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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Our insolvency law reform – will it all end in tears?

While Australia has been debating for too long what law we should have to assist in the recovery of distressed businesses, both the UK and Europe are considering more advanced reforms consistent with a stated policy of encouraging, by law or otherwise, better corporate restructuring outcomes.
A failing business that simply collapses into  liquidation and winding up invariably loses much of the monetary value of its assets, including its ideas and its momentum; a failing business whose problems are attended to earlier can result in the preservation of that value either for itself, or for others taking it over and improving its prospects. That is the UK/European approach, and also one largely adopted in Australia.  The interminable debate here is how to frame laws to facilitate that, or, to pull back on our laws against insolvent trading that can impose personal liabilities on directors trying to preserve their business, but at the undue expense of the creditors
A UK consultation paper has been issued that is examining four broad areas for reform:
  1. a 3 month moratorium (which may be extended) during which period creditors can require ongoing information from the insolvency practitioner, a right that is potentially to be extended to all insolvency procedures. Directors may remain in control of the company’s affairs during the moratorium, with no exposure, for personal liability, subject to applying for protection under a set of eligibility tests and qualifying conditions that go to serve and protect creditors’ interests – that is debtor in possession. An authorised supervisor would be involved in the application process and would monitor the company’s compliance with the qualifying conditions throughout the moratorium. That person might be an insolvency practitioner, an accountant or a lawyer.
  2. a broadening the definition of ‘essential supplies’, which are protected from termination under ipso facto terms, with appropriate safeguards. Essential supplies were recently extended in the UK to include IT services;
  3. significantly, developing a new type of restructuring plan to increase the rescue options available, including allowing the company to enter an arrangement to bind all creditors, including secured creditors, and to ‘cram-down’ those dissenting; and
  4. increasing the availability of debtor/rescue finance, ‘new money’ often being a prerequisite for a business’ revival, if the investor is given some priority if the revival fails.
Comment
It can be difficult to contrast and compare different insolvency and legal regimes, in particular where background laws and practices differ. The UK did away with the Australian concept of receivership some years ago, with the insolvency administrator now having responsibilities to both the secured and unsecured creditors.  The UK revenue authority has less power than our ATO, the latter with its director penalty and garnishees notices. There is a government funded Official Receiver in the UK, who takes on much of the assetless work, and investigations of corporate misconduct, allowing the practitioners to focus more on the core business issues. The legacy of the London approach continues – a Bank of England  exercise in moral suasion of the banking community to promote more positive approaches to customer distress. Economic data is more available in the UK, assisted by the recent  opening up of company data to the public; and the professional bodies regularly produce and publish valuable qualitative data from their membership and commission quality research.
Overall, the culture and attitude to unpaid debt remains more severe in Australia than in the UK, as revealed in some of the responses to the government’s announced reduction in the period of bankruptcy to one year.  Even Ireland, which had a 12 year period of bankruptcy not that long ago, has recently adopted a one year period.
Nevertheless, despite these underlying differences, a valid and adverse comparison can be made between Australia and the UK, the latter with its higher standard of thinking and analysis, influenced by its history and culture, and also much influenced by its proximity to the ideas coming from Europe, and the US.
Knee jerks of political and media jingoistic populist mantra
While Australia often knee jerks with jingoistic populist mantra – a ‘debtor in possession’ model would allow the fox into the hen house; Chapter 11 comes from the US, has no place here; a reduction in the power of banks in Australia would lead to a rise in interest rates – a more informed and constructive debate, even politically, appears to exist in the UK.
It is too early to assess now, but in 12 or 18 months Australia may have a new restructuring regime; with the UK likely to be ahead on the business revival spectrum.
Two requests
One request is made by your writer. Given that many submissions will have been made to government promoting the merits of one particular type of drafting reform or another – a carve out, a defence, a statement of duty – a process should be put in place to monitor the effectiveness of the reform, with criteria for effectiveness being set.  That may well be an economic or statistical task for government, but it is often that, once a major change is introduced, those at whose pleading and submission the reform was made, then lose any sense of responsibility for monitoring and reporting on the regime that they themselves pushed for, government agencies included.  Ask the ATO whether it has statistics on its increased tax recoveries from its director penalty notices after the major 2012 reforms which the ATO itself sought.
Another request is more broad. We should recognise that the law has it limits and no amount of new or reformed sections of the Corporations Act will provide an answer.  Regulation of compliance will assist. But even then, the law can only do so much.  There is a need for other disciplines and bodies to be engaged – a change in language, a more constructive focus on risk, better regulator communications, promotion of the worth of financial monitoring, supported by improved software, wider advice offerings by local accountants and business advisers. Certainly when any new law is introduced, there should be a barrage of positive and constructive messages issued, and on-going, to the business and director community.
Will it all end in tears?
It is also of your writer’s nature to warn that this whole approach to more flexible arrangement for corporate distress may end in tears, some years down the track.  Just as now, we look back upon the pre-GFC collateralised debt obligations, and think ‘how did we ever think that way?’.
A 2026 start date?
For those with these concerns, there is legislative hope, if not for defeat at least for delay.  In a 2002 judgment, Justice Julie Dodds-Streeton identified a single drafting error in the Corporations Act that could, she said, lead to injustice, and she recommended its correction by the legislature.  That error is now remedied in the 2016 Insolvency Law Reform Act. But, no rush – that Act, and its remedial correction, is not to commence until at least March 2017. At that rate, our beneficial restructuring reforms may not come into effect until 2026.
Michael Murray

Notes:

  • The relevant law in the UK is the Insolvency Act 1986  It was substantially amended in by the Enterprise Act 2002, which, among other reforms, introduced a one year period of bankruptcy.  England has a single insolvency regulator, the Insolvency Service, although professional bodies have a significant professional regulation role.
  • The UK consultation paper – A Review of the Corporate Insolvency Framework, 25 May 2016 – calls for  submissions by 6 July 2016.
  • It seeks views on whether the UK’s regime needs updating in light of the international principles developed by the World Bank and UNCITRAL, in light of recent large corporate failures in the UK and of an increasing European focus on restructuring. The latter follows the March 2014 recommendation of the European Commission to adopt a new more constructive approach to business failure and insolvency for the EU. The University of Leeds has been tasked with providing a major review of European insolvency and ideas for reform.
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