World Congress of the International Association of Procedural Law Salvador, Bahia, Brazil 19 September 2007

NEW TRENDS IN INSOLVENCY PROCEEDINGS: AN AUSTRALIAN PERSPECTIVE

ROSALIND MASON BA, LLB(Hons) Q’ld, LLM Syd, PhD Q’ld, Solicitor

Associate Professor Department of Law University of Southern Queensland Toowoomba Qld 4350 AUSTRALIA Email: [email protected] © Rosalind Mason 2007

New Trends in Insolvency Proceedings: An Australian Perspective

Dr Rosalind Mason

Introduction Australia operates as a market economy and, as such, it provides the opportunity for risk-taking firms to profit from their success in business.1

Concomitantly it is

fundamental to such a system that firms risk failure.2 In the context of firms’ reliance upon credit to operate, failure means that debtors will be unable to meet their financial obligations as they fall due.3 The spectre of financial failure haunts not only businesses but also consumers to whom credit has been extended for the purchase of goods or services. Where there is default in meeting financial obligations, whether for a business or consumer debtor, this may result in secured creditors exercising their rights against the debtor’s property or unsecured creditors pursuing debt recovery avenues. Eventually, where financial obligations can not ultimately be satisfied, individual action by secured or unsecured creditors may be eclipsed by a collective insolvency administration. The 2006 Organisation for Economic Co-operation and Development (OECD) assessment of the Australian economy referred to Australia’s reputation as the ‘lucky’ country, and the fact that ‘Australia has been riding the global boom in commodities, benefiting increasingly from its proximity to Asia. Yet Australia ‘has also made its own luck’ through a series of structural reforms and the introduction of a robust macroeconomic framework which have bolstered resilience.’4 It has experienced impressive macroeconomic performance in recent years measured in terms of growth in gross domestic product (GDP) and real gross domestic income, record low unemployment rate,5 controlled inflation and elimination of general government net debt. 1

ED Flaschen & TB DeSieno, ‘The Development of Insolvency Law as Part of the Transition from a Centrally Planned to a Market Economy’, (1992) 26 (3) The International Lawyer 667. 2 Internal causes and symptoms include poor management, deficient accounting information, inadequate response to change: J Argenti 1976, Corporate Collapse: The Causes and Symptoms, McGraw Hill Book Company (UK) Limited, London. External factors include, for example, change to government regulation or climate change. 3 United Kingdom Insolvency Law Review Committee 1982, ‘Principles of Insolvency Law’, Report on Insolvency Law and Practice, Cmnd 8558, Her Majesty’s Printing Office, London, para 198(a). 4 Organisation for Economic Co-operation and Development 2006, Executive summary of assessment and recommendations, Economic Survey of Australia 2006: http://www.oecd.org/document/17/0,2340,en_2649_37429_37147409_1_1_1_37429,00.html 5 The Australian Bureau of Statistics Labour Force Survey Report indicates the unemployment rate fell to 4.8% in July 2006, the lowest unemployment rate in 30 years and the lowest level in the number of unemployed in more than 16 years. http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/6202.0Explanatory%20Notes1Aug%202006?Open Document

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Since the beginning of the 1990s, living standards have steadily improved and in 2006 they surpassed all G7 countries except the United States.6 Although a little dated, research undertaken in 2000 into business failure and change found that most Australian businesses survive for a considerable time.7 Some two–thirds of businesses were still operating after five years and almost half were still operating after ten years. Around 7.5 per cent of businesses exited each year with cessations accounting for around 80 per cent of exits and changes in ownership the remainder but most exits were not due to failure of the firm. Less than 0.5 per cent of businesses exited each year due to bankruptcy or liquidation. Yet insolvency policy and regulation is more significant than might be expected, given the relatively small proportion of businesses which exit because of business failure.8 Such policy and regulation affect more than just those associated with the failing business. They ‘affect economic incentives more broadly by changing the willingness of people to lend money to businesses, and the level of prudence adopted by entrepreneurs.’9 They also affect the number of businesses that become insolvent and they can ‘partly determine the extent of reorganisation of resources in an economy over time, with potential long run impacts on overall business dynamism and productivity.’10

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Organisation for Economic Co-operation and Development 2006, Economic Survey of Australia 2006, Chapter 2 summary: ‘gross domestic product (GDP) growth since the turn of the millennium has averaged above 3% per annum and, including the terms-of-trade gains, growth in real gross domestic income has averaged over 4%, among the handful of OECD countries achieving such rapid growth; the unemployment rate has fallen to around 5%, its lowest level since the 1970s; inflation has remained within the target range; and, following a long stretch of fiscal surpluses, Australia is now one of the few OECD countries where general government net debt has been eliminated.’ http://www.oecd.org/document/40/0,2340,en_2649_37429_37149416_1_1_1_37429,00.html 7 I Bickerdyce, R Lattimore & A Madge, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, Ausinfo, Canberra, 2000 http://www.pc.gov.au/research/staffres/bfacaap/index.html The Productivity Commission is an independent Commonwealth agency and the federal government’s principal review and advisory body on microeconomic policy and regulation. 8 Equally, there is a relatively small proportion (0.14%) of the population who enter insolvency proceedings as individuals (or as joint debtors or partners within a partnership). According to the Insolvency Trustee Service Australia, 0.14% of the total Australian population became bankrupt or entered into a formal arrangement with their creditors in 2005: Insolvency and Trustee Service Australia 2006, Profile of Debtors 2005, Commonwealth of Australia p 33: http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/about+us>publications->debtor+profiles?opendocument 9 I Bickerdyce, R Lattimore & A Madge, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, Ausinfo, Canberra, 2000 at 76. 10 I Bickerdyce, R Lattimore & A Madge, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, Ausinfo, Canberra, 2000 at 77.

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The inevitability of default in meeting financial obligations by a proportion of business and consumer debtors requires efficient and effective insolvency laws as part of the fabric of the regulation of a market economy.11 As noted by the World Bank, ‘Effective insolvency and creditor rights systems are an important element of financial system stability.’12 Insolvency law underpins the commercial and financial dealings in a market economy,13 finally allocating the losses in the event of financial failure of a business. This underlines the ‘close relationship between economic results and legal solutions in this field’.14 In Australia, the close relationship between economics and regulatory policy surrounding companies, including those experiencing insolvency or near insolvency, is reflected in the Corporate Law Economic Reform Program (CLERP) program initiated by the federal Treasurer in March 1997. CLERP involves ‘a fundamental review of key areas of regulation which affect business and investment activity. The objective of the Program is to ensure that business regulation is consistent with promoting a strong and vibrant economy and provides a framework which assists business in adapting to change.’15 The same close link between economics and law has not been made explicit in personal insolvency policy. In press releases heralding bankruptcy law reform the current federal Attorney-General uses phrases that emphasise the importance of ‘the equity and integrity’ of the personal insolvency system.16 However, the focus appears to be more on the integrity of ‘the debtor’ than ‘the system’. Reference is made to debtors who ‘avoid

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See steps being taken by the United Nations Commission for International Trade Law (Legislative Guide on Insolvency Law), the World Bank (Principles for Effective Insolvency and Creditors’ Rights Systems), the International Monetary Fund (Report of the Working Group on International Financial Crises) and others to promote reform of insolvency systems. 12 World Bank 2005, Principles for Effective Insolvency and Creditors’ Rights Systems (revised), p 2 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/LAWANDJUSTICE/GILD/0,,contentMDK:207 74193~pagePK:64065425~piPK:162156~theSitePK:215006,00.html 13 PR Wood 1995, Principles of International Insolvency, Sweet & Maxwell, London, at p 1. 14 HS Burman, ‘Harmonization of International Bankruptcy Law: A United States Perspective’ (1996) 64 Fordham Law Review 2543 at 2548. 15 http://www.treasury.gov.au/contentitem.asp?NavId=013&ContentID=267 CLERP Policy Framework dated 1 May 1998. 16 Attorney-General, Government to Act on Bankruptcy Avoidance (Media Release 145 of 2005). The current Attorney-General’s media releases may be accessed at http://www.ag.gov.au/.

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obligations to creditors’ (either as bankrupts17 or as debtors entering into creditor arrangements18) rather than on the stability of the financial system, even though it may be implied that widespread failure of debtors to meet their financial obligations adversely affects ‘the system’ and, importantly, confidence therein. This paper provides a review of insolvency proceedings in Australia. First, it explains the Australian use of the terms ‘bankruptcy’ and ‘insolvency’, followed by an outline of the Australian legal system, describing the constitutional and legislative context for personal and corporate insolvency laws, the jurisdictional framework for the relevant courts; and finally the institutional context addressing the regulators, the insolvency administrators and the role of the courts. Second, it outlines the insolvency administrations available for personal and corporate debtors in Australia, including comments on recent developments in each. Third, it addresses insolvency law reform in Australia over the past decade or so – highlighting the different approaches and issues evident in the personal and corporate arenas. The paper concludes by drawing out some themes or recent trends in Australian insolvency proceedings.

Terminology Australian insolvency proceedings distinguish between individual (or natural person) and corporate debtors.

The laws dealing with personal bankruptcies and

alternative arrangements with creditors are to found in the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) and the equivalent corporate insolvency administrations are regulated by the Corporations Act 2001 (Cth) (‘Corporations Act’).19 In Australia, the term ‘insolvency law’ typically signifies laws dealing with insolvent debtors generally. That is, debtors who are unable to meet their debts as and when they fall due. In its development, Australian ‘insolvency law’ has paralleled the 17

Attorney-General and Minister for Revenue and Assistant Treasurer, Government moves to close Super [superannuation] Loophole (Joint Release 49 of 2003). ‘The changes, along with other recent bankruptcy reforms, demonstrate the government’s ongoing commitment to ensuring bankruptcy laws cannot be used inappropriately to avoid obligations to creditors.’ 18 Attorney-General, Part X of the Bankruptcy Act to be Strengthened (Media Release 98 of 2004): The changes ‘are designed to overcome concerns that Part X arrangements were being manipulated by some debtors to avoid paying their debts’. Attorney-General, Part X of Bankruptcy Act to be Strengthened (Media Release 37 of 2004): Amongst other things, the amendments are aimed at enhancing ‘the integrity of Part X arrangements’. 19 Australian Commonwealth legislation is available at http://www.comlaw.gov.au/ . An extensive federal, state and territory legislation and case law data base is available via http://www.austlii.edu.au/ .

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experience in England, from which system it evolved. In the nineteenth century, the term ‘insolvency law’ was used in a more restricted fashion. It referred to arrangements which were intended to protect all creditors and as such they differed from laws on recovery of judgment debts by individual judgment creditors. They also differed from ‘bankruptcy’ laws which provided for sequestration of an individual debtor’s divisible estate and its distribution to the collective body of creditors according to a statutory regime. This more restrictive use of the term ‘insolvency law’ is reflected in the phrase ‘bankruptcy and insolvency’ that became enshrined in the Australian Constitution in 1901. In twenty-first century Australia, the term ‘bankruptcy’ is confined to laws covering the sequestration and distribution of an individual debtor’s divisible estate to the collective body of creditors; whereas arguably ‘bankruptcy law’ may cover both sequestration as well as arrangements with creditors as these are all contained in the relevant statute, the Bankruptcy Act.

