developments in Corporations and Insolvency Law – for the NSW Bar Association CPD Program on 11 April 2018. It discusses the Amerind decision, the Insolvency Law Reform Act changes, and how courts are reading those new provisions, and the pending ipso facto changes.

Safe harbour

Justice Black raises ‘several complexities’ that are likely to arise in the operation of the safe harbour section – s 588GA.  As paraphrased:

‘First, the question whether the course of action is “reasonably likely to have a better outcome” for the company seems to be an objective question one, on its face.  However, the Court is to have regard to matters relating to what the director has done under s 588GA(2), which provides an inclusive list of matters relevant to determining whether the course of action was reasonably likely to lead to a better outcome for the company, focussing on steps taken by directors.  The fact that such steps are taken may make it more likely an informal restructuring would be reasonably likely to have a better outcome for the company.  It is nonetheless possible that, even after those steps are taken, the informal restructuring which is undertaken was misconceived, and would not be reasonably likely to lead to that better outcome for the company, and the “defence” would not then be available.  

Second, the term “better outcome” is defined, in s 588GA(7), as a better outcome for the company than the immediate appointment of an administrator or liquidator.  The case law will need to determine what is the threshold at which steps taken are “reasonably likely” to lead to a better outcome for the company, and whether that comparison has regard only to the corporate entity or also to the interests of its creditors, and further complexity will arise if differing classes of creditors would have different interests.  This comparison may also require a party relying on that defence to prove the likely outcome of a hypothetical administration or liquidation that had taken place at the time the directors instead undertook an informal restructuring. 

Third, there will be a question as to the extent of connection that is required to fall within the language “directly or indirectly in connection with the course[s] of action”, although the Explanatory Memorandum (at [1.48]) contemplates that trade debts will fall within the section’.

The exclusion from safe harbour in relation to unmet tax obligations ‘is triggered by late payment of the employee entitlements, and not only by non-payment.  A question may arise, if a company makes some late payments or fails to lodge some taxation returns, whether that amounts to less than “substantial” compliance for the purpose of the exclusions’.

Justice Black queries

whether the safe harbour will be available to, or will be of assistance to, directors of smaller proprietary companies, where delays in payment of employee entitlements or failures to comply with obligations to report withholding tax or superannuation guarantee liabilities may well have occurred when such a company came under financial pressure.  The exclusions to the safe harbour may be triggered in that situation …’.

He also raises the question

‘as to the position of a director who seeks to rely on the “safe harbour” regime and receives a director penalty notice if the company has reported but not paid PAYG and superannuation guarantee liabilities’.  

High Court

The High Court is to decide whether special leave to appeal should be given in the corporations and trusts law matter of Amerind. The corporations and environmental law decision in Linc Energy is also the subject of a special leave application; with the Canadian Supreme Court remaining reserved in its decision on comparable issues in Redwater Energy.

The High Court is also to hear these cases where special leave has been granted:

  1. Coshott v Spencer, on 10 May 2018, in Canberra, as to whether there is an exception in the case of solicitor litigants to the general rule that litigants are not entitled to recover as costs for their time in conducting their own litigation (“the Chorley exception”), this case having the added issue that the solicitor litigant acted through an incorporated entity; and in
  2. Mighty River, on 19 June 2018, in Perth, as to whether the ‘holding’ deed of company arrangement, which provided for ‘no property’ to be available for creditors, complied with sec 444A(4)(b) of the Corporations Act, its purpose being to avoid the need for a court application to extend the convening period for the second creditors meeting.

ASIC

The Parliamentary Joint Committee on Corporations and Financial Services is conducting its regular review into ASIC at a hearing in Melbourne on 25 May 2018, all the more interesting in light of issues arising from the Banking Royal Commission.

Gift cards

The government is again looking at the question of gift cards, after a Senate committee abandoned its inquiry following the Dick Smith collapse in 2016.  The current inquiry, by Treasury, is limited to assessing An the period of time before a gift card expires, recently set in NSW at 3 years.  The Treasury paper notes that ‘carrying liabilities for longer means that there could potentially be a greater pool of liabilities owed by a company in the event of insolvency or bankruptcy’. It goes on to point out that gift card holders are unsecured creditors in an insolvency, and typically they remain unpaid. An accounting question is also asked, as to how businesses account for gift card liabilities, what costs are associated with maintaining gift card liability and how long businesses carry those gift card liabilities.

New Zealand appears to be continuing with its broader inquiry into gift cards, following the Borders matter.  At the same time, it still has lay-bys.

Questions or comments are welcome.

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