This document provides an overview and outline of key changes to Australian insolvency law under the Insolvency Law Reform Act 2016, which will take effect from 1 September 2017 and beyond. Some of the major changes discussed include new communication obligations for insolvency practitioners, changes to creditor meetings and committees of inspection, new court powers, and potential future reforms regarding safe harbour provisions for company directors and changes to ipso facto clauses and the bankruptcy period.

1. THINGS THAT ARE KEEPING YOU AWAKE AT NIGHT
INSOLVENCY LAW REFORM:
LOOKING AT 1 SEPTEMBER AND BEYOND
JASON HARRIS
UTS FACULTY OF LAW

2. OUTLINE
 Insolvency Law Reform Act 2016 (Cth) (ILRA)
 Communicating with creditors
 Creditor meetings
 Committees of inspection
 CVL changes
 Reporting obligations
 Court powers
 Future reform
 Safe harbour
 Ipso facto protection
 12 month bankruptcy
 FEG
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3. OVERVIEW OF ILRA
 New Insolvency Practice Schedule into Sch 2 of the Bankruptcy Act and Corporations Act
 New Insolvency Practice Rules for Bankruptcy and Corporations
 Hundreds of provisions moved from BA and CA and from their regulations into the new IPS and IPR
 Largely harmonised across bankruptcy and corporate insolvency (at least by Division)
 New defined concepts: ‘regulated debtor’ and ‘external administration’
 Most of Part 3 of IPS and IPR only apply to regulated debtors and external administration
 Parts 1 and 2 apply to registered trustee and registered liquidator
 No more ‘official liquidator’ status from 1.3.17
 Increased role and powers for Inspector General and ASIC
 New rights for Commonwealth (FEG scheme) 3

4. IPS AND IPR STRUCTURE
 (1.3.17) Part 1 Div 1 (Introduction); Div 5 (Definitions)
 (1.3.17) Part 2 Div 10 (Introduction); Div 15 (Register of liquidators); Div 20
(Registering liquidators); Div 25 (Insurance); Div 30 (Annual liq returns); Div 35
(Notice requirements); Div 40 (Disciplinary and other action); Div 45 (Court
oversight); Div 50 (Committees under Pt 2)
 (1.9.17) Part 3 Div 55 (Introduction); Div 60 (Remuneration); Div 65 (Funds
handling); Div 70 (Information); Div 75 (Meetings); Div 80 (Committees of
inspection); Div 85 (Directions by creditors); Div 90 (Review of ext admin)
 (1.3.17) Part 4 Div 95 (Introduction); Div 100 (Other matters); Div 105 (The
IPRs) 4

5. COMMUNICATING WITH CREDITORS
 Creditors may request information, documents or reports: IPS s70-40 (resolution of creditors); s70-45
(individual creditors)
 Must comply within 5 business days or such longer period as agreed (IPR s70-1)
 Must comply unless:
 Not relevant to administration;
 Trustee/ext admin would breach their duties to the debtor/company if they complied; or
 It is otherwise not reasonable to comply (explained in IPR ss70-10, 70-15; must give notice under IPR s70-5)
 Substantial prejudice to the interests or one or more creditors or a 3rd party; information is subject to legal
privilege; breach of confidence; insufficient property available to comply; info already provided; info already
required to be provided within 20 b/d under the Act or Regs; request is vexatious
 Any ground other than these is deemed reasonable 5