Such ‘bankruptcy law’ evolved initially for

individuals and partnerships. With the growth of the corporate form, laws were introduced to deal with insolvent companies, generally as part of general company law or, rarely, as specific winding up laws. Over time, the equivalent laws on sequestration/liquidation and arrangements with creditors for corporate debtors have become known as ‘insolvency laws’ or ‘corporate insolvency laws’. Currently, ‘bankruptcy’ technically only applies to individuals, and this is reflected in the title of the legislation; the name of the collective sequestration administration for individuals; the names of the territories (Bankruptcy Districts) for each of which there is an Official Receiver; and the title of certain officers e.g. InspectorGeneral of Bankruptcy (who nevertheless is the Chief Executive Officer of the Insolvency and Trustee Service Australia) and trustees in bankruptcy. However in common parlance, the term ‘bankruptcy’ is often used loosely to refer to ‘insolvency’ regardless of the type of debtor. For example, the media often loosely uses terms such ‘being bankrupt’ or ‘in liquidation’ or ‘in receivership’ for debtors unable to meet their financial obligations, regardless of the technical term of the administrations to which they may be subject. As far as consumer as distinct from business bankrupts are concerned, Australian bankruptcy law makes no explicit recognition of such bankrupts as a separate regulatory

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target. Likewise, general company law does not differentiate between closely held (e.g. small family owned) companies and large commercial corporations, nor does specific corporate insolvency law differentiate between administrations depending on the size or complexity of the company. Arguably, the Bankruptcy Act still retains minor remnants of earlier English bankruptcy regimes which were confined to ‘traders’ and so did not apply to consumer bankrupts at all.20 For example, a defence to an antecedent voidable transaction recovery action for unfair preferences is only available in a business context.21 Another distinction recently introduced in respect of business bankrupts is a rebuttable presumption of insolvency in the context of certain antecedent transaction provisions.

That is, a

presumption that the transferor was insolvent at the time of the transaction will arise if it is established that the transferor had not, in respect of that time, kept proper ‘books, accounts and records’.22 However, the Insolvency Trustee and Insolvency Service Australia (ITSA) Annual Reports distinguish between ‘business’ and ‘non-business’ bankruptcies. This distinction depends upon whether or not an individual’s occupation and cause of bankruptcy are related to any proprietary interest in a business.23 This classification as business or non-business (or consumer) bankruptcy is based upon the trustees’ inquiries, including the bankrupt’s statement of affairs and the bankrupt’s occupational status prior to bankruptcy.

Australian Legal System The Australian legal system24 derives from the United Kingdom with relatively recent recognition of a place for Aboriginal customary law. Australia is a common law country and so the sources of law include both general (judge-made) law and statute. It is

20

The first (1542) English statute dealing with bankruptcy was limited in its operation to traders. Section 122(2)(a) Bankruptcy Act applies to a person who engaged in the relevant conduct ‘in the ordinary course of business’. 22 Or where, having kept the appropriate books, accounts and records in relation to that time, the transferor had failed to preserve them. This is discussed below under involuntary bankruptcy. 23 The reports area available on the ITSA website http://www.itsa.gov.au 24 Aspects of this paper on insolvency administrations draw upon R Mason 2006, ‘Insolvency Law in Australia’ in R Tomasic (ed), Insolvency Law in East Asia, Ashgate, Aldershot, pp 473 - 517. 21

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a federation with law-making power distributed between the Commonwealth (federal Parliament) and six states and two internal self-governing territories.25 Upon European settlement in 1788, the continent was regarded, as a matter of law, as a settled not conquered or ceded colony, and so English law was the received law of the land. During the nineteenth century, although the United Kingdom retained certain law-making power,26 the colonies gradually developed their own legislatures and court systems. Eventually six colonies were established, each with a Constitution granting plenary power to pass laws for the peace, order [or welfare] and good government of particular geographical areas (subject to certain powers of the Imperial Parliament). They joined together as a federation on 1 January 1901 with the Commonwealth (also known as the federal) Parliament being granted specific powers under the Australian Constitution. The states’ plenary powers continue to the extent they are not overridden by the Australian Constitution. Where the Commonwealth and the states exercise concurrent legislative powers, then Commonwealth legislation overrides to the extent of any inconsistency.27

Constitutional and Legislative Context Under the Australian Constitution, the federal Parliament was granted a specific power, to be exercised concurrently with the states, to make laws with respect to ‘bankruptcy and insolvency’.28 The colonies’ personal bankruptcy and insolvency laws29 continued in existence until made otiose by comprehensive Commonwealth bankruptcy legislation.30 Although the grant of power to the Commonwealth to legislate on ‘insolvency’ was wide enough to extend to the liquidation of companies,31 the English approach of including the regulation of corporate insolvency in the general corporations 25

The Northern Territory and the Australian Capital Territory. Both the United Kingdom’s power to pass paramount force legislation and the right of appeal from Australian courts to the Judicial Committee of the Privy Council ceased at different stages for the Commonwealth and the states. An important final step was the Australia Act 1986 (Cth) and its complementary United Kingdom and state legislation. 27 Section 109 Australian Constitution. 28 Section 51(xvii) Australian Constitution. 29 The colonies had laws based on the Bankruptcy Act 1883, 46 & 47 Vict, c 52, except Queensland and Tasmania whose laws were based on the Bankruptcy Act 1869, 32 & 33 Vict, c 71. 30 Bankruptcy Act 1924 (Cth), subsequently repealed by the current Bankruptcy Act 1966 (Cth). 26

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legislation was followed in Australia. Thus, the colonies - and later, the states - continued to legislate on the winding-up of trading companies and other associations in various Companies Acts.32 The Australian Constitution granted the Commonwealth concurrent law-making power with the states over corporations, in respect of ‘foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth’.33 Despite the constitutional limitations imposed by the words ‘trading’, ‘financial’ and ‘formed’, a move towards uniform corporate regulation in Australia began in the early 1960s.34 In 1989, the Commonwealth sought to legislate federally for Australia-wide comprehensive

companies’

regulation.

However,

this

was

struck

down

as

unconstitutional by the High Court.35 As a consequence, the Commonwealth, states and the Northern Territory negotiated a national scheme of cooperative legislation. In 1990, the states and the Northern Territory introduced their own statutes applying federal legislation passed for the Australian Capital Territory to regulate companies, grant national regulatory powers to the Australian Securities Commission (now the Australian Securities and Investments Commission (‘ASIC’)) and cross-vest jurisdiction between the federal, state and territory courts. In 1999, the cross-vesting scheme was held by the High Court to be constitutionally invalid insofar as it attempted to cross-vest state jurisdiction in the federal courts.36 Other matters before the High Court37 raised more concerns about the

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Justice RS French, ‘Federal Jurisdiction — An Insolvency Practitioner’s Guide to the Labyrinth’ (2000) 8 Insolvency Law Journal 128, 129, citing Victoria v Commonwealth (1957) 99 CLR 575, 612 (Dixon J). See also Victoria v Commonwealth (1957) 99 CLR 575, 624 (McTiernan J) and 658 (Kitto J). 32 M Gronow 2006, McPherson’s The Law of Company Liquidation, 5th edn, Lawbook Co, [1.400]. The first colonial statute dealing with insolvent companies, the New South Wales Winding Up Act of 1847, was followed closely the English Winding up Act of 1844. Each of the subsequent colonies (and then states) passed and amended their own Companies Acts which covered incorporation, regulation and winding up of trading companies and other associations and closely followed English legislation. Reference was made in the statutes to the laws of bankruptcy, for example in respect of the proof of claims and voidable antecedent transactions. 33 Australian Constitution s 51(xx). 34 Uniform Companies Acts of 1961–62, followed by the Companies Acts of 1981, although strict uniformity was not achieved. For more detailed background material, see Bills Digest No 140 2000–01: Corporations Bill 2001 (2001), available from the Parliament House web site http://www.aph.gov.au 35 New South Wales v Commonwealth (1990) 169 CLR 482. 36 Re Wakim; Ex parte McNally (1999) 198 CLR 511. The vesting of the applicable state jurisdiction in the other state Supreme Courts remained valid. The conferral of jurisdiction on the Federal Court with respect

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continued viability of the cooperative scheme, in particular ASIC’s capacity to incorporate companies under state law.38 After a period of significant uncertainty that adversely affected business and investment at a national level, agreement was finally reached between the various governments to put national corporations regulation on a firmer constitutional foundation. Through state referral of powers to the Commonwealth39 combined with the Commonwealth’s pre-existing constitutional powers, comprehensive federal legislation was passed in 2001 in the form of the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’)40 While various law reform bodies and committees of review have mooted a merged regulatory framework for personal and corporate insolvencies,41 there is no indication at present that the policy makers intend to change the current regime. The Commonwealth Parliamentary Joint Committee on Corporations and Financial Services (‘Parliamentary Joint Committee’) stated in its 2004 Corporate Insolvency Laws: A Stocktake report: The Committee notes the support of witnesses for a merger and previous recommendations of other inquiries suggesting that the merits of a unified legislative and administrative framework for corporate and personal insolvency are worth examining. It considers that a possible merger of corporate and personal insolvency law should remain an option for governments to consider. In the absence of any concrete proposal for a merger of corporate and personal insolvency law, the Committee makes no firm recommendation but is conscious of the importance for the Government to ensure that any future reform in either system is developed and implemented with a view to maintaining compatibility between them.42

to civil matters arising under the Corporations Law of the Australian Capital Territory and Northern Territory, based on Australian Constitution s 122, was valid. 37 Insofar as it involved Commonwealth officers and authorities (for example, the Director of Public Prosecutions or ASIC) performing functions conferred under state law: R v Hughes (2000) 202 CLR 535. 38 Transcript of Proceedings, GPS First Mortgage Securities Pty Ltd v Lynch; Ex parte A-G (Cth) (High Court of Australia, Callinan J, 23 June 2000). 39 Australian Constitution s 51(xxxvii). 40 The states agreed to refer the relevant powers for a period of five years that may be terminated earlier or may be extended by proclamation. The referral of powers has since been extended. 41 Australian Law Reform Commission 1988, Report No 45, General Insolvency Inquiry, (Mr R W Harmer, Commissioner-in-Charge), AGPS, Canberra, para 933; Trade Practices Commission 1992, Study of the Professions, Final Report – July 1992, Accountancy, p 73; Working Party 1997, Review of the Regulation of Corporate Insolvency Practitioners, AGPS, Canberra, pp 66 - 69. 42 Joint Committee on Corporations and Financial Services, Parliament of Australia (2004), Corporate Insolvency Laws: A Stocktake, at [12.84] http://www.aph.gov.au/Senate/committee/corporations_ctte/completed_inquiries/2002-04/ail/report/ail.pdf

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It formally recommended that the government ‘ensure, particularly when contemplating changes to the law, that the two streams of Australia’s insolvency laws, personal bankruptcy and corporate insolvency, harmonise where possible.’43

Jurisdictional Context The constitutional allocation of legislative powers between the federal and state Parliaments has affected the courts with jurisdiction over personal and corporate insolvency in Australia. These courts are from general federal and state court systems. Personal insolvency law applies to a single jurisdiction comprising all Australian states and internal territories. The Bankruptcy Act vests jurisdiction in the Federal Court and the Federal Magistrates Court, as well as the federal Family Court in certain circumstances.44 While federal jurisdiction is stated to be ‘exclusive’,45 this does not mean that bankruptcy issues may only be heard by the Federal Court and Federal Magistrates Court. For example, trustees in bankruptcy may take action in Magistrates Courts, District or County Courts or Supreme Courts as courts of competent jurisdiction for the recovery of debts from bankrupts and other persons.46 More complex jurisdictional issues arise in multi-faceted disputes which involve federal bankruptcy law as well as areas of state law. In Sutherland v Brien,47 the New South Wales Supreme Court exercised jurisdiction to determine claims to a fund held in a trust account, even though the legal issue for determination required construction and application of a voidable antecedent provision in the Bankruptcy Act.48 Corporate insolvency law is contained in federal legislation and, while the current cooperative scheme is in operation, one Commonwealth Act applies across a single

