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2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATIONS AMENDMENT (INSOLVENCY) BILL 2007
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the
Hon Chris Pearce, MP)
Table of contents
GLOSSARY............................................................................................................1
OUTLINE ..............................................................................................................3
REGULATION IMPACT STATEMENT .....................................................................5
IMPROVING OUTCOMES FOR CREDITORS ..........................................................25
DETERRING CORPORATE MISCONDUCT ............................................................75
IMPROVING REGULATION OF INSOLVENCY PRACTITIONERS............................85
FINETUNING VOLUNTARY ADMINISTRATION ....................................................91
MISCELLANEOUS .............................................................................................131
TRANSITIONAL PROVISIONS ............................................................................135
Corporations Amendment (Insolvency) Bill 2007 iii
1
Glossary
1.1 The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ACN Australian Company Number
AGM Annual General Meeting
ASIC Australian Securities and Investments
Commission
ASIC Act Australian Securities and Investments
Commission Act 2001
ATO Australian Taxation Office
Bankruptcy Act Bankruptcy Act 1966
CALDB Companies Auditors and Liquidators
Disciplinary Board
CAMAC Corporations and Markets Advisory
Committee, previously the
Corporations and Securities Advisory
Committee
CAMAC Report (1998) 1998 Corporations and Markets
Advisory Committee Report Corporate
Voluntary Administration
CAMAC Report (2004) 2004 Corporations and Markets
Advisory Committee Report
Rehabilitation of Large and Complex
Enterprises
CASAC Corporations and Securities Advisory
Committee
Corporations Act Corporations Act 2001
Corporations Amendment (Insolvency) Bill 2007 1
Introduction
DEWR Department of Employment and
Workplace Relations
DOCA Deed of Company Arrangement
GEERS General Employee Entitlements and
Redundancy Scheme
ICAA Institute of Chartered Accountants in
Australia
IPAA Insolvency Practitioners Association of
Australia
James Hardie Report 2004 Report of the James Hardie
Special Commission of Inquiry
OCH Options Clearing House
PJC Report 2004 Parliamentary Joint Committee
on Corporations and Financial Services
(PJC) Report Corporate Insolvency
Laws: A Stocktake
Review of Insolvency Practitioners 1997 Review of the Regulation of
Corporate Insolvency Practitioners
ROT clause Retention of Title Clause
SGAA Superannuation Guarantee
(Administration) Act 1992
SGC Superannuation Guarantee Charge
UNCITRAL United Nations Commission on
International Trade Law
2 Corporations Amendment (Insolvency) Bill 2007
2
Outline
2.1 The Corporations Amendment (Insolvency) Bill (the Bill) includes a
range of measures intended to modernise Australia's insolvency laws. These
measures were announced by the Hon Chris Pearce MP, Parliamentary
Secretary to the Treasurer, on 12 October 2005.
2.2 The reforms have been developed having regard to the
recommendations of a number of recent reviews into the corporate insolvency
framework. Specifically, the reforms are based on the findings of the following
reviews and inquiries into the corporate insolvency framework: the 1997
Review of the Regulation of Corporate Insolvency Practitioners; the 1998
Corporations and Markets Advisory Committee (CAMAC) Report Corporate
Voluntary Administration; the 2000 CAMAC Report Corporate Groups; the
2004 CAMAC Report Rehabilitation of Large and Complex Enterprises and the
2004 Parliamentary Joint Committee on Corporations and Financial Services
(PJC) Report Corporate Insolvency Laws: A Stocktake.
2.3 The issues arising out of these reviews fall into four broad themes.
2.4 The first theme relates to improving outcomes for creditors, through
enhanced protections for employee entitlements, improved information to
creditors, removal of unnecessary procedural requirements, and by introducing
a statutory pooling process to facilitate the winding up of related companies.
2.5 The second theme relates to deterring misconduct by company officers,
primarily through the establishment of an assetless administration fund to
improve the quality of information forwarded to the Australian Securities and
Investments Commission (ASIC) by insolvency practitioners, and a new ASIC
enforcement programme targeted at phoenix company behaviour. In support of
this initiative, reforms are proposed to restore the longstanding interpretation of
the non-applicability of penalty privilege in proceedings for disqualification or
banning orders. ASIC will also be provided with enhanced powers to
investigate the conduct of registered liquidators.
Corporations Amendment (Insolvency) Bill 2007 3
Regulation impact statement
2.6 The third theme relates to improving the regulation of insolvency
practitioners, primarily through enhancements to the registration regime
administered by ASIC, but also through the introduction of more flexible
disciplinary procedures.
2.7 The fourth theme relates to fine-tuning voluntary administration,
comprising a package of technical amendments to enhance the efficiency and
cost effectiveness of that process. These amendments recognise market
developments and opportunities for improvement that have been identified
since the procedure was introduced in 1993.
2.8 While the individual reforms are generally minor in nature, it is
anticipated that the cumulative impact of this package will include significantly
reduced compliance costs, improved commercial certainty, and improved
integrity in the insolvency regime. A well functioning insolvency regime is
essential for maintaining the ready availability of capital at a low cost for
Australian businesses, and for expediting the allocation of capital to its highest
valued uses in the economy.
2.9 The Government has announced that it will adopt the United Nations
Commission on International Trade Law (UNCITRAL) Model Law on
cross-border insolvency. The Model Law will provide effective and efficient
mechanisms for dealing with cases of cross-border insolvency. These reforms
will be enacted through separate legislation, and will adopt the approach
detailed in the CLERP 8 Discussion Paper.
Financial impact statement
2.10 There is no financial impact.
4 Corporations Amendment (Insolvency) Bill 2007
3
Regulation impact statement
Background
3.1 The last major reform of Australia's corporate insolvency laws was
undertaken following the 1988 review of those laws by the Australian Law
Reform Commission (the `Harmer Report'). Recommendations of this review
were implemented in the Corporate Law Reform Act 1992.
3.2 Since then a number of inquiries into the system have been conducted.
In 2004, the Parliamentary Joint Committee on Corporations and Financial
Services tabled a report, entitled Corporate Insolvency Laws: A Stocktake (the
PJC Report). The report contained 63 recommendations for changes to
Australia's insolvency system. The Corporations and Markets Advisory
Committee (CAMAC) published a report on Corporate Voluntary
Administration in 1998 (containing 60 recommendations) and a report on the
Rehabilitation of Large and Complex Enterprises in 2004 (containing
49 recommendations). A 1997 Working Party inquired into the regulation of
insolvency practitioners and recommended improvements to the regulatory
framework.
3.3 These reports generally endorsed the current insolvency system but at
the same time proposed measures to strengthen creditor protections and
improve the efficiency of insolvency processes.
Consultation
3.4 Stakeholders from a wide spectrum of interests (insolvency
practitioners, employee and business groups, the legal community,
representatives of financial institutions, regulators, accounting bodies and
members of the academic community) actively participated in these public
inquiries and expressed support for reforms of insolvency laws.
Corporations Amendment (Insolvency) Bill 2007 5
Regulation impact statement
3.5 On 22 March 2005 the Government announced that it would address
corporate law issues raised by reviews of the insolvency framework in the
context of developing an integrated set of proposals to improve the operation of
Australia's insolvency laws. On 12 October 2005 the Government announced
details of its package. The package has four key themes:
· improving outcomes for creditors, including through:
initiatives to enhance protections for employee entitlements in
insolvency proceedings;
initiatives to facilitate informed decision making by creditors;
initiatives to streamline external administration and reduce
associated costs; and
allowing for the administration of related companies to be
conducted as a single process.
· deterring corporate misconduct, including through allowing ASIC a
general power to investigate breaches of liquidators' duties and restoring
the longstanding position that penalty privilege does not apply in
disqualification proceedings (complementing the assetless administration
initiative discussed below);
· improving the regulation of insolvency practitioners by updating the
registration regime administered by ASIC and introducing greater
flexibility in disciplinary proceedings; and
· finetuning the voluntary administration process, in recognition of market
developments and experience with the process since its introduction.
3.6 Some of the proposals of the Government's insolvency package, notably
an expansion of the range of the entitlements available to employees whose
employment is terminated as a result of their employer's insolvency under the
General Employee Entitlements and Redundancy Scheme (GEERS) and the
introduction of an assetless administration fund, announced on
12 October 2005, are already in place.
3.7 An additional $62 million over four years was allocated for the
introduction of four new GEERS enhancements:
· assistance for underpaid wages in the three month period prior to the date
of employer insolvency;
6 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
· assistance that recognises a claimant's entitlement to notice of termination
under their terms of employment;
· coverage for employees who resign or whose employment is terminated
up to six months prior to the date of their employer's insolvency; and
· aligning the treatment of `excluded employees' (directors and close
relatives) with their treatment under the Corporations Act 2001.
3.8 These enhancements to GEERS are included in revised GEERS
Operational Arrangements, and apply to insolvencies that occur on or after
1 November 2005.
3.9 On 22 August 2006, the Minister for Employment and Workplace
Relations announced a further extension to GEERS. The amount of unpaid
redundancy pay available under GEERS has been doubled from eight weeks to
a maximum of 16 weeks. This change is applicable to all GEERS claims made
as a result of liquidations or bankruptcies that occur on or after 22 August 2006.
This extension of GEERS brings it into line with the community standard for
redundancy provisions now available in awards and agreements.
3.10 The Government has also allocated $23 million over four years to
establish an `assetless administration' fund and complementary enforcement
programme by the Australian Securities and Investments Commission (ASIC).
The fund will finance preliminary investigations by expert liquidators of
companies, selected by ASIC, that have been left insolvent with little or no
assets. The fund addresses a regulatory gap through more rigorous investigation
of insolvent businesses. It aims to improve corporate conduct generally, and
reduce the scope for phoenix activity. The fund is now in operation. As at
31 October 2006, ASIC has approved 132 applications for funding.
3.11 The assetless administration fund and the enhancements to GEERS are
not the only measures that can assist employees whose employment is
terminated as a result of their employer's insolvency. There is also scope to
improve the operation of insolvency laws and processes for the benefit of
employees of insolvent businesses and other creditors.
Corporations Amendment (Insolvency) Bill 2007 7
Regulation impact statement
The treatment of employee entitlements in voluntary
administration
Background
3.12 The PJC Report noted that the protection of employee entitlements in the
circumstances of employer insolvency is an important public policy objective and
it is appropriate for governments to explore options for better protecting such
entitlements. While it recommended that the maximum priority proposal not be
adopted, it made a number of recommendations to improve the standing of
employee entitlements in the event of employer insolvency.
3.13 Business failures can have widespread and long lasting effects on
stakeholders, particularly employees who commonly do not receive their full
entitlements on their employer's insolvency. Employee entitlements generally
comprise wages, annual leave, long service leave, sick leave, redundancy,
notice and superannuation. The Productivity Commission has estimated that
each year between 55,000 and 65,000 businesses cease to operate. Direct job
losses resulting from business cessations are likely to account for, at most,
between 9-10 per cent of total annual job losses. The majority of cessations,
estimated to be around 80 percent, are `solvent' failures. That is, the businesses
in question cease operations without owing any debts or owing outstanding
employee entitlements.
3.14 Empirical data on the extent of employees' losses is limited. In 2003 the
ACTU estimated that around 19,000 employees lose up to $500 million in
unpaid entitlements each year. The General Employee Entitlements and
Redundancy Scheme (GEERS) provides a limited safety net for employees
whose employment has been terminated because of an employer's insolvency.
In 2004-05 $66.7 million was paid to employees under GEERS. In 2005-06 the
total paid amounted to $49.2 million. The number of insolvent businesses
totalled 912. The total number of recipients was 7,790. GEERS is fully funded
by taxpayers.
3.15 In 2005, 7,277 companies entered external administration. Of these,
2,636 companies -- approximately 36 per cent -- entered voluntary
administration. Introduced in 1993, the voluntary administration procedure
replaced earlier arrangements that were considered to offer too limited scope for
companies to trade their way out of difficulties.
3.16 In a winding up the law confers a priority on employee entitlements.
The treatment of employee entitlements in a voluntary administration differs
from that in a winding up.
8 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
3.17 The primary purpose of the voluntary administration procedure, set out
in Part 5.3A of the Corporations Act 2001 (Corporations Act), is to provide a
flexible and relatively inexpensive procedure that enables a company to
suspend the payment of its debts, so that it can attempt a compromise or
arrangement with its creditors aimed at saving the company or the business or,
if that is not possible, maximising the return to creditors. If successful, the
compromise or arrangement will be set out in a deed of company arrangement
(DOCA), which binds the company and the creditors. If these attempts fail, the
legislation facilitates the transition to winding up.
3.18 If the creditors decide to enter into a DOCA, the Corporations Act sets
out what the deed must contain, although the requirements are flexible. The
DOCA details the adjustment of the rights and obligations of creditors in
relation to the company.
3.19 If a DOCA is recommended, the administrator must provide a statement
setting out details of the deed. The DOCA must include some essential matters
(such as the property to be available to pay creditors' claims, the duration of
any moratorium period for which the deed provides, the extent to which the
company is to be released from its debts, conditions for the deed to operate, the
circumstances for termination of the deed, and the order of payment of
creditors' claims).
3.20 In addition, the deed may include prescribed provisions (set out in
Schedule 8A of the Corporations Regulations). One of the provisions is clause 4
of Schedule 8A, which provides that the administrator must apply the property
of the company in the order of priority specified for a liquidation. It is not
mandatory to include these provisions in every deed. The deed may make other
provision including altering the priority that would apply in a liquidation. In
practice, most deeds will apply the property of the company in the order
specified for a winding up.
3.21 To address the possibility that some creditors may be unfairly treated by
the meeting of creditors, or outmanoeuvred at the meeting, the law allows
creditors who consider a particular deed oppressive or unfairly prejudicial or
discriminatory to initiate proceedings in the Supreme Courts or in the Federal
Court to have the deed overturned.
Problem identification
3.22 Insolvency law has long sought to protect employee entitlements in the
event of the insolvency of the employer. It affords priority status to employee
entitlements in liquidation and a receivership. Traditionally, the employee has
been seen to be in a different bargaining position in comparison to other
creditors and investors. The impact of an employer's insolvency is likely to be
greater for employees as a group than for other creditors. Wages are likely to be
Corporations Amendment (Insolvency) Bill 2007 9
Regulation impact statement
the only source of income for employees, while other creditors have access to
other sources of income. Employees are involuntary creditors. In negotiating
the terms of their employment, they are rarely able to seek provision for
protection against employer insolvency. In most circumstances tradespersons
and independent contractors are able to write off bad debts and diversify their
risk. Under the General Employee Entitlements and Redundancy Scheme
(GEERS), employees are not entitled to benefits under the scheme if the DOCA
does not include the priorities specified in the Corporations Act in relation to
the entitlements to be paid to employees in a liquidation.
3.23 In its Report, the Parliamentary Joint Committee noted an instance
where the priority had been altered in a DOCA to the disadvantage of
employees and against the wishes of a substantial number resulting in
ineligibility for GEERS entitlements. Though the incidence of such cases is
small in comparison to the total number of companies entering voluntary
administration, the consequences can be serious for affected employees.
Employee creditors have rights of appeal but the cost of undertaking an appeal
imposes a considerable burden on them, particularly where not all are in
agreement or willing to contribute to the cost of proceedings.
Objective
3.24 The broad objective is to improve the operation and fairness of
insolvency laws. In particular, the objective is to enhance the prospect of
payment of employee entitlements in the event of employer insolvency and
improve the standing of ordinary employees in voluntary administrations.
Identification of options
Option 1
3.25 An option is to leave the voluntary administration procedure unchanged
in relation to the priority of employee entitlements.
Option 2
3.26 The PJC Report recommended that the Government amend the law to
make it mandatory for a DOCA to preserve the priority available to creditors in
a winding up, unless affected creditors agree to waive their priority. It
recommended that creditors or the administrator should have the right to initiate
court proceedings to have the deed upheld.
3.27 An option is to accept that recommendation. (The PJC Report made no
comment on the size of any majority of affected creditors, whether it be
50 per cent, 75 per cent or unanimous, required to waive the priority.)
10 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
Impact analysis
Impact group identification
3.28 For practical purposes the creditors who stand to benefit from Option 2
are employees, as they are the only relevant class of creditors who are afforded
priority status under the law. Affected parties include employee groups, other
unsecured creditors, insolvency practitioners, other potential stakeholders in
voluntary administrations and the Department of Employment and Workplace
Relations (DEWR) (which has responsibility for the administration of GEERS).
Analysis of the impact of each option
Option 1
Benefits
3.29 Option 1 would preserve the flexibility of the voluntary administration
procedure and allow insolvency practitioners the greatest flexibility in
proposing DOCAs. Insolvency practitioners would prefer this option in order to
maximise their opportunities to negotiate acceptable DOCAs with creditors and
other potential stakeholders in insolvency administrations.
Costs
3.30 If the recommendation is not adopted in the form proposed (or in some
other form), there will continue to be criticism of the law and the treatment of
employee entitlements where DOCAs alter the priority of the entitlements of
employees without their consent. It would place the onus on employees to
challenge deeds where the priority was altered. There are legal costs for
employees who choose to challenge a deed that displaces their priority.
Option 2
Benefits
3.31 The main argument in favour of Option 2 is that it would improve the
standing of employees in the voluntary administration procedure. It would
reduce the risk that employees' interests are not taken into account in
negotiating a DOCA. A significant number of employees are potentially
affected. Approximately 40 per cent of external administrations take the form of
voluntary administrations.
3.32 Option 2 does not depart significantly from current practice (and other
insolvency procedures which also recognise the priority of employee
entitlements). It is a feature of the model DOCA set out in the Corporations
Act. It is possible that the courts may take the view that the maintenance of the
Corporations Amendment (Insolvency) Bill 2007 11
Regulation impact statement
priority is an implicit feature of the voluntary administration procedure as it
currently exists.
3.33 If a DOCA alters the priority of employee entitlements, the only option
available to aggrieved employees is to initiate court action. This imposes a
considerable burden on employees. The costs arising from court action would
be borne by employees. There appears to be no decided case on the question on
altering the priority of employee entitlements to the disadvantage of employees
in a DOCA since the introduction of the voluntary administration scheme in
1993.
Costs
3.34 Increasing the protection of employee entitlements may be seen to
reduce the flexibility of the voluntary administration procedure. It would be
seen to limit the capacity of insolvency practitioners and/or stakeholders to
conduct creditors' meetings and achieve a consensus as to the way forward -- a
DOCA or liquidation.
3.35 Under Option 2, employees may choose to waive their priority. It will
thus still be possible for a DOCA to alter the priority if the circumstances
warrant. It has been suggested that employees will never or very rarely choose
to waive their priority. They will always prefer the company's liquidation
(particularly given that GEERS assistance may only be available if the
company is put into liquidation).
3.36 If the priority of employees is legislated for, employees as a group
would never (or rarely) agree to waive their entitlements and would rather vote
for liquidation. Employees are traditionally seen as the type of creditor who
would be likely to prefer a DOCA to a liquidation, as it presents the prospect of
some employees retaining their jobs.
3.37 Option 2 will not benefit other unsecured creditors. It will be possible
for their rights to be modified to their disadvantage by a DOCA. It may have
the effect of reducing the level of returns that may otherwise be available to
unsecured creditors in a DOCA. It may be seen to further the inequitable
treatment of unsecured creditors vis-à-vis employees in insolvency law.
3.38 Option 2 may impose a cost on companies entering voluntary
administrations, in that it narrows the options open to companies and their
administrators in negotiating solutions to their financial difficulties. To some
extent, it may compromise the objective of the voluntary administration
procedure, which is to provide an expeditious, uncomplicated, inexpensive and
flexible procedure for addressing a company's financial difficulties. Company
shareholders may be affected if strategies for resolving financial difficulties are
restricted. However, it is creditor interests that are paramount in insolvency.
12 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
Consultation
3.39 The problem received close consideration in the PJC Report. The results
of any further consultation would be predictable. Non-employee stakeholders in
corporate insolvencies would be opposed to mandating the priority of employee
entitlements in DOCAs.
Conclusion and recommended option
3.40 In assessing the different options there are competing public policies to
balance: the protection of employee entitlements and the desirability of
encouraging business rescues wherever possible. The proposal favours the
former policy over the latter.
