This presentation discussed the current state of insolvency law reform within the context of insolvency practitioner regulation in Australia and the pending Insolvency Law Reform Act 2016 (Cth).

1. Insolvency law reform:
New age or missed
opportunity?
Jason Harris
Associate Professor, UTS Faculty of Law
Jason.Harris@uts.edu.au

2. Outline
 Basic features of Australian insolvency law
 The narrative of insolvency law reform
 The history of insolvency law reform
 Comparative perspectives
 Current law reform project-the ILRA 2016
 Potential future law reform
2

3. Australian insolvency law
 Bifurcated system
 Bankruptcy Act 1966 (Cth) (personal)
 Corporations Act 2001 (Cth) Ch 5 (corporate)
 Separate regulatory agencies (AFSA and ASIC)
 Separate departments (Treasury: corp; A-G: bankr)
 External administration not debtor in possession
 Compare US Chapter 11; CCAA (Canada)
 Formal collective appointments:
 Bankruptcy (personal)
 Liquidation (corporate)
 Alternatives:
 Pt IX (debt agreement); Pt X (PIA) (bankruptcy)
 Voluntary administration and schemes of arrangement (corporate)
 Primacy of secured debt (receivership) 3

4. Recent Inquiries
 Insolvency Law Reform Bill 2012,14,15 (exposure drafts)
 Insolvency Law Reform Act 2016 (Cth)
 Senate Economics Committee: ASIC Report
 Parliamentary inquiries into construction, agribusiness insol,
loan impairments
 ARITA Green Paper: A Platform for Recovery
 Financial System Inquiry
 Whittaker Review of the PPSA
 Productivity Commission draft report
 There is a lot of reviewing/reporting/discussion, although
not a lot of actual law reform
 Challenging parliamentary environment
 Crowded policy agenda (FOFA, Tax Review, Super)
 Main parliamentary leader on insolvency (Sen Williams) has a
professional regulation focus
4

5. Context of the Discussion
 Considerable public debate concerning role and
regulation of insolvency practitioners (IPs)
 Insolvency industry has reputation of having some
cowboys/criminal activity/money laundering/
‘colourful identities’
 Concern about phoenix companies
 ASIC has received criticism as regulator
 Regulation of IPs involves several bodies
 Charging practices of IPs criticised
 Independence of some IPs has been criticised
 Creditors feel disempowered
 So why are we having this debate now?
5

6. Senator John ‘Wacka’ Williams
(Nat, NSW)
“It’s just bloody outrageous”
-quote to SMH 1.4.10
6

7. The narrative of insolvency reform
(Alex Hawke-Assistant Treasury)
it is clear that the level of confidence in the insolvency industry needs
to be improved. Insolvency practitioners received the lowest rating for
perceived integrity in the latest survey of ASIC's stakeholders.’
A key aim of the bill is to restore confidence in the insolvency
profession by raising the standards of professionalism and competence
of practitioners, and identifying and removing 'bad apples' from the
profession more swiftly.
‘proactive surveillance of corporate insolvency practitioners’
‘unjustifiably expensive or poorly-performing practitioners’
‘the need to protect consumers of insolvency services’
‘improving practitioner standards with flow-on effects to practitioner
performance’
(Senator Williams)
There have certainly been some nasties in this industry
I think that their charges are outrageous… the liquidator seems to get
the lot with their fees
7

8. The (recent) history of insolvency reform
 Harmer Report, General Insolvency Inquiry (ALRC) 1988
 Corporate Law Reform Act 1992
 Voluntary administration (Pt 5.3A)
 Repeal of official management (Pt 5.3)
 Bankruptcy amendments 2002-2005
 Corporations Amendment (Insolvency) Act 2007
 Since 2000 more than 30 inquiries that have made
recommendations on insolvency-still waiting for
implementation 8

9. Comparative perspectives
 England
 Enterprise Act 2002
 Administration, restricting receiverships
 Rise of pre-pack administrations
 Small Business, Enterprise and Employment Act 2015
 Reducing creditor meetings
 Reform pre-pack requirements
 Europe
 European Commission 2014 (‘new approach to business
rescue’)
 Germany 2012
 Spain 2012, 2014
 South Africa (Business Rescue Act 2008)
 Current/pending reviews: Singapore, Hong Kong, USA9