43

Recommendation 59. Section 35 Bankruptcy Act confers jurisdiction in bankruptcy on the Family Court where the trustee is a party to property settlement or spousal maintenance proceedings. Under s 35A Bankruptcy Act, the Federal Court or Federal Magistrates Court may transfer proceedings to the Family Court. 45 Section 27 Bankruptcy Act: that is exclusive of the jurisdiction of all courts other than the High Court under Australian Constitution s 75 or the jurisdiction of the Family Court under section 35 or 35A Bankruptcy Act. 46 For example, an action pursuant to s 139ZG Bankruptcy Act for the recovery of unpaid income contributions or instalments. 47 (1999) 149 FLR 321. 48 Under s 39 Judiciary Act 1903 (Cth), state courts have jurisdiction to decide matters involving the Bankruptcy Act in the course of proceedings instituted otherwise than under or by virtue of that Act. Rose D, Lewis: Australian Bankruptcy Law, 11th ed, LBC Information Services, Sydney, 1999 at 23. 44

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national jurisdiction.49 The Act confers civil jurisdiction,50 as well as vesting and cross-vesting criminal jurisdiction,51 in the relevant federal, state and territory courts. While issues may arise in personal insolvency matters because of the concept of ‘exclusive jurisdiction’ residing with Federal courts, these are not a concern in corporate insolvency because jurisdiction may be exercised concurrently by the relevant federal, state and territory courts. The courts with primary jurisdictional competence under the Corporations Act are the Federal Court and the state and territory Supreme Courts.52 State and territory lower courts may determine certain civil claims, such as debt recovery and monetary compensation matters, subject to their general jurisdictional limits as to the amounts and value of property with which they may deal.53

Institutional Context Regulators This bifurcation of insolvency law between individual (or natural person) and corporate debtors has resulted in separate regulatory bodies for personal and corporate insolvency administrations. Individual debtor administrations are regulated by the Insolvency and Trustee Service Australia (ITSA) established as an executive agency within the Attorney-General’s portfolio.54 Corporate insolvency administrations are regulated by Australian Securities and Investments Commission (ASIC).55 Both bodies are members of the International Association of Insolvency Regulators.56

49

The purpose of Corporations Act pt 1.1A is to clarify that the Commonwealth does not intend to cover the field in relation to certain aspects of corporations legislation and therefore to ensure the validity of state and territory law. For example, if states impose additional obligations or liabilities on directors, the Corporations Act is not intended to exclude or limit concurrent operation unless there is a direct inconsistency between the Commonwealth legislation and the state or territory law: s 5E. 50 Corporations Act pt 9.6A, div 1. 51 Corporations Act pt 9.6A, div 2. 52 Corporations Act s 1337B. These courts and their officers must severally act in aid of, and be auxiliary to, each other in civil matters under the corporations legislation: Corporations Act s 1337G. 53 Corporations Act s 1337E. 54 For more information refer to the Inspector-General in Bankruptcy’s Annual Report available on http://law.gov.au/itsa. 55 ASIC is established under the ASIC Act http://www.asic.gov.au/ 56 http://www.insolvencyreg.org/

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Government Departments More significantly for developments in insolvency regulation, different government departments are responsible for policy and law reform for the personal and corporate debtors.57 In personal insolvency, one of ITSA’s key functions is to advise government on appropriate reform to the Bankruptcy Act and related legislation following consultation with its clients and stakeholders. Thus ITSA’s Adviser, Policy and Legislation, works closely with the Attorney-General’s Department in matters of bankruptcy law reform. To assist its deliberations, ITSA has established the Bankruptcy Reform Consultative Committee whose members are drawn from the finance industry, financial counselling services, banking sector, government, Law Council and the insolvency practitioners. Corporate insolvency law reform is the responsibility of Treasury, in particular the Governance and Insolvency Unit within the Corporations and Financial Services Division.58 This Division has the benefit of advice from the Companies and Markets Advisory Committee (CAMAC), a body established by the ASIC Act.59 It also consults with various professional bodies and individuals on law reform in the corporate insolvency area. In 2006, the Parliamentary Secretary to the Treasurer established an Insolvency Law Advisory Group to provide technical advice on the accuracy and appropriateness of draft legislation implementing a package of corporate insolvency law reforms announced in 2005. It comprises leading experts in the field of corporate insolvency including senior accounting and legal practitioners, an academician and representatives of the leading accounting, banking, insolvency practitioner and legal professional bodies.60

57

Until 1996 they were in different sections (ITSA and Companies and Business Law Section) within the Attorney General’s Department however the Companies and Business Law Section was moved to Treasury by the new conservative government, reflecting their views on the economic significance of such laws. 58 http://www.treasury.gov.au/ 59 CAMAC is to provide advice to the Australian government on issues that arise from time to time in corporations and financial markets law and practice. Its functions (on its own initiative or when requested by the Minister) include advising and making recommendations to the Minister about any matter connected with law reform in relation to the corporations legislation. http://www.camac.gov.au/CAMAC/camac.nsf 60 Parliamentary Secretary to the Treasurer, Establishment of Insolvency Law Advisory Group (Media Release 6 of 2006): http://parlsec.treasurer.gov.au/cjp/content/pressreleases/2006/006.asp

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Insolvency Officers/Administrators Another dimension to the separation of personal and corporate insolvency laws is that the ‘administrators’ of insolvency administrations differ depending on whether the debtor is an individual or a company. Both external personal and corporate administrators must be registered with either ITSA or ASIC.61 Personal insolvency administrations are conducted by both the public and private sector whereas corporate insolvency administrations are the sole preserve of the private sector. Bankruptcies may be administered by trustees from either the private or public sector although the vast majority are administered by the Official Trustee, in effect ITSA’s Official Receivers.62 A trustee in bankruptcy is governed by the general law relating to trustees except to the extent that their position is modified by the Bankruptcy Act or associated statutory provisions such as the Bankruptcy Regulations.63 In the area of corporate insolvency, formally appointed external administrators to a company or its property are only drawn from the private sector.64 There is no equivalent to the office of Official Trustee in bankruptcy. This has led to the federal government establishing the Assetless Administration Fund in 2005. It is administered by ASIC and finances preliminary investigations and reports by liquidators into the failure of companies with few or no assets, where it appears that enforcement action may result from the investigation and report.65 In a compulsory winding up, the court must appoint an official liquidator66 and in such circumstances the liquidator is an officer of the court; whereas in a creditors’

61

Except corporate administrators appointed as a liquidator in a members’ voluntary (solvent) liquidation or as a controller who is not a receiver or receiver and manager. 62 The Official Trustee, a corporation sole with perpetual succession (s 18 Bankruptcy Act), is the trustee of any estate for which no private registered trustee is appointed. In practice, the Official Trustee acts through the Official Receivers for each (state/territory) bankruptcy district, who conduct the administration of estates. 63 Adsett v Berlouis (1992) 109 ALR 100. This may also be viewed via http://www.austlii.edu.au 64 The roles include provisional liquidator, liquidator, voluntary administrator, deed administrator, controller, receiver, and receiver and manager. 65 Further information is available on http://www.asic.gov.au 66 Section 1283 Corporations Act. A registered liquidator may request ASIC be registered as an official liquidator. Applicants must undertake not to refuse consent to act as liquidator in a court winding up solely because the company has no assets or otherwise may not have sufficient funds to cover the anticipated professional costs of the liquidation; and acknowledge that an official liquidator is an officer of the court, and as a result, has special responsibilities in connection to the winding up of a company when appointed by the court.

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voluntary winding up, the liquidator need only be a registered liquidator.67 A liquidator has been described as ‘a hybrid composite with elements of fiduciary trustee, agent, officer of the corporations and (in some instances) officer of the court’.68 The duties of a liquidator include fiduciary duties to the company, its creditors and members as well as statutory duties as an officer of the company.69 As a fiduciary, a liquidator must act honestly, avoid conflicts of interest and act impartially. Role of the courts As far as court involvement in personal insolvency is concerned, debtors’ petitions for voluntary bankruptcy are presented to the Official Receiver so that the court’s role is limited at the time of initiation of proceedings. However involuntary creditors’ petitions are determined by the court, with a Registrar exercising judgedelegated power. Alternative arrangements with creditors do not require court involvement to initiate the administration. The court has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the court;70 and may make such orders as the court considers necessary for the purposes of carrying out or giving effect to the Bankruptcy Act in any such case or matter.71 A trustee may at any time apply to the court for directions in respect of a matter arising in connexion with the administration of the estate.72 Persons, such as debtors or creditors, can apply to court to review a trustee’s actions or decisions.73 Also the court exercises control over trustees in so far as the court may inquire into the conduct of a trustee in relation to a bankruptcy and remove the trustee from office and make such order as it thinks proper.74 With regard to court involvement in corporate insolvency, an involuntary winding up or liquidation necessarily requires an application to court. A creditors’ voluntary 67

Section 1282 Corporations Act. Sydlow Pty Ltd v T G Kotselas Pty Ltd (1996) 14 ACLC 846 cited in M Murray 2005, Keay’s Insolvency: Personal and Corporate Law and Practice, 5th edn, Lawbook Co, Sydney, [10.110]. 69 Sections 180-184 Corporations Act. 70 Part IX debt agreements; Part X personal insolvency agreements; Part XI insolvent deceased estates. 71 Section 30 Bankruptcy Act. 72 Section 134(4) Bankruptcy Act. 73 Section 178 Bankruptcy Act. This may be by the Inspector-General, a creditor or the bankrupt. 68

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winding up is typically initiated through meetings of members and creditors without court involvement. During a liquidation, a court has general supervisory powers over the administration75 and the liquidator may if needed seek directions from the court.76 Persons who are aggrieved by a liquidator’s acts, omissions or decisions may appeal to the court and seek appropriate orders or directions.77 An ‘interim form’ of administration introduced for insolvent companies in 1993 is the voluntary administration, which may lead to a deed of company arrangement approved by the creditors. A court is not necessarily involved in a voluntary administration, although it has a supervisory role with wide-ranging powers to facilitate the objects of the voluntary administration procedure.78 The court plays an important role in the initiation of a scheme of arrangement scheme.79 Even if the proposed scheme is accepted by the necessary majority of creditors, the company must then seek court approval of the scheme.80

Overview of Australian Insolvency Administrations The collective administrations available for insolvent individuals or natural persons are (voluntary or involuntary) bankruptcy or the alternative arrangements with creditors: Part IX debt agreements or Part X personal insolvency agreements. Bankruptcy occurs where a debtor’s divisible estate is sequestrated for distribution to creditors in accordance with a statutory regime with a concomitant discharge from any outstanding provable debts. The alternative for a debtor is a binding arrangement with their creditors which avoids sequestration and its disadvantages for both debtor and creditors while providing sufficient advantages to merit their uptake. Part 74

Section 179 Bankruptcy Act. The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs. 75 Section 536 Corporations Act. 76 Section s 479(3) Corporations Act. 77 Section 1321 Corporations Act. 78 In particular, the court has a general power ‘to make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company;: s 447A Corporations Act. Also, in respect of the administrator, the court may declare whether or not the purported appointment is valid (s 447C) and give direction to the administrator about matters arising in connection with the performance or exercise of any of the administrator’s functions or powers (s 447D). 79 Section 411 Corporations Act. 80 Matters considered by the court include issues of public policy and commercial morality and the court may nevertheless not sanction it where it believes that in the circumstances a winding up with the liquidator’s broader powers of investigation would be preferable.

