What is going to change with the insolvency reforms?

The Insolvency Law Reform Act 2016 (IRLA) and further proposed reforms are the most extensive reforms of the insolvency regime in Australia since the early 90s. Key changes professional advisers should be aware of include:

  • Bankruptcy has been reduced to one year

The default period of undischarged bankruptcy (i.e. for individuals) is going to be reduced from 3 years to 1 year. The objective of the change is to encourage entrepreneurs.

  • Official Liquidator’s status to be removed

Currently, when a liquidator is appointed by the court they are required to have status as an “Official Liquidator” status. As a requirement Official Liquidators undertake to finalise liquidations without any precondition that they are paid remuneration. This often results in Official Liquidators being appointed in assetless administrations where they receive no remuneration. The status of “Official Liquidator” is to be removed and liquidators will be free to require an indemnity or upfront payment from creditors before taking on court appointed liquidators. This change is likely to increase the cost to creditors of putting a company into liquidation through a court application.

  • Liquidators can now be replaced by an ordinary resolution of creditors

Under the IRLA creditors will be able to remove a liquidator by ordinary resolution. This means that only a majority of creditors, by value and number, will need to vote in support to remove a liquidator. This will replace the current condition requiring creditors to pass a special resolution, involving the need for 75% in value and a majority in number, in support of the resolution.

  • Creditors can appoint an independent reviewer of fees

An issue often arising in administrations is the excessive fees charged by insolvency practitioners. By resolution, creditors will be able to appoint another insolvency practitioner to review the fees of the current appointee. This may help to avoid costs of going to court to resolve fee disputes between insolvency practitioners and creditors.

  • Ipso facto clauses to be unenforceable

An ipso facto clause allows a party to terminate a contract upon a formal insolvency appointment to a counterparty. For example, a landlord in a standard commercial lease will have the right to terminate (based upon an event of default) if a voluntary administrator is appointed over a tenant. The proposed insolvency reforms will render an ipso facto clause unenforceable.

  • Pre-insolvency adviser

The insolvency reforms propose to create a “Restructuring Adviser” as a registered pre-insolvency adviser. It is proposed that directors of a company appoint a Restructuring Adviser that the directors of the company will be protected in a “safe harbour” from prospective insolvent trading claims (if the company were to eventually go into liquidation). However, directors should keep in mind that under the proposal a safe harbour is only in effect when the Restructuring Adviser is appointed to a solvent company.

 

Sewell & Kettle Lawyers are trusted advisers to credit managers, accountants, entrepreneurs, transactional lawyers and in-house lawyers. Sewell & Kettle has a business mind-set and provides specialist advice in the following areas: Insolvency and bankruptcy law, commercial litigation and dispute resolution, personal property securities law and commercial debt recovery.

 

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