Vol 2 (2005) - Issue 1

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Stocktake on Australian Insolvency Laws: Parliamentary Joint Committee Releases Report

In Volume 1, Issue 2, the author reported on two committees which have been considering certain aspects of Australian insolvency laws. The first, the Parliamentary Joint Committee on Corporations and Financial Services (‘PJC’) released its report on 1 July 2004 entitled ‘Corporate Insolvency Laws: A Stocktake’. The report considers a wide range of issues, including aspects of the voluntary administration (‘VA’) and deed of company arrangement (‘DOCA’) procedures, and such issues as antecedent transaction claims, insolvency practitioner independence, and cross-border insolvency regimes. The report has been published at www.aph.gov.au/senate/committee/corporations_ctte/reports/ index.htm.

The PJC was comprised of members of parliament from a number of parties and has reported both in government and opposition reports. The government report makes 63 recommendations, a number of which will be considered below. However the strong impression is that the committee generally considers the corporate insolvency procedures to be operating, by and large, appropriately and large-scale reform has not been recommended. We may need to await the outcome of the upcoming general Federal election to know the timing of the governmental response.

Voluntary administration

The PJC concluded that the VA procedure has been a successful innovation and should be retained as a central feature of Australian insolvency law. The committee observed that VA generally strikes a reasonable balance between liquidation and reorganization. In the event that reorganization or rescue is impossible, the VA procedure permits a prompt transition to a predictable, fair and orderly liquidation procedure. The flexibility that is inherent in the procedure in most cases achieves a balance between the interests of debtors and creditors.

This recommendation was of particular interest to practitioners because the PJC considered whether there should be some enhancement to bring VA closer to the Chapter 11 procedure available under US bankruptcy law (see further below on this issue). However, for the most part recommendations were more of a fine tuning than fundamental nature. For example, there was comment on timing of creditor meetings and the quality of information available to creditors to make the decision on whether the company should be liquidated or enter a reorganization through a DOCA. The PJC recommended two changes which would extend the period of time for which the VA operates:

(a) recommendation to lengthen the period before the first meeting of creditors from 5 business days to 8 business days; and

(b) the period for holding the second meeting of creditors be extended to 25 business days with a new convening period of 20 business days.

The effect of this would be to extend the usual period for the VA by at least 2 weeks. This is significant for creditors, and secured creditors in particular, as it extends the period for which the moratorium against enforcement action applies and for which the administrator will incur costs and expenses which have a priority over floating charge assets.

The PJC also recommended that the grounds for appointment of administrators be somewhat amended in order to make it easier for directors to commence VA. At present, the directors must resolve that the company is insolvent, or ‘is likely to become insolvent at some future time’.