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IX debt agreements better suit the consumer debtor (or very small business operator) because it is available for debtors with low incomes, few assets and low levels of debt. Part X personal insolvency agreements merely require insolvency - however they are more formal and expensive and as such are more suited to business debtors with enough assets. Collective administrations for companies are liquidation, also known as winding 81

up,

and the alternatives of deeds of company arrangement (necessarily following a

voluntary administration) or schemes of arrangement. Receiverships differ in that they are administrations typically initiated by creditors holding floating charge securities and are appointments in the interests of secured creditors rather than the collective body of creditors. The forms of the personal and corporate collective insolvency administrations in Australia can be classified in accordance with the following matrix:

Individual Consumer Debtor

Sequestration Bankruptcy

Individual Business Debtor

Bankruptcy

Corporate Debtor

Liquidation

Corporate Debtor

Other Collective arrangement with creditors: • Part IX Debt agreement • Part X Personal insolvency agreement (rarely, due to cost and complexity) Collective arrangement with creditors: • Part IX Debt agreement (only if threshold requirements satisfied) • Part X Personal insolvency agreement Collective arrangement with creditors: • Deed of company arrangement (following a voluntary administration) • Scheme of Arrangement (less commonly, due to cost and complexity) Non-collective administration on behalf of secured creditor: • Receivership

The next section of the paper provides brief overview of these insolvency proceedings as well as a discussion of significant recent developments for each.

81

A creditors’ voluntary winding up or an involuntary winding up by court is available to an insolvent company. A members’ voluntary winding up is only available to a solvent company.

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Australian Insolvency Law: Bankruptcy / Liquidation Individual Debtor: Bankruptcy Where an individual is insolvent and is unable to pay her debts as and when they become due and payable,82 a number of options are available: a person may become bankrupt voluntarily upon his or her own petition or involuntarily upon a creditor’s petition. Voluntary Bankruptcy Voluntary bankruptcy is initiated by a debtor presenting a petition83 to an Official Receiver together with a statement of affairs, which contains personal details and details of assets, liabilities, and income. The Official Receiver also requires an acknowledgment from the debtor that they have read the prescribed information.84 Generally, unless the Official Receiver decides to reject the petition because it fails to comply with the formal requirements or because it represents an abuse of the bankruptcy system, the Official Receiver must accept the petition.85 The person becomes bankrupt on the day the petition is accepted. The Official Receiver automatically becomes the trustee unless the debtor nominates a private registered trustee who has previously signed a consent to act. By far the largest proportion of bankruptcies results from the debtor’s own petition.86 There have been few changes in recent years to regulation of voluntary bankruptcy. A requirement for the debtor to have a jurisdictional connection with Australia and more elaborate provisions on Official Receiver’s refusal to accept a debtor’s petition was introduced in 2002. This followed a number of cases87 in which

82

Section 5(2) Bankruptcy Act. A debtor’s petition may be presented by an individual, by a partnership or by joint debtors (ss 55 – 57). 84 Bankruptcy Regulation 4.11 states that, at the time of presentation of the debtor’s petition, the Official Receiver must give the debtor information about alternatives to and consequences of bankruptcy, sources of financial advice and guidance to persons facing or contemplating bankruptcy, and information about the debtor’s right to choose administration either by a registered trustee or the Official Trustee, and a statement about certain acts of bankruptcy. The Official Receiver must not accept a debtor’s petition unless the debtor has given a signed acknowledgment that the debtor has received and read the prescribed information. 85 Section 55(4) Bankruptcy Act. 86 In the 2004-2005 financial year, 92% of new bankruptcies resulted from debtors’ petitions and 8% from creditors’ petitions: Insolvency and Trustee Service Australia, Annual Report by the Inspector General in Bankruptcy on the Operation of the Bankruptcy Act 2004 – 2005, Commonwealth of Australia, Canberra. Quarterly and annual statistics are available at http://law.gov.au/itsa/ 87 In Re Coote (1993) 47 FCR 522; (1993) 120 ALR 134, the debtor, who resided in the United States of America and presented a debtor’s petition while visiting Australia, was not permitted to become bankrupt 83

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debtors with minimal links with Australia had filed locally for bankruptcy raising concerns about the debtors abusing the process and filing for bankruptcy to achieve discharge from provable debts (that may also be recognised in other jurisdictions). New subsections were introduced to permit the Official Receiver to reject a debtor’s petition if it appears that the debtor would be likely either immediately or within a reasonable time to be able to pay all the debts specified in the statement of affairs and at least one of the following conditions is satisfied: •

•

“it appears from the information in the statement of affairs and any additional information supplied by the debtor that the debtor is unwilling to pay one or more debts to a particular creditor or creditors or is unwilling to pay creditors in general;” or “before the current petition was presented, the debtor previously became bankrupt on a debtor’s petition at least three times or at least once in the period of 5 years before presentation of the current petition.”88 ITSA has released a Best Practice Statement89 outlining the its approach to the

processing of debtor’s petitions and it is clear that these new provisions are only intended to apply to those more blatant and obvious cases that might come to the Official Receiver’s attention. Involuntary Bankruptcy Compulsory bankruptcy results from a creditor’s petition for which the prerequisites are an act of bankruptcy within the previous six months, a specific jurisdictional link with Australia and a liquidated sum of $2,000 owing by the debtor to the creditor.90 The most common act of bankruptcy relied upon is a failure to comply with a bankruptcy notice.91 Initially all creditors’ petitions are heard by a Registrar

upon his own petition. The statement of affairs accompanying his petition disclosed some $1.5 million of unsecured creditors and no assets. It further stated he was self-employed as a consultant, had an estimated income for the next twelve months of US $20,000 and was being sued in the Supreme Court of Victoria. The Registrar referred the petition to the court which directed the Registrar to reject it as an abuse of process with the appearance of a fraud upon the creditors. However Official Receiver v Walia (1997) 79 FCR 299 raised concerns about the limited circumstances in which an Official Receiver may bring to the attention of the Court a debtor’s petition that is suspected of being an abuse of the bankruptcy procedures. 88 Bankruptcy Legislation Amendment Bill 2002 Explanatory Memorandum, paragraph 89 regarding the new sub-sections 55(3AA), (3AB) and (3AC) Bankruptcy Act. 89 ITSA 2003, Best Practice Statement 1.4, paragraphs 17 and 18. This is available on the ITSA website. 90 Sections 43 - 44 Bankruptcy Act. 91 Section 40(1)(g) Bankruptcy Act.

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exercising delegated powers.92 At the hearing of the petition, the creditor must prove the matters stated in the petition, the service of the petition and that the debt relied upon is still owing.93 Nevertheless, the court has complete discretion whether or not to make a sequestration order. Upon bankruptcy, the divisible property of the bankrupt vests in the trustee. Divisible property extends beyond that which is held by the bankrupt on the date of the sequestration order as it includes after-acquired property (i.e. acquired between that date and the date of discharge) and property which may be available under the voidable antecedent transaction provisions. Certain property is exempt from the divisible estate, such as household personal property and means of transport; and life assurance, superannuation and retirement savings accounts (within prescribed limits). The trustee has a power to set aside voidable antecedent transactions where there has been an undervalued transaction;94 a transfer to defeat creditors95 or a preference given to a creditor.96 The Bankruptcy Legislation Amendment (Anti-Avoidance) Act 2006 (Cth) strengthens these ‘claw-back’ provisions. For example, the time period for clawing back undervalued transactions is increased from 2 to 4 years where property is transferred to a ‘related entity’ (as defined) during that period for less than market value. A rebuttable presumption of insolvency has also been introduced into the provisions on undervalued transactions and transfers to defeat creditors in relation to bankrupts who carried on business. The presumption that the transferor was insolvent at the time of the transfer will arise if it is established that the transferor had not, in respect of that time, kept proper ‘books, accounts and records’.97 The books, accounts and 92

Order 77 Rule 7 Federal Court Rules. Section 52 Bankruptcy Act. 94 Section 120 Bankruptcy Act applies where there has been a transfer of property within two years before commencement of the bankruptcy (or within 4 years if to a related entity or within 5 years if the debtor was insolvent at the time) and the transferee gave either no consideration or less than market value for the property. 95 Section 121 Bankruptcy Act applies where there was a transfer of property that otherwise would probably have become part of the divisible property and the main purpose of the transfer was to prevent the division of the property among the creditors or to hinder or delay the property’s availability for creditors. 96 Section 122 Bankruptcy Act applies where, within around six months of the bankruptcy, there has been a transfer of property by the debtor in favour of a creditor when the debtor was insolvent and the effect of the transfer was to give the creditor a preference priority or advantage over the other creditors. 97 Or where, having kept the appropriate books, accounts and records in relation to that time, the transferor had failed to preserve them. 93

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records are to be as “are usual and proper in relation to the business carried on by the [bankrupt] and as sufficiently disclose the [bankrupt’s] business transaction and financial position”. The elements of the good faith defence to an action regarding a transfer to defeat creditors have been amended to include a standard of ‘reasonableness’. This applies to the recipient’s knowledge of the transferor’s intention in conveying the property. A person can only take advantage of the defence if (subjectively) they did not know the transferor was seeking to defeat creditors and (objectively) they could not have reasonably inferred that this was the transferor’s main purpose. Some examples of factors suggested on ITSA’s web site that might bring this into play include: • • •

“the transferee knew that the bankrupt was in financial difficulty or the relationship between the transferee and the bankrupt was such that they were usually exposed to the bankrupt’s financial dealings and affairs; the transaction was conducted very quickly and unexpectedly; the transaction was very unusual given the bankrupt’s history and other circumstances – that is, the transferee should have been surprised and could have been expected to query the transaction.”98 Amendments were made the reach of the provisions on transfers at an undervalue

and to defeat creditors to extend to circumstances where, for example, prior to bankruptcy, a person transfers property for full market value consideration but directs that the purchaser pay the consideration to a third party, thereby depriving their (subsequent bankrupt) estate of its value.99 It was also made clear that ‘consideration’ for the purposes of these provisions is not to include any right that the transferee has given to their bankrupt spouse to reside at the transferred property (except in the case of marital breakdown).100 In certain circumstances, the trustee may also recover property from entities controlled by the bankrupt. Division 4A of Part VI provides that, in certain circumstances, a trustee may ‘recover’ property from an ‘entity’ that during the ‘examinable period’ was ‘controlled’ by the bankrupt and benefited from the bankrupt’s personal services. Amendments in 2006 extended these provisions to a natural person and allowed the court to examine how a bankrupt’s substantive contribution (income flow or 98 99

This is contained in a memorandum detailing the reforms available at www.itsa.gov.au Section 121A Bankruptcy Act.