3.41 Option 2 -- mandating the priority of employee entitlements -- has the
advantage that it does not represent a significant departure from current
practice. Other insolvency stakeholders are not unduly affected. Its impact is
therefore limited. It gives recognition to an important public policy -- the
protection of employee entitlements. The current law imposes a considerable
burden on employees in that it is predicated on an assumption that they will
initiate potentially expensive court proceedings to challenge a DOCA that treats
them unfairly. The flexibility of the voluntary administration procedure and the
policy of encouraging business rescues are not unduly compromised by the
adoption of option 2.
3.42 The recommended option is for the law to recognise that the priority of
employee entitlements should be safeguarded in DOCAs but not necessarily in
the precise terms proposed by the PJC.
Implementation and review
3.43 The proposed approach is consistent with the manner in which creditors
determine matters at creditors' meetings under the current law, providing
flexibility for eligible employee creditors. An administrator will be able to
propose a DOCA that does not observe the priority only if they first secure the
agreement of a majority (by number and value) of affected creditors at a
meeting of eligible employee creditors. Creditors as a whole would then
conduct a vote on whether the deed should be executed at the section 439A
meeting (the major meeting of creditors in a voluntary administration). The
impact of the provision can be monitored by ASIC, which collects statistical
data on external administrations, and Treasury in its oversight of the legislative
scheme for corporate insolvency.
Corporations Amendment (Insolvency) Bill 2007 13
Regulation impact statement
The treatment of the superannuation guarantee charge in external
administrations
Problem identification
3.44 The PJC Report identified uncertainties about the interaction between
the Superannuation Guarantee (Administration) Act 1992 (SGAA) and the
Corporations Act. There is a lack of clarity as to how the Superannuation
Guarantee Scheme is intended to operate in relation to employers that are under
different forms of external administration. These uncertainties may have the
result that employees are not receiving their full entitlement.
3.45 Neither the Corporations Act nor SGAA deals with the priority of the
superannuation guarantee charge (SGC) in a receivership or a voluntary
administration. Under the current law the only insolvency procedure in which
the SGC is afforded a priority is in a winding up. As a result SGC payable to
ordinary employees is not afforded the priority that applies to superannuation
contributions in a receivership resulting in situations where employees do not
receive their superannuation in the form of SGC as a priority.
3.46 If the law is amended to recognise that the priority of employee
entitlements should be safeguarded in deeds of company arrangement as
proposed above, the priority of superannuation and the SGC would need to be
considered.
3.47 Under the Corporations Act there is a limit ($2,000) on the amount that
can be paid to excluded employees as a priority in respect of wages and
superannuation. Excluded employees include directors, their spouses including
de facto spouses and relatives. It has been a long standing policy of insolvency
law that priority is not afforded to debts or claims in respect of directors over
$2,000.
3.48 The SGAA provides that in the winding up of a company any
superannuation guarantee charge payable by the company is, for the purposes of
payment, to have a priority equal to that of a debt of the company of the kind
referred to in the Corporations Act. The above limit on debts or claims in
respect of directors that attracts priority status is arguably not recognised in the
SGAA.
3.49 The PJC Report recommended that the Government clarify how the
SGC is intended to operate in relation to employers in external administration.
14 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
Objectives
3.50 The objective of the proposal is to clarify the status and priority of the
SGC in a liquidation, a receivership and a voluntary administration. It aims to
improve the recovery of employee entitlements in the event of employer
insolvency.
Identification of options
3.51 It is necessary to clarify how the SGC should be treated in a receivership
and a voluntary administration. There are no other feasible options in this
regard.
3.52 In relation to the cap on debts in respect of directors that attracts priority
status in external administrations, an option is to include SGC amounts in that
cap. This would deliver the objective of consistent treatment of superannuation
entitlements and SGC amounts. It would improve the likelihood of
non-excluded employees receiving their entitlements.
3.53 An alternative option is to exclude SGC amounts from the cap. From a
retirement incomes policy perspective it may be preferred that the SGC be
excluded from this limit for the following reasons.
· SG charge amounts do not necessarily relate to the period where the
company became insolvent. Therefore, while the directors of a company
have some control over how it operates, the SG charge may relate to
periods where the company was solvent.
· SG amounts represent compulsory community standard minimum
amounts. Compulsory employer superannuation contributions are already
subject to a maximum contribution limit, defined in section 15 of the
Superannuation Guarantee (Administration) Act 1992, which ensures that
an employee's SG entitlement is not excessive.
· Unlike the cap in section 556(1A) of the Corporations Act 2001 the
maximum contribution limit is indexed to maintain its value over time. It
is noted that the $2,000 cap in the Corporations Act has not changed in
the last 15 years. This erosion of value over time could potentially
significantly reduce the amount going towards a director's retirement
savings in future years.
Analysis of the impact of each option
3.54 The primary argument in support of including SGC amounts in the
$2,000 cap for excluded employees is that this would improve the recovery of
Corporations Amendment (Insolvency) Bill 2007 15
Regulation impact statement
employee entitlements for other employees in the event of employer
insolvency.
3.55 In relation to the alternative option of excluding SGC amounts from the
cap, it is noted that it has been a long standing policy of insolvency law that
priority is not afforded to debts or claims in respect of directors (above $2,000).
The balance of any debts payable to excluded employees falls for consideration
as an ordinary unsecured debt in a liquidation. The arguments in favour of
retirement incomes policy recede in importance in the circumstances of an
insolvent administration in which there will be insufficient funds to pay the
outstanding debts and a choice has to be made as to which debts are to be paid
or paid in priority to other debts. The fact that the $2,000 cap which has not
changed in the last 15 years can be addressed by increasing the cap from time to
time. There have been no recommendations for an increase at this time.
Costs and expenses of mandating the priority
3.56 As SGC is a tax, excluding directors from the limit may reduce the
amounts payable to the Commissioner of Taxation in external administrations.
However, the great majority of these amounts are forwarded to employee's
superannuation funds.
Consultation
3.57 The Insolvency Practitioners Association of Australia has requested
these amendments. It is unlikely that any other stakeholders in external
administrations (apart from directors) would oppose the amendments.
Conclusion
3.58 The option of clarifying the status and priority of the SGC in a
liquidation, a receivership and a voluntary administration is the only real option
available at this time. The option of including SGC amounts in the $2,000 cap
for excluded employees would appear to outweigh the other options.
Implementation and review
3.59 The impact of the proposed amendments would be monitored by
Treasury in light of statistical data on external administrations.
16 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
The registration of insolvency practitioners
Problem identification
3.60 The administration of corporate insolvencies is carried out by private
sector practitioners. Insolvency practitioners may act as liquidators, provisional
liquidators, receivers, receivers and managers, voluntary administrators,
administrators of deeds of company arrangement or scheme managers. In 2005,
7,277 companies entered external administration. Insolvency appointments in
2005 totalled 11,758.
3.61 Under the law insolvency practitioners are required to be registered (as
`registered liquidators'). As at 4 October 2006 there were 743 registered
liquidators in Australia. Not all registered liquidators are actively engaged in
insolvency work. About 520 are actively engaged. There are two forms of
liquidator registration. A person may be registered as an official liquidator or as
a registered liquidator. Of the 743 registered liquidators, 448 were official
liquidators. The Insolvency Practitioners Association of Australia (IPAA) has
about 400 members. Not all registered liquidators are members of the IPAA --
it is not a prerequisite to being a registered liquidator -- but most active
liquidators are. Registered liquidators are predominantly accountants and
members of accounting bodies.
3.62 Insolvency practitioners are granted extensive powers over debtors and
their assets and are subject to fiduciary duties in relation to the assets they
control, including duties to act impartially, to avoid conflicts of interest and to
act in good faith and for proper purposes. They must exercise the highest
standards of honesty, competence, skill and diligence and ensure that the law is
applied effectively and impartially. They must be appropriately qualified and
have the knowledge, experience and personal qualities that will ensure
insolvency proceedings are efficiently conducted and there is confidence in the
process. They are supervised by ASIC and the Companies Auditors and
Liquidators Disciplinary Board (CALDB).
3.63 The role of insolvency practitioners has been the subject of comment
and suggestions for reform in a number of reports beginning with the Harmer
Report (1988) and the Trade Practices Commission `Study of the Professions'
(1992). In 1997 a government Working Party issued a comprehensive report on
the regulation of insolvency practitioners (Review of Insolvency Practitioners).
More recently the Parliamentary Joint Committee on Corporations and
Financial Services in its 2004 report `Corporate Insolvency Laws: a Stocktake'
(the PJC report) and the Corporations and Markets Advisory Committee
(CAMAC) in its reports on `Corporate Voluntary Administration' (1998) and
the `Rehabilitation of Large and Complex Enterprises' (2004) have examined
the role of insolvency practitioners and recommended reforms.
Corporations Amendment (Insolvency) Bill 2007 17
Regulation impact statement
3.64 The problem is that some insolvency practitioners are not independent
and are not exercising the high standards of honesty, competence, skill and
diligence required of them or performing their duties efficiently and impartially.
3.65 Some of the key issues that have been raised in the abovementioned
reports (and in the media and in ministerial correspondence) in relation to
insolvency practitioners include:
· the independence of practitioners;
· the selection of administrators;
· the remuneration of practitioners;
· criteria for initial registration; and
· ongoing criteria for registration.
Objective
3.66 The objective is to enhance the independence and competence of
insolvency practitioners and ensure that insolvency practitioners maintain the
capacity to adequately and properly perform the duties and functions of
registered liquidators on an ongoing basis.
Identification of options
Option 1
3.67 One option is to leave the law unchanged.
Option 2
3.68 A second option is to remove altogether the requirement to register as a
condition of practice as an insolvency practitioner.
Option 3
3.69 A third option is to retain the current registration system and adopt
targeted amendments and enhancements of the current regime for insolvency
practitioners to address specific concerns that have been identified. The
operation of the system could be improved with the following amendments:
· improve the quality and reliability of information available to creditors in
considering the appointment of insolvency practitioners;
· update the experience criteria for initial registration of practitioners;
18 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
· strengthen the ongoing requirements for registration;
· prohibit the offering of inducements to directors or other persons to obtain
appointments; and
· introduce more flexibility for creditors to replace administrators.
3.70 The independence of practitioners could be enhanced by amendments
that require the disclosure of relevant relationships and allowing creditors to
appoint a different person as liquidator when the administration ends and the
company proceeds into liquidation and when a deed of company arrangement
ends and the company proceeds into liquidation.
3.71 Ongoing requirements for registration could be improved by
amendments to make the requirement for insolvency practitioners to lodge a
security for the due performance of duties more flexible by permitting other
forms of insurance to be provided, to replace the triennial reporting requirement
with an annual reporting requirement, to allow ASIC to cancel the registration
of practitioners where matters do not require the consideration of the CALDB
(where a practitioner becomes disqualified by reason of bankruptcy or becomes
disqualified from managing corporations, or fails to maintain the insurance
required to cover their work as a registered liquidator) and to require practitioners
to transfer files on suspension or cancellation of registration.
Option 4
3.72 A fourth option is to introduce a licensing regime in place of the current
registration regime, such as the occupational licensing regime for providers of
financial services. The United Kingdom has a type of licensing regime for
insolvency practitioners. Features of a licensing regime could include:
· Requiring the regular renewal of licenses, to facilitate regular monitoring
of matters such as compliance with continuous education standards and
maintenance of practice capabilities;
· Providing for the cancellation of licenses at an administrative level
(without seeking the approval of CALDB);
· Provide for the conditional issuing of licenses;
· More active monitoring of insolvency practitioners by ASIC; and
· Ongoing obligations to perform adequately and properly the duties of a
registered liquidator, to remain a fit and proper person, to comply with
conditions of registration prescribed by the regulations or ASIC, to
maintain professional skills, to maintain adequate practice capacities, to
Corporations Amendment (Insolvency) Bill 2007 19
Regulation impact statement
notify ASIC if practitioners become disqualified from registration, to
lodge annual statements and to maintain arrangements for compensation
for loss.
Impact analysis
Impact Group Identification
3.73 Affected persons are:
· registered liquidators; and
· stakeholders who have an interest in the outcomes of external
administrations, including creditors, directors and shareholders.
Analysis of the impact of each option
Option 1
Benefits
3.74 Leaving the law unchanged would not result in any additional costs for
practitioners or require additional resources for the regulator. The current law
provides an adequate supervisory framework. While the focus of the current
regime is on initial registration, a practitioner's status as a registered liquidator
may be suspended or cancelled by the CALDB on the application of ASIC if it
considers that a practitioner has failed to carry out their duties or is otherwise
not a fit and proper person to remain registered.
Costs
3.75 In the longer term a failure to respond to some of the concerns about the
regulation of insolvency practitioners may erode public confidence in the
insolvency process. Concerns about the professionalism and the lack of
independence of practitioners are commonly expressed by stakeholders in
corporate insolvencies in submissions to the public inquiries and in the media.
Criticisms include:
· the increasing popularity of the voluntary administration process (which
may be conducted by registered liquidators) and the resultant decline in
the number of court liquidations (which may only be carried out by
official court appointed liquidators) has brought about an `ambulance
chasing mentality' on the part of some insolvency practitioners;
· the appointment as an administrator under the voluntary administration
procedure does not ensure independent administrators in every case.
20 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
Conflicts of interest tend to arise by reason of the appointment of the
administrator by incumbent management;
· the existence of improper relationships between administrators and other
parties;
· the `partial' exercise of casting votes by administrators.
3.76 Concerns have also been expressed about the lack of on-going
requirements for registration. The law does not require practitioners to meet
ongoing obligations to retain their registration such as an obligation to maintain
professional skills or continuing education. Practitioners retain their registration
notwithstanding that they may not have taken up insolvency appointments for
some years or have maintained professional skills or education. However, ASIC
is able to address a failing by a registered liquidator by making a formal
application to the CALDB.
Option 2
Benefits
3.77 In some jurisdictions there is no registration or licensing system for
insolvency practitioners. In New Zealand and Hong Kong any natural person
(with some exceptions regarding bankruptcy, insanity and relationship to the
company) may act as a liquidator. In the United States, in reorganisation cases
(including out-of-court restructurings and Chapter 11 bankruptcy cases) the
company's existing management generally administers a restructuring with the
assistance of insolvency counsel and financial advisers. There is no regulatory
body which oversees the qualification of these restructuring professionals,
however there are voluntary certification mechanisms.
3.78 Removing the registration requirement in Australia (as in New Zealand
or Hong Kong) or relying on voluntary certification only (as for restructuring
professionals in the United States) could increase competition in the industry,
resulting in a reduction in administration costs. This approach would rely on
market perceptions and reputation to test the qualification and experience of
practitioners, providing stronger incentives for improved performance and
reduced cost. Practitioners would not be subject to registration costs, the costs
of maintaining their practices to a sufficient standard to meet statutory
obligations for continuing registration and the costs of maintaining security for
the performance of their duties.
Costs
3.79 If registration requirements are repealed and any person allowed to carry
out external administrations, some creditors may have difficulty in deciding
who to select as an external administrator. They may not be able to assess
Corporations Amendment (Insolvency) Bill 2007 21
Regulation impact statement
whether a person seeking to act as an external administrator possessed the
qualifications, skills and/or experience needed to enable him/her to carry out
that role. There is a risk that unqualified persons or creditors themselves might
seek to undertake the functions of an external administrator without the
knowledge or skills that are necessary for the discharge of such functions. The
consequences of poor administrations may impact severely on creditors.
3.80 Creditors do not determine external administrators in every insolvency
procedure. Methods for the appointment of external administrators differ
depending on the procedure involved. In a voluntary administration an
administrator may be appointed, and the procedure commenced, by the
company itself (that is the board of directors), by its liquidator or provisional
liquidator or by a creditor who is entitled to enforce a charge on the whole, or
substantially the whole of a company's property and the charge has become and
remains enforceable. In other procedures such as a liquidation or a receivership
a creditor or creditors may nominate the liquidator. A registration system
provides a mechanism to improve confidence about the ability and integrity of
practitioners.
Option 3
Benefits
3.81 There are concerns commonly expressed by stakeholders about some
issues where the law has failed to move with market developments. In recent
years creditors and other stakeholders in corporate insolvencies have expressed
concerns about the lack of independence and impartiality on the part of
insolvency practitioners. Concerns have been expressed about the mode of
appointment of administrators, the disclosure of relationships that might be
relevant in deciding whether to replace an administrator, the offering of
inducements for the referral of work, the registration requirements for external
administrators, ongoing obligations to maintain professional skills or undertake
continuing education, limitations on the ability of creditors to remove
administrators or liquidators, and the desirability of a code of ethics for
insolvency practitioners. The adoption of targeted amendments to address these
concerns would be an appropriate response to issues raised in recent reviews of
the insolvency framework, improving the efficiency and cost effectiveness of
insolvency proceedings without introducing transitional costs or new
compliance obligations.
3.82 Targeted amendments which address concerns that have been identified
in recent reviews would increase public confidence in the insolvency process
and strengthen creditors' ability to select, and negotiate with, insolvency
practitioners.
22 Corporations Amendment (Insolvency) Bill 2007
Regulation impact statement
Costs
3.83 Targeted amendments that are proposed by this option (see above)
would not give rise to any budgetary implications, unless the Government was
to make a separate decision to increase ASIC's enforcement activities in this
area.
Option 4
Benefits
3.84 A move to a licensing regime could lead to a better balance between
initial registration requirements and ongoing requirements. Providing ASIC
with greater resources to monitor practitioners could improve the speed and
efficiency of enforcement actions. The shift to a licensing regime would
facilitate regular monitoring of matters such as compliance with continuous
education standards and maintenance of practice capabilities and enhance
practitioner accountability. It would improve the efficiency and speed of the
regime, and ensure CALDB's resources were directed at more serious conduct
matters.
Costs
3.85 The costs of introducing a licensing model for some 450 active
insolvency practitioners may outweigh its benefits. More active monitoring of
insolvency practitioners by ASIC would impose costs on government to ensure
that new requirements are enforced, with the extent of the implications
determined by the features of the licensing model adopted. Practitioner
compliance costs would increase and be passed on to creditors in the form of
higher fees. This option would combine investigatory and decision-making
functions in one body (ASIC) in relation to matters with potentially significant
impacts on individual practitioners.
Consultation
3.86 Public inquiries that have examined the regulatory regime for
insolvency practitioners include the 1997 Report of the Working Part on the
Regulation of Insolvency Practitioners, the 1998 report of CAMAC on
Corporate Voluntary Administration in 1998, the 2004 report of CAMAC on
the Rehabilitation of Large and Complex Enterprise and the 2004 report of the
Parliamentary Joint Committee on Corporations and Financial Services,
Corporate Insolvency Laws: A Stocktake. Insolvency practitioners and their
representatives were consulted in the development of recommendations in these
reports. Amendments to address these concerns have been made available for
public consultation, including consultation with practitioner representative
bodies.
Corporations Amendment (Insolvency) Bill 2007 23
Regulation impact statement
Conclusion and recommended option
3.87 A registration system provides a mechanism to improve confidence
about the ability and integrity of practitioners. That system can be improved
through targeted amendments. Option 3 is the preferred option. It addresses the
concerns raised by stakeholders, imposes minimal new burdens on insolvency
practitioners, enhances practitioner accountability, improves the supervisory
framework administered by ASIC, enhances the capacity of creditors to choose
independent administrators, and raises no new budgetary costs.
3.88 Option 1 fails to respond to the issues raised in the abovementioned
reports that have been the subject of a number of recommendations (the
independence of practitioners, the selection of administrators, the remuneration
of practitioners, criteria for initial registration and ongoing criteria for
registration.). Option 2 would pose risks for creditors. Registration has the
benefit that it ensures insolvency practitioners are well qualified, experienced,
are members of self regulatory associations (CPA Australia and ICAA) that
impose professional standards of practice and have satisfied ASIC that they are
capable of performing the duties of a liquidator and are otherwise fit and proper
persons. Option 4 (a licensing model) would impose significant new burdens on
practitioners and require increased resources on the part of the regulatory
authority to supervise a licensing regime. The relatively lower costs associated
with option 3, compared to the higher costs of a licensing model, make option 4
less attractive than option 3.