6. COMMUNICATING WITH CREDITORS
 Reporting obligations
 the annual administration return (IPS s70-5)
 the end of administration return (IPS s70-6)
 the initial information given to creditors (IPR s70-30)
 the statutory report report within 3 months of appointment, which includes
prospects of recoveries and dividends (IPR (Corps) s70-40-only for liq, not VA)
 initial remuneration notices (IPR s70-35)
 reports to assist with remuneration determinations (IPR s70-45)
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7. CREDITOR DIRECTIONS
 Creditors may give directions to the trustee/external administrator: IPS
s85-5
 IP not bound to follow, but must have regard to
 If not followed, must make a written record of that fact, together with
reasons for not complying
 Committee of inspection may also give directions under IPS s80-35,
direction by creditors overrides COI
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8. CREDITOR MEETINGS
 2 VA meetings remain, CVL meetings removed (unless requested)
 New power to pass a resolution without holding a meeting (IPS s75-40; IPR s75-130)
 Special resolution without a meeting (IPR (Bankruptcy) s75-137)
 Creditors may remove trustee or ext/admin (IPS s90-35)
 New rules for convening creditor meetings under IPS and IPR Div 75, including:
 Trustee/ext admin may convene meeting at any time (IPS s75-10)
 Trustee/ext admin must convene meeting if COI directs, creditors direct by resolution or creditors
owed 25% in value of debt direct (IPS s75-15) or >10% but <25% in value direct and provide security
for costs if requested by trustee/ext admin
 Trustee/ext admin need not convene meeting if unreasonable (see IPR s75-250 for grounds)
 Meeting must be convened ‘as soon as practicable’ (with at least 10 b/d prior notice)
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9. COMMITTEES OF INSPECTION
 Committee of inspection across bankruptcy, liquidation and VA (no longer called committee of creditors)
 New statutory purpose includes to direct and monitor the trustee/external administrator (IPS s80-35)
 New right for employees owed 50% or more of outstanding entitlements to appoint a representative (IPS
s80-25)
 New right for ’large creditor’ owed at least 10% of value of the creditors can appoint a representative (IPS
s80-20)
 COI may request information, reports and documents from trustee/ext admin (IPS s80-40)
 Must comply unless not relevant to administration, breach of duty by trustee/ext admin or not reasonable (IPR s80-15)
 COI may obtain external advice or assistance (IPS s80-50)
 Must obtain approval of trustee/ext admin or the court
 Can’t directly or indirectly derive a profit or advantage from a transaction entered into for or on behalf of
debtor (IPS s80-55): does not apply if creditors resolve otherwise or the court gives leave
 New standing to seek court orders under IPS s90-15
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10. CVL CHANGES
 New reporting obligations
 Initial information
 3 month statutory report
 Annual administration and end of administration return
 Initial remuneration notice and remuneration report
 No need to convene creditor meeting within 11 days if directors don’t give declaration of
solvency
 Just provide preliminary information to creditors
 No need for annual meeting (s508 repealed)
 No need for final meeting (s509 replaced)
 Deregistration 3 months after lodging ‘end of administration return’
 ASIC or the court may now replace a voluntary liquidator who resigned (in addition to
creditors)
 If registration suspended or cancelled, only ASIC can replace them
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11. COURT POWERS
 IPS Div 45
 Any orders it thinks fit in relation to a registered trustee or registered liquidator (IPS s45-1)
 Make orders in relation to costs of a matter in relation to a registered trustee or registered
liquidator (IPS s45-5)
 Remuneration
 Court may approve remuneration determination (IPS (Corps) s60-10) or review determination
(s60-11)
 Creditor meetings
 Review related entity voting (IPS (Corps) s75-41); casting vote (ss75-42, 75-43)
 Make interim orders (IPS (Corps) s75-44) 11

