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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.

 

Australian insolvency law – current reforms

As in many countries, general elections put law changes and reform on hold pending the new government’s decisions on pending law. The government was returned in Australia at the recent May election and this is a convenient time to review where Australian insolvency law reform is at the moment, or as much can be anticipated.

While there was a list of pending bills, only a few, if that many, were or are significant. These are ones that focus on the overall structure in which insolvency is required to try,  to meet its purposes.  

Phoenix

Anti-phoenix company measures are a focus, although simply with more ex post recovery rights being introduced under the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. It would create a new voidable transaction, a ‘creditor defeating disposition’; give new powers to ASIC to ‘order’ the re-transfer of property, as if it were a court.  The Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 would re-write Pt 5.8A of the Corporations Act 2001 in relation to the entering into a transaction that would avoid or prevent recovery or significantly reduce recovery of employee entitlements; with a new civil penalty provision and liability to pay compensation, and new disqualification powers.

There may be deterrent effects with these, if they are enforced, but that is problematic, and the rights of recovery are complex, and potentially costly, with some constitutional uncertainty about ASIC’s power to order the re-transfer of assets.

Director identity

There is a significant need for the director identification numbers (DINs) which are part of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018, and related Bills. A difficulty, apparently, is the archaic state of the corporate registers.

Penalties

New increased penalties are being introduced for corporate misconduct, including in insolvency. For example, the penalty for managing a company while disqualified would increase from 1 year prison to 5. Various civil penalties are increased from A$200,000 to A$1m and A$10m for a company. Directors’ duties, financial reporting and auditing and fundraising offences have increases up to 10 years jail. There are new disgorgement remedies for civil penalties, including based as a percentage of the annual turnover of the transgressor. Courts are to give greater priority to compensation for victims over financial penalties. There are also new accessorial liability and attempt provisions.

Like many other jurisdictions, certain criminal penalties are not provable debts, and in the case of a company in liquidation, they disappear.

Pharmacists

A small but apparently significant change proposed is through the National Health Amendment (Pharmaceutical Benefits) Bill 2019 which would allow PBS medicines to continue to be supplied to patients following the bankruptcy of an approved pharmacist. Licences are typically personal to the bankrupt, given that the licence is based upon the qualifications and experience of that person alone: see Fisher v Transport for NSW [2016] NSWSC 1888, Griffiths v Civil Aviation Authority [1996] FCA 1502.  The trustee is not to be “as a matter of law an approved pharmacist but is deemed to be”: see also Pharmacy Board of Australia v Nyoni [2018] WASAT 134.

Debt agreements

Again, like other comparable jurisdictions, Australia has a debt agreement regime – Part IX of the Bankruptcy Act 1966 – for low income and asset insolvents. Debt agreements now comprise around over a third of all personal insolvencies, although they, and bankruptcies, have been falling to low levels. Debt agreements are now subject to more regulation since new law commenced on 27 June 2019. It made provision for the types of practitioners authorised to be debt agreement administrators; their registration, deregistration and their obligations; the formation, administration, variation and termination of debt agreements; protections against debt agreements that cause financial hardship or have other defects, and powers of the Inspector-General in Bankruptcy with respect to debt agreements and their administrators. One aim is to “deter unscrupulous practices”.

A significant change is to double the threshold value of the debtor’s property for entry into an agreement. This amount is currently A$114,478. According to the government, this increase is needed because of the significant inflation in Australian property prices.

The one-year bankruptcy

The relevant Bill to reduce the three year period is yet to reappear but the reform is consistent with the government’s views. AFSA has reported that trustees lodged only 519 objections to discharge in 2016-2017 in relation to the 57,923 persons who were in bankruptcy; that trustees leave it until the last moment to lodge objections, and creditors generally get back on average $100 for their unpaid debt. There may be other issues – trustees’ remuneration? – but this has not been explained.

If the one year bankruptcy does not proceed, debt agreements will continue to be seen more favourably, or so insolvent debtors might be persuaded.

AFCA

The Australian Financial Complaints Authority is a new agency, handling financial complaints of its wide range of financial institution membership. Its UK equivalent is the Financial Ombudsman Service.

AFCA’s factsheet on its website – Insolvent consumers – sets out only some of the issues involved with a financial complaint of a bankrupt, or an insolvent business.

Significantly, a February 2019 Senate Committee report has recommended that AFCA have a role in regulating pre-insolvency and debt advisers.