3.89 The current provisions of the law provide ASIC with flexibility to revise
requirements regarding such matters as ongoing training and other capability
requirements and do not need to be fundamentally altered. Policy
Statement 186, released in September 2005, details how ASIC tailors its
approach to the requirements for registration to reflect current insolvency
practice, the nature of the work of registered liquidators, and its experience in
administering the provisions. The legislative framework is complemented by
self-regulatory oversight of the Insolvency Practitioners Association and
professional bodies. The current law allows ASIC to initiate disciplinary
proceedings before the CALDB where a registered liquidator has, among other
things, failed to carry out or perform adequately and properly the duties of a
liquidator or is otherwise not a fit and proper person to remain registered as a
liquidator. Appropriate sanctions may be imposed.
Implementation
3.90 After taking effect as provided for by the amending legislation, the
administration and enforcement of the new legislation will be monitored by
Treasury, ASIC and the insolvency profession. No specific review is proposed.
24 Corporations Amendment (Insolvency) Bill 2007
4
Improving outcomes for creditors
Part 1 -- Enhancing protection of employee entitlements
Mandating the priority debt ranking in deeds of company arrangement
Background
4.1 It is implicit in the current law that the priority provided for in a
liquidation under section 556 will generally be observed in a deed of company
arrangement (DOCA). The law provides a model deed which expressly
preserves, in a DOCA, the priority applicable in a winding up (Clause 4,
Schedule 8A, Corporations Regulations 2001 (the Corporations Regulations)).
4.2 The provisions of the model deed may be displaced by the meeting of
creditors. To address the possibility that some creditors may be unfairly treated
at the meeting of creditors the law allows creditors who consider a particular
deed is oppressive or unfairly prejudicial or discriminatory to initiate
proceedings in the Supreme Court or the Federal Court to have the deed
overturned. However, it may be difficult for employees to use this mechanism,
because each employee may be owed a small amount relative to the costs of
court action. While the employees may pool their resources and act together,
this has its own costs and incentive problems.
4.3 To enhance the standing of employee creditors in voluntary
administrations, the Bill will amend the law to make it mandatory for a DOCA
to preserve the priority available to employee creditors in a winding up unless
employees agree to waive their priority. Interested persons, employee creditors
or the administrator will have the right to initiate court proceedings to have the
deed amended to modify the priority of employee entitlements, but only if those
entitlements are protected.
4.4 The effect of this change will be that the burden of challenging a DOCA
that does not observe the priorities for employee entitlements will be borne by
those best placed to bear the costs and assess the merits of any court action.
Corporations Amendment (Insolvency) Bill 2007 25
Improving outcomes for creditors
This is consistent with recommendation 49 of the 2004 Parliamentary Joint
Committee on Corporations and Financial Services (PJC) Report Corporate
Insolvency Laws: A Stocktake (the PJC Report).
Key changes
4.5 A provision will require all DOCAs to apply the priority afforded to
unsecured debts under paragraph 556(1)(e), (g) or (h), section 560 and
section 561 of the Corporations Act 2001 (Corporations Act) unless a meeting
of employee creditors (to be termed `eligible employee creditors') agrees to
vary that priority. Other provisions of the model DOCA will continue to be able
to be displaced.
4.6 If an administrator proposes to put to creditors a DOCA that does not
observe the priority, the administrator will first need to seek the agreement of
the employees.
4.7 Specifically, the administrator will need to secure the agreement of a
majority (by number and value) at a meeting of eligible employee creditors
prior to proposing a formal DOCA and conduct a vote on whether the deed
should be executed at the section 439A meeting (the major meeting of creditors
in a voluntary administration).
4.8 If the consent to a modification of the employee priority is not obtained,
administrators and other interested persons will have a right to seek an order
from the Court to have the deed amended to allow for such a modification. This
is consistent with the current regime in relation to the amendment or alteration
of DOCAs. The Court will be empowered to uphold the modified deed if, in the
Court's view, it offers eligible employee creditors the same or a better outcome
than they would receive in a winding up.
Notes on items
4.9 Item 1 of Schedule 1 will introduce a new term `eligible employee
creditor', which defines those creditors who will vote on a proposal to modify
the priority of employee entitlements. They are creditors whose debt or claim
would, in a winding up of the company, be payable in priority to other
unsecured debts and claims in accordance with paragraph 556(1)(e), (g) or (h)
or section 560 or 561 of the Corporations Act.
4.10 Item 4 will insert new section 444DA of the Corporations Act that will
mandate the priority of employee entitlements in a DOCA. Specifically,
subsection 444DA(1) will require all DOCAs to include a provision to the
effect that the assets of the company will be applied such that any eligible
employee creditors is entitled to a priority at least equal to what they would
have been entitled to under the priority set out in sections 556, 560 and 561.
26 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.11 New subsection 444DA(2) will provide that the rule requiring the
DOCA to apply the priority set out in sections 556, 560 and 561 will not apply
if, by resolution, eligible employee creditors consent to the non-inclusion of
such a provision at a meeting which is held before the section 439A meeting.
Subsection 444DA(3) will require the administrator to convene the meeting by
giving written notice of the meeting to as many of the company's eligible
employee creditors as reasonably practicable at least five business days before
the meeting. Subsection 444DA(4) states that the notice is to be accompanied
by a statement setting out the administrator's opinion about whether it would be
in the eligible employee creditors' interests to not include the provision in
subsection 444DA(1) in the DOCA, his/her reasons for that opinion and other
information that will enable the employee creditors to make an informed
decision.
4.12 New subsection 444DA(5) will provide that the Court may approve an
alteration of the employee priorities in a deed, if the Court is satisfied the
alteration is likely to result in the same or a better outcome for eligible
employee creditors than would result from an immediate winding up of the
company. Subsection 444DA(6) states that an application seeking an alteration
of the employee priorities may be made by the administrator of the deed, any
eligible employee creditor or any interested person. Subsection 444DA(7) states
that the Court may make an order before or after the section 439A meeting.
4.13 Item 10 will amend paragraph 1364(2)(f) of the Corporations Act to
allow the regulations to make provision for meetings of eligible employee
creditors.
Treatment of the superannuation guarantee charge under the
Corporations Act in external administration
Background
4.14 Section 52 of the Superannuation Guarantee (Administration) Act 1992
(SGAA) determines the priority of the superannuation guarantee charge (SGC)
in a liquidation. It does not address the priority of the SGC in a receivership,
voluntary administration or a DOCA.
4.15 Section 52 of the SGAA provides that in a winding up of a company,
any SGC payable is to have a priority equal to that of a debt of the kind referred
to in paragraph 556(1)(e) of the Corporations Act. Judicial consideration of this
provision has determined that it does not confer the same priority status on the
SGC as superannuation contributions enjoy under paragraph 556(1)(e) --
Corporations Amendment (Insolvency) Bill 2007 27
Improving outcomes for creditors
section 52 of the SGAA merely directs observance of paragraph 556(1)(e) of
the Corporations Act.1
4.16 It has been held that superannuation contributions and the SGC amounts
are separate and distinct debts for the purposes of section 556 of the
Corporations Act.2 This is because the two debts do not have the same
character. Paragraph 556(1)(e) of the Corporations Act gives a priority to
`superannuation contributions payable by the company in respect of services
rendered to the company by employees before the relevant date'. Subsection
556(2) of the Corporations Act defines `superannuation contribution' as: `a
contribution by the company to a fund for the purposes of making provision for,
or obtaining superannuation benefits for an employee of the company...'.
4.17 The SGC is a statutory tax liability owed to the Commonwealth. The
SGC is not paid in respect of services rendered or paid to a fund. It does not
arise as a result of a contractual obligation. As a consequence it does not fall
within the term `superannuation contribution'.
4.18 The superannuation guarantee system is the means of ensuring
compliance with superannuation obligations for the benefit of employees. Every
sum paid or recovered as an SGC is referable to a failure by an employer to
meet the criteria with respect to making superannuation contributions for the
benefit of employees. From a policy perspective, it is important that the SGC
receive the same priority as superannuation contributions.
4.19 Recommendation 46 of the PJC Report stated that the Government
should clarify how the SGC is intended to operate in relation to employers in
external administration.
Key changes
4.20 The first step to clarifying the treatment of the SGC in external
administrations is to remove section 52 of the SGAA, which currently provides
for priority in a winding up. This is necessary to avoid statutory duplication.
4.21 To ensure that `superannuation contributions' and the SGC attract the
same priority, section 556 of the Corporations Act will recognise the concept of
the SGC, and include the SGC in paragraph 556(1)(e) along with
superannuation contributions.
1 DP Excavation & Haulage Pty Limited v Commissioner of Taxation [2005] NSWSC 533.
2 Deputy Commissioner of Taxation v Rathner [2004] VSC 352.
28 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.22 This amendment will apply to liquidation, and will also flow through to
DOCAs as the subsection 556(e), (g) or (h) priority is to be mandated for
DOCAs. Where a receivership precedes a liquidation, subsection 433(3) of the
Corporations Act will ensure the SGC is dealt with in the same manner as in a
liquidation.
Notes on items
4.23 Item 11 of Schedule 1 will repeal section 52 of the SGAA. Item 14 is an
application provision that provides for the commencement of the repeal of
section 52 of the SGAA.
4.24 Item 6 will ensure that the SGC is treated in the same manner as other
debts in paragraph 556(1)(e) of the Corporations Act, ranking these debts
equally with wages and superannuation contributions. Item 2 will provide that
`superannuation guarantee charge' has the same meaning as in the SGAA. Item
3 will provide that `superannuation guarantee shortfall' has the same meaning
as in the SGAA.
4.25 Item 7 will overcome the limiting effect of the wording of paragraph
556(1)(e) of the Corporations Act `in respect of services rendered to the
company by employees before the relevant date' by deeming the SGC to be a
debt payable by the company in respect of services rendered in the quarter to
which the corresponding shortfall relates (notwithstanding that the charge is
payable to the Commonwealth).
Timing issues and priority for superannuation guarantee charge
Background
4.26 When a company fails to make the required superannuation
contributions by the due date, the SGC is incurred. If the SGC arises in respect
of unpaid entitlements accruing after the date of appointment, there has been
some uncertainty for practitioners as to whether the SGC should be afforded a
priority in line with either:
· other employee entitlements under paragraph 556(1)(e) of the
Corporations Act; or
· other post-appointment debts, such as expenses of the administration
which are afforded a higher priority) under paragraph 556(1)(a) of the
Corporations Act.
4.27 Notwithstanding that the SGC is a new debt distinct from unpaid
superannuation, the SGC represents the economic equivalent of the unpaid
superannuation amount and is imposed to ensure it is ultimately remitted to the
Corporations Amendment (Insolvency) Bill 2007 29
Improving outcomes for creditors
employee. The nominal interest component reflects the period of late payment
and is intended to represent any possible gains the contribution would have
made in that time, had the money been in the control of the complying
superannuation fund. The administration component represents the cost of
administering the superannuation guarantee scheme, and is retained by the
Australian Taxation Office (ATO).
Key changes
4.28 Amendments will address the situation where SGC amounts are
attributable to periods wholly before or wholly after the relevant date or the
relevant date divides a quarter (which begins on 1 January, 1 April, 1 July or
1 October). The term `attributable' relates to the period in which the
employment services were provided to the company by the employee.
4.29 The amount of SGC attributable to the period occurring before the
relevant date will be taken for the purposes of section 556 of the Corporations
Act to be an amount referred to in paragraph 556(1)(e). The amount of SGC
attributable to the period occurring after the relevant date will be treated as a
cost of the winding up and taken for the purposes of section 556 of the
Corporations Act to be an amount referred to in paragraph 556(1)(a).
4.30 This reform is consistent with recommendation 46 of the PJC Report,
which stated that the Government should clarify how the SGC is intended to
operate in relation to employers in external administration.
Notes on items
4.31 Item 7 will insert new subsections 556(1AB), 556(1AC), 556(1AD),
556(1AE) and 556(1AF) in the Corporations Act. New subsection 556(1AB)
will address the situation where SGC amounts are attributable to a quarter that
is wholly before the relevant date. New subsection 556(1AC) will address the
situation where the relevant date divides the quarter. New subsection 556(1AD)
will address the situation where the relevant date coincides with the first day of
the quarter.
4.32 Where SGC amounts are attributable to a quarter which is wholly before
the relevant date the SGC will be taken to be an amount within paragraph
556(1)(e) under new subsection 556(1AB). Where the relevant date divides the
quarter, for the purposes of section 556 of the Corporations Act, the amount of
SGC attributable to the period before the relevant date will be taken to be an
amount referred to in paragraph 556(1)(e) and the amount of SGC attributable
to the period after the relevant date will be taken to be an amount referred to in
paragraph 556(1)(a) under new subsection 556(1AC). Where the relevant date
coincides with the first day of the quarter the amount of SGC attributable to the
30 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
quarter will be taken to be an amount referred to in paragraph 556(1)(a) under
new subsection 556(1AD).
4.33 To avoid any doubt, the new provisions will explicitly address the
situation where wages are paid after the commencement date, in relation to
employment services provided prior to the commencement date, following an
advance provided for that purpose (for example, under the General Employee
Entitlements and Redundancy Scheme scheme). Such payments may give rise
to a new liability under the SGAA, arising after the commencement date.
Notwithstanding that the SGC liability arises after the commencement date in
relation to a payment of wages made after the commencement date, new
subsections 556(1AE) and 556(1AF) clarify that, where the SGC is attributable
to wages for pre-insolvency services, the SGC charge falls within sec 556(1)(e).
Otherwise the SGC is taken to be an expense under paragraph 556(1)(a).
4.34 Item 8 provides that the term `quarter', when used in section 556 of the
Corporations Act, has the same meaning as under the SGAA.
Superannuation guarantee charge and excluded employees
Background
4.35 Under subsection 556(1A) of the Corporations Act there is a $2,000
limit on the amount that can be paid to excluded employees as a priority in
respect of wages and superannuation. Excluded employees is defined in
subsection 556(2) to include directors, their spouses (including de facto
spouses) and relatives.
4.36 It has been a long standing policy of insolvency law that priority is not
afforded to debts or claims in respect of directors and their relatives. The
balance of any debts payable to excluded employees falls for consideration as
an ordinary unsecured debt in a liquidation.
4.37 The limitation applicable in the case of excluded employees does not
apply in relation to outstanding SGC amounts.3 This has the potential to reduce
the payments to ordinary employees as the amounts available to them as a
priority debt may be reduced because of the inclusion, as a priority debt, of
outstanding SGC amounts payable to directors.
4.38 An individual superannuation guarantee shortfall must be calculated as
9 per cent of an employee's salary or wages. The maximum amount of salary or
wages which can be used in calculating an individual superannuation guarantee
3 Deputy Commissioner of Taxation v Rathner [2004] VSC 352.
Corporations Amendment (Insolvency) Bill 2007 31
Improving outcomes for creditors
shortfall is equal to the maximum contribution base ($33,720 a quarter in
2005-06).
Key changes
4.39 As a result of other amendments in this Bill (see `Treatment of the
superannuation guarantee charge under the Corporations Act' above), the SGC
will be explicitly provided for in section 556 and aligned with the treatment of
superannuation contributions under paragraph 556(1)(e). As a result of this
change, subsection 556(1A) of the Corporations Act will apply the $2,000 limit
to the SGC as well as to wages and superannuation contributions.
4.40 Section 64B of the SGAA sets out a formula which directs that any
payment, including dividend payments, received must be allocated amongst all
employees on a pro-rata basis. It does not permit the Commissioner of Taxation
(the Commissioner) to allocate shares to employees to take account of special
circumstances such as the limit that applies in the case of excluded employees
under subsection 556(1A) of the Corporations Act or paragraph 109(1)(e) of the
Bankruptcy Act 1966 (Bankruptcy Act) in respect of an employee. The Bill will
address this issue, by introducing a new discretion for the Commissioner to
make adjustments of this nature.
4.41 This reform is consistent with recommendation 46 of the PJC Report,
which stated that the law should be amended to clarify how the SGC is intended
to operate in relation to employers in external administration.
Notes on items
4.42 Item 13 will amend section 64B of the SGAA to allow the
Commissioner to vary an employee's proportion where the amount of the
payment is affected by the application of section 556(1A) of the Corporations
Act or paragraph 109(1)(e) of the Bankruptcy Act in respect of an employee.
Item 12 will make a consequential amendment.
4.43 Item 15 is an application provision providing for the commencement of
new subsection 64B(3A) of the SGAA.
Superannuation guarantee charge and double payments
Background
4.44 Where an insolvent company has not made required superannuation
contributions, or has done so but late, the ATO, affected creditors and
complying superannuation funds may look to prove as creditors in any
subsequent insolvent administration. This gives rise to the possibility that two
32 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
proofs will be admitted in respect of what is (in an economic sense) the same
debt.
4.45 If an employee or a superannuation fund has a contractual entitlement to
superannuation contributions, there are two types of double payment concerns
in a liquidation context:
· Superannuation contributions are paid late giving rise to an SGC. Whilst
the employees or superannuation fund have no unpaid debt to prove for,
they will effectively receive a double payment if the SG charge is
consequently paid to the ATO by the liquidator and the ATO remits
monies to their complying fund.
· Superannuation contributions are unpaid and an SGC accrues. Both the
ATO and the affected employees and superannuation funds prove for the
outstanding SGC and unpaid superannuation respectively. As the debts
are legally distinct, the rule against double proofs does not apply and a
liquidator is obliged to admit all proofs.4
4.46 Amendments to the SGAA announced in the 2005-06 Budget and
contained in the Tax Laws Amendment (Loss Recoupment Rules and Other
Measures) Act 2005 will resolve the first issue:
· The SGAA now allows for the offsetting of a late payment of
contributions against an employer's SGC.
· Under the offsetting rule, employers that make a late payment to a
complying superannuation fund or retirement savings account within
one month after the due date (which is 28 days from the end of the
relevant quarter) can offset the late payment against the components of
the SGC liability that relate to the employee's entitlements.
· Where such a late payment occurs, the SGC will arise but the components
of the SGC which relate to employee entitlements are able to be offset to
the extent of the amount of the late payment. The employee related
entitlements of the SGC are the shortfall and nominal interest
components.
4.47 In relation to the second scenario however, with the amendments
aligning the treatment of superannuation contributions with the SGC, the ATO,
employees and superannuation funds will be entitled to participate in any
available dividends payable in respect of each of their proofs.
4 Deputy Commissioner of Taxation v Rathner [2004] VSC 352.
Corporations Amendment (Insolvency) Bill 2007 33
Improving outcomes for creditors
Key changes
4.48 In order to resolve this anomaly, external administrators will be required
to reject a proof of debt when this scenario arises. It is preferable that the
ATO's proof for the SGC be accepted rather than the affected employees' or
superannuation fund's proof because the SGC includes the interest component
and will ultimately give affected employees a greater benefit.
4.49 Section 553 of the Corporations Act provides for the admission to proof
of debts and claims in a winding up. It will be amended to require the liquidator
to refuse a proof of debt for a superannuation contribution that results in a SGC.
4.50 In the case of a voluntary administration and a DOCA, proofs of debt
are required to determine creditors' eligibility to vote at the meetings of
creditors. Administrators are guided by regulations 5.6.23 and 5.6.26 of the
Corporations Regulations in this respect.
4.51 This reform is consistent with recommendation 46 of the PJC Report,
which stated that the Government should clarify how the SGC is intended to
operate in relation to employers in external administration.
Notes on items
4.52 Item 5 will insert new section 553AB of the Corporations Act. New
section 553AB will require the liquidator to reject the whole, or a specified part
of, a debt by way of a superannuation contribution where an SGC is attributable
to the whole or part of that debt.
4.53 Item 4 will insert new section 444DB of the Corporations Act which
will impose a similar requirement on deed administrators by prescribing it as a
matter to be specified in a deed.
Clarification of the rights of subrogated creditors
Overview
4.54 A `subrogated creditor' is a person who is entitled to be substituted for
another creditor in a liquidation because they have advanced funds to meet a
particular creditor's debt. As a general rule, a subrogated creditor is treated as a
substitute for the original creditor, retaining all their rights.
4.55 An example is the right of the Commonwealth to stand in the shoes of
employee creditors after the Commonwealth has paid out the entitlements of
those employee creditors under GEERS. Banks may also advance funds to
enable the payment of particular debts.
