Vol 4 (2007) - Issue 4

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Reforming Australia’s Corporate Insolvency Laws

Corporate insolvency reform in Australia has been ex-pected for some time1 and proposals have now emerged from the Government. The Corporations Amendment (Insolvency) Bill 2007 (the ‘Bill’) was introduced to Parliament on 31 May 2007. The Bill amends the Corporations Act 2001 (Cth) (the ‘Act’). A draft of the Bill was released for discussion purposes in November 2005.

This is the first major suite of reforms since 1992, when voluntary administration (VA) and deeds of company arrangement (DOCA) were introduced. Significant changes to voluntary administration were considered at various committees, but feedback from industry strongly endorsed the voluntary administration procedure, with two-thirds of corporate insolvencies in Australia now commencing by way of VA. Many of the proposed reforms are in the nature of enhancing and developing the VA regime. A US style Chapter 11 debtor in possession regime was considered but has not made it into the Bill. Some proposed changes will drive VAs closer to Chapter 11, for example administrator finance gaining a super priority. In addition, a parliamentary committee has recommended that the Bill should limit creditors’ rights to enforce ipso facto clauses and termi-nate contracts in VA.

The Bill has some controversial aspects. There has been a lot of discussion on a proposed new system for pooling the assets and liabilities of corporate groups and changes to practitioner remuneration and independence. The original proposals have been tempered somewhat, with the original proposal for pooling in voluntary administration abandoned, although it survives in amended form in liquidation. Notably, the UNCITRAL Model Law on Cross Border Insolvency, first proposed to be enacted in 2002, has not been included in the Bill.
The reforms are grouped under four broad themes:

1 improving outcomes for creditors;
2 deterring misconduct by company officers;
3 improving regulation of insolvency practitioners; and
4 fine-tuning voluntary administration.

We focus in this article on some of the key proposals.

Employees’ priorities to be protected under a DOCA

DOCAs will be required to apply the liquidation priority for employee entitlements in respect of distributions of all property of the company unless employees vote to change the priority.2 The vote must be taken at a meeting prior to proposing a DOCA and a majority in number and value of employees must agree. If employees do not agree, the administrator, an employee or an ‘interested party’ may apply to the court, although the court may not disturb the priority unless it is satisfied that employee creditors will have the same or better outcome than under a winding up.
This is not a major departure from practice and is ar-guably implicit in the current law. However, flexibility is currently available under a DOCA to create different pools of assets and creditors, with some creditors able to be preferred over others as long as any such discrimi-nation is consistent with the objects of the VA process, in particular to maximise the chances of a company continuing in existence. For example, funds may be contributed by a third party to enable trading to con-tinue and to encourage key creditors to continue with the business.

All creditors, including employees, are protected by an ability to obtain Court orders setting aside a DOCA if their position is worse under the DOCA than in a liq-uidation. The fact that some creditors’ positions might be enhanced over others is not generally a ground to set aside a DOCA. The proposal would require an applica-tion to the Court if employees did not agree to change their priority over property of the company, even if third party funding is to be used to meet their entitlements and no prejudice would result. DOCAs may be able to be structured in most instances so as not to offend the proposed provisions, and employees will usually be mo-tivated to support a restructuring, however the current flexibility appears to be diminished, and costs and ef-ficiency of DOCA implementation potentially increased as a consequence.