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activities) has resulted in the acquisition of property or an increase in its value for the benefit of the controlled entity. Trustees in bankruptcy have a duty to administer the estate as efficiently as possible, avoiding unnecessary expense, and to exercise their powers and perform their functions in a commercially sound way.101 There have been recent changes to improve the regulation of registered trustees. New statutory provisions and regulations were introduced in 2002 dealing with their registration, referring for example to the requirements for qualifications and experience and insurance and potential disqualifying factors such as criminal convictions for fraud or dishonesty or their own insolvency. Since 2004, registered trustees must comply with performance standards102 in the exercise of their powers, or the carrying out of their duties. Failure to comply may be relevant where a committee is determining whether a trustee should remain registered.103 Concerns about abuse of the process by debtors resulted in the 2002 abolition of early discharge from bankruptcy.104 Prior to this certain bankrupts could make written application to the trustee for early discharge from bankruptcy at any time after six months from the date of filing the statement of affairs.105 The trustee had to be satisfied that the bankrupt was eligible for early discharge and was not otherwise disqualified.106 The rationale provided for the abolition of early discharge was that it did not appear to be achieving its stated intent of applying to those whose bankruptcy was brought about by ‘misfortune’ rather than ‘misdeed’. Also there were concerns that the reduced period of bankruptcy discouraged debtors from trying to enter formal or informal arrangements

100

Section 120(5) and 121(6) Bankruptcy Act. Section 19(1)(j)-(k) Bankruptcy Act. 102 Bankruptcy Regulation 8.34A and Schedule 4A 103 Section 155H Bankruptcy Act. 104 The amendments also strengthened objection-to-discharge provisions by making it easier for trustees to lodge objections to a person’s discharge from bankruptcy and harder for bankrupts to sustain challenges to objections. 105 The former s 149S. 106 A bankrupt was not eligible for early discharge unless there was not enough money available to pay the remuneration and expenses of the trustee or to pay a dividend to creditors. Grounds for disqualification included the bankrupt’s unsecured liabilities exceeding 150% of the income derived by the bankrupt, as determined by the trustee, during the year prior to the date of bankruptcy and failure to support the administration of the bankruptcy. 101

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with their creditors to settle debts, and provided little opportunity for debtors to become better financial managers.107

Corporate Debtor: Liquidation Chapter 5 Corporations Act 2001 deals with external administration, mainly of local companies,108 the term ‘company’ being defined to mean ‘a company registered under this Act’.109 Proceedings to liquidate a company do not necessarily involve insolvency. ‘Liquidation’ signifies the imminent termination of a company, an entity created at law which is separate from its promoters, governance (directors) and members (shareholders or contributories). A company, once created, may exhaust its purpose or become superfluous following a merger and so its controllers may determine that it should cease to exist. Where such a company is solvent, it is liquidated via a members’ voluntary winding up.110 Where a company is insolvent, it may be liquidated voluntarily through a creditors’ voluntary winding up or involuntarily by order of the court. Voluntary Liquidation A creditors’ voluntary winding up is not initiated by the creditors (unless via the voluntary administration procedure discussed below). Rather the company initiates it by calling a meeting of members for a members’ voluntary winding up and if the directors can not make a declaration of solvency then a creditors’ meeting follows and the liquidation proceeds as a creditors’ voluntary winding up. The administration of a creditors’ voluntary winding up is the same as for an involuntary winding up. The regulation of the administration has been stable for many years. In 2004, the Parliamentary Joint Committee report on corporate insolvency law recommended that the procedure be retained and entry to the procedure be simplified to enable directors to place 107

Bankruptcy Legislation Amendment Bill 2002 Explanatory Memorandum, paragraphs 42-43. There are specific issues associated with winding up a ‘foreign company’ – see R Mason, ‘Private International Law’ in M Gronow 2006, McPherson’s The Law of Company Liquidation, 5th edn, Lawbook Co, Sydney. 109 Section 9 Corporations Act. 110 Solvent companies may also be wound up involuntarily – for example where the members wish to realise their investment or minority members seek an end to oppressive conduct. A members’ voluntary winding up is initiated by a special resolution of the members initiates this winding up procedure (s 491). The company must be solvent which is established by the directors making a written declaration to that effect (s 494). A recent statement of the company’s assets and liabilities must be attached. The members 108

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a company immediately into liquidation.111 In its response, the government has rejected this proposal, stating it would confer an inappropriate power on the directors of companies. Its position is that creditors, not directors, should have the right to place a company in liquidation, or to apply to a court to have a company placed in liquidation.112 Involuntary Liquidation Part 5.4 provides for ‘winding up in insolvency’ of a company.113 The persons who may file in court for an application for a winding up order include creditors and ASIC, but most commonly applicants are unsecured creditors. The applicant must establish that the company is insolvent,114 proof of this is assisted by various rebuttable presumptions.115 Where the assets and affairs of the company are in jeopardy, the creditor may apply after the filing of the application and before the making of a winding up order for the appointment of a provisional liquidator.116 The powers of a provisional liquidator are normally limited to taking possession of the company’s assets and preserving them until the hearing of the winding up application. A liquidator has a power to set aside antecedent voidable transactions where there has been an unfair preference;117 uncommercial transaction;118 fraudulent transaction;119 unfair loan;120 or an unreasonable director-related transaction.121

appoint the liquidator, determine the liquidator’s remuneration and have supervisory powers over the liquidator’s conduct of the liquidation. 111 Parliamentary Joint Committee on Corporations and Financial Services 2004, Corporate Insolvency Law: A Stocktake Recommendation 54. http://www.aph.gov.au/Senate/committee/corporations_ctte/completed_inquiries/2002-04/ail/report/ail.pdf 112 Government Response is available on the Parliamentary Joint Committee web site. 113 Specific provisions dealing with the insolvency of special types of corporate entity, such as authorised deposit-taking institutions, insurance companies and statutory corporations may be found in particular pieces of legislation. This paper only deals with standard companies. 114 Corporations Act s 95A: unable to pay all of its debts as and when they become due and payable. 115 The most common ground for establishing insolvency is non-compliance with a statutory demand: ss 459E – 469S Corporations Act. 116 Section 472(2) Corporations Act. 117 Section 588FA Corporations Act. This applies where, at a time when the company is insolvent, the company and the creditor are parties to the transaction and the transaction results in the creditor receiving more from the company more than it would have received in relation to the debt in a winding up of the company. The relevant time periods are 6 months or 4 years where the other party is a related entity to the company. 118 Section 588FB Corporations Act. This applies where, at a time when the company is insolvent, a reasonable person in the place of the company would not have entered into the transaction, taking into account the benefits and detriments to the company, the respective benefits to the other parties and any other relevant matter. The relevant time periods are two years prior to the ‘relation back day’, typically the date of the winding up order, or 4 years where the other party is a related entity to the company.

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The Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth) introduced a new ground for a liquidator to reclaim property. It applies to an unreasonable transaction made to, or on behalf of, to for the benefit of a director or ‘close associate’ of a director that was entered into up to 4 years before the ‘relation back day’. Reasonableness takes into account the costs and benefits as well as benefits to the recipient.122 This is an example of incremental corporate insolvency law reform undertaken in recent years in response to particular high profile corporate collapses. According to the Parliamentary Bills Digest, The origin of this Bill lies in the collapse of telecommunications carrier One.Tel in May 2001. Shortly after One.Tel went into administration it was revealed that the company’s co-managing directors Mr Keeling and Mr Rich had each received $7.5 million in bonuses in a year where the company had lost $291 million. The bonuses were paid on the basis of market capitalisation which in November 1999 reached over $5 billion at the height of the telecommunications boom. In response to the public outcry, the Prime Minister announced on 4 June 2001 that: “The Commonwealth intends to amend the law so that in future, where bonuses are paid in the circumstances where those bonuses were paid to the bosses of One.Tel, that money will be refundable and can be used to meet the lawful and legitimate entitlements of workers and also the other creditors of the company.” Following the Prime Minister’s announcement it was reported that Mr Rich and Mr Keeling agreed to repay the bonuses.123 Another piece of legislation, the Corporations Amendment Act (No 1) 2005 (Cth), was introduced in response to a court decision on the potential liability of directors of corporate trustees. Hanel v O’Neill,124 a decision of the Full Court of the South Australian Supreme Court, raised the spectre that directors of corporate trustees were effectively guaranteeing trust liabilities in the event that there were insufficient trust assets to meet 119

This applies where, at a time within 10 years of the ‘relation back day’, the company entered into the unfair preference or uncommercial transaction for the purpose of defeating, delaying or interfering with the rights of all or any of the creditors: Section 588FE(5) Corporations Act. Related entity benefits from insolvent transactions (unfair preferences and uncommercial transactions) may also be recovered from the relevant related entity (S 588FH) 120 Section 588FD Corporations Act. This applies to a loan to the company pursuant to which the interest or charges are exorbitant. No time limit applies. 121 Section 588FDA Corporations Act. This applies to an unreasonable transaction made to, or on behalf of, to for the benefit of a director or ‘close associate’ of a director that was entered into up to 4 years before the ‘relation back day’. Reasonableness takes into account the costs and benefits as well as benefits to the recipient. 122 Section 588FDA Corporations Act. 123 Bills Digest No. 79 2002-03 (footnotes omitted) http://www.aph.gov.au/library/pubs/bd/200203/03bd079.htm#Purpose

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these due to its interpretation of a provision in the Corporations Act.125 Amending legislation was introduced to make it clear that the liability of directors of trustee companies was limited. General company law developments in corporate governance have also had an impact on insolvency practice. As the Royal Commission Report into the collapse of the major HIH insurance group stated: “Public interest in [corporate governance] has increased markedly in the wake of corporate failures here and overseas.”126 A liquidator may on behalf of the company, recover damages from directors or officers of the company as a result of their having breached common law or statutory duties to the company.127 In ASIC v Adler,128 the court held that Adler was an officer of a wholly owned subsidiary company (HIH Casualty and General Insurance Co Ltd) based on the extended definition of ‘officer’ and accordingly may be liable for breach of statutory duties owed to the company.129 This was because he was someone who affected its business, namely investment decisions, even though his appointment was as a director of the holding company, HIH Insurance Ltd. Such was the concern about corporate governance raised by the HIH Royal Commission that the Parliamentary Secretary to the Treasurer referred to CAMAC a review of the personal duties and liabilities of corporate officers, employees and other individuals below board level. It is not known whether any of the CAMAC recommendations will be adopted into the Corporations Act however they have the potential to affect corporate insolvency practice. For example, there is a recommendation that the statutory duties of care and diligence and good faith and proper purpose beyond directors and corporate officers to ‘any other person who takes part, or is concerned, in the management of that corporation’. Directors may also be liable to pay compensation for permitting a company to trade whilst insolvent.130 There have been numerous cases on these provisions in recent 124

[2003] SASC 409. Section 197 Corporations Act. 126 Report of the HIH Royal Commission, Part 3 Future Directions, Chapter 6 Corporate Governance, opening para. http://www.hihroyalcom.gov.au/finalreport/Chapter%206.HTML 127 Sections 180-184 Corporations Act. 128 (2002) 41 ACSR 72; [2002] NSWSC 171 at [55-75]. 129 See section 9 ‘officer paragraph 2(a) and ss 180 – 183 Corporations Act. 130 Section 588G Corporations Act. 125

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years, in which courts have emphasised that directors should not adopt a passive approach to corporate governance, particularly regarding possible insolvent trading. In Woodgate v David,131 the New South Wale Supreme Court stated: Section 588G and related provisions serve an important social purpose. They are intended to engender in directors of companies experiencing financial stress a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company’s debt burden. The provisions are based on a concern for the welfare of creditors exposed to the operation of the principle of limited liability at a time when the prospect of that principle resulting in loss to creditors has become real.

Collective Arrangements with Creditors From the individual debtor’s point of view, entering into a formal binding arrangement with their creditors has the advantage of avoiding the stigma of bankruptcy, the cost of court proceedings and untoward publicity as well as the limitations which are placed on undischarged bankrupts. For a corporate debtor, such arrangements have the benefit of avoiding the deregistration of the company, and for the directors and other officers of the company, it may avoid actions being taken against them, for example for breach of duties or for insolvent trading. Arrangements may also tend to minimise the extent to which the affairs of the debtor are examined and so the debtor’s or associated parties’ exposure to criminal prosecution is likely to be less. The advantages for creditors include an independent administrator taking control of the debtor’s assets from the time the procedure is initiated. The creditors may receive a distribution sooner than they would in a bankruptcy or liquidation.

Individual debtor: Arrangements with Creditors Part IX Debt Agreements In 1996 a new form of administration was introduced with Part IX debt agreements. Debt agreements are intended to be ‘a viable low cost alternative to bankruptcy for low income debtors with little or no property, with few creditors and with low levels of liability, for whom entry into a Part X administration is not possible because

131

[2002] NSWSC 616 at [36] cited in M Murray 2005, Keay’s Insolvency: Personal and Corporate Law and Practice, 5th edn, Lawbook Co., Sydney [16.84].