10. The changing narrative
 Static or falling appointment numbers
 Lack of large scale receiverships, VAs
 Arrium and Dick Smith excepted
 Push in Australia (and elsewhere) for early intervention
and turnaround/restructuring
 The stigma of insolvency
 Avoiding termination clauses
 Changing nature of business:
 Values depend less on fixed assets and more on people and
service contracts
 Increasing secondary debt market in Aust
 Increasing role of distressed funds in Aust
 Sankaty and Oaktree local offices
 Fragmentation of senior lending groups
 Push for early intervention, restructuring, reorganisation10

11. A snapshot of corporate insolvency
1326, 11%
678, 5%
1126, 9%
2932, 24%
6273, 51%
Insol appt 14-15
VA
Rec
Controller
Court liq
CVL
11

12. Co Exad appointments-ASIC Series 2
9314
12689
14056
12726
0
2000
4000
6000
8000
10000
12000
14000
16000
FY00-01 FY05-06 FY09-10 FY14-15
Total CVL Court liq VA Rec and Cont
12

13. DOCA and VA appointments
ASIC statistics (Series 2)
 DOCA appt down from 7% of all corp insol appt in FY00-
01 to 2.6% of all appt in FY12-13 (3% in FY14-15)
 DOCA appt were:
 28% of VA in FY00-01
 32% of VA in FY09-10
 28% of VA in FY14-15
 VA appt down from 25% of all corp insol appt in FY00-01
to 10% of all appt in FY12-13 (same in FY14-15)
 Total corp insol appt up from FY00-01 (9,314) to FY14-15
(12,726) 36% increase
13

14. VA and DOCAs
2363
1657 1644
1326
672
541
418 376
0
600
1200
1800
2400
3000
FY00-01 FY09-10 FY12-13 FY14-15
VA
DOCA
14

15. A snapshot of personal insolvency
17163
10911
214
Bankruptcy Act appointments
Bankruptcies
Debt ag (Pt IX)
PIA (Pt X)
15

16. Appointments under Bankruptcy
25611
27351
36539
28288
23902
22299
27509
17163
1223
4866
8427
10911
486 186 603 2140
5000
10000
15000
20000
25000
30000
35000
40000
FY00-01 FY05-06 FY09-10 FY14-15
Total Bankruptcy Pt IX Pt X
16

17. Trends in personal insolvency
 Total bankruptcy appointments down from 30822
(FY12-13) to 28288 (FY14-15) (down 9%)
 Formal bankruptcies down from 68% of total (FY12-
13) to 61% of total (FY14-15)
 Debt Agreements up from 31% of total (FY12-13) to
38.5% (FY14-15)
 PIA halved as a proportion of all appointments to
.5% (from 294 to 214) (FY12-13 compared with
FY14-15)
17

18. Current law reform: ILRA 2016 (Cth)
 Attempt to harmonise personal and corporate insolvency
 Similarly numbered ‘Insolvency Practice Schedule’ into each Act
 Insolvency Practice Rules (not yet released)
 ‘External administrator’ regulation rather than appointment focussed
regulation
 Consolidated rules for creditor meetings, reporting, court powers
 Major over hall of corporate insolvency practitioner
regulation
 Mirroring of bankruptcy practitioner regulation
 Reciprocal banning/disqualification between bankr and corp insol
 Dramatic increase in regulator disciplinary powers
 Request information and update information
 Show cause notice
 Attend creditor meetings
 Removal of CALDB power
 Reshaping relationship between IPs and creditors
 Redesign of reporting obligations
18

19. The present: practitioner regulation
 Registered liquidators (s 1282)
 44% work in small or medium practices of 9 partners or less
 Official liquidators for court appointment
 Compare O/S insolvency practitioners (lawyers and
accountants)
 Must have studied equivalent of 3 years
accounting and 2 years commercial law
 Court has power to inquire into liquidator, VA,
receiver
 Court may remove liquidator, VA, receiver
 ASIC may lodge application with CALDB (s1292)
 CALDB may suspend or cancel registration
 No obligation to renew registration
 ASIC increasingly use undertakings
19

20. The present: practitioner regulation
 Insolvency practitioners belong to:
 ARITA (approx 85%)-Code of Professional Practice (3rd ed)
 CAANZ; CPA; IPA- APES 330
 Increasing judicial focus on practitioner remuneration
 Anti-hourly rates; focus on ad valorem percentages
 Proportionality
 Re Independent Contractor Services (Aust) P/L (No 2)
[2016] NSWSC 106
 Regulatory focus on independence
 Referral relationships
 Pre-insolvency advisors and phoenix activity
20

