There has been a growing appetite for corporate insolvency law reform in Australia in the last 18 months. In 2021, public consultations were completed on improvements to creditors’ schemes of arrangement and the treatment of insolvent trusts, and there was an independent review of the laws providing directors with a safe harbour from insolvent trading liability.
In March 2022, the Government announced it would make unfair preference claims ‘simpler and fairer’ – so that transactions amounting to less than AUD$30,000 or that occur more than three months prior to a company entering external administration will no longer be able to be clawed back.
On 28 September 2022, the Parliamentary Joint Committee on Corporations and Financial Services announced a new inquiry into corporate insolvency in Australia (PJC Inquiry), which will examine, among other things, the operation of the existing legislation, further support for businesses to access corporate turnaround, and options for reform canvassed in the previous 2021-2022 consultations.
In February 2023, the Commonwealth Attorney-General also flagged that ‘urgent changes’ were required to Australia’s personal insolvency laws.
This article looks at corporate insolvency, and considers what some of the more immediate areas of reform might be – possibly as early as the second half of 2023.
Where are we at?
The PJC Inquiry is the ‘root and branch’ review of Australian corporate insolvency law that has long been called for in the profession. It is the first major review of corporate insolvency in the country since the Harmer Review in 1988.
35 years later, the view among many in the insolvency industry is that the current laws have become overly complex and do not provide the flexibility required to achieve the core objects of a modern insolvency regime – maximising creditor returns, the quick exit of unviable businesses and the effective restructuring of distressed but viable businesses.
What to look out for
A significant focus of the PJC Inquiry is likely to be comparative overseas insolvency processes.
The 2021 consultation on improving schemes of arrangement raised the prospect of Australia introducing more flexible restructuring models seen in the US, Singapore and the UK, which include a court-ordered cross-class cram down capable of binding dissenting classes of creditors. The UK version – the new ‘restructuring plan’ introduced in June 2020 – has had great success in the last two years, including in Virgin Active, Hurricane Energy, Smile Telecoms, GateGroup and DeepOcean – and it could also assist in larger restructurings in Australia.
Other issues to look out for include:
- Modifications to the small business restructuring (SBR) process introduced in January 2021. Many argue that the current eligibility threshold – outstanding debts of less than AUD$1 million – needs to be raised, especially with worsening economic conditions and the majority contribution small businesses make to economic activity in Australia. Changes to the scope of the SBR enforcement moratorium and the role and duties of small business restructuring professionals may also be considered.
- Changes to safe harbour – this has not been tested in the courts, and directors have been reluctant to resort to it due to uncertain concepts in the legislation. The safe harbour review suggested a range of improvements, which are likely to comprise some of the first reforms made in the current consultation process.
- Informal restructuring – to encourage great creditor collectivism and support for out-of-court workouts, tax incentives such as exemptions for loan haircuts taken by creditors and the introduction of an informal restructuring enforcement moratorium (similar to the UK standalone moratorium introduced in June 2020) could be considered.
- Building a stronger rescue finance market – working capital is the lifeblood of any business, and new funding is essential to a successful restructuring. To encourage creditors to advance new funds to a distressed company, a DIP finance regime with super-priority status for new lenders (modelled on the US and Singapore systems) could be considered.
- Cross-border processes – Australia has been regarded as a leader in advancing a consistent, predictable framework for cross-border cooperation and recognition, having been an original signatory to the UNCITRAL Model Law on Cross-Border Insolvency and promoting the development and adoption of the court to court communication and cooperation protocols reflected in the Judicial Insolvency Network Principles and Modalities. Now, Australia can further lead the way by becoming among the first countries to adopt the two new Model Laws on the Recognition and Enforcement of Insolvency Related Judgments and on Enterprise Group Insolvency to keep pace with rapid economic and digital change.
Australia’s chance to become a regional restructuring and insolvency hub
As economic conditions continue to deteriorate in 2023 – with a combination of slowing growth, persistent high inflation and a further tightening in monetary policy – businesses will come under intense pressure, with an expected uptick in new insolvency filings.
The economic backdrop will give further impetus to the reform process – with effective and flexible restructuring and insolvency laws contributing to economic and financial stability and long-term growth.
The current PJC Inquiry is Australia’s chance to ‘get it right’ – to develop a modern restructuring and insolvency ecosystem that could become a regional cross-border hub, similar to what has occurred in Singapore following its landmark law reform process in 2017 after years of dedicated consultation and careful policy planning.