34 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.56 Under section 560 of the Corporations Act, where the company has paid
wages, salary, superannuation contributions, money due for the various types of
leave or a retrenchment payments using money advanced for that purpose by
some other person, that creditor is entitled to the same priority in respect of that
money as the recipient would have been entitled to if the payment had not been
made.
Background
4.57 A number of issues have been identified in relation to the rights of
subrogated creditors.
4.58 First, it is unclear whether section 560 of the Corporations Act can apply
to advances made after the relevant date. This issue has been recently
highlighted as a consequence of the Commonwealth advancing funds through
GEERS after a winding up begins or is taken to have begun. External
administrators in practice have accepted advances from the Commonwealth
under GEERS after the relevant date as advances for the purpose of section 560.
4.59 Second, it is unclear whether a subrogated creditor in a receivership or a
voluntary administration retains their rights as a creditor when that
administration moves into liquidation. The effect of this is that whilst the
subrogated creditor enjoys the same priority as the creditor to whom it has
advanced funds, they may not have the standing of that creditor, or enjoy the
same rights (subrogated creditors enjoy rights as an `interested person' in some
cases). The rights of subrogated creditors should be consistent across the
different forms of external administration. Subrogated creditors should retain
the rights of the original creditors.
4.60 Third, as currently worded, section 560 of the Corporations Act may
permit voting rights associated with a single debt to be split among two or more
persons. This may allow the outcome of creditors meetings to be manipulated.
4.61 Fourth, it is necessary to clarify the rights of a subrogated creditor in a
DOCA. The Bill will make it mandatory for a DOCA to preserve the priority
available to eligible employee creditors in a winding up under section 556 of
the Corporations Act unless eligible employee creditors agree to waive their
priority. In relation to subrogated creditors, a Court has ruled that a DOCA that
imports the section 556 system of ranking will not without more import the
statutory right conferred by section 560 on persons who advance money for the
payment of priority claimants.5
5 Re ACN 050 541 047 Ltd [2002] NSWSC 586.
Corporations Amendment (Insolvency) Bill 2007 35
Improving outcomes for creditors
4.62 Finally, it is necessary to address an issue highlighted in the decision in
Capt'n Snooze Management Pty Ltd v McLellan [2002] VSC 432 (Capt'n
Snooze), in particular the inclusion of the words `out of' in section 560. In
Capt'n Snooze, Hansen J interpreted the requirement that a payment must be
made `out of' monies advanced such that where the account from which the
payments are made is in debit, or where the amounts advanced are `mingled'
with other monies, the operation of section 560 would not be attracted.
4.63 The decision in Capt'n Snooze may affect a subrogated creditor's right
of repayment of advances under section 560 of the Corporations Act. One way
to address this issue would be for liquidators to establish a separate account,
and use that separate account for the receipt and distribution of section 560
advances. However, the opening of separate accounts, and their administration,
imposes an expense on liquidators. To avoid this expense, an amendment to
section 560 will overcome the problem that has arisen from the decision in
Capt'n Snooze. Specifically, section 560 will be amended to avoid the need for
making an advance into a separate bank account.
4.64 These various concerns have been highlighted in the context of the
administration of GEERS, where the Commonwealth's right to `stand in the
shoes' of employee creditors after those employees have had their entitlements
paid out under the GEERS scheme is critical for the operation of the scheme.
Key changes
4.65 Amendments to section 560 of the Corporations Act will clarify the
section may apply to advances that are made before, on or after the relevant
date. The law will be amended to ensure subrogated creditors have the same
rights as the original creditors would have had under Chapter 5 of the
Corporations Act if the advance had not been made. Persons making advances
may not split voting rights associated with a single debt among two or more
persons. The law will be amended to ensure that a DOCA mandating the
priority available to eligible employee creditors also extends to the statutory
rights under section 560.
Notes on items
4.66 Item 9 will replace section 560 of the Corporations Act with a new
provision. New subsection 560(b) will clarify that the new section 560 applies
to advances that are made before, on or after the relevant date. The new
subsection 560(c) will make it clear that the person by whom the money was
advanced has the same rights under Chapter 5 as a creditor of the company. The
reference in section 560 to `a payment made out of money advanced by a
person' will be replaced in new subsection 560(b) with `the payment was made
as a result of an advance of money by a person'.
36 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.67 Item 4 will add new subsection 444DA(1), which will mandate the
priority of employee entitlements including priorities conferred under sections
560 and 561 (except where the employees agree to waive the priority or the
Court makes an order).
Corporations Amendment (Insolvency) Bill 2007 37
Improving outcomes for creditors
Part 2 -- Better informing creditor decisions
Administrators and liquidators to make available declarations of relevant
relationships and indemnities
Background
4.68 Under common law, administrators have a duty to avoid placing
themselves in a position where they may be subject to a conflict of interest or a
conflict of duty. Further, section 448C of the Corporations Act identifies a
number of circumstances in which a person must not seek or consent to
appointment as an administrator. Notwithstanding the requirements under
common law and statute, concerns have been raised about the independence of
administrators.
4.69 For example, there may be a perception of a lack of independence where
the administrator earlier acted as an adviser to the appointing board of directors,
particularly where the administrator is subsequently required to consider the
possibility of offences, negligence or breaches of duty or trust by the current
and former directors.
4.70 Recommendation 1 of the PJC Report and recommendation 36 of the
1998 Corporations and Markets Advisory Committee Report Corporate
Voluntary Administration (`CAMAC Report (1998)') both stated the
Government should consider introducing new disclosure requirements to
address concerns about the independence of administrators.
Key changes
4.71 It is proposed to address the concerns about the independence of
administrators by requiring administrators to declare any `relevant
relationships' and declare any indemnities that have been provided. These
declarations will allow creditors to make a more informed decision about
whether to replace the administrator.
4.72 The declarations will be provided to creditors with the notice of the first
meeting of creditors. The categories of relationship that an administrator is
required to declare are targeted around those parties that have the power to
initially appoint an administrator. While conflicts may arise due to relationships
with other parties, it considered that a relationship with these parties would
pose a particular concern for creditors, and as such the administrator should be
required to disclose them and explain why they do not amount to a conflict of
interest or duty. While a conflict may not arise at law, the existence of such a
relationship may be one factor for creditors to take into account when
considering whether to replace the administrator. A key theme of the reforms in
38 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
this Bill is to provide creditors with better information and more power to
manage external administration processes.
4.73 The question of whether a `relevant relationship' exists between an
administrator and another person will be a matter of fact and degree. However,
the term should be interpreted in light of the object of the provision to alert the
creditors to relationships that may not give rise to a conflict, but which may be
relevant in considering whether to replace the administrator. This would include
relationships where a conflict might be perceived to exist in the absence of full
disclosure. It does not require the disclosure of trivial interpersonal connections.
4.74 To maximise the usefulness of the declarations to creditors (including
creditors who may be unfamiliar with insolvency proceedings) the declarations
should be expressed in simple language. They should be no more than two
pages in length.
4.75 Including a relationship in a declaration will in no way `cure' any
conflict of interest or conflict of duties that may arise out of that relationship,
even if creditors approve the appointment after the declaration is made.
4.76 In light of the changes to the process for commencing creditors'
voluntary liquidation, included at Part 3 of Schedule 1 of this Bill, stakeholders
have raised concerns that similar concerns about the independence of
liquidators may arise in relation to that proceeding. Accordingly, the
requirement to disclose relevant relationships has been extended to liquidators
in a creditors' voluntary liquidation. The requirement to disclose indemnities
has not been extended to liquidators, given the different nature of that
proceeding.
Notes on items
4.77 Item 18 will insert a definition of `firm' in relation to an administrator or
liquidator.
4.78 Item 16 will add a definition of a `declaration of indemnities' to section
9 of the Corporations Act.
4.79 Items 17 and 19 will add a definition of a `declaration of relevant
relationships' to section 9 of the Corporations Act.
4.80 Item 21 will provide for a declaration of indemnities and relevant
relationships to be supplied by an administrator appointed under sections 436A,
436B or 436C of the Corporations Act. The declaration must list any
relationships falling within the definition of a `declaration of relevant
relationships' and must state why any of these relationships do not result in the
administrator having a conflict of interest or duty. The declaration must be
Corporations Amendment (Insolvency) Bill 2007 39
Improving outcomes for creditors
provided to as many creditors as is reasonably possible, at the same time as the
administrator gives those creditors notice of the first meeting. The administrator
must also table a copy of the declaration at the meeting. Failure to comply with
these requirements will be an offence, punishable by a fine of 5 penalty units. In
a prosecution for an offence to include a particular matter in a declaration under
this section, it is a defence if the defendant proves that they made reasonable
enquires and after those enquires had no reasonable grounds for believing the
matter should be included in the declaration.
4.81 Item 24 will provide for a declaration of indemnities and relevant
relationships to be supplied by a replacement administrator, appointed under
subsection 449C(1) of the Corporations Act, and circulated with the notice of
meeting required under subsection 449C(5) of the Corporations Act. The
declaration requirements will not apply if the replacement administrator is
appointed by creditors or by the Court, as there is a reduced prospect for a
conflict with the directors, substantial chargee or previous liquidator in these
circumstances. The provisions will otherwise operate in a similar manner to
those discussed at paragraph 4.80 above.
4.82 Item 36 will provide for a declaration of relevant relationships to be
made by a liquidator in a creditors' voluntary liquidation, and provided to
creditors along with the notice of meeting under section 497 of the Corporations
Act. Again, the new provision will operate in a similar manner to those
discussed at paragraph 4.80 above.
ASIC's power to seek court review of remuneration
Background
4.83 The remuneration of administrators and deed administrators is typically
fixed by creditors of a company pursuant to paragraph 449E(1)(a) of the
Corporations Act. Subsection 449E(2) of the Corporations Act lists parties that
may apply to the court for a review of remuneration. Included in the list are
officers, members and creditors of the company. The Australian Securities and
Investments Commission (ASIC) is not included in this list. In the case of
Korda in the Matter of Stockford Limited (Subject to Deed of Company
Arrangement) [2004] FCA 1682 (Stockford) [at para 4] the court commented
that the lack of standing for ASIC to apply for review by the court `is a
surprising gap'.
Key changes
4.84 The Bill will amend subsection 449E(2) of the Corporations Act to
include ASIC as a party who may apply to the court for a review of the
remuneration of administrators and deed administrators.
40 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.85 This proposal is consistent with recommendation 23 of the PJC Report.
Notes on items
4.86 Item 27 will amend the Corporations Act to allow ASIC to apply to a
court for a review of an administrator's remuneration.
Factors for consideration by a court in setting remuneration
Background
4.87 In Stockford [at para 2] the court called for `closer judicial scrutiny [of
administrators] fees'. In order to allow a more effective role for the court in
reviewing and setting remuneration for insolvency practitioners, the Bill will
provide greater guidance to the court by identifying relevant factors for
consideration in setting remuneration.
Key changes
4.88 The Corporations Act will be amended to require a court to give
consideration to a number of factors when setting or reviewing the
remuneration of an insolvency practitioner.
4.89 Relevant factors that the court must consider in setting remuneration
include:
· the extent to which the work performed, or likely to be performed, by the
insolvency practitioner was reasonably necessary, or is likely to be
reasonably necessary;
· the period during which the work was, or is or likely to be, performed by
the insolvency practitioner;
· the quality of the work performed, or likely to be performed, by the
insolvency practitioner;
· the complexity (or otherwise) of the work performed, or likely to be
performed, by the insolvency practitioner;
· the extent (if any) to which the insolvency practitioner was, or is likely to
be, required to deal with extraordinary issues;
· the extent (if any) to which the insolvency practitioner was, or is likely to
be, required to accept a higher level of risk or responsibility than is
usually the case;
Corporations Amendment (Insolvency) Bill 2007 41
Improving outcomes for creditors
· the value and nature of any property dealt with, or likely to be dealt with,
by the insolvency practitioner;
· whether the insolvency practitioner was, or is likely to be, required to deal
with one or more administrators, liquidators, receivers, or receivers and
managers;
· the number, attributes and behaviour, or the likely number, attributes and
behaviour, of the company's creditors;
· if the remuneration is ascertained, in whole or in part, on a time basis:
the time properly taken, or likely to be properly taken, by the
insolvency practitioner in performing the work; and
whether the total remuneration payable to the insolvency
practitioner is capped;
· any other relevant matters.
4.90 It is not intended that insolvency practitioners should be required to
report against each one of these matters (or even a given subset of these
matters) when seeking approval for remuneration from creditors or a committee
of creditors. This would be unduly onerous, particularly for routine matters. The
requirements relating to reports to creditors and committees of creditors are
dealt with separately below, and intentionally allow significant flexibility in the
matters that are addressed in particular remuneration reports.
Notes on items
4.91 Items 20, 28, 30 and 35 will amend sections 425, 449E, 473 and 504 of
the Corporations Act to require a court to give consideration to the factors
identified in paragraph 4.89 when setting or reviewing the remuneration of an
insolvency practitioner. Item 34 effects a minor consequential amendment to
support this change.
Information to be provided to creditors to allow remuneration to be
assessed
Background
4.92 In Stockford [at para 15] it was noted that a report by a leading
insolvency practitioner `...provided no information which would enable the
creditors to determine the reasonableness or otherwise of the proposed rates.'
There is currently no legal requirement for insolvency practitioners to provide
information that would allow such an assessment to be made.
42 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
Key changes
4.93 The Bill will amend the Corporations Act such that an external
administrator must provide sufficient information to enable the approving party
to assess remuneration as reasonable, including a summary description of the
major tasks and the costs associated with each of them. This requirement will
apply where the approving party is a committee of inspection, a committee of
creditors or a meeting of creditors. This requirement will apply where
remuneration is being set under sections 449E and 473, 495 and 499 of the
Corporations Act.
4.94 The requirements are expressed in general terms, as the matters that will
need to be addressed and the amount of detail required to appropriately inform
creditors will vary with the size and nature of the proceeding and the amount of
remuneration sought. It is intended that the new requirements would provide
practitioners with maximum flexibility and avoid the imposition of unwarranted
costs (which ultimately are borne by creditors). To maximise the usefulness of
the report to creditors (including creditors who may be unfamiliar with
insolvency proceedings) the report should be expressed in simple language. It
should be no more than two pages in length for routine matters.
4.95 It should not be taken that the creditors' report should address each of
the matters that a court must consider in setting remuneration, or even a given
subset of these matters. This would be unduly onerous and inflexible. Rather,
the report should focus on explaining the main bases for the remuneration
proposal, noting that further elucidation may be provided at the meeting of
creditors or the meeting of the committee.
Notes on items
4.96 Item 28 will insert new subsection 449E(5) into the Corporations Act to
require an administrator to prepare a report that will enable a committee of
creditors to assess remuneration as reasonable. The item will also insert a new
subsection 449E(6) into the Corporations Act to require an administrator to
prepare a report that will enable a committee of inspection to assess
remuneration as reasonable. The item will also insert a new subsection 449E(7)
into the Corporations Act to require an administrator to prepare a report that
will enable creditors to assess remuneration as reasonable.
4.97 Item 30 will insert new subsections 473(11) and 473(12) into the
Corporations Act to require a liquidator prepare a report that will enable a
committee of inspection, or the company's creditors, respectively, to assess
remuneration as reasonable.
Corporations Amendment (Insolvency) Bill 2007 43
Improving outcomes for creditors
4.98 Item 31 will insert new subsection 495(5) into the Corporations Act to
require a liquidator in a members' voluntary winding-up to prepare a report that
will enable members to assess remuneration as reasonable.
4.99 Item 33 will insert new subsections 499(6) and 499(7) into the
Corporations Act to require a liquidator in a creditors' voluntary winding up to
prepare a report that will enable a committee of creditors, or creditors,
respectively, to assess remuneration as reasonable.
Allow administrators to apply to seek approval from a court for
remuneration if creditors have not met
Background
4.100 Paragraph 449E(1)(b) of the Corporations Act states that the
remuneration of an administrator of a company under administration or of a
deed of company arrangement may be fixed by the court upon application by
the administrator.
4.101 It was noted by Finkelstein J in the Stockford case that it is unclear
whether an administrator is able to approach the court to have remuneration
fixed under this section prior to a meeting of creditors occurring. Clarification
of the section is desirable to ensure that administrators are able to approach the
court to have remuneration fixed when creditors have not met. This is desirable
as it may be the case that creditors are disinterested (especially where there are
no assets available for distribution) and it is not possible to obtain a quorum of
creditors in meeting to approve remuneration.
Key changes
4.102 The Bill will make it clear that it is possible for an administrator to
apply to a court for remuneration to be fixed when creditors have not met. It is
anticipated that this would generally only be considered where an attempt to
convene a meeting of creditors had been made but had failed to attract a
quorum, however flexibility is provided to allow the court to deal with other
extraordinary circumstances that may arise.
Notes on items
4.103 Item 25 will insert a new subsection 449E(1C) into the Corporations Act
to specifically provide for an administrator to apply to a court to have
remuneration approved when creditors, or a committee of creditors, have not
met. It will also insert a new subsection 449E(1D), which will introduce a
similar provision in relation to the remuneration of deed administrators.
44 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
Clarify the requirements for approval of administrator's remuneration
Background
4.104 Paragraph 449E(1)(a) of the Corporations Act states that remuneration
of an administrator or deed administrator may be fixed by a resolution of the
company's creditors passed at a meeting convened under sections 439A or
445F of the Corporations Act.
4.105 Unlike other procedures, this does not anticipate approval of
remuneration by a committee of creditors or a committee of inspection.
Allowing for approval by a committee of creditors or a committee of inspection
would streamline proceedings and reduce meeting costs, while still allowing
creditors to monitor remuneration.
4.106 In the case of approving remuneration for a deed administrator,
paragraph 449E(1)(a) of the Corporations Act does not make it clear whether
one vote can be sufficient to approve a DOCA and approve remuneration.
4.107 A vote in favour of a DOCA should not be sufficient to be taken as
approval of remuneration. It should not be possible to have a combined
resolution that approves a DOCA and approves an administrator's
remuneration.
Key changes
4.108 The amendment makes it clear that remuneration of an administrator or
deed administrator may be approved by a committee of inspection or a
committee of creditors respectively, and that a separate and distinct resolution
of creditors is required to approve remuneration of an administrator when a
company enters into a deed of company arrangement.
Notes on items
4.109 Item 25 will replace subsection 449E(1) of the Corporations Act with
new subsections 449E(1) and 449E(1A) which will clarify that a committee of
creditors and a committee of inspection, in the case of a deed administration,
may determine the remuneration to be received by the administrator or deed
administrator. Alternatively, an administrator may seek to have remuneration
approved by the creditors of the company or by a court.
4.110 Item 25 will also insert new subsection 449E(1B) to require a resolution
dealing with remuneration to deal exclusively with that topic.
4.111 Item 26 is a consequential amendment to allow the Court to review the
remuneration determined under subsection 449E(1) and (1A).
Corporations Amendment (Insolvency) Bill 2007 45
Improving outcomes for creditors
Allow a fixed amount of fees to be drawn down where a creditors
meeting lacks quorum
Background
4.112 Liquidators in a court-ordered liquidation are sometimes unable to
obtain approval for remuneration as a result of creditors' meetings failing to
attract a quorum of creditors. While court approval for remuneration may be
sought, this may be impractical where only limited funds are available. This
may restrict the extent to which an investigation into the circumstances of the
company is conducted. Similar issues arise in relation to a creditors' voluntary
winding-up.
Key changes
4.113 The amendment will address this problem by allowing liquidators to
draw down a maximum of $5,000 where a liquidator has called a meeting of
creditors but failed to obtain approval for remuneration because of a lack of
quorum.
Notes on items
4.114 Items 29 and 32 will insert new subsections 473(4A) and 499(3A) into
the Corporations Act to provide for a liquidator drawing down a maximum of
$5,000 where a creditors meeting fails to approve remuneration due to a lack of
quorum.
Annual meeting in a creditors voluntary winding up
Background
4.115 In a creditors' voluntary liquidation, a meeting of creditors and a
meeting of the company must be held annually where the winding up continues
for more than a year (paragraph 508(1)(b) of the Corporations Act). This
requirement has been criticised. In relation to the meeting of members, it is said
that the members have no economic interest in the conduct of the liquidation of
an insolvent company. In relation to the meeting of creditors, it is said that the
meetings are costly to hold and creditors often do not attend. Sometimes a
quorum is not reached and the meeting has to be adjourned. These complaints
suggest that the meetings of members and creditors do not add value to the
external administration relative to the costs (for example advertising, meeting
room hire, conduct of meeting, preparation and lodgement of minutes) of
holding them.