21. The future: practitioner regulation
(enacted-ILRA 2016)
 Registration (licensing) IPS Division 20
 No more official liquidators
 Renewable every 3 years
 Refer application to committee (ASIC, Min, Industry appointees)
 May be subject to conditions and limitations on roles (eg rec only)
 Adequate insurance levels
 Ongoing professional development requirements
(pending)
 Educational requirements (university study in insolvency?)
 Insolvency Practice Rules may require this
 User pays regime for registered liquidators
 Increasing rego fee from $300 to >$8,000
 Licensing fee of potentially $12,000 (tiered for smaller firms) 21

22. The present: IPs and creditors
 Different rules for each appointment type
 Creditors approve remuneration
 Court can also approve/review remuneration
 Creditors can seek court inquiry into conduct of IP or
seek court order to remove IP
 Creditors can challenge IP decision in court under s 1321
 Liquidator must ‘have regard to’ directions of creditors
 Difficult to remove IP once appointed
 In VA creditors can only remove at first meeting
 Creditors can seek to be appointed to ‘committee of
inspection’
 IP does not need creditor permission to sell assets
22

23. The future
Disciplinary action
 No more CALDB-disciplinary committee (Div 40)
 ASIC can suspend or cancel (limited grounds);
committee can suspend or cancel
 if rego cancelled can’t reapply for 10 years
 ASIC can issue show cause notice (s40-40)
 ASIC can direct IP to give information, correct
information, give documents; obligation to
correct information
 ASIC can give direction not to accept further
appointments (s 40-15)
 Industry association can report members to ASIC
23

24. The future
Role of the court
 Shifting from appointment specific provisions to new
IPS Div 90
 Abolish s 1321 (replace with broader court powers)
 s447A remains in Pt 5.3A
 New general court inquiry provision (s 90-5); or on appl by
creditor, ASIC or an officer of co (s 90-10)
 General court power to make appropriate orders (s 90-15)
 Application by persons in s 90-20
 Court or ASIC may appoint a reviewing liquidator (s90-23)
 Creditors may also appoint, but limited to costs and
remuneration (s 90-24)
24

25. The future
Relationship with creditors
 New rules on creditor meetings (Div 75)
 Creditors may remove external administrator (s
90-35)
 New role for committees of inspection (Div 80)
 Request information (if reasonable)
 Request a report (if reasonable)
 Seek court orders (by authorising a creditor
member)
 Obtain external advice (charged as a cost of the
committee)
 Seek reviewing liquidator
25

26. Future reforms: announced
1. Reduce personal bankruptcy to 1 year
default
2. Introduce safe harbour for directors for
insolvent trading:
A. Safe harbour defence
B. Carve out/presumption against liability
 Role of restructuring advisor?
3. Make ipso facto clauses void on
appointment of IP
Innovation Statement (7.12.15)
26

27. Productivity Commission Reforms
Findings:
 The current culture, incentives and legal framework around voluntary
administration inhibit its effectiveness as a genuine restructuring mechanism
 Wholesale change of insolvency law is not warranted-Ch 11 rejected as a
model
 VA required to certify 1 month after appointed where co can be viable
business and if not convert into liquidation (Rec 14.1)
 Introduction of pre-positioned sales (Rec 14.3)
 Moratorium for creditors’ schemes of arrangement (Rec 14.6)
 Introduction of ‘small liquidation’ process (Rec 15.1)
 Can only be used if books and records are accurate
 Can use a pre-positioned sale process (Rec 14.4)
 ASIC should produce a new Reg Guide on small business liquidation and
restructuring (Rec 15.7)
 Rename AAF to Public Interest Administration Fund and fund small
liquidations where assets insufficient (Rec 15.2)
 Greater reporting obligations on receivers regarding sales (Rec 15.4)
 Allow a committee of inspection to challenge receiver fees 27

28. Other reforms?
 Receivership under focus
 Insolvency of trusts reform
 Insolvency ombudsman
 Insolvency Panel
 Consolidated Insolvency Act?
 US Chapter 11 bankruptcy?
28

29. QUESTIONS?
29