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of set up costs.’132 A debt agreement is initiated by a debtor submitting a proposal and a statement of affairs to the Official Receiver who, if it is an eligible proposal, advises the creditors and allows them to vote on it.133 Typically debt agreements propose payment by instalments, payment of a lump sum, or transfer of an asset to the creditors or combinations of these. In 2005, ITSA and the Attorney-General’s Department conducted a review of the operation of debt agreements, seeking public submissions and consulting key stakeholder groups – debt agreement administrators, creditors and financial counsellors. The report has informed announced amendments to Part IX, although draft legislation had not been released at the time of writing. The major changes will be to the regulation and accountability of debt agreement administrators; regulation of administrators’ deduction of their fees; introduction of a requirement for pari passu distribution; reduction of the requirements for acceptance of the proposal to an ordinary resolution (simple majority in number and value of those voting); and the options available to an administrator in the event of the debtor’s default. Part X Personal Insolvency Agreements Under Part X personal insolvency agreements, a debtor who is insolvent signs a s 188 authority in favour of a registered trustee (alternatively, less commonly, a solicitor; or, unlikely, the Official Trustee) to assume control of the debtor’s property and to call a creditors’ meeting to consider a proposal put by the debtor. This commences a moratorium on creditor action regarding provable debts.134 The proposed trustee must provide the debtor with prescribed information before consenting to act as controlling trustee.135 Prior to the proposed controlling trustee giving consent, the debtor must provide a statement of affairs as well as a proposal for dealing with them.136 The proposal given prior to the trustee’s consent must include a draft personal insolvency agreement.137

132

Australia, House of Representatives 1996, Bankruptcy Legislation Amendment Bill 1996: Explanatory Memorandum, AGPS, Canberra, para 135.16. 133 Sections 185C, 185E Bankruptcy Act.. 134 Section 189AA Bankruptcy Act. Section 189AAA prevents a creditor’s petition that has already been filed from proceeding until the conclusion or adjournment of the first meeting of creditors. 135 Sub-sections 188(2AA) and (2AB) Bankruptcy Act; Bankruptcy Regulation 10.02. 136 Sub-sections 188 (2C) and (2D) Bankruptcy Act. 137 Sub-section 188 (2E) Bankruptcy Act.

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Prior to the meeting, the controlling trustee sends creditors a report on the debtor’s affairs;138 an opinion on whether the creditors’ interests would be better served by accepting the debtor’s proposal, if any, or by bankruptcy; and a statement about the possible resolutions that may be passed at the meeting.139

In order to achieve an

arrangement which is binding on all creditors with provable debts, the proposed arrangement must be approved by special resolution.140 A properly executed personal insolvency agreement will bind all creditors. However, the rights of secured creditors and rights under family maintenance agreements or orders are still enforceable.141 Personal insolvency agreements will not automatically release the debtor from provable debts but will only do so to the extent that the agreement specifies.142 In 2002, ITSA and the Attorney-General’s Department under took a review of Part X arrangements, the terms of reference being: • • • •

“To identify any issues which could undermine the integrity of Part X and test the extent to which these issues are causing real problems in practice; To examine reasons for the decline in new Part X arrangements over recent years; To identify any improvements which could be made to practices and procedures to ensure Part X is operating as intended; and To identify any legislative changes, which would maintain the integrity of Part X or improve its effectiveness.143 The concerns raised by those making submissions to the review included the lack

of access by debtors, creditors and practitioners to sufficient information to make informed decisions and perform functions properly and adequately; acts which may deny the true general body of creditors the opportunity to determine whether to accept or reject 138

Section 211 Bankruptcy Act specifically applies the investigation powers of a trustee in bankruptcy to the period of the controlling trustee. This may assist with preparation of the s189A report to creditors. 139 Sections 189A - s 189B Bankruptcy Act. A controlling trustee must now advise the Official Receiver in the relevant district of the authority and provide a copy of the statement of affairs within 2 working days of the consent: s188(5). This enables ITSA to receive early notice of the proposal and to better enable investigation and/or attendance at the meeting. 140 That is, by a majority in number and at least 75% in value of the creditors voting at the meeting: s 204 Bankruptcy Act. 141 Section 229 Bankruptcy Act. 142 There are some exceptions, such as debts not provable in bankruptcy. See s 153 Bankruptcy Act for the debts which are not discharged in bankruptcy. They include for example penalties and fines which are not provable in bankruptcy. Debts owed to secured creditors are also not discharged unless the secured creditor has proved under the personal insolvency agreement for their debt.

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a proposal or other ‘unfair’ factors surrounding meetings and voting; and unnecessary complexity, costs or flaws in processes for termination, variation and avoidance of agreements. Many submissions proposed the elimination of the distinction between assignments, arrangements and compositions and the introduction of a single flexible type that could incorporate features of all three kinds. Other comments were made about the level of ITSA’s regulatory presence being insufficient and the standard of performance by a minority of controlling trustees as well as the ability of ITSA to deal with such malfeasance. Significant changes were made to Part X in 2004, streamlining it to cover only one the type of arrangement as well as simplifying the provisions dealing with variation, setting aside and termination of arrangements.144 A new requirement was introduced that the controlling trustee provide the debtor with prescribed information before consenting to act as controlling trustee, to more closely align with the requirements for bankruptcy and debt agreements.145 A new regulation 10.02 set out the information to be supplied. Interestingly, the regulation requires that the information be “factual and objective”. The intention is apparently to ensure that the provision of information is not essentially an advertising campaign for the potential controlling trustee.146 Under the old procedure the debtor had fourteen days to provide a statement of affairs and a proposal; whereas now they must be provided to the trustee, solicitor or Official Trustee prior to them giving consent to act.147 The proposal must also include a draft personal insolvency agreement.148 These requirements address some of the criticisms that controlling trustees were unaware of the estate and could not commence early enquiries. As part of the aim to enhance integrity of the system, the legislation

143

ITSA and Attorney-General’s Department, Review of Part X of the Bankruptcy Act 1966, p 4. http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/reform->reviews->reviews?opendocument 144 Sections 221A, 222, 222A and 222B Bankruptcy Act. 145 :Section 188(2AA) and (2AB) Bankruptcy Act. 146 Aspects of this discussion on Part X are drawn from Mason R & Anderson C 2004, Personal Insolvency Agreements: A Part X Arrangement by any other name?, Downs & South West Queensland Law Association / Department of Law USQ Seminar, 17 September. 147 Section 188 (2C) and (2D) Bankruptcy Act. 148 Section 188 (2E) Bankruptcy Act.

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specifically applies the investigation powers of a trustee in bankruptcy to the period of the controlling trustee.149 Amendments were made to the s 189A report provisions to improve their effectiveness. The controlling trustee must now include in his or her report the names of creditors who are related entities as well as a declaration stating whether the controlling trustee is a related entity of the debtor. The new performance standards for trustees also apply to Part X,150 for example they require the s 189A report to include information about each of the content requirements listed in s 188A(2).151 Further, there is a new list of duties for a controlling trustee.152 These duties reflect those of trustees in bankruptcy, with the addition of some that are applicable only to controlling trustees. The controlling trustee is required to disclose to creditors any material personal interest that may conflict with the performance of her or his functions.

Corporate debtor: Arrangements with Creditors A form of corporate administration introduced into Australian law in the 1960s that provided an alternative collective administration to liquidation was Official Management, which derived from concepts of judicial administration. However it was rarely used, due to stringent requirements regarding solvency, and was repealed in 1993. A Part 5.1 Corporations Act scheme of arrangement is a procedure permitting a company to make a compromise or arrangement binding on all its creditors/members (either or both), or classes of either or both. Due to the time and cost involved in obtaining the necessary approvals including those of the court, it is not as popular as a voluntary administration followed by deed of company arrangement.153

149

Section 211 Bankruptcy Act. Section 155H Bankruptcy Act; Bankruptcy Regulation 8.34A and Schedule 4A. 151 The report is also required by the regulation to provide the basis of the valuation of the debtor’s assets as well as information on the type of investigations and any matters that require further investigation. The report must also contain the reasons for the controlling trustee’s opinion in the report. 152 Section 190A Bankruptcy Act. 153 For example, in the month of June 2006 (June being the end of the financial year in Australia), there were no scheme administrator appointments whereas 262 companies entered voluntary administration, 181 companies were wound up pursuant to a creditors’ voluntary winding up and 245 companies were wound up by court order http://www.asic.gov.au/asic/asic_pub.nsf/byheadline/2006+insolvency+statistics?openDocument 150

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The Part 5.3A Corporations Act voluntary administration and deed of company arrangement regimes were introduced in 1993, providing an opportunity for a moratorium and corporate reconstruction. Their genesis was the Harmer Report which promoted a corporate rescue culture, stating: A constructive approach to corporate insolvency requires the preservation, if practical and possible, of the property and business of the company in the brief period before creditors are in a position to make an informed decision. This assists in an orderly and beneficial administration, whether creditors decide to wind the company up or accept a compromise.154 Corporate debtor: Schemes of Arrangement A scheme of arrangement is initiated by the company preparing a proposal (possibly in consultation with its major creditors) as well as an explanatory statement of the proposal which includes a report of the affairs of the company.155 The company applies to the court to approve the convening of a meeting of creditors, or classes of creditors,156 to consider the proposal.157 At the meeting, the proposal must be accepted by a specified majority in number of the creditors present and voting.158 If the proposal is accepted, the company must then seek court approval of the scheme.159 As this process takes at least two months, if the company is continuing to trade during this period, then directors are at risk of an insolvent trading action if there is an eventual winding up. Also there is no statutory moratorium during the initiation stage, so the success of a scheme very much depends upon the skills of those proposing it. Two approaches to dealing with this difficulty are to seek some interim formal insolvency administration, receivership if possible, or failing that, the appointment of a provisional liquidator; or to impose a set of temporary restrictions on the company’s capacity to incur credit and dispose of assets.160

154

Australian Law Reform Commission 1988, Report No 45, General Insolvency Inquiry, (Mr R W Harmer, Commissioner-in-Charge), AGPS, Canberra, para 53. 155 Section 412 Corporations Act. Copies of these are to be delivered to ASIC at least 14 days before the first court hearing. 156 That is, when the different interests or rights of creditors or members require separate meetings. 157 Section 411 Corporations Act. 158 Section 411(4) Corporations Act: that is, a majority whose debts or claims against the company amount in the aggregate to at least 75% of the total amount of the debts or claims of the creditors present and voting. 159 Section 411(4) Corporations Act. 160 M Murray, Australian Insolvency Management Practice, CCH Australia, Sydney, [75-405]. (loose leaf)

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The only recent legislative changes to this administration concern the categories of person disqualified from acting as scheme administrator. These were part of general amendments to replacing the term ‘officer’ with its particular definition with ‘director, secretary, senior manager or employee of the body’ wherever appropriate.161 Corporate debtor: Voluntary Administration and Deed of Company Arrangement The object of Part 5.3A Corporations Act is: ‘to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.’162 A voluntary administration commences a moratorium on creditor action while a registered liquidator manages the company until a meeting of creditors decides between a deed of company arrangement, liquidation or the return of the company to management by the directors. It can be initiated quickly, inexpensively and without court intervention. Directors are encouraged to consider initiating a voluntary administration when facing financial stress,163 the most common manner of initiation is by resolution of the board of directors.164 The administrator takes control of the company’s business, property and affairs. Their role is to investigate the company’s business, property and affairs and financial circumstances and to form an opinion on each of three matters: whether it would be in the

161

Corporate Law Reform Economic Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) amended s 411(7) Corporations Act. 162 Section 435A Corporations Act. 163 See insolvent trading defences in s 588H(5) and (6) Corporations Act and potential responses by directors in order to avoid personal liability attaching under s 222AOB Income Tax Assessment Act 1936 (Cth) for unremitted tax deductions. There is also a moratorium on enforcement of directors’ guarantees during voluntary administration s 440J Corporations Act. 164 The resolution being that, in the opinion of the directors voting, the company is insolvent or is likely to become insolvent at some future time and an administrator should be appointed: s 436A Corporations Act. The other methods available are appointment by a liquidator or provisional liquidator, for example where the company is insolvent yet part of its business could be realised more beneficially if continued as a going concern prior to sale; and appointment by a chargee of the whole or substantially the whole of the company’s property, if the charge is enforceable, for example in the rare situation where a secured creditor may consider that a voluntary administration has advantages over a receivership.

