Australia’s corporate SME insolvency law may soon become law – and then….

The Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 progressed through a third reading in the Australian parliament on 8 December 2020 and its passage is now before the Senate. One parliamentary sitting day remains this year. The rushed or limited consultations, the limited coverage of the Bill and the lack of funds in SMEs were some themes of the debate.

A proposal to have the law reviewed after 12 months was rejected by the government. The government has already failed to meet a legislative requirement to review Australia’s safe harbour laws, due at the end of 2019, and it probably did not want to add to that failure, despite its view that this is the most significant corporate insolvency legislation in 30 years.

Some background

Although ideas for SME insolvency reform go back some years,[1] a 2015 Productivity Commission report finally gave them some focus, to some degree. While not rejecting the Commission’s recommendations, the government did not pursue them. But one acknowledgment to the limited funds of SMEs made by the government in 2015 was that liquidators should not have to work for free, which was often the case given the large proportion of assetless SME failures. The ‘norms of the market – economic self-interest and the maximisation of private gains’ would prevail. Hence, creditors should fund the liquidator; and if not, the many assetless SMEs would by-pass the liquidation process and go into deregistration.[2] Likewise, directors would need to fund the liquidator in voluntary liquidations.

While in 2017 the government considered setting up a ‘government liquidator’ to conduct a streamlined external administration of SMEs with a private registered liquidator appointed if circumstances warranted it – the model of both the UK and New Zealand – that idea was not pursued further nor has it been reconsidered. It would not align with the government’s preference for companies without assets to simply be deregistered.

Meanwhile, an intention to reduce the period of bankruptcy from 3 years to one had been announced in 2015.

COVID-19

The economic impact of COVID-19 has now prompted some legislative concern for SME insolvencies in 2020. But while the 1988 Harmer Report said, of its ground-breaking voluntary administration regime, that it would be a success even if only a ‘small percentage’ were able to be salvaged,[3] the government[4] and even the media[5] are not so modest about this Bill, both assessing it as the “biggest shake-up to corporate insolvency legislation in 30 years”.

Whatever its merits and potential limited coverage, it offers some potential for saving a struggling business with enough funds and resources remaining. And there still remains the option of the existing liquidation process, or simply deregistration, with the 50,000+ deregistered assetless companies at least overseen by ASIC and by the company’s creditors.

A case study

As one MP explained in the debate, an case study example is a tourism business shut down by COVID-19 which should not be described as ‘failing’ at all, or failing through the owner’s fault. Rather the COVID-19 impact was ‘something outside their control’ which occurred despite their efforts and their ‘excellent business plan’.

Under the new reforms, the tourism business owner’s options will depend but could include a corporate restructure with the aid of a smal business restructuring practitioner, or a company deregistration or a personal bankruptcy for 3 years or Part IX or Part X agreements.

Sole traders

The parliamentary debate focused much on the plight of the bulk of SMEs operating as sole traders, or perhaps as directors but exposed to personal liabilities even despite the ‘saving’ of their company. They are limited to the existing Bankruptcy Act options.

Current SME reforms by the Attorney-General under the Bankruptcy Act range from extending the realisations charge to Norfolk Island, introducing new family law court arrangements, and removing the requirement for bankruptcy notices to have a judgment ‘attached’ to them.[6]

Internationally

Australia’s new SME insolvency law coincides with an international meeting this week working on guidance for SME insolvencies, through the UN Commission on International Trade Law’s Working Group V – Insolvency. Among those members attending this 7-10 December meeting are the UK, the US, Canada, China, Singapore and Japan; Australia does not attend but an Australian non-government agency – UNCCA – is attending as observer.

UNCCA attendees (Casey Watters and Matyas Szuk) have reported thus far that policy discussions are focused on the recognition of employee protections; and the parameters of the debtor-in-possession, including as to its right to dispose of assets, to provide full information about its business and finances, and to take into account the interests of creditors.

Meanwhile, the international and local community await further details as to the commencement and application of Australia’s new laws.

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[1] For example, Keay’s Insolvency, Murray & Harris, 2011; What do we expect of insolvency (and of insolvency practitioners)? Murray & Harris, INSOL International. The Hague 18-19 May 2013; www.murrayslegal.com.au