12. COURT POWERS
 IPS Div 90
 Inquire into the conduct (IPS s90-5, 90-10)
 Make orders that it thinks fit in relation to the administration of a regulated
debtor’s estate or ext admin (IPS s90-15)
 Standing given to IP, COI, ASIC/AFSA and officers of the co (IPS s90-20)
 Require meetings of creditors to held (IPS s90-21) (corporate only)
 Appoint reviewing liquidator (IPS (Corps) s90-22 to 90-29); I-G reviews in
bankruptcy (IPS (Bankr) ss90-21, 90-22
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13. FUTURE REFORM: SAFE HARBOUR FOR DIRECTORS
 New s588GA provides that s588G(2) (insolvent trading liability) will not apply to
directors where:
1. At a time when they start to suspect that co is or may become insolvent
2. They develop one or more courses of action (this must be done within a reasonable time)
 Safe harbour will end at the end of a reasonable time
3. The courses of action are reasonably likely to lead to a better outcome for the company
 Judged against immediate appointment of an administrator or liquidator
4. Debts incurred directly or indirectly in connection with the course of action
 New s588WA for parent companies of wholly owned groups
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14. SAFE HARBOUR
 Safe harbour applies from the time they take the course of action to the time
when:
 Reasonable time has ended (if no course of action taken)
 The director ceases to take any such course of action
 The course of action ceases to be reasonably liable to lead to a better
outcome for the co
 A voluntary administrator or liquidator is appointed
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15. SAFE HARBOUR
 Directors bear an evidential burden to establish that the safe harbour applies
 Requires pointing to evidence that suggests a reasonable possibility that the matter does or doesn’t exist
 Where evidence of a reasonably possibility of the safe harbour applying is provided in another recovery
proceeding: court must presume reasonable possibility exists (new s588E(8))
 (some) Relevant factors for determining whether a course of action would be reasonably likely to lead
to a better outcome for co:
 Properly informing themselves of the co financial position
 Taking appropriate steps to prevent misconduct
 Taking appropriate steps to ensure company keeps appropriate financial records
 Developing a restructuring plan
 Obtaining advice from ‘an appropriately qualified entity’ who was given sufficient information to give
appropriate advice
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16. SAFE HARBOUR CARVE OUTS
 Safe harbour will apply to conduct before or after commencement (expected to be
1.1.18)
 Safe harbour won’t apply to debts incurred before commencement
 Safe harbour won’t apply where:
 Employee entitlements are not paid on time
 ATO returns, notices, statements applications or other documents as required by taxation
laws are not provided
 RATA forms not supplied
 Officers refuse to hand over company books to liquidator
And the failure amounts to ‘less than substantial compliance’
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17. FUTURE REFORM: IPSO FACTO PROTECTION
 New prohibition against ipso facto clauses that are in a contract, agreement or arrangement where co is
in:
 Creditors’ scheme (new s415D) (announcement of scheme, application for court order under s411(1), or co
becomes subject to a scheme)
 Appointment or existence of a managing controller over the whole or substantially the whole of the co property
(new s434J)
 Co comes under or is under voluntary administration (new s451E)
 The stay also applies where the ipso facto rights are based on ‘the company’s financial position’ (or a
prescribed reason) and the co is in a scheme, managing controllership or VA
 The financial position ground is disregarded if not in one of those 3 appointments
 Once the stay is imposed, the right cannot be exercised in the future (permanent stay)
 New power that contractual rights may only be exercised with leave of the court or on conditions set out
by court order, where court believes rights are being exercised because of creditors’ scheme, managing
controllership or VA
 This can include a potential exercise of contractual rights
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18. IPSO FACTO: SCOPE OF THE STAY
 Will not apply to stand alone liquidation, but will apply to VA-CVLs
 Court powers to lift the stay or to extend the period of the stay ‘in the interests of justice’
 Interim orders may be granted imposing the stay and no undertaking to damages may be required
 There will be regulations exempting certain arrangements (eg derivatives contracts, set off
provisions)
 Will not apply where Payment Systems and Netting Act or Cape Town Convention applies
 Will not require provision of money or new credit to company
 Will not prevent IP from consenting to exercise of ipso facto right
 Will only apply to rights arising under contracts, agreements or arrangements entered into from
the commencement (expected to be 1 July 2018)
 Will not apply to rights arising from contracts entered into during the scheme, managing
controllership or VA
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19. FUTURE REFORM: 12 MONTH BANKRUPTCY
‘The default bankruptcy period of three years may discourage innovation and business
start-ups.…Reducing the default period and related restrictions to one year will
encourage entrepreneurial endeavour and reduce associated stigma’
 Retain trustee’s ability to object to discharge
 Obligations of the bankrupt to assist the trustee and to pay outstanding income
contributions will remain for 3 years (or longer)
 Obligation to make income contributions will continue for 3 years despite discharge
after 12 months
 Retention of information on NPII may be reduced
 Overseas travel restriction reduced to 12 months
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20. FUTURE REFORM: SHARP PRACTICES AND FEG
 Sharp practices include employing workers through an assetless company; asset transfers to phoenix
company; appointing a ‘friendly liquidator’ to minimise investigations; conduct by receivers or
liquidators ‘who do not comply with their ss433, 561 obligations’
 Proposals:
 Make proving offence under Part 5.8A easier (eg recklessness; introduce a reasonable knowledge test; make
assessment wholly objective) and/or allow broader range of applicants; change wording of the provisions to be
make them clearer
 Increase criminal penalties and provide civil penalties for breaches of Part 5.8A
 Introduce contribution order for employee entitlements in corporate groups
 Greater penalties and/or disqualification for directors with multiple companies improperly rely on FEG (eg breach
of dir duties + FEG payments in two or more companies)
 Change the law relating to s556 priority payment out of trust assets
 Align ss433 and 561 20