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creditors’ interests for the company to execute a deed of company arrangement, to be wound up or for the administration to end.165 The administrator must also call at least two creditors’ meetings. The first meeting is to be held within five business days of the commencement of the administration to allow the creditors to consider appointing a committee of creditors and, perhaps, to replace the administrator with their own choice.166 The second meeting is for the purposes of voting on the company’s future. If a deed of company arrangement is proposed, then the administrator is to include with the documentation sent to creditors a statement setting out details of the proposed deed.167 If the creditors approve the execution of a deed of company arrangement by the company and the deed administrator, they are bound by the deed during the period between the meeting and the actual execution. The Corporations Act currently contains very few requirements of the deed which increases the flexibility of this option.168 The Parliamentary Joint Committee was specifically asked to consider and report on the operation of the voluntary administration laws. Its report noted that while many submissions criticised particular features of the procedure and suggested alternative approaches is some areas, the general view was that “the VA process is a useful and valuable procedure for companies that may be facing collapse”.169 The committee considered and rejected proposals to introduce a regime more closely aligned to the Chapter 11 procedure in the United States. Most submissions on this point argued strongly against it, expressing concerns about the company remaining in the hands for the debtor and the length of the process.170 Recommendations have been made to improve areas of Part 5.3A, from the perspective of improving procedural efficiency and increasing public confidence. For example, voting at creditors’ meeting currently requires a majority voting in favour and the value of that majority’s debts to be more than 50% of the total value of debts of all 165

Section 438A Corporations Act. Section 436E Corporations Act. 167 Section 439A Corporations Act. 168 For example regarding the property available or the priority of distribution: s 440A Corporations Act. 169 Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (2004) at [5.3]. 170 Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (2004) at xxi. 166

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creditors voting. This can result in a stalemate, in response to which the administrator presiding may exercise a casting vote. However the committee recommends that this casting vote not be used in a resolution concerning the administrator’s replacement or remuneration.171 Other recommendations addressing perceptions about administrator integrity are that administrators should be required to make available a statement of independence before the first meeting of creditors and to disclose any conflicts of interests if and when they arise.172 Administrators, in their report to creditors prior to their vote on the future of the company, are required by regulation 5.3A.02 to specify whether there appear to be voidable transactions recoverable by a liquidator. The committee recommends that this be extended to include reporting on rights of recovery against the company’s directors for insolvent trading.173 With regard to deeds of company arrangement, it is recommended that the employee entitlements available in a liquidation be mandated, unless affected creditors waive their priority. Also, creditors or the administrator should be given the right to apply to court to have the deed upheld if in the court’s view the deed offered the dissenting creditors a better return than they would obtain in a liquidation. This recommendation, which was supported in the government’s response, runs counter to the otherwise flexible approach of Part 5.3A.

Out of court workouts Informal arrangements between an individual or corporate debtor and their creditors that are not sanctioned by statute suffer certain weaknesses. Creditors who have not agreed to the arrangement may still proceed to bankrupt or liquidate the debtor. Also, the protections in place to enhance the integrity of formal administrations (for example requiring a debtor’s statement of assets and liabilities or other forms of disclosure by

171

Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (2004) at [3.73] and [7.25]. 172 Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (2004) at [3.58] and [3.59]. 173 Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (2004) at [4.49].

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relevant parties) may mean that creditors support an informal arrangement based on inadequate information and with less certainty that it is in their best interests. There has been some doubt as to whether an individual debtor may enter into informal arrangements with their creditors due to a provision in the Bankruptcy Act, which provided that arrangements by a debtor with his or her creditors made otherwise than in accordance with Part X were void. However that provision was repealed in 2004 which opens up a greater possibility that a debtor may seek a private informal arrangement with his or her creditors.174 Companies undergoing financial stress may seek such arrangements with their creditors in order to resolve the debtor’s difficulties.175 In order to be binding on creditors, such arrangements should be by way of deed under seal. Advantages of these arrangements include the lack of adverse publicity and their flexibility. Nevertheless, their disadvantages are that a single dissenting creditor may jeopardise the arrangement and, if there is a subsequent liquidation, then certain payments may be set aside176 or the directors may face liability for insolvent trading.177

Secured Creditor Appointments Reflecting the English origins of Australian company, property and security law, another administration available to certain secured creditors over company assets is that of a receivership. While the estates of individuals and partnerships may be subject to receivership, this does not usually occur in the context of insolvency, whereas corporate receivership almost always results from the insolvency or near insolvency of a company. As it is not a collective appointment, it does not introduce a moratorium and so, for example, a winding up application may proceed resulting in a concurrent liquidation and receivership. However, the rights of unsecured creditors may be severely limited because of the overriding interest that a secured creditor has in the company’s assets.

174

Nevertheless, s 222(2) Bankruptcy Act provides that the Inspector-General, the trustee, a creditor or the debtor may apply to the court to set aside an agreement that was not entered into in accordance with Part X or does not comply with Part X requirements. 175 See M Murray 2005, Keay’s Insolvency: Personal and Corporate Law and Practice, 5th edn, Lawbook Co., Sydney [18.45]. 176 For example, as unfair preferences under s 588FA Corporations Act. 177 Section 588G Corporations Act.

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Most commonly, a receiver or other controller of property of a company is appointed privately, based on the contractual relationship between the company and its creditor.178 When a debtor company grants a creditor is a fixed and/or floating charge over its assets and undertakings, it typically includes the right to appoint a receiver (or a receiver and manager where the charge is over a company’s whole assets and undertakings) of the property. Although appointments are made on the basis of the terms of the security documentation, the Corporations Act does regulate aspects of such administrations, such as the appointee’s powers and duties. The property of the company does not vest in the receiver, rather control over it passes to the receiver. The receiver’s main responsibility is to realise the assets of the company which are the subject of the charge for the benefit of the debenture-holder. Importantly, under statute, the receiver when exercising the power of sale must take all reasonable care to sell the property for not less than the market value.179 This has resulted in case law exploring the process of sale that should be undertaken by a receiver. In Florgale Uniforms Pty Ltd v National Australia Bank Limited180 the Victorian Supreme Court stated that the process of sale is “informed by the objective of securing the best possible return for the secured creditor, subject to the obligations imposed by general law doctrines and s 420A. … the process of evaluating and balancing the competing costs and benefits and the associated risks of various methods of sale will not, in every case, require a formal comparative analysis or documented calculations. All will depend on the circumstances of the individual case, including the scale of the receivership, the value and nature of the property involved, the receiver’s expertise in relation to the type of property, relevant expert advice, the advice or input of proprietors and staff, the trading history and marketing of the company, including during the receivership, and other relevant variables in a realistic commercial context.”

178

Court appointments are made pursuant to (1) a court’s inherent jurisdiction or express power where it appears to the court to be just and convenient that the order should be made or (2) general statutory provisions in order to preserve assets. 179 Or in its absence, the best price that can be reasonably obtainable having regard to the circumstances existing when the property is sold: s 420A Corporations Act. 180 [2004] VSC 65 at [442] - [443].

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Australian Insolvency Law Reform Until the incremental yet steady changes in recent years, personal insolvency law reform typically has not been high on the political agenda for legislative action in Australia. The Clyne Committee was appointed by the federal Attorney-General in 1956 to review Australia’s bankruptcy law and submitted its report in 1962. However, it was not until 1966 that the new Bankruptcy Act was passed and this did not commence operations until 1968. The Australian Law Reform Commission (ALRC) Report No. 6: Insolvency: the Regular Payment of Debts (1978) and Report No. 45: General Insolvency Inquiry (1988) (Harmer Report) also influenced personal insolvency law reform. 181 The Harmer Report in particular had a significant impact on personal insolvency law. During the past decade or so, personal insolvency reform has relied more on professional and community consultation than on wide-ranging law reform inquiries. Corporate insolvency law reform has had a greater investment in the reform process through parliamentary inquiries and advisory body reports; however the pace of change has been slower than for bankruptcy and its alternatives in recent years. Many of the changes recommended by the 1988 Harmer Report were not enacted for some years, major corporate insolvency law changes being introduced from June 1993. Subsequent inquiries and reports have not as yet resulted in any major changes to Chapter 5 Corporations Act. Instead the relatively minor amendments have typically focussed on single issues, such as unreasonable director-related transactions. However in October 2005, the federal government announced it would be proceeding with an integrated package of reforms to improve the operation of Australia’s corporate insolvency laws.182

Personal Insolvency Law Reform Significant amendments to the Bankruptcy Act over the past decade or so can broadly be classified under the following themes: refining the property available;183

181

http://www.alrc.gov.au Australian Government Treasury, Corporate Insolvency Reform (2005) http://www.treasury.gov.au/documents/1022/PDF/Corporate_Insolvancy_Reform_attachment.pdf 183 For example, new income contribution scheme (1991); revised voidable antecedent transactions (1996); improved interaction with family law (2004); amendments to voidable antecedent transaction provisions to overcome High Court decision on superannuation contributions in Cook v Benson (2003) 114 CLR 370 (2005). 182

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addressing inappropriate debtor behaviour;184 regulating trustees or administrators;185 improving procedural aspects;186 and introducing or refining arrangements with creditors as alternatives to bankruptcy.187 A notable feature of bankruptcy reform has been the process of consultation prior to amending legislation. For example in September 2005, the Attorney-General and the Assistant Treasurer released a consultation paper on the recovery of superannuation contributions made before bankruptcy (as part of the government’s ongoing commitment to preventing bankrupts from using superannuation funds to put excessive sums out of the reach of creditors.)188 Subsequently in July 2006, the government announced that it would not proceed with earlier proposals for recovery of ‘excessive’ superannuation contributions ‘as these would have unduly complicated both the bankruptcy and superannuation systems.’ Instead it would introduce legislation to ‘prevent unscrupulous debtors from transferring assets into superannuation when bankruptcy is looming. However, genuine contributions to superannuation for retirement income purposes will be protected from recovery.’189 The amendments are to superannuation contributions made after the date of the government’s announcement, with the relevant legislation being introduced as soon as practicable. Another form of consultation process involving Parliament followed announced amendments ‘targeting high income earners who use bankruptcy to avoid paying debts they can afford to pay.’190 An exposure draft of the legislation was referred to the House of Representatives Standing Committee on Legal and Constitutional Affairs in May 2004. The Committee received numerous submissions and conducted public hearings, canvassing in particular the proposed bankruptcy trustees’ powers it recover property held by third parties, including family members. As a result of the Committee’s

184

For example, changes to discharge and annulment provisions (1991); amendments to the controlled entity provisions (2006). 185 For example, performance standards (2004); proposed regulation of debt agreement administrators. 186 For example, creditors meetings (1991). 187 That is, introduction of Part IX debt agreements (1996); revision of Part X arrangements with the introduction of personal insolvency agreements (2004). 188 Attorney-General and Minister for Revenue and Assistant Treasurer, Reforms Target Bankruptcy – Super Contributions (Joint Media Release 162 of 2005). 189 Attorney-General, Submissions Invited for Bankruptcy Offences Review, (News Release 140 of 2006). 190 Attorney-General, Tougher Laws to Stop Bankrupts Living the High Life (Media Release 74 of 2004).