Aboriginal corporations

Aboriginal and Torres Strait Islander corporations are registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth). That Act has particular provisions that accommodate the different governance issues involved, including in relation to those corporations’ insolvency or other instability. A Bill has proposed an easier route to winding up these companies: see Corporations (Aboriginal and Torres Strait Islander) Amendment (Strengthening Governance and Transparency) Bill 2018, with presumptions of insolvency available if the corporation has failed to keep financial records as required.

CCIVs not MIS

Managed investment schemes (MIS) under Chapter 5C of the Corporations Act may be replaced by a corporate collective investment vehicle (CCIV) regime, under the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill. It included winding up provisions on a sub-fund-by-sub-fund basis. Some parallels are found in UK and European law.

Whistleblowing

Also, like other jurisdictions, Australia now has a (limited) whistleblowing protection law, under the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019.

One issue is that professional accountants – in Australia CAANZ, CPA and IPA members – have obligations to attend to and if necessary refer breaches of the law to the authorities, under APES 110, which implements the International Code of Ethics for Professional Accountants, including insolvency practitioners and auditors. Our bankruptcy regulator has issued guidance for trustees – see AFSA’s Accountants’ duty to disclose non-compliance with laws and regulations, June 2018.

One example would be an accountant’s responsibility under the Code if their hospitality client was underpaying its workers or taxes.

Whistleblowing laws also exist in insolvency, with ARITA and others having the authority to refer insolvency practitioner misconduct to the regulators. Some statutory protection is given.

But otherwise, ill-advised whistleblowing outside a formal regime can raise possible liabilities: see Whistleblowing: is it worth the risk under Australian law? Grant Hansen, 2018.

MSMEs

Australia continues to retain two regulators, but with only a government trustee in personal insolvency – the Official Trustee in Bankruptcy – which shares the administration of insolvencies with the private profession. The government has raised the idea of a government liquidator, consistent with its recent abolition of the official liquidator role. While Australia adopted most of the corporate law reforms of the UK in the late 19th century, its significant departure was to opt for an official liquidator role instead. In the absence of such a position being created, there would be many business not able to afford a private insolvency appointment.

Crown priority

And while the UK is re-introducing Crown priority in insolvency, Australia dispensed with that in 1993, the quid pro quo being the imposition of direct liability on directors for the company’s unpaid taxes. That liability, and the range of circumstances in which it can be imposed, has increased steadily over the years. The negative behavioural impact that the Crown priority had on the Australian Tax Office is well explained by Professor Chris Symes in Reminiscing the Taxation Priorities  in Insolvency [2005] JIATaxTA 23. He quotes parliamentary debates at the time to the effect that

“the size of the debts owed to the Tax Office was allowed to grow to ridiculous proportions … because … the ATO had no incentive to take quick and decisive action in these cases because its priority under the existing arrangements guaranteed that it would get its money regardless of the consequences this might have for other creditors and, most importantly, employees”.

Unpaid SME taxes

As to employee taxes and related payments, there are indications in Australia that many small medium enterprises in particular fields are not properly paying workers or taxes, making those businesses technically and actually insolvent ‘zombies’. Disclosure of large amounts unpaid in the café and restaurant industry is probably indicative of problems elsewhere. This also raises obvious unfair competition issues.

Similar issues have occurred, and probably remain, in the building and construction industry.

Banking inquiry

Australia’s Royal Commission into our banking and financial services has raised concerns about the standards of governance and conduct in those areas. Australia’s rather opaque environment in which business operates may, some say, cover up similar issues in many other industries. The Commission’s sole recommendation in insolvency was in relation to farm debt mediation and the sale of rural properties.

Safe harbour

Australia’s ‘safe harbour’ regime that seeks to encourage a more flexible environment for corporate restructuring by directors is due for its two-year review after September 2019. Its effect, if any, is more at the top end of the market.

Conclusion?

Hence, apart perhaps from the one-year bankruptcy, the director identity number, and the government liquidator – which I classify as structural reforms – not much would be lost if some of these reforms did not proceed. Returns to creditors, though only one aspect of the purposes of insolvency, are so low that any changes cannot make any real impact, on average. The beneficiaries may be the priority creditors, the government.

Major reforms await a review of Australia’s insolvency regime. It is a long time since its last review – the Harmer and Fisher report – over 30 years ago.

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