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Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Changes to Australia’s insolvency laws – some different perspectives

The recent changes to Australia’s insolvency laws are being well explained by the experts. These are some comments from me both on the changes and on some gaps.

The changes to Australia’s insolvency laws are well explained elsewhere – the extended declarations of intention; the new $20,000 threshold for bankruptcy petitions; and $20,000 thresholds for bankruptcy notices and winding up demands, and their 6 month time periods for compliance; along with the suspension of the insolvent trading laws.

Here are some particular issues.

  • While bankruptcy notices and petitions and winding up demands are now limited, there are other triggers and liquidation available, along with other debt recovery mechanisms. How or whether a creditor would want to use them in the current crisis is another matter.
  • Pending insolvency matters can still proceed, but again, their continuation may be seen unfavourably if not in strict legal terms. It will be interesting to see if the courts exercise their general discretions against making a winding up or a sequestration order in particular cases.
  • Involuntary bankruptcy on the application of a creditor comprises only 10% of all bankruptcies at the best of times. The proportion would be similar in corporate insolvency.
  • Hence voluntary insolvency still remains an option and there is nothing to stop a company itself or individual activating the insolvency process and nor should there be. In fact, many may do so for the usual reasons of business failure or personal indebtedness compounded by what may be a psychological need to have the protection from creditors, and financial woes, that insolvency offers. The numbers may be tempered by the substantial moneys being paid by the government, and deferrals of rent and mortgage payments.
  • The 6 months suspension of the potential liability of directors for insolvent trading under s 588G(2) has had the usual mixed reception, depending on whether one’s perspective comes from the big corporates or the smaller creditors. The impact of removing such a broadly based liability may fall either way, or, more likely, not much at all.
  • Nevertheless, it is not open slather. Business must continue to incur relevant debts in the ordinary course of business, and which are debts, according to the Explanatory Memorandum, necessary to facilitate the continuation of the business during this 6 month period; for example, financing on-line operations of a business and retention of employees. That is narrower than the existing safe harbour protection for debts incurred. Businesses and their advisers should document the protective actions they take. Abuse of the regime could come under close scrutiny down the track, including under other more general duties owed by directors.
  • Whatever the outcome, creditors need to try to protect their trading position and the impact of access to credit may be tightened as suppliers pay more attention to their trading terms.
  • And it remains that a debtor who goes bankrupt because of this crisis will remain legally constrained for 3 years – no time period abridgment there. If they had only operated as a one director one shareholder company, they could have quickly tried to restore themselves immediately post liquidation.
  • The calculation of ‘months’ is found in s 2G of the Acts Interpretation Act 1901, s 2G(2) defining a statutory reference to a period of 2 or more months, and giving examples of references to 6 months. And,
  • The new law only applies prospectively – check the transitional sections.

Resourcing and more

The term ‘avalanche’ of insolvencies has been used, with some of these measures trying to prevent or forestall that in appropriate cases.  These will mostly likely be, in numbers at least, in the SME sector.

Australia may not be as well prepared for that avalanche as it should be.

The government Official Trustee in Bankruptcy is there to take on what may be many assetless bankruptcies. But given AFSA’s recent statement that 63% of supposedly moneyed bankruptcies handled by private trustees are unremunerated, trustees generally might like to look carefully at what estates they are being asked to consent to take on.

There is no fall back to an Australian Official Receiver in corporate insolvency as there is in the UK and NZ. That has always been the case, but the problem may now arise of resourcing by a private and necessarily profit motivated industry the administrations of large numbers of SME assetless insolvent businesses. The corporate system has been described as being ‘barely supported’ by the remaining assets of companies entering insolvency at the best of times.

Those in financial distress will also have to negotiate what is inflexible law and regulation in relation to the resolution of often joint personal and company liability, as will practitioners.

Given human nature, there will also be those abusing these changes, and those assisting them, for the regulators and the industry to counter.

Comments are welcome.

 

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