4.116 Notwithstanding these concerns, it is important that those involved in
the external administration of insolvent companies be required to keep the
46 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
creditors informed of the progress of the administration. Meetings are an
important part of the system of corporate regulation. It is desirable that
meetings be held, and documents laid before those meetings for consultation
and debate by stakeholders. However, other means of informing stakeholders of
the progress of external administrations should also be available.
Key changes
4.117 The Bill will remove the requirement to conduct annual meetings of
members in a creditors' voluntary winding up. The requirement will be retained
in a members' voluntary winding up, because members generally have an
economic interest in these proceedings.
4.118 In relation to the annual meeting of creditors, the Bill will provide the
liquidator with the choice of either calling an annual meeting of creditors or
lodging with ASIC a report on the progress of the administration. Under this
approach liquidators will not be required to incur the costs of convening a
meeting which may fail due to a lack of quorum. They will retain the flexibility
to hold a meeting if they consider it desirable (for example to seek to have the
creditors fix their remuneration or to consider important issues affecting
creditors). They will remain accountable to creditors through the requirement to
prepare a progress report and notify creditors that the report is available free of
charge.
Notes on items
4.119 Item 37 will amend paragraph 508(1)(b) of the Corporations Act to
remove the requirement to hold an annual meeting of members. The
amendment will also provide liquidator in a creditors' voluntary winding up
with the choice of either convening a meeting of creditors (as currently
required) or preparing and lodging with ASIC a progress report, within the
specified time period.
4.120 Item 40 specifies what the progress report must contain. It must set out
an account of the liquidator's acts and dealings and the conduct of the winding
up during the preceding year, the tasks remaining to be done in the liquidation
and an estimate of when the liquidation is expected to be completed. The
liquidator will be required to notify creditors that the report has been prepared,
and provide it to creditors on request free of charge.
4.121 Item 38 provides that the time period for the convening of the meeting
or the lodgement of the report commences from the day on which the company
resolved it be wound up voluntarily. This is intended to address concerns that
arise where a lengthy administration precedes a winding up, and as such the
liquidator is left with little time to meet their statutory obligations.
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4.122 Item 39 is a consequential amendment, reflecting a restructuring of
subsection 508(1) of the Corporations Act to reflect the above amendments.
Part 3 -- Streamlining external administration
Advertising requirements
Background
4.123 The Corporations Act currently requires that various notices, documents
and other forms of communication, sent by an external administrator of a
company to creditors of the company or ASIC, must also be published in a
national newspaper or in a newspaper that circulates in each State or Territory
in which the company has an office or carries on business.
4.124 The publication requirement can impose a significant cost on an external
administration, and as such should be limited to circumstances where that cost
is warranted. For example, where a proceeding is in its late stages, and the
creditors of the company have largely been identified, there may be little
justification for requiring communications with creditors to also be published.
4.125 It is also noted that an alternate form of public notice is provided
through the Company Alert System administered by ASIC. Credit managers
can use Company Alerts to monitor their loan or credit portfolio, and respond to
changes in the status of a company as they arise.
4.126 Recommendation 19 of the PJC Report stated that the Government
should consider alternatives to the current advertising and gazettal requirements
for external administrations.
Key changes
4.127 The Bill will remove the requirement to publish notices in newspapers,
except where there is a strong policy rationale for such publication. For
example, the requirement to publish notices in newspapers will be retained in
circumstances where creditors and the public have not been alerted about
important facts, such as the commencement of an insolvency proceeding, or
where there is a need for notifying the broader community of an event. The Bill
will also allow for related notices to be published together, to reduce costs.
Notes on items
4.128 Item 58 will remove the requirement in subsection 421A(3) of the
Corporations Act for a managing controller to advertise that a report about a
corporations affairs has been prepared and lodged with ASIC.
48 Corporations Amendment (Insolvency) Bill 2007
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4.129 Item 69 will insert a new subsection 436E(3A) of the Corporations Act
that will permit the notice of the first meeting of creditors in a voluntary
administration required under subsection 436E(3) of the Corporations Act to be
combined with notice of appointment of an administrator required under
paragraph 450A(1)(b) of the Corporations Act. Item 78 will insert a
complementary provision 450A(1A) of the Corporations Act.
4.130 Item 75 will remove the current requirement in paragraph 445F(2)(b) of
the Corporations Act, which provides that the notice of a meeting of creditors
must be published in a national newspaper or in a daily newspaper that
circulates in each State or Territory in which the company has a registered
office or carries on business.
4.131 Item 76 will amend subsection 445F(3) of the Corporations Act to
reflect the amendments in Item 69, omitting the reference to `paragraph (2)(a)'
and substituting reference to `subsection 2'.
4.132 Item 80 will repeal paragraph 450B(b) of the Corporations Act which
requires that, as soon as practicable after a deed of company arrangement is
executed, the deed's administrator must publish a notice of execution of the
deed in a national newspaper or in a daily newspaper that circulates in each
State or Territory in which the company has a registered office or carries on
business.
4.133 Item 82 will remove the requirement in paragraph 450C(b) of the
Corporations Act for a deed administrator to publish a notice in the prescribed
form that a company has failed to execute a deed of company arrangement
within the required period.
4.134 Item 85 will repeal paragraph 450D(c) of the Corporations Act which
requires that, where a deed of company arrangement terminates because of
paragraph 445C(b) of the Corporations Act, the deed's administrator must
publish a notice of termination as prescribed. This will have the effect of
removing the requirement (see regulation 5.3A.09 of the Corporations
Regulations) to publish a notice of termination in a national newspaper or in a
daily newspaper that circulates in each State or Territory in which the company
has a registered office or carries on business.
4.135 Item 84 will delete `and' from paragraph 450D(b) of the Corporations
Act to reflect the amendment in item 85.
Corporations Amendment (Insolvency) Bill 2007 49
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Electronic communication
Background
4.136 Subsection 249J of the Corporations Act facilitates electronic
distribution of notices of meetings of members. However, there is no equivalent
facility for electronic distributions of a number of notices that external
administrators are required to send to creditors. An external administrator that
wished to use electronic means to distribute notices would ordinarily need to
seek the court's approval to do so.
4.137 Recommendation 20 of the PJC Report stated that the Government
should consider making technology and e-commerce options more widely
available to enhance communication with stakeholders in external
administrations and reduce the costs of external administrations.
Key changes
4.138 The Bill will introduce a facility similar to section 249J of the
Corporations Act in order to allow external administrators to send notices
electronically, provided certain conditions are met.
4.139 A provision similar to section 249J of the Corporations Act, new
section 600G of the Corporations Act, sets out the framework for electronic
communication of various notices and documents in relation to external
administration. Section 600G permits various modes of electronic
communication:
· giving or sending the document to an electronic address or facsimile;
this mode would allow, for example, sending a document by
attaching it to an electronic mail message;
· giving or sending the document by other electronic means;
this mode would allow sending a document by some electronic
means other than email; and
· rather than sending the document, notifying the recipient that it is
available for access by some electronic means;
this mode would allow, for example, the recipient to be notified by
email that a document is available for viewing and/or download at
an internet site.
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4.140 Under all modes of electronic communication, it is a requirement that
the recipient has first expressly nominated that particular mode for the purposes
of receiving such notices and provided the person sending the document (the
`notifier') with the relevant electronic address details. It is envisaged that, in
most cases, external administrators seeking to utilise the facility would seek the
nominations of creditors for a particular electronic communication mode early
in the external administration procedure, so that after the nomination has been
made, the external administration could communicate with the creditor through
that electronic means throughout the remainder of the proceeding. A key reason
why this option may be attractive for creditors is that the speed of electronic
communication will improve opportunities for creditor participation in the
proceeding, and maximise the time available for making potentially complex
decisions.
4.141 New section 600G of the Corporations Act lists the provisions of the
Corporations Act to which the electronic communication facility will apply.
Notes will be added to the relevant provisions to flag that the electronic
communication facility is available. The amendments are not intended to limit
the methods by which notices can be given, sent or lodged under other
provisions of the Corporations Act.
Notes on items
4.142 Item 120 will insert a new section 600G of the Corporations Act that
permits the sending of notices and other documents required or authorised
under Chapter 5 of the Corporations Act through electronic means, provided
certain conditions are met.
4.143 Subsection 600G(1) will identify the types of information that may be
sent electronically under this new mechanism.
4.144 Subsection 600G(2) will allow notices or documents under the relevant
provisions to be sent to an electronic address or facsimile number, if the
recipient has nominated such an electronic address or facsimile number for the
purpose of receiving such notices or documents. It is expected that external
administrators would seek the nomination in a form that could be substantiated
later in the event a dispute were to occur about its content.
4.145 Subsection 600G(3) is similar in form to 600G(2) except it deals with
electronic means other than one that would involve an `electronic address'. This
provision will allow for the take up of future technologies that may permit
electronic communication without using an `electronic address' (such as an
electronic mail address).
4.146 Subsection 600G(4) will provide that if a recipient nominates an
electronic `notification means' and also an electronic `access means', the
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notifier may give or send the notice or document to the recipient by notifying
the recipient (using the nominated notification means) that the notice or
document is available and how the recipient may use the nominated access
means to access the notice or document. Under this facility, external
administrators would be able to distribute a notice by, for example, posting it to
a website and advising the recipient that it is viable for viewing or downloading
from that site. Recipients must first expressly nominate such a communication
mode.
4.147 Subsections 600G(5) and (6) relates to the timing of the notices sent by
electronic means and provides for a deemed giving or sending on the business
day after it is either sent or the recipient is notified of its availability.
4.148 Subsection 600G(7) is intended to clarify that the electronic
communication facilities under subsection (2), (3) and (4) do not limit any other
modes of communication that may be available under the relevant provisions.
4.149 Items 40, 68, 73, 74, 75, 77, 79, 81, 83, 86, 90, 95, 101, 116, 118 and
119 will insert notes flagging the existence of the electronic communication
facility in section 600G in the provisions to which it applies which are listed in
subsection 600G(1). Similar notes have been added to many of the new notice
provisions under the pooling arrangements in Schedule 4 of Part 1 of the Bill.
4.150 Item 89 will remove from subsection 473(4) of the Corporations Act
(one of the provisions to which section 600G applies) the requirement to
`attach' documents to a notice, because the concept of attachment may not be
applicable if electronic communication is utilised. The documents formerly
required to be attached to the notice must still accompany the notice.
4.151 Item 100 will remove from paragraph 497(2)(a) of the Corporations Act
(one of the provisions to which section 600G applies) the requirement for the
notice to be sent `by post' to recognise the possibility of electronic
communication under section 600G.
Gazettal requirements for controllerships
Background
4.152 The database maintained by ASIC provides the public with access to
notices lodged in relation to controllerships. Section 427 of the Corporations
Act requires the gazettal of certain matters related to controllerships in addition
to notifying ASIC of the same matters. Gazettal is a significant expense for
small controllerships.
4.153 The Review of Insolvency Practitioners recommended the repeal of
provisions requiring gazettal of matters relating to controllerships. This would
52 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
reduce the regulatory burden on controllers by limiting the notification
requirements to lodgement of a notice with ASIC.
Key changes
4.154 The Bill will repeal the requirement for gazettal of controllerships. The
ASIC database will become the main source of information regarding
controllerships.
Notes on items
4.155 Item 65 will repeal the subsections that require gazettal and notification
of ASIC of matters related to controllerships and substitute provisions that
require only the lodgement of notices with ASIC in relation to such matters.
4.156 Item 66 will repeal the subsection that requires both gazettal and
notification of ASIC when a person ceases to act as a controller of property of a
corporation. The substitute provision will require a notice to be lodged with
ASIC when such an event occurs.
Limiting the requirement to maintain separate bank accounts to
managing controllers
Background
4.157 Section 421 of the Corporations Act requires all controllers to open and
maintain a separate bank account for each controllership, and is designed to
prevent the mingling of funds and make accounting for, and tracing of, the
proceeds of the sale or profits from controllerships straight-forward and
transparent. However, this requirement may be unduly onerous where a
controllership is simple (for example, where a controller acquires rights over a
single minor asset).
4.158 The Review of Insolvency Practitioners recommended that only
managing controllers should be required to open a separate bank account when
they receive money. The Review noted that `the requirement to open a separate
bank account is seen as burdensome and unnecessary' and indicated that the
more complex controllerships are likely to be those where the controller is a
managing controller.
Key changes
4.159 The Bill will limit the requirement to maintain separate bank accounts to
managing controllers. This change in no way inhibits the ability of a controller,
who is not a managing controller, to maintain separate bank accounts should
they wish to do so.
Corporations Amendment (Insolvency) Bill 2007 53
Improving outcomes for creditors
Notes on items
4.160 Items 53, 54, 55 and 56 will insert the word `managing' before
`controller' wherever it occurs in subsection 421(1) of the Corporations Act.
The intended effect of these amendments is to limit the requirement to maintain
separate bank accounts to managing controllers.
4.161 Item 57 will insert the word `managing' before `controller' in subsection
421(2) of the Corporations Act such that the records kept by a managing
controller under paragraph 421(1)(d) of the Corporations Act may be inspected
by any director, creditor or member of a corporation.
Reporting of misconduct
Background
4.162 The Review of Insolvency Practitioners noted that managing controllers
are arguably in as good a position as receivers to discover misconduct in the
course of their work and, if they do, they should be obliged to report the
possible misconduct.
Key changes
4.163 The requirement to report possible misconduct that is identified in the
conduct of a proceeding will be extended to managing controllers.
Notes on items
4.164 Items 59, 60, 61, 62 and 63 will amend section 422 of the Corporations
Act to require a managing controller to prepare a report and lodge that report
with ASIC should they apprehend that an officer, member or employee of the
corporation may be guilty of an offence in relation to the corporation.
4.165 Item 64 will expand the power of a court to allow it to require a report
from a managing controller where it appears to the court that a past or present
officer, employee or member of the corporation has been guilty of an offence
under the Corporations Act.
Power to consent to a transfer of shares of the company
Background
4.166 There is currently a lack of consistency across voluntary liquidation,
court-ordered liquidation and voluntary administration, with respect to the
practitioner's power to consent to a transfer of shares or an alteration in the
status of members of a company.
54 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
· A transfer of shares in a company, or an alteration in the status of the
members of a company, that is made during the administration of a
company is void, unless the Court orders otherwise (section 437F of the
Corporations Act).
· By contrast, a transfer of shares in a voluntary winding up is permitted
with the consent of the liquidator (subsection 493(2) of the Corporations
Act).
· Finally, any transfer of shares in a court-ordered winding-up is void
(subsection 468(1) of the Corporations Act).
4.167 Recommendation 37 of the CAMAC Report (1998) called for improved
consistency in this area of the law.
Key changes
4.168 A consistent approach will be adopted across the three procedures, with
respect to authorising a transfer of shares or a change in the status of members
of a company. The intent is to provide maximum flexibility to practitioners in
each of the types of proceeding, while retaining core shareholder protections.
4.169 Under this approach, a liquidator will have the power to consent to a
transfer of shares in a company in liquidation. The liquidator will need to be
satisfied that it is in the best interests of creditors as a whole.
4.170 The ability to apply to the Court for an order authorising a transfer of
shares will be retained, but will only be available where the liquidator's consent
has been unsuccessfully sought first. This will ensure the `least cost' option for
approval is explored first. The court's power will be exercisable on application
by the prospective transferor or transferee of shares, with the liquidator having
standing to be heard on any application.
4.171 Liquidators will also be granted a power to consent to an alteration in
the status of members of a company. Such an alteration may not be approved
unless it complies with the rules for alteration of class rights in Part 2F.2 of the
Corporations Act.
4.172 The amendments to effect similar changes for voluntary administration
are found at item 7 of Part 1 of Schedule 4. The powers of deed administrators
are generally dealt with in the deed, however item 29 of Part 1 of Schedule 4 of
the Bill will clarify an existing limitation to the deed administrator's power to
transfer shares.
Corporations Amendment (Insolvency) Bill 2007 55
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Notes on items
4.173 Item 87 will remove the provisions governing the transfer of shares, and
an alteration in the status of members during a court-ordered liquidation from
subsection 468(1) of the Corporations Act. Item 88 will replace these provisions
with a new provision which will regulate transfers of shares (new subsections
468A(1)-(7)) and alterations in the status of members during court-ordered
liquidation (new subsections 468A(8)-(15)).
4.174 In relation to a transfer of shares, new subsection 468A(1) will provide
that a transfer is void unless the liquidator gives written consent to the transfer,
or the Court makes an order authorising the transfer. New subsection 468A(2)
will provide that the liquidator must be satisfied that it is in the best interests of
creditors as a whole before granting his or her consent. New subsections
468A(3) and (5) will give the prospective transferor or transferee or a creditor
standing to apply for a court order authorising the transfer if the liquidator
refuses consent or a court order setting aside any conditions imposed by the
liquidator. New subsections 468A(4) and (6) will empower the Court to
authorise a transfer after a liquidator has refused consent to the transfer, or has
approved the transfer subject to conditions that have not been met, where the
Court is satisfied it is in the best interests of the creditors as a whole to do so.
4.175 New subsections 468A(8)-(15) will provide that an alteration to the
status of members will be void unless the liquidator gives written consent to the
alteration. The liquidator must be satisfied that the alteration is in the best
interests of creditors as a whole before granting his or her consent and must
refuse consent if the alteration would contravene the class rights provisions in
Part 2F.2 of the Corporations Act (new subsection 468A(8)). Provision will also
be made for the Court to authorise alterations where a liquidator has refused to
grant consent, and to set aside conditions to which the liquidator's consent is
subject.
4.176 Items 92, 93 and 94 will make similar amendments to the provisions
regulating a transfer of shares or an alteration in the status of members during a
voluntary liquidation (new section 493A of the Corporations Act).
Schemes of compromise or arrangement -- court discretion to approve
Background
4.177 Approval of a members' scheme requires a resolution to be passed by:
· a majority of members present and voting
(sub-subparagraph 411(4)(a)(ii)(A) of the Corporations Act); and
56 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
· a special majority (75 per cent) according to the voting rights attaching to
share capital (sub-subparagraph 411(4)(a)(ii)(B) of the Corporations Act).
4.178 The court has no discretion to approve a members' scheme if the
resolution fails to attain both required majorities.
4.179 A members' scheme could be defeated by parties opposed to the scheme
engaging in `share splitting', which involves one or more members transferring
small parcels of shares to a large number of other persons who are willing to
attend the meeting and vote in accordance with the wishes of the transferor. By
splitting shares to increase the number of members voting against the scheme,
an individual or small group opposed to the scheme may cause the scheme to be
defeated. This may occur even though a special majority is achieved in terms of
voting rights attaching to share capital, and if the share split had not occurred,
the majority of members were in favour of the scheme.
Key changes
4.180 The Bill will amend Part 5.1 of the Corporations Act to confer a
discretion on a court to approve a members' scheme where a resolution in
favour of a compromise or arrangement:
· is passed under sub-subparagraph 411(4)(a)(ii)(B) of the Corporations
Act (special majority pursuant to share capital voting rights); but
· is not passed under sub-subparagraph 411(4)(a)(ii)(A) of the Corporations
Act (majority of members present).
Notes on items
4.181 Item 52 will amend sub-subparagraph 411(4)(a)(ii)(A) of the
Corporations Act to give the court a discretion to make an order that the
requirement for a majority of members present and voting may be dispensed
with. It is intended that the court would only exercise the discretion to disregard
the majority vote under sub-subparagraph 411(4)(a)(ii)(A) in circumstances
where there is evidence that the result of the vote has been unfairly influenced
by activities such as share splitting, however the court's discretion has not been
limited to allow for unforeseen extraordinary circumstances.
Corporate membership of the committee of creditors and the committee
of inspection
Background
4.182 Section 436G of the Corporations Act provides that a person can be a
member of a committee of creditors of a company under administration if, and
Corporations Amendment (Insolvency) Bill 2007 57
Improving outcomes for creditors
only if, he or she is a creditor of the company, the attorney of such a creditor
because of a general power of attorney, or authorised in writing by such a
creditor to be a member.
4.183 Paragraph 548(3)(a) of the Corporations Act provides that a person is
not eligible to be appointed a member of a committee of inspection unless, in
the case of an appointment by creditors of the company, the person is a creditor
of the company, the attorney of a creditor of the company by virtue of a general
power of attorney given by the creditor, or a person authorised in writing by a
creditor of the company to be a member of the committee of inspection.
4.184 Paragraph 548(3)(b) of the Corporations Act provides that a person is
not eligible to be appointed a member of a committee of inspection unless, in
the case of an appointment by the contributories of the company, the person is a
contributory of the company, the attorney of a contributory of the company by
virtue of a general power of attorney given by the contributory, or a person
authorised in writing by a contributory of the company to be a member of the
committee of inspection.
4.185 Recommendation 34 of the 2004 Corporations and Markets Advisory
Committee Report Rehabilitation of Large and Complex Enterprises (`CAMAC
Report (2004)') stated that the Corporations Act should be amended to make it
clear that a corporation can be a member of a committee of creditors.
Key changes
4.186 Paragraph 22(1)(a) of the Acts Interpretation Act 1901 provides that a
person includes a body corporate and body politic as well as an individual.
However, the reference to `he or she' in section 436G of the Corporations Act
suggests that membership of a committee of creditors may be limited to natural
persons and, therefore, section 436G creates some uncertainty as to whether a
corporation can be a member of a committee of creditors.
4.187 The Bill will amend section 436G and subsection 549(4) of the
Corporations Act to confirm that corporate membership of a committee of
creditors and a committee of inspection is possible, and that corporations may
be represented at meetings by an officer or employee of the member or some
other authorised person.
Notes on items
4.188 Item 70 will amend section 436G of the Corporations Act to insert `(1)'
before `A person'. Item 71 will amend section 436G to delete reference to `he
or she' and substitute `the person', confirming that membership is not limited to
natural persons. Item 72 will insert subsection 436G(2) to provide that if a
member of a committee of creditors is a body corporate, the member may be
58 Corporations Amendment (Insolvency) Bill 2007
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represented at meetings of the committee by an officer or employee of the
member, or an individual authorised in writing by the member for the purposes
of subsection 436G(2).
4.189 Item 117 inserts new subsection 549(4) of the Corporations Act to
provide that if a member of a committee of inspection is a body corporate, the
member may be represented at meetings of the committee by an officer or
employee of the member, or some other individual who is authorised in writing
by the member under the provision to represent it at committee meetings.
Creditors' voluntary winding up
Background
4.190 Directors of insolvent companies or companies in financial difficulty
must carefully consider the options for external administration because they are
under a legal obligation to cause an insolvent company to cease trading. If they
fail to do so they may be held personally liable for the company's debts. One of
the options available to directors of insolvent companies is to initiate a
creditors' voluntary winding up.
4.191 Part 5.5 of the Corporations Act sets out the procedure for a creditors'
voluntary winding up. Following a resolution by directors, a meeting of
members is called to place the company into liquidation. A meeting of creditors
must also be held, and that must be on the same day or the day after the member
of meetings. The meetings of creditors may replace the liquidator.
Section 497(1) provides that notices of meeting for the members' and creditors'
meetings must be sent simultaneously.
4.192 Under subsection 497(2), creditors must be provided with seven days
notice before the meeting of creditors. The combination of the notice and
timing requirements for the creditors' meeting means that the meeting of
members cannot be called to resolve that an insolvent company be placed in
liquidation until nearly a week after the initial directors' resolution.
4.193 On the other hand, voluntary administration may be entered into directly
from a directors' resolution. For that reason, it is often used as an indirect route
to a creditors' voluntary winding up, even when it is clear that a company has
no option but to be wound up. That is because the longer timeframe for entering
a creditors' voluntary winding up may expose directors to potential liability for
insolvent trading and possible personal liability for taxation liabilities of the
company.
4.194 Using the voluntary administration procedure in cases where there is
clearly no option but to ultimately wind up the company may result in
Corporations Amendment (Insolvency) Bill 2007 59
Improving outcomes for creditors
unnecessary costs due to the investigative, reporting and meeting requirements
of Part 5.3A of the Corporations Act.
Key changes
4.195 The process for commencing a creditors' voluntary liquidation will be
streamlined, and modelled on the process for putting a company into voluntary
administration. However, the requirement for a meeting of members to put the
company in liquidation will be retained, to protect members. Granting directors'
the power to put a company into liquidation could disadvantage members, as it
is difficult to halt a winding up once it commences.
4.196 To effect this change, the requirement to hold the members' meeting and
creditors' meeting on the same day will be relaxed. The required timing for the
creditors meeting will be extended to 11 days after the day of the members'
meeting. The extension of this time period will mean that, in circumstances
where a meeting of members can be called directly after the directors' meeting
(by using the facility for members to consent to short notice under
subsection 249H of the Corporations Act), an insolvent company may be placed
into a creditors' voluntary winding up almost immediately.
4.197 The requirement to convene the creditors' meeting within 11 days after
the day of the meeting at which the resolution for voluntary wing up is
proposed will align the timing of the creditors meeting in a creditors' voluntary
liquidation with the first meeting in voluntary administration. The amendments
will also make provision for creditors appointing a different person as liquidator
at the creditors' meeting. The liquidator's powers will be restricted until after
the creditors' meeting is held, to protect the interests of creditors.
Notes on items
4.198 Item 112 will repeal subsections 499(1) and 499(2) of the Corporations
Act and replace them with a new process for the appointment of a liquidator in
a creditors' voluntary liquidation. Under the new section 449(1), the company
in general meeting will be required to appoint a liquidator. (The process for the
appointment of a liquidator where an administration or deed administration
precedes the liquidation is dealt with at paragraphs 4.204-4.210 below.)
Item 111 will provide that the creditors may remove the liquidator from office
and appoint another person as liquidator, at the meeting of creditors convened
under section 497 of the Corporations Act. Item 91 will provide that the
liquidator must not exercise certain powers until the meeting of creditors has
been held.
4.199 Item 97 will amend section 497 of the Corporations Act to require the
creditors' meeting to be held within 11 days following the meeting at which the
resolution for voluntary winding up is to be proposed. The amendment will also
60 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
remove the requirement for the notice of the creditors' meeting to be sent out
simultaneously with the sending of the notices of the meeting of the company.
4.200 Items 98, 102, 104 and 105 will clarify that the liquidator (rather than
the company) is obliged to call a meeting of creditors and send out the relevant
notices (including a list of creditors) to creditors. Item 106 and 109 will remove
offence provisions that have been made redundant by these changes.
4.201 Item 99 will amend subsection 497(2) of the Corporations Act to clarify
that the meeting referred to in that subsection is the same meeting of creditors
referred to in subsection 497(1).
4.202 Item 107 will amend the provision concerning directors' duties (new
subsection 497(5)), such that the directors will be required to make a report to
the liquidator (rather than reporting to the company). Failure to meet this
obligation will be an offence of strict liability, punishable by a fine of
10 penalty units or imprisonment for three months, or both. This is consistent
with the penalty currently provided for a breach of subsection 497(5), and is
consistent with several other offence provisions in the Corporations Act. The
obligation for a director to attend the creditors' meeting will be removed, as the
liquidator will now fill this role. Item 108 will also remove the obligation for
the director and secretary to attend the meeting of creditors and disclose the
affairs of the company, and to lodge a copy of their report to the company with
ASIC. Item 110 will provide that the creditors may appoint one of their number
or the liquidator to preside at the meeting.
4.203 Item 103 will amend the threshold for creditors to be sent a copy of the
list of creditors, from debts exceeding $200 to debts exceeding $1,000. This
will further reduce the cost of commencing this form of external administration.
Item 96 will make a similar change to subsection 496(3), where a company in a
members' voluntary liquidation turns out to be insolvent.
Creditors to have power to appoint different person as liquidator in
administration
Background
4.204 Section 446A of the Corporations Act provides for an administrator or
deed administrator to become the liquidator of a company in a broad range of
situations. In some instances creditors may consider that it is desirable to have a
different person act as liquidator, notwithstanding that this could introduce new
costs (which indirectly will be borne by creditors). One reason for such a
decision could be a desire to have the conduct of the administration, or the
pre-commencement conduct of the company, reviewed by a different
practitioner.
Corporations Amendment (Insolvency) Bill 2007 61
Improving outcomes for creditors
Key changes
4.205 The Bill will allow creditors to appoint a different person as liquidator
when a company proceeds from administration into liquidation or from a deed
of company arrangement into liquidation.
4.206 This proposal is consistent with recommendation 2 of the PJC Report.
Notes on items
4.207 Item 22 repeals subsection 446A(4), which currently provides that the
administrator or deed administrator is taken to be nominated as the liquidator
when a company under administration or a DOCA is put into liquidation.
Item 23 inserts a cross-reference to the replacement provisions, which are now
found in section 499. Item 112 repeals subsections 499(1) and 499(2) of the
Corporations Act, and replaces them with new provisions providing for the
appointment of a liquidator in a creditors' voluntary winding up. Item 112 also
introduces new provisions dealing with the case where a company proceeds
from administration or a DOCA into a creditors' voluntary liquidation.
4.208 New subsection 499(2A) deals with the situation where a company
proceeds from administration into a creditors' voluntary winding up because the
creditors resolve that the company be wound up under section 439C(c). The
default position is that the administrator will be liquidator, but the provision
allows creditors to appoint a different person as liquidator.
4.209 The new subsection 499(2B) will provide for the administrator
becoming liquidator when a company fails to execute a deed as required under
subsection 444B(2).
4.210 The new subsection 499(2C) will provide for the appointment of a
liquidator where a company proceeds from deed of company arrangement into a
creditors' voluntary winding up as a result of a resolution by creditors to
terminate the deed and wind up the company. The default position is that the
deed administrator will be liquidator, but creditors may choose to appoint a
different person as liquidator.
Multiple liquidators
Background
4.211 Paragraph 451A(2)(a) of the Corporations Act provides that where there
are two or more administrators of a company, a function or power of an
administrator of the company may be performed or exercised by any one of
them, or by any two or more of them together, except so far as the instrument or
resolution appointing them provides otherwise.
62 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.212 Paragraph 451B(2)(a) of the Corporations Act provides that where there
are two or more administrators of a deed of company arrangement, a function or
power of an administrator of the deed may be performed or exercised by any
one of them, or by any two or more of them together, except so far as the deed,
or the resolution or instrument appointing them provides otherwise.
4.213 Subsection 506(4) of the Corporations Act provides that when several
liquidators are appointed, any power given by the Corporations Act may be
exercised by such one or more of them as is determined at the time of their
appointment, or in default of such determination, by any number not less than
two.
4.214 Joint and several appointments of administrators of a company, under
paragraph 451A(2)(a), and of administrators of a deed of company
arrangement, under paragraph 451B(2)(a), are convenient and efficient,
enabling multiple appointees to divide responsibilities in large and complex
cases.
4.215 There is some uncertainty as to whether subsection 506(4) allows for
joint and several appointments of liquidators. Under subsection 506(4), where
the powers of multiple liquidators have not been determined at the time of their
appointment, they may be appointed `jointly' and not `jointly and severally'.
4.216 The Corporations Act does not explicitly provide for joint and several
appointments of receivers or receivers and managers.
4.217 Recommendation 57 of the PJC Report stated that consideration should
be given to repealing subsection 506(4) and replacing it with a provision in
similar terms to sections 451A and 451B. That is, where more than one
liquidator is appointed, their functions or powers should be able to be exercised
by any one of them, subject to the resolution or instrument appointing them
providing otherwise. The Report also recommended that consideration be given
to similar provisions being included in Parts 5.2 and 5.6 of the Corporations Act
dealing with receiverships and windings-up generally.
Key changes
4.218 Amendments to sections 434D, 434E, 506(4), 530 and 530AA of the
Corporations Act will provide for multiple `joint' or `joint and several'
appointments in liquidations and receiverships, except where the instrument of
resolution of appointment provides otherwise.
Notes on items
4.219 Item 67 will insert a new section 434D of the Corporations Act which
provides that where there are two or more receivers of property of a
Corporations Amendment (Insolvency) Bill 2007 63
Improving outcomes for creditors
corporation, a function or power of a receiver of property of the corporation
may be performed or exercised by any one of them, or by any two or more of
them together, except so far as the order or instrument appointing them
provides otherwise. New section 434D will also provide that a reference in the
Corporations Act to a receiver, or to a receiver of property of a corporation, is a
reference to whichever one or more of those receivers as the case requires.
4.220 Item 67 will also insert new sections 434E, 434F and 434G of the
Corporations Act which includes similar provisions with respect to multiple
receivers and managers, controllers and managing controllers respectively.
These provisions are not intended to apply where two or more receivers,
receivers and managers or controllers are appointed over property of the
company and they are appointed: over different property; by different secured
creditors; or under different instruments.
4.221 Item 114 will insert a new section 530 and 530AA of the Corporations
Act, which include similar provisions with respect to liquidators and
provisional liquidators respectively.
4.222 Item 113 will repeal subsection 506(4) of the Corporations Act, because
its subject matter will be dealt with by new section 530.
4.223 Items 41, 42, 43, 44, 45, 46, 47 and 48 will amend the definitions of
`controller', `liquidator', `managing controller', `provisional liquidator' and
`receiver' in section 9 of the Corporations Act to recognise that there may be
more than one appointee.
Change of company name in external administration
Background
4.224 When a company is under external administration, a number of issues
relating to its name may arise.
4.225 The company name is an asset that may have some value as part of a
business sale in external administration. As such, facilitating a change of name
may maximise the value of an asset, improving outcomes for creditors.
However, it is extremely difficult for a special resolution to be passed for a
public company in external administration, particularly considering the
problems identified in relation to companies in external administration holding
annual general meetings6. In the case of external administration, the interests of
6 Generally, if a company wishes to change its name, it must pass a special resolution adopting the new
name and lodge an application in the prescribed form with ASIC (section 157).
64 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
creditors should be prioritised. As such, there is a case for allowing greater
flexibility for practitioners to be able to change the name of a company.
4.226 On the other hand, it is important that creditors of externally
administered companies have adequate opportunity to identify that a company
is subject to external administration. Companies commonly change their name,
often to their Australian Company Number (ACN) only, before appointing an
administrator, to minimise the potentially damaging commercial effect of
having their prior name associated with a voluntary administration. This
practice may disadvantage creditors who may not associate the new name with
the company with which they have been dealing. For instance, creditors may
not recognise the new name in notices of creditors' meetings, in notices calling
for proofs of debt and in general correspondence.
4.227 Recommendation 60 of the CAMAC Report (1998) stated that any
company that changes its name during the course of, or in the six months
before, a voluntary administration should be required to disclose its former, as
well as its current, name on its public documents for the period of that
administration or any subsequent liquidation.
Key changes
4.228 The Bill will introduce a series of new rules relating to the names of
companies under external administration, to better balance the competing
interests discussed above.
4.229 The law will permit liquidators, administrators and deed administrators
to lodge an application with ASIC to change a company's name without the
need for a special resolution of members, where they are satisfied it is in the
interests of creditors as a whole to do so.
4.230 The law will also provide that any company that changes its name
during, or six months prior to, an external administration should be required to
disclose its former, as well as its current, name on its public documents for the
period of that administration or any subsequent liquidation. This will include
public documents issued by an external administrator.
4.231 In relation to deeds of company arrangement, there may be limited
circumstances where a deed is still yet to be terminated but there is little risk to
creditors arising out of a change of name. Accordingly, the law will provide an
opportunity for the deed administrator to apply to the Court for an exemption
from the requirements to disclose the company's former name as well as the
new name in circumstances where the Court considers that there is little risk to
creditors. (A similar ability to apply to the Court will be introduced in relation
to the requirement to disclose that a company is under a DOCA -- see items 41
and 42 of Part 1, Schedule 4).
Corporations Amendment (Insolvency) Bill 2007 65
Improving outcomes for creditors
Notes on items
4.232 Item 49 will insert new section 157A of the Corporations Act which
permits liquidators, administrators, deed administrators and managing
controllers to lodge an application with ASIC to change a company's name
without the need for a special resolution of members, where it is in the interests
of creditors as a whole to do so.
4.233 Item 50 will insert new section 161A in the Corporations Act, which
provides that a company that changes its name during, or six months prior to, an
external administration should be required to disclose its former, as well as its
current, name on its public documents for the period of that administration or
any subsequent liquidation. New subsections 161A(3), (6) and (7) will provide
that, in relation to a company subject to a DOCA, the deed administrator can
seek leave of the Court for an exemption from the requirements of new section
161A.
4.234 Contravention of subsections 161A(2) or (3) will comprise an offence.
The new offence provision is comparable to existing subsection 541(2), which
makes an offence based on subsection 541(1) (a subsection which requires
notification that a company is in liquidation) one of strict liability. Several other
offence provisions in the Act such as sections 448C, 448D and 471A have
similar penalties. Item 121 will amend the penalties schedule to provide a
penalty for an offence against subsection 161A(2) or (3) of 10 penalty units or
imprisonment for three months, or both.
Exemption from the requirement to hold an annual general meeting
Background
4.235 Section 250N of the Corporations Act requires public companies to hold
an annual general meeting (AGM) within 18 months of registration and at least
once in each calendar year and within five months after the end of its financial
year. Public companies can apply for an extension of the time for holding
AGMs from ASIC under section 250P. However, ASIC currently cannot give
an exemption from the requirement to hold an AGM.
4.236 The above sections continue to apply whilst a company is under external
administration. Further, section 508 provides that if a creditors' or members'
winding up continues for more than one year, the liquidator must convene an
AGM within three months after the end of the first year from the
commencement of the winding up and the end of each succeeding year. There is
no requirement for an AGM in the case of a winding up by the Court.
4.237 The cost of holding an AGM, which in the case of companies in external
administration is borne by creditors, may be considerable. In a large number of
66 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
cases, these meetings have little value to an administration relative to the cost
required to hold the meeting. It is understood to be rare that any business is
conducted at these meetings. It has been observed that AGMs of members and
creditors in a creditors' voluntary liquidation rarely attract a quorum and are
generally considered to be an unnecessary drain on funds which may otherwise
be distributed to creditors.
4.238 The amendments to section 508 discussed above (paragraphs
4.115-4.122) will remove the general requirement for liquidators in a creditors'
voluntary winding-up to convene an annual meeting of members. The rationale
for this change is that members do not generally have an economic interest in
an insolvent company. However, this does not affect the obligation for public
companies to convene an annual meeting under section 250N. For public
companies, there may be a higher level of stakeholder interest in the conduct of
the external administration and a continued meeting requirement may be
warranted.
Key changes
4.239 ASIC will be granted a discretion to grant an individual public company
an exemption from the requirement to hold an annual general meeting on
application made by an external administrator.
Notes on items
4.240 Item 51 will insert new section 250PAA in the Corporations Act, giving
ASIC the power to make an order exempting a specified class of companies in
external administration from the requirement to hold an annual general meeting
under section 250N. Item 51 will also insert new section 250PAB to allow
ASIC to provide individual exemptions from the requirement to hold an annual
general meeting under section 250N.
Corporations Amendment (Insolvency) Bill 2007 67
Improving outcomes for creditors
Part 4 -- Facilitating pooling in external administration
Background
4.241 Part 4 of Schedule 1 of the Bill sets out a statutory `pooling' mechanism
to facilitate the winding up of companies in corporate groups. The Bill
introduces a new Division 8 for pooling in a liquidation under Part 5.6 of the
Corporations Act.
Pooling in liquidation
4.242 The Bill for pooling provides for two separate methods of pooling:
voluntary pooling and Court ordered pooling.
4.243 In a voluntary pooling, the liquidator of a group of companies may make
a determination that the winding up be conducted on a pooled basis and submit
that determination to separate meetings of the `eligible unsecured creditors' of
the companies proposed to be pooled. The pooling may proceed if 75 per cent
of the eligible unsecured creditors by value and 50 per cent by number of each
of the companies in the group approve the making of the determination. The
determination takes effect after the resolutions have been passed. The
determination does not take effect if the required majorities are not obtained for
any company in the proposed group. If an eligible unsecured creditor objects to
the determination, that creditor may apply to the court to have the determination
terminated or varied on the grounds (inter alia) that the determination would
materially prejudice that creditor.
4.244 The concept of an `eligible unsecured creditor' is a central one to the
pooling regime. In general terms, it includes all the unsecured creditors of the
group but excludes other companies in the pooled group (that is, it excludes
intra-group companies from voting on or objecting to the pooling
determination).
4.245 In the case of Court ordered pooling, the Court may determine, by order,
that a group of companies in liquidation is a pooled group if it is satisfied that it
is just and equitable to do so. The Court may not make the order if the order
would materially disadvantage an eligible unsecured creditor of a company in
the group and the eligible unsecured creditor has not consented to the making of
the order.
Item 133 -- Voluntary pooling
4.246 New sections 571 and 574 of the Corporations Act will provide for
voluntary pooling.
68 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.247 New section 571 of the Corporations Act will permit a liquidator to
make a determination that a group of companies is a pooled group for the
purposes of the section. A pooling determination must be in writing and sent to
the unsecured creditors of each of the companies in the group.
4.248 For a liquidator to be able to make such a determination each company
in the group must be being wound up. The term `group' is not defined or used
in a technical sense in the Bill. It has its ordinary meaning as a collective noun.
The relationships between the companies that may be the subject of a pooling
determination will be specified in new subsection 571(1)(b). Specifically, the
companies in the group must:
· be related companies; or
· be jointly liable for one or more debts; or
· own or operate property that was used in connection with a business,
scheme or undertaking carried on jointly by the companies.
4.249 The term `pooling' is not defined in the new model. However, new
subsection 571(2) will outline the consequences of a pooling determination.
The section provides that the consequences of a pooling determination are:
· each company in the group is taken to be jointly and severally liable for
each debt payable by and each claim against each other company in the
group;
· each debt payable by a company in the group to any other company in the
group is extinguished.
4.250 Under new paragraph 571(1)(d) a liquidator would have the power to
modify the outcome of a pooling determination in certain ways, if they consider
it is just and equitable to do so. Specifically, the liquidator may modify the
consequences of a determination as provided for in subsections 571(2)-(7) if the
liquidator considers it is just and equitable as between the various creditors to
do so. This power will permit the maximum flexibility for the terms of the
pooling determination to reflect the specific circumstances of the companies in
the group.
4.251 The broad power of a liquidator to vary the outcome of a pooling
determination is considered to be desirable from a policy perspective, as it will
allow the liquidator to minimise the prospect of a disaffected creditor applying
to the court to have a determination terminated or varied. In this regard, it is
noted that the procedure for pooling will be accompanied by a number of
amendments intended to protect minority creditors and prevent the 75 per cent
majority disadvantaging the 25 per cent minority. Eligible unsecured creditors
Corporations Amendment (Insolvency) Bill 2007 69
Improving outcomes for creditors
will have a right to apply to the Court to have the pooling determination varied
or terminated if they are materially disadvantaged by the pooling determination,
the information provided to creditors is false or misleading, material
information was omitted or the pooling determination would be oppressive or
unfairly prejudicial to, or unfairly discriminate against, creditors. In the case of
a members' voluntary winding up, members are afforded similar rights to apply
to have the pooling determination varied or terminated.
4.252 Employee creditors will be provided with additional protections, in that
the eligible employee creditors are guaranteed a return at least equal to that
provided if their employer company had been wound up separately
(subsection 571(1)).
4.253 The term `eligible unsecured creditor' is defined in new section 579Q of
the Corporations Act. Eligible unsecured creditors will generally comprise the
external unsecured creditors of the companies in the group. It is not generally
intended that other companies in the pooled group who may be unsecured
creditors of other companies in the group should be able to vote for the pooling
determination or a variation of the determination. A pooling determination will
have the effect that each debt payable by a company in the group to any other
company in the group is extinguished once the determination takes effect. The
regulations will be able to extend the definition of `eligible unsecured creditor'
so as to include or exclude a creditor as an eligible unsecured creditor for the
purposes of the definition. This will ensure that the provisions are flexible
enough to take account of different circumstances and ensure the integrity of
the pooling mechanism.
4.254 New subsection 571(2) will not apply to a secured debt unless the debt
is payable by a company in the group to any other company in the group.
External secured creditors are excluded from the scope of a pooling
determination to the extent of their security (new subsection 571(9)).
4.255 New section 574 of the Corporations Act will provide that, within five
business days after a liquidator makes a pooling determination, the liquidator
must convene separate meetings of the unsecured creditors of each of the
companies in the group for the purpose of considering and making a decision
about the determination. The liquidator must give written notice of the proposed
determination to each eligible unsecured creditor, together with a statement
identifying each of the companies in the group and setting out: the liquidators
opinion about particular matters (whether it would be in the interest of creditors
for the determination to take effect, the extent to which particular creditors and
particular companies are likely to be disadvantaged by the determination, and
the likely return to creditors if the determination takes effect and if it does not);
the reasons why disadvantaged creditors should vote for the determination; and
any other information that will enable creditors to make an informed decision
about whether to approve the determination.
70 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.256 A pooling determination comes into force immediately after the
resolutions approving the making of the determination are passed (new section
578 of the Corporations Act). A copy of the pooling determination must be
lodged with ASIC within 7 days of it taking effect (new section 573 of the
Corporations Act).
4.257 A pooling determination under new section 571 of the Corporations Act
will not limit a liquidator's power under section 477 of the Corporations Act,
for example to make any compromise or arrangement with creditors or
compromise any debts or claims (new subsection 571(11)).
4.258 Provisions also permit a pooling determination in force in relation to a
group to be varied, subject to similar protections for creditors as discussed at
paragraphs 4.251 and 4.252 (new sections 574, 577, 578(2) and 579A of the
Corporations Act).
4.259 In exercising a function or power in connection with a proposed pooling
determination with due care and in good faith, a liquidator or an administrator
will not to be taken to be in breach of fiduciary duties owed to a particular
company or to creditors of a particular company, or duties to a company in a
group under sections 180, 181, 182, 183 or 184 of the Corporations Act (new
section 579 of the Corporations Act).
Item 133 -- Court-ordered pooling
4.260 New sections 579E and 579G of the Corporations Act will provide for
court-ordered pooling.
4.261 New section 579E will empower a Court to determine, by order, that a
group of companies is a pooled group for the purposes of section 579E. The
Court may make such an order if it is satisfied that it is just and equitable to do
so. In considering whether to make an order the Court must have regard to the
following matters (new subsection 579E(12)):
· the extent to which a company in the group and the officers or employees
of a company in the group were involved in the management of any of the
other companies;
· the conduct of a company in the group and the officers or employees of a
company in the group towards the creditors of any of the other
companies;
· the extent to which the circumstances that gave rise to the winding up of
any of the pooled companies were attributable to the actions of any of the
other companies in the group or the officers or employees any of the other
companies in the group;
Corporations Amendment (Insolvency) Bill 2007 71
Improving outcomes for creditors
· the extent to which the business of the pooled companies has been
intermingled;
· the extent to which creditors of any one or more of the pooled companies
may be advantaged or disadvantaged by the making of the pooling order;
and
· any other relevant matters.
4.262 A court may not make a pooling order if the order would materially
disadvantage an eligible unsecured creditor of a company in the group and that
eligible unsecured creditor has not consented to the making of the order (new
subsection 579E(10)).
4.263 New subsection 579E(2) will provide that the consequences of a pooling
order under section 579E are:
· each company in the group is taken to be jointly and severally liable for
each debt payable by and each claim against each other company in the
group;
· each debt payable by a company in the group to any other company in the
group is extinguished.
4.264 An application for a court-ordered pooling may only be made by the
liquidator or liquidators of the companies in the group (subsection 579E(11)).
4.265 Under new section 579G of the Corporations Act the Court may make
ancillary orders in approving the making of a pooling determination. It may:
· exempt specified debts or claims from the determination;
· transfer property or liabilities from one company to another;
· modify the application of the Corporations Act in relation to the winding
up of the companies in the group; and
· give such directions in relation to the winding up of the companies in the
group as the Court thinks fit.
4.266 The Court's power to make an order or direction under section 579G
includes power to provide for different returns for different classes of creditors
or the subordination of the debts and claims of specified creditors.
72 Corporations Amendment (Insolvency) Bill 2007
Improving outcomes for creditors
4.267 Subsection 579G(2) specifies that the liquidator or a creditor of a
company in the group has standing to make an application for an ancillary
order.
4.268 New section 579L of the Corporations Act makes provision for
consolidated meetings of creditors.
Other items
4.269 Item 124 will add a note at the end of subsection 473(3) of the
Corporations Act cross-referencing the provision that provides for the conduct
of consolidated meetings of creditors. Under new section 579L of the
Corporations Act a resolution passed at a consolidated meeting of creditors of
the companies in the group is taken to have been passed by the creditors of each
of the companies in the group. A resolution about remuneration passed at a
consolidated meeting of creditors of the companies in the group will be taken,
for the purposes of subsection 473(3), to be a resolution of the creditors of a
particular company.
4.270 Item 125 will permit regulations to be made in relation to a pooled
liquidation so as to make provision for the matters currently dealt with in
section 538 of the Corporations Act, such as the maintenance of bank accounts
by a liquidator, payments into such accounts, and the deposit of bills, notes and
other securities. Item 126 will allow a liquidator of companies in a group to
lodge one set of accounts of receipts and payments for the group. Items 127,
128, 129, 130 and 131 will make provision for the formation of a committee of
inspection for the group.
Corporations Amendment (Insolvency) Bill 2007 73
5
Deterring corporate misconduct
Compulsory powers to investigate liquidators' conduct
Background
5.1 There are limitations on the circumstances in which ASIC may use its
compulsory powers for the purpose of inquiries into liquidators' conduct.
Section 13 of the Australian Securities and Investments Commission Act 2001
(ASIC Act) sets out when ASIC's investigative powers in Part 3 of the ASIC
Act are triggered. Those circumstances include investigation of a suspected
contravention of the corporations legislation, or of a `law of the
Commonwealth, or of a State or Territory' relating to the management or affairs
of a body corporate or involving fraud or dishonesty. For that purpose a `law of
the Commonwealth, or of a State or Territory' is limited to enactments of
parliaments and does not extend to common law or equitable duties.
5.2 It is within ASIC's administrative functions under the corporations
legislation to enquire into liquidators' actions (section 536 of the Corporations
Act) and to make applications for disciplinary purposes to the Companies
Auditors and Liquidators Disciplinary Board (CALDB) where a liquidator has
failed to carry out the duties of a liquidator adequately (subsection 1292(2) of
the Corporations Act).
5.3 However, it is not always clear that ASIC can use the full suite of its
compulsory powers in Part 3 of the ASIC Act for the purposes of investigating
the extent to which a registered liquidator has satisfied the duties owed by them
in various proceedings. Unlike directors' duties, the fiduciary duties of
registered liquidators are not codified in the corporations legislation.
Key changes
5.4 The Bill will empower ASIC to use its compulsory powers in Part 3 of
the ASIC Act to investigate liquidators' conduct generally, including the extent
to which registered liquidators comply with those fiduciary duties that are not
Corporations Amendment (Insolvency) Bill 2007 75
Deterring corporate misconduct
codified in the corporations legislation. ASIC can use its compulsory powers if
it has reason to suspect certain matters, for example that a person has or may
have failed to carry out or perform adequately and properly the duties of a
liquidator.
Notes on items
5.5 Item 1 of Schedule 2 to the Bill will insert a new subsection 13(3) into
the ASIC Act.
5.6 New subsection 13(3) will allow ASIC to use the investigatory powers
in Part 3 of the ASIC Act when ASIC has reason to suspect that a registered
liquidator has not, or may not have, faithfully performed his or her duties; or is
not, or may not be, faithfully performing his or her duties as a liquidator.
Schemes of compromise or arrangement -- right of recovery for breach
of condition or alteration
Background
5.7 Part 5.1 of the Corporations Act provides for schemes of compromise or
arrangement, comprising plans that bind a Part 5.1 body's creditors or members
or both to some form of rearrangement of their rights and obligations.
5.8 When an application is made to the court to approve a scheme proposal
that has been passed by members and/or creditors, the court will consider the
application and may approve the scheme subject to any alteration or condition
as the court thinks just (subsection 411(6) of the Corporations Act).
5.9 Currently, the provisions do not contain a mechanism for recovery
where a person suffers loss or damage as a result of a breach of any alteration or
condition imposed by the court pursuant to subsection 411(6). Introduction of
such a mechanism will provide the court with broader powers to protect persons
who may be adversely affected by a proposal. The desirability of such a
mechanism was highlighted in the context of the James Hardie Report.
Key changes
5.10 The Bill will amend the scheme of compromise or arrangement
provisions in the Corporations Act to introduce a new right for a person to make
an application for a court order to recover compensation where:
· the court imposes an alteration or condition on the scheme's approval
pursuant to subsection 411(6);
· that alteration or condition is breached by the Part 5.1 body; and
76 Corporations Amendment (Insolvency) Bill 2007
Deterring corporate misconduct
· the person suffers loss or damage as a result of the breach.
Notes on items
5.11 Item 2 of Schedule 2 to the Bill will insert a new subsection 411(6A) of
the Corporations Act, providing a right for a person to recover compensation if
they have suffered loss or damage due to breach by a body of a condition or
alteration imposed by the court under subsection 411(6).
5.12 The new right will only apply to those parts of the arrangement or
compromise that are altered by the court or added by the court, that is, where
the scheme as approved differs from the proposal passed by members and/or
creditors. It does not affect any right of recovery from a breach of the
arrangement or compromise as initially proposed.
5.13 If a breach of condition or alteration is made out, the court may make
orders that it considers are just in the circumstances. Although such orders may
be for orders to pay compensation or to enforce the condition or alteration (new
subsection 411(6B)), the court will not be limited to those remedies (new
subsection 411(6C)).
Court orders preventing company officers and others from avoiding
liability
Background
5.14 Section 486A of the Corporations Act allows a court to make certain
orders to prevent a company officer (or related entity of a company) acting in a
manner that could allow the officer (or related entity) to avoid their liabilities to
a company that is being wound up. Such orders include prohibition on sending
funds out of the jurisdiction, prohibitions on leaving the jurisdiction and the
surrender of passports.
5.15 Currently, such an order may only be made by the court on the
application of a liquidator or provisional liquidator, and the court can only
make orders if `the company is being wound up in insolvency or by the Court,
or an application has been made for the company to be so wound up'
(subsection 486A(2)). In a case where an application to wind up a company has
been made but the winding up has not commenced, there will not necessarily be
any liquidator or provisional liquidator appointed. Accordingly, there will not
be any eligible party to make the application.
Key changes
5.16 The Bill will amend section 486A to allow ASIC to also make an
application to a court for an order preventing an officer or related entity from
Corporations Amendment (Insolvency) Bill 2007 77
Deterring corporate misconduct
avoiding liability to a company. ASIC already has standing to make an
application under section 486B of the Corporations Act.
Notes on items
5.17 Item 4 will amend subsection 486A(1) to remove the requirement in that
subsection that the application be brought by the liquidator or provisional
liquidator.
5.18 Item 7 will insert new subsection 486A(2A) stating who has standing to
make an application under subsection 486A(1), providing that ASIC, as well as
a liquidator or provisional liquidator, has standing to apply for such an order.
5.19 To make this Division easier to understand, it will be broken up into two
subdivisions. The first subdivision (Subdivision A) relates to the general
powers of the court. The second subdivision (Subdivision B) relates to the
procedures in relation to section 486B warrants. As part of this change, item 3
of Schedule 2 to the Bill will insert the new title `Subdivision A -- General
Powers' after the heading of Division 3 of Part 5.4B.
5.20 Item 5 will clarify paragraph 486A(1)(a), by replacing the words `the
company' with the words `a company.'
5.21 Item 6 will clarify paragraphs 486(1)(b), (c) and (d), by replacing the
words `the company' with the words `a company.'
5.22 Item 8 will clarify subsections 486A(3), (4) and (5) by inserting the
words `for an order' before the words `under subsection (1)' in each case.
Warrant to arrest a person
Background
5.23 Section 486B of the Corporations Act allows a court to issue a warrant
to arrest and bring before the court a person who is absconding, or who has
dealt with property or books, so as to avoid obligations in connection with a
winding up.
5.24 The provision was enacted in 1992, following recommendations in the
Harmer Report7 and is modelled on section 78 of the Bankruptcy Act 1966.
However, the provision lacks any details about the procedure for how a person
subject to a warrant is to be treated, both before and after they are brought
7 Australian Law Reform Commission 1988, General Insolvency Inquiry.
78 Corporations Amendment (Insolvency) Bill 2007
Deterring corporate misconduct
before the court. In particular, the provision does not give the court any express
power to order that the person remain in custody, or make other orders. In the
absence of express authorisation, a court would have no authority to detain a
person in custody until, for example, an examination can take place, or to
require bail or other security.8
Key changes
5.25 The Bill will insert amendments to provide guidance on how a person
who is subject to a section 486B warrant is to be treated, including:
· who may arrest the person;
· specifying that as soon as practical the person is to be brought before a
court; and
· at the time of appearance in court, allowing the court to make orders
remanding the person in custody or on bail, or remanding the person in
custody or on bail until they are to be dealt with at a later date, or
releasing them.
5.26 The amendments will also provide that the court may make orders
relating to section 486A, 598 or 1323 of the Corporations Act when the person
subject to a section 486B warrant is brought before it.
Notes on items
5.27 Item 9 of Schedule 2 to the Bill will insert a note in section 486B stating
that the procedures for the warrant are set out in a new subdivision following
the provision.
5.28 Item 10 will insert the new Subdivision B -- Procedures relating to
section 486B warrants, containing the process for how a person who is subject
to a section 486B warrant is to be treated, (comprising new sections 489A,
489B and 489C of the Corporations Act).
5.29 Section 489A will set out the details of who can arrest the person named
in the section 486B warrant, that is, a police officer or Sheriff (or Sheriff's
officer) of the particular State or Territory in which the person is found or a
member or special member of the Australian Federal Police. It is loosely based
on section 82 of the Service and Execution of Process Act 1992 (Cth).
8 This was the view taken by Cooper J, in ASC v Greig Ronald Heilbronn (No. G 3002 of 1995, Fed
No. 27/95, Federal Crt of Australia in Qld) (Unreported).
Corporations Amendment (Insolvency) Bill 2007 79
Deterring corporate misconduct
5.30 Section 489B will set out the procedure after apprehension and is
loosely based on section 83 of the Service and Execution of Process Act 1992
(Cth). Section 489B will provide that as soon as practicable after being arrested,
the person is to be taken before the issuing Court. The issuing Court must order
either that the person be remanded on bail, or that the person be remanded in
custody or that the person be released. Other conditions can also be applied to
the order.
5.31 Section 489C will set out the procedure on remand on bail. Section
489D will clarify the issuing Court's power to make orders under sections
486A, 598 or 1323 when a persons appears before the Court under a section
486B warrant or section 489B. Section 489E will state that, to avoid doubt, a
matter arising under Subdivision B is a civil matter for the purposes of
Part 9.6A.
Time limit for the lodgement of reports by liquidators
Background
5.32 If it appears to liquidators of a company, in the course of winding up,
that there have been offences committed by officers or employees, or the
company may be unable to pay unsecured creditors more than 50 cents in the
dollar, then the liquidator is required by section 533 of the Corporations Act to
lodge a report with respect to the matter with ASIC.
5.33 Currently, section 533 requires such reports to be lodged `as soon as
practicable'. ASIC guidelines suggest two months for lodgement. Subsequent
reports are permitted to be lodged by the liquidator under subsection 533(2) if
he or she thinks fit.
5.34 Reports are often lodged outside the time frame suggested by ASIC.
Sometimes reports are lodged years after the commencement of the
liquidation -- which may be too late to take any remedial action. It is in the
interests of creditors that corporate misconduct identified in the course of a
winding up be notified to ASIC within a reasonable timeframe.
Key changes
5.35 The law will provide a specific time limit of six months for the
lodgement of reports by liquidators about the possible commission of offences
by officers or members of corporations. This will assist in ensuring that ASIC is
notified of the possible offences in a timely fashion. The six month period will
commence at the point in time the liquidator became aware of the possible
offence. Reports should continue to be lodged as soon as practicable before
six months.
80 Corporations Amendment (Insolvency) Bill 2007
Deterring corporate misconduct
5.36 There will be no additional mechanism for liquidators to seek an
extension to the new timeframe. As ASIC's guidelines suggest a two month
timeframe for lodgement, a six month statutory timeframe is considered ample
time. In any case, subsequent reports are permitted to be lodged by a liquidator
under subsection 533(2).
Notes on items
5.37 Item 11 of Schedule 2 to the Bill will amend subparagraph 533(1)(d) to
provide a time limit of six months in addition to the current requirement for the
liquidator to lodge the report `as soon as practicable' after becoming aware of a
matter.
Removal of penalty privilege in relation to bannings and disqualifications
and licence suspensions and cancellations
Background
5.38 Banning and disqualification orders and orders to cancel or suspend a
licence under the Corporations Act are important tools for deterring corporate
misconduct. They allow the removal of unwanted participants from the
corporations and financial services market and thereby maintain the integrity of
the market. One of their main benefits is that they allow for an expeditious
response to corporate misconduct.
5.39 Prior to the High Court's decision in Rich v Australian Securities and
Investments Commission9, the use of banning or disqualification as a remedy for
corporate misconduct was viewed as protective rather than penal in nature.
However, in that case, the High Court found that a banning or disqualification
order was a penalty and, as a direct consequence, allowed people to invoke the
common law privileges protecting the disclosure of information that may
expose a person to a penalty in a banning or disqualification proceeding.
5.40 As a result of the Rich decision, where this privilege is claimed, ASIC is
not able to obtain discovery of documents or the filing and serving of certain
affidavits by defendants in proceedings seeking a banning or disqualification or
licence suspension or cancellation order. In addition, material subject to the
privilege obtained by ASIC during an investigation is not admissible in
evidence in these proceedings or to comply with a statutory requirement.
Relevant proceedings include civil or criminal proceedings in a court,
administrative proceedings in the Administrative Appeals Tribunal (AAT) and
other administrative proceedings, for instance hearings before the CALDB.
9 [2004] HCA 42.
Corporations Amendment (Insolvency) Bill 2007 81
Deterring corporate misconduct
5.41 That this privilege is now available to these proceedings has reduced the
ability for ASIC to act quickly to remove unwanted participants from the
corporations and financial services market, which can endanger the integrity of
the market.
Key changes
5.42 The Bill will remove penalty privilege for proceedings where a
disqualification, banning, suspension or cancellation order, or a declaration to
that effect, is being sought. A person in such an administrative, civil or criminal
proceeding will not be entitled to refuse or fail to comply with a requirement on
the grounds that to do so might tend to make the person liable for a penalty by
way of a disqualification, banning, suspension or cancellation order, or a
declaration to that effect. This will restore the longstanding provision that
penalty privilege does not apply to these types of proceedings.
5.43 The Bill will also remove penalty privilege in relation to a person
complying with a statutory requirement under the Corporations Act or the ASIC
Act on the grounds that to do so might tend to make the person liable for a
penalty by way of a disqualification, banning, suspension or cancellation order,
or a declaration to that effect.
5.44 The requirements that a person is not entitled to refuse or fail to comply
with in relation to the proceeding or other statutory compulsion include:
· to answer a question or give information; or
· to produce a book or any other thing; or
· to do any other act whatever.
5.45 These requirements are deliberately wide so that they will encompass
any of the requirements ASIC could have imposed on a person prior to the Rich
decision when it was seeking such an order and no other penalty. At that time,
as penalty privilege could not be claimed, a defendant could not rely on it to
refuse to do any act or fail to comply with any requirement. While these
amendments do not affect the High Court's classification of these orders as
penalties, the removal of penalty privilege is limited to when ASIC is seeking
one of these remedies and no other penalties.
5.46 The Bill also ensures that when ASIC receives information during an
investigation pursuant to its powers in Part 3 of the ASIC Act or from a Court
examination in relation to an external administration over which penalty
privilege is claimed, ASIC may make use of this information in the proceedings
for a disqualification, banning, suspension or cancellation order, or a
declaration to that effect.
82 Corporations Amendment (Insolvency) Bill 2007
Deterring corporate misconduct
5.47 The removal of penalty privilege has effect despite the Court being
required to apply the rules of evidence and procedure for civil proceedings.
That the rules of evidence may otherwise deny the use of privileged information
will not apply in proceedings for a disqualification, banning, suspension or
cancellation order, or a declaration to that effect. This amendment operates in
conjunction with the confirmation of admissibility within the new section. The
removal also operates despite other provisions in the Corporations Act, ASIC
Act or Administrative Appeals Tribunal Act 1975.
Notes on items
5.48 Item 12 will introduce new subsection 1349(1) of the Corporations Act,
which will provide that in a civil or criminal proceeding under, or arising out of,
the Corporations Act or the ASIC Act, or a proceeding in the AAT, a person is
not entitled to refuse or fail to comply with a requirement to answer a question
or give information; produce a book or any other thing; or do any other act
whatever on the ground that the information or act, as the case may be, might
tend to make the person liable to a disqualification or banning, or licence
suspension or cancellation penalty within the specified provisions of the
Corporations Act.
5.49 The proceedings for the penalties to which the removal of penalty
privilege applies are set out in the provision, and are proceedings for:
· a disqualification under Part 2D.6 of the Corporations Act; or
· a declaration under section 853C of the Corporations Act; or
· a suspension or cancellation under section 915B of the Corporations Act;
or
· a suspension or cancellation under section 915C of the Corporations Act;
or
· a banning order under section 920A of the Corporations Act; or
· an order under section 921A of the Corporations Act; or
· a cancellation or suspension under Division 3 of Part 9.2 of the
Corporations Act; or
· a requirement to give an undertaking under paragraph 1292(9)(b) or (c) of
the Corporations Act; or
· a cancellation or suspension under Division 2 of Part 9.2A of the
Corporations Act.
Corporations Amendment (Insolvency) Bill 2007 83
Deterring corporate misconduct
5.50 New subsection 1349(2) ensures that the removal of the penalty
privilege applies whether or not the person is a defendant in a proceeding
before a court or a party to a proceeding before the AAT or any other
proceeding.
5.51 New subsection 1349(3) applies the removal of penalty privilege to
compliance with a statutory requirement in the Corporations Act or ASIC Act.
A person will not be entitled to refuse or fail to comply with a requirement in
those Acts to answer a question or give information; produce a book or any
other thing; or do any other act whatever on the ground that the information or
act, as the case may be, might tend to make the person liable to a
disqualification or banning, or licence suspension or cancellation penalty within
the specified provisions of the Corporations Act. It is intended that this
amendment will include any requirements in relation to CALDB proceedings,
along with other statutory requirements.
5.52 New subsection 1349(4) ensures that the limitations on admissibility of
statements compelled by use of ASIC's powers in Part 3 of the ASIC Act and
made in Court examinations in relation to an external administration over which
penalty privilege is claimed are removed. The effect of this amendment, in
combination with the new subsection 1349(5) and the current section 76 of the
ASIC Act, ensures these statements are admissible in proceedings for a
disqualification or banning, or licence suspension or cancellation penalty within
the specified provisions of the Corporations Act.
5.53 New subsection 1349(4) modifies the operation of paragraph
597(12A)(d) of the Corporations Act and paragraph 68(3)(b) of the ASIC Act in
relation to admissibility, while new subsection 1349(5) modifies the removal of
privilege in relation to the Court being required to apply the rules of evidence
and procedure for civil proceedings. That the rules of evidence may otherwise
deny the use of privileged information will not apply in proceedings for a
disqualification, banning, suspension or cancellation order, or a declaration to
that effect. This amendment operates in conjunction with the confirmation of
admissibility within the new subsection 1349(4). The removal also operates
despite other provisions in the Corporations Act, ASIC Act or Administrative
Appeals Tribunal Act 1975.
5.54 New subsection 1349(6) clarifies that for the purposes of the penalty
privilege removal in the section, penalty includes forfeiture.
5.55 The amendments commence on the date of Royal Assent, and where
relevant, will apply to a proceeding for a disqualification or banning order, or
order for licence suspension or cancellation within the specified provisions of
the Corporations Act that commences on or after the date of Royal Assent.
84 Corporations Amendment (Insolvency) Bill 2007
6
Improving regulation of insolvency practitioners
Extending the prohibition on inducements for the referral of work
Background
6.1 Section 595 of the Corporations Act prohibits persons offering
inducements to members or creditors of a company to secure an appointment as
an external administrator. Concern has been expressed that this prohibition is
unnecessarily narrow. Examples of persons that were not covered by the
prohibition include directors, providers of professional services (for example
accounting firms and legal firms) and associates of such persons.
Key changes
6.2 The Bill will prohibit inducements being offered to any person or entity
with a view to securing an appointment as an external administrator.
Notes on items
6.3 Items 1, 2 and 3 of Schedule 3 will amend subsection 595(1) of the
Corporations Act to broaden the prohibition on the offering of inducements to
secure an appointment as an external administrator. The proposed amendments
seek to apply the principle that the appointment of an external administrator
should not be influenced by the offering of inducements by anyone to anyone
else.
6.4 Item 4 makes a consequential amendment to paragraphs 595(1)(a), (b),
(c), (d) and (e).
Corporations Amendment (Insolvency) Bill 2007 85
Improving regulation of insolvency practitioners
Education criterion for registration as a liquidator
Background
6.5 Only persons registered by ASIC as liquidators under the Corporations
Act may be appointed as external administrators for certain types of
proceedings.
6.6 Subsection 1282(2) of the Corporations Act sets out educational
qualifications required to become a registered liquidator. Subparagraph
1282(2)(a)(i) sets out one of three alternative requirements as being
membership of certain named or prescribed professional bodies. The other
alternatives are holding a degree representing a course of study involving the
study of accountancy and commercial law (subparagraph 1282(2)(a)(ii), or
other qualifications or experience that ASIC considers equivalent (subparagraph
1282(2)(a)(iii)).
Key changes
6.7 It is proposed to delete the provision stating that the education criterion
is satisfied if a person is a member of a named or prescribed professional body.
ASIC will still have power to recognise membership of such a body as an
alternative form of qualification by forming an opinion under subparagraph
1282(2)(a)(iii) that membership of a body is equivalent to the educational
qualifications in subparagraph 1282(2)(a)(ii).
Notes on items
6.8 Item 5 will repeal subparagraph 1282(2)(a)(i), which provides
membership of certain named or prescribed professional bodies is an acceptable
qualification for the purposes of one of the elements required for registration as
a liquidator.
6.9 Item 6 will make a minor consequential change to subparagraph
1282(2)(a)(iii).
Experience criterion for registration as a liquidator
Background
6.10 Paragraph 1282(2)(b) of the Corporations Act provides, as a criterion for
registration as a liquidator, that ASIC is satisfied as to the experience of the
applicant in connection with the winding-up of bodies corporate. Insolvency
practice under Chapter 5 of the Corporations Act includes many activities other
than those involving the winding-up of bodies corporate. Particularly given the
prominence of the voluntary administration procedure in modern insolvency
86 Corporations Amendment (Insolvency) Bill 2007
Improving regulation of insolvency practitioners
practice, it is desirable that experience in all types of external administration be
taken into consideration when ASIC considers an application to register an
insolvency practitioner.
Key changes
6.11 The proposed amendment to the Corporations Act will allow ASIC to
take into consideration experience in all types of external administration under
Chapter 5 of the Corporations Act when processing an application for
registration of an insolvency practitioner.
Notes on items
6.12 Item 7 will amend paragraph 1282(2)(b) of the Corporations Act to
require that ASIC be satisfied as to the experience of an applicant for
registration in connection with `externally-administered bodies corporate'
instead of with `the winding up of bodies corporate'.
Professional indemnity insurance
Background
6.13 Section 1284 of the Corporations Act requires that registered liquidators
maintain with ASIC a security for the due performance of their duties. The
required securities (insurance performance bonds) are no longer available, and
in practice ASIC has been waiving this requirement for many years. Existing
practice is for professional indemnity insurance and fidelity insurance to take
the place of such securities.
Key changes
6.14 The proposed amendment to the Corporations Act will require registered
liquidators to obtain and maintain professional indemnity insurance and fidelity
insurance to cover their work as licensed practitioners.
Notes on items
6.15 Item 8 will repeal section 1284 of the Corporations Act which requires a
registered liquidator to maintain with ASIC security for the performance of
their duties as a liquidator. In its place a substitute section 1284 will require a
registered liquidator, or a liquidator of a specified body corporate, to maintain
adequate and appropriate professional indemnity insurance and adequate and
appropriate fidelity insurance.
Corporations Amendment (Insolvency) Bill 2007 87
Improving regulation of insolvency practitioners
Triennial statements to be replaced by annual statements
Background
6.16 Section 1288 of the Corporations Act requires a registered liquidator to
lodge a statement with ASIC every three years. This requirement is no longer
considered adequate given the significant changes that may occur over a
three year period and the affect that such changes may have on the suitability of
a person for continued registration.
Key changes
6.17 The amendment will replace the requirement for a triennial statement
with a requirement for a more detailed annual statement.
Notes on items
6.18 Item 9 will amend subsection 1288(3) to replace the requirement for a
triennial statement with a requirement for an annual statement.
Cancellation of registration by ASIC
Background
6.19 Section 1291 of the Corporations Act provides ASIC with a broad
discretion to cancel the registration of an official liquidator. Under
section 1292, cancellation of the registration of liquidators is by application to
the Companies Auditors and Liquidators Disciplinary Board (CALDB).
6.20 Where a person becomes disqualified by reason of bankruptcy or
disqualification from managing corporations, and where a person fails to
maintain the insurance required to cover their work as a registered liquidator, it
is appropriate that ASIC should have power to quickly cancel that person's
registration without reference to CALDB. It is considered that such matters do
not warrant a reference to CALDB due to the relatively objective nature of each
matter.
Key changes
6.21 The amendment will allow ASIC to cancel the registration of a
liquidator in the aforementioned circumstances.
Notes on items
6.22 Item 10 will insert a new section 1290A to provide for ASIC cancelling
the registration of a liquidator in the stated circumstances.
88 Corporations Amendment (Insolvency) Bill 2007
Improving regulation of insolvency practitioners
Transfer of books
Background
6.23 The Corporations Act does not specifically provide for the transfer of
documents associated with an external administration upon the cancellation or
suspension of the registration of a practitioner. In the absence of such a
provision, there exists a possibility that a person whose registration is cancelled
or suspended might fail to transfer documents to a replacement liquidator or
administrator. Such failure might impose additional costs, or create additional
delays, in relation to an external administration that was being conducted by a
person whose registration is cancelled.
Key changes
6.24 The amendment to the Corporations Act will create an obligation for a
practitioner to transfer books related to an external administration to a
replacement practitioner upon having their registration cancelled or suspended.
Notes on items
6.25 Item 14 will amend the Corporations Act to provide for the transfer of
books related to external administration of an externally administered body
corporate when the registration of a liquidator is cancelled or suspended.
Disciplinary proceedings -- CALDB
Background
6.26 CALDB may suspend or cancel a practitioner's registration if it is
satisfied that the person has failed to lodge triennial statements, has ceased to
live in Australia, has failed to carry out or perform adequately and properly the
duties of a registered liquidator, or is otherwise not a fit and proper person to
remain a registered liquidator.
6.27 Where ASIC's application to CALDB relates to a liquidator's failure to
adequately or properly carry out or perform his or her duties, CALDB may
admonish or reprimand the person or require the person to give an undertaking
to refrain from certain conduct. The Bill will provide CALDB with greater
flexibility in its processes and in respect of the penalties that it may impose.
Key changes
6.28 CALDB will be given the power to conduct a pre-hearing conference
involving only the Chairman, for the purpose of determining certain procedural
Corporations Amendment (Insolvency) Bill 2007 89
Improving regulation of insolvency practitioners
matters. This change will avoid the cost and delay of having more than one
member of the board attend for the purpose of deciding timetabling matters.
6.29 CALDB will be given greater flexibility to publish the reasons for its
decision. Section 1296 of the Corporations Act requires that CALDB provide
the person who is the subject of disciplinary proceedings with written reasons
for its decision. The publication of these reasons will promote transparency in
decision-making and will bring CALDB into line with other bodies that
undertake disciplinary functions, such as the Administrative Appeals Tribunal.
6.30 CALDB will be given an express power to delay the effect of its
decisions for a period of up to 90 days. This is in accordance with existing
practice of the board, which allows for the orderly transfer or completion of a
liquidator's ongoing work.
Notes on items
6.31 Item 11 will amend the Corporations Act to provide for a pre-hearing
conference with only the chairperson of CALDB to consider timetabling
matters, determine when submissions are to be made to the Board, when
evidence is to be brought before the board in relation to the matter and give
directions as to the procedure to be followed with respect to the hearing.
6.32 Item 12 will amend the Corporations Act to provide CALDB with the
ability to publish its decisions and reasons for decisions on the internet, or
otherwise.
6.33 Item 13 will amend the Corporations Act to provide CALDB with the
ability to give effect to its decisions at a point in time up to 90 days after
providing a practitioner with notice of the decision.
90 Corporations Amendment (Insolvency) Bill 2007
7
Finetuning voluntary administration
Part 1 -- General
Court's power to bind secured creditors
Background
7.1 Secured creditors and owners or lessors of real or personal property
(herein, `secured creditors') are not bound to the terms of a deed of company
arrangement (DOCA) unless they agree (subsections 444D(2) and (3) of the
Corporations Act). However, the court has the power to order that these persons
be bound, notwithstanding that they have not agreed to be bound:
· where enforcement of their rights would materially adversely affect the
arrangement; and
· provided that their interests are adequately protected.
7.2 The court's power applies where `it is proposed that a company execute
a deed of company arrangement' (paragraph 444F(1)(a) of the Corporations
Act).
7.3 There is some concern that the word `proposed' could be interpreted as
meaning at the point the administrator first forms the view that it would be in
the creditors' interests to enter into a DOCA. This is an earlier time than when
creditors formally resolve that a DOCA be executed.
7.4 The concern is that such an interpretation may cause the court's power
to operate before the details of the arrangement are considered and approved by
creditors. Recommendation 28 of the CAMAC Report (1998) stated that the
Corporations Act should be amended to deal with this issue.
Corporations Amendment (Insolvency) Bill 2007 91
Finetuning voluntary administration
Key changes
7.5 The Corporations Act will be amended to clarify that the Court may
only make an order that secured creditors be bound by a DOCA after creditors
have formally resolved that the DOCA be executed.
7.6 Clarification of the legislation in this area will provide certainty, and
ensure that the court can only bind secured creditors at the later time. It will
ensure secured creditors have adequate opportunity to consider the formal
details of a DOCA proposal, and ascertain the position of other creditors on the
matter.
Notes on items
7.7 Item 28 will amend paragraph 444F(1)(a) to provide that section 444F
applies where creditors have resolved that the company execute a deed of
company arrangement at a meeting under section 439A of the Corporations Act.
Third party guarantees
Background
7.8 A DOCA releases the company from a debt in so far as the deed
provides for the release and the creditor concerned is bound (section 444H of
the Corporations Act). In this way, it is said that the company's debt is
extinguished by the deed.
7.9 Third parties may act as guarantors or indemnify a creditor against loss
for various debts owed by the company to creditors.
7.10 A possible view is that the acceptance of a DOCA extinguishes the
liability of guarantors for debts of the company, by extinguishing the debt that
is being guaranteed. This argument would not apply to an indemnity, however,
as the person in that case guarantees against loss and the creditor would have
suffered a loss by the non-payment of debt.
92 Corporations Amendment (Insolvency) Bill 2007
Finetuning voluntary administration
7.11 There is authority that supports the position that creditors' adoption of a
DOCA does not affect their rights against third parties, including their rights
under guarantees.10 Recommendation 34 of the CAMAC Report (1998) stated
that the Corporations Act should be amended to deal with this issue.
Key changes
7.12 Certainty in this area is desirable. The law will be amended to
unequivocally state that when creditors resolve to execute a DOCA, creditors'
rights under a guarantee or indemnity are unaffected.
Notes on items
7.13 Item 30 will insert new section 444J of the Corporations Act that makes
it clear that creditors' rights under a guarantee or indemnity are unaffected
where a debt is released by acceptance of the terms of a deed of company
arrangement