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recommendations, the government decided to proceed with some aspects of the draft legislation, for example dealing with the interaction of bankruptcy and family law and an enhanced income contribution regime,191 but not to proceed with changes allowing a trustee to recover assets held in the name of the bankrupt’s spouse, or that of another party, where the bankrupt has paid for and uses the asset. Then during 2005, a consultation paper192 was released on a revised approach to targeting high income earners using bankruptcy to avoid debts and amending legislation was introduced into Parliament. It was passed in March 2006 and took effect from 31 May 2006. Two areas of proposed reform on which the government is currently seeking public comment are changes to the Part IX debt agreement regime and to the bankruptcy offences provisions. In March 2006 the Attorney-General released proposals to overhaul bankruptcy debt agreements in order to increase confidence in the system and to define clearly the responsibilities of debt agreement administrators to ensure highly capable professionals are available to assist debtors with unmanageable debt.193 In July 2006, the Attorney-General invited submissions as part of a review by ITSA in partnership with the Attorney-General’s Department of the bankruptcy offences provisions194 Subsequently a discussion paper was released that indicates the purpose of the review is to ascertain whether the offence provisions are consistent with community standards and expectations in relation to behaviour which merits punishment in the context of bankruptcy; to consider the appropriateness of the penalties for contravention of the offences (including in the context of penalties for similar offences contained in other legislation); and to identify any legislative changes which would improve the operation of the provisions.’195

Corporate Insolvency Law Reform There has been a greater investment in the corporate insolvency law reform process through parliamentary inquiries and advisory body reports; however the pace of change has been slower than in personal insolvency. Many of the changes recommended 191

Attorney-General, Attorney-General Welcomes Committee Report on Bankruptcy Amendments (Media Release 128 of 2004). 192 Attorney-General, Discussion Paper on Strengthening Bankruptcy Laws (Media Release 18 of 2005). 193 Attorney-General, Government to Overhaul Bankruptcy Debt Agreements (Media Release 46 of 2006). 194 Attorney-General, Submissions Invited for Bankruptcy Offences Review (Media Release 140 of 2006).

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by the 1988 Harmer Report were not enacted until the Corporate Law Reform Act 1992 (Cth) and Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Cth), both taking effect from June 1993. Some ten years after the Harmer Report, the federal government foreshadowed a broad based review of the operation of Australia’s corporate insolvency laws.196 However this review did not commence until 2002. Meanwhile there have been a number of other corporate law reform initiatives. In 1997 a Working Party appointed by the Attorney-General undertook a Review of the Regulation of Corporate Insolvency Practitioners.197 The voluntary administration regime has been the subject of a number of reports: an Australian Securities Commission Study of Voluntary Administrations in NSW in 1998; a Companies and Securities Advisory Committee (fore-runner to CAMAC) report in the same year on Corporate Voluntary Administration198 and a CAMAC report on Rehabilitating Large and Complex Enterprises in Financial Difficulties of October 2004.199 Another CAMAC report in May 2000 touched on insolvency matters, the topic being Corporate Groups. Relevant ALRC reports have included Personal Property Securities (1993), Legal Risk in International Transactions (1996) and Principled Regulation: Federal Civil & Administrative Penalties in Australia (2002).200 A Royal Commission to inquire into certain matters relating to the building and construction industry and its recommendations addressed, amongst other things, fraudulent phoenix company activity.201 In 2002, Treasury issued a discussion paper, CLERP Paper No 8 Cross-Border Insolvency: Promoting International Cooperation and Coordination, on the adoption of the UNCITRAL Model Law on Cross-border Insolvency.202 Finally on 14 November 2002, the Parliamentary Joint Committee on Corporations and Financial Services resolved to inquire into and report on the operation

195

This discussion paper is available at http://www.itsa.gov.au. The Hon Joe Hockey, Minister for Financial Services and Regulation, Speech: Insolvency Systems in Asia: An Efficiency Perspective, Hotel Intercontinental, 30 November 1999, Sydney. 197 The review may be viewed at http://www.treasury.gov.au . 198 These reports may be viewed at http://www.camac.gov.au. 199 The report may be viewed at http://www.camac.gov.au. 200 Personal Property Securities (ALRC Report No 64); Legal risk in international transactions (ALRC Report No 80); Federal Civil & Administrative Penalties in Australia (ALRC Report No 95) These reports may be viewed at http://www.alrc.gov.au/. 201 The report may be viewed at http://www.royalcombci.gov.au. 202 The paper may be viewed at http://www.treasury.gov.au/documents/448/PDF/CLERP8.pdf 196

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of Australia’s insolvency and voluntary administration laws. It released an Insolvency Issues Paper in May 2003 and held public hearings, received written submissions and considered information and recommendations contained in the various reviews and inquiries above as well as professional commentary. The Committee issued its final report, Corporate Insolvency Law: A Stocktake, in June 2004.203 It stated in its Executive Summary that “a wide range of policies and objectives must be taken into consideration in the design of an insolvency law. … The foremost objective, in the Committee’s view, is to promote and maximise trust and confidence in the operation of insolvency law on the part of the community in general and the business and corporate sector in particular. In its approach to the range of issues it had to consider, the Committee placed importance on the following objectives and values: • • • • • •

encouraging early intervention in the affairs of companies in financial difficulties and restoring companies to profitable trading where practicable; striking a balance between voluntary administration and liquidation; protecting the interests of creditors and, in particular, employees in circumstances of financial difficulty and corporate malpractice; maximising the value of an insolvent company’s assets; reducing the cost of credit; and encouraging the good management of companies and deterring malpractice and, in particular, abuses of the corporate form and insolvency procedures generally.”204 In October 2005, the federal government announced that it will proceed with an

integrated package of reforms,205 following which the Parliamentary Secretary to the Treasurer announced the establishment of an Insolvency Law Advisory Group to provide technical advice on the accuracy and appropriateness of draft legislation implementing the package of reforms.206 At the time of writing, draft legislation has not yet been released for public comment.

203

The report may be viewed at http://www.aph.gov.au/Senate/committee/corporations_ctte/completed_inquiries/2002-04/ail/report/ail.pdf 204 Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (2004) at xix. 205 Australian Government Treasury, Corporate Insolvency Reform (2005) http://www.treasury.gov.au/documents/1022/PDF/Corporate_Insolvancy_Reform_attachment.pdf 206 Parliamentary Secretary to the Treasurer, Establishment of Insolvency Law Advisory Group (2006), http://parlsec.treasurer.gov.au/cjp/content/pressreleases/2006/006.asp

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When announcing the package of reforms, the government indicated that the issues to be addressed by the package fall into four broad themes. •

•

• •

“strengthening creditor protections, primarily through enhancements to the General Employee Entitlements and Redundancy Scheme (GEERS). In addition, targeted amendments are proposed to address weaknesses in general creditor protections”; “deterring misconduct by company officers, primarily through the establishment of an assetless administration fund to improve the quality of information forwarded to the Australian Securities and Investments Commission (ASIC) by insolvency practitioners, and a new ASIC enforcement programme targeted at phoenix company behaviour”; “improving the regulation of insolvency practitioners, primarily through enhanced disclosure requirements in relation to independence and remuneration”; and “fine-tuning voluntary administration, comprising a package of technical amendments to enhance the efficiency and cost effectiveness of that process”207

The government also announced it would introduce the UNCITRAL Model Law on cross-border insolvency, adopting the approach detailed in CLERP 8.

Conclusion This review of Australian personal and corporate insolvency has confirmed that insolvency law is embedded in the commercial, financial and societal culture of the relevant jurisdiction. Also, the range of Australian reviews and inquiries into business, essentially corporate, insolvency law policy and reform reflects its complex interaction with a range of laws relevant to an insolvency administration. While the Australian economy is currently in a healthy condition, nevertheless policy-makers in both the personal and corporate field are foreshadowing more changes to the Bankruptcy Act and the Corporations Act. Commercial litigation originating in insolvency disputes is also producing case law on the statutory provisions.208

207

http://www.treasury.gov.au/documents/1022/PDF/Corporate_Insolvancy_Reform_attachment.pdf Some examples of recent High Court matters dealing with bankruptcy are: Adams v Lambert [2006] HCA 10 on validity of bankruptcy notices; Trustee of Estate of Cummins v Cummins [2006] HCA 6 transfer to defeat creditors and main purpose for transfer; Coventry v Charter Pacific Corporation Ltd [2005] HCA 67 on provable debts in bankruptcy. Recently, corporate insolvency issues have been considered in Rich v ASIC [2004 HCA 42 on privilege against exposure to penalties and forfeitures where ‘civil penalty provision’ under the Corporations Act; AssetInsure Pty Limited v New Cap Reinsurance Corporation Limited [2006] HCA 13 on a international reinsurance insolvency and distributions under local statute. 208

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New Trends in Insolvency Proceedings: An Australian Perspective

Dr Rosalind Mason

The separate regulation of personal and corporate insolvency matters affects insolvency law and practice. While constitutionally ‘bankruptcy and insolvency’ lawmaking power is shared by the states and Commonwealth, comprehensive federal legislation on personal insolvency has resulted in it being a federal matter with ‘exclusive jurisdiction’ vested in federal courts. In corporate insolvency, regulation is also contained in federal statute, however it is part of the general corporations law which relies for its constitutional efficacy on state referral of power. Its constitutional context has resulted in jurisdiction being vested in both federal and state courts, with much significant case law originating in the state Supreme Courts. The potential for divergence between personal and corporate insolvency laws is reinforced by the fact that different government departments are responsible for policy and law reform. There are also different bodies who regulate insolvency practice and practitioners, ITSA for trustees in bankruptcy and ASIC for liquidators and other insolvency administrators. The majority personal insolvencies deal with consumer bankrupts with few assets and these are typically administered by the public sector Official Receivers within ITSA. By comparison, corporate insolvencies rely upon the private sector and only recently has the government begun to tackle the implications of assetless administrations. It is perhaps a reflection of this divergence between personal and corporate insolvencies that the recent developments in personal insolvency law reform seem to focus more on improper behaviour by debtors whereas corporate law reform has a greater emphasis on the relationship between economics and regulatory policy surrounding companies. Significant personal insolvency reform has addressed the extent of the divisible estate (not only fine-tuning antecedent voidable transaction provisions but also strengthening the income contribution scheme); debtor behaviour (for example, the transfer of assets to superannuation funds or controlled entities); and tighter regulation of trustees or Part IX or X administrators. Comprehensive corporate insolvency reform is still pending, although draft legislation is expected to be released before the end of 2006. Meanwhile there have been a number of reviews and inquiries. Some have focussed on similar themes to those

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New Trends in Insolvency Proceedings: An Australian Perspective

Dr Rosalind Mason

applying to individuals such as regulation of the insolvency practitioners and fine-tuning of the alternatives to liquidation. However others have been linked to more systemic issues such as issues associated with corporate groups and fraudulent phoenix company activity, a well as cross-border insolvency. There have also been amendments to the Corporations Act in order to remedy the effects of recent case law, often in respect to the liability or otherwise of company directors. While an insolvency law is integrally interwoven with the laws and culture of its particular jurisdiction, work undertaken by multilateral bodies, such as the World Bank and UNCITRAL, reveals some common issues to consider when reviewing an insolvency regime.209 The session on New Trends in Insolvency Proceedings at the 2007 World Congress of the International Association of Procedural Lawyers will also no doubt advance international understanding of the similarities and differences in developments in insolvency across a range of jurisdictions.

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World Bank 2005, Principles for Effective Insolvency and Creditors’ Rights Systems and UNCITRAL 2004, Legislative Guide on Insolvency Law http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/2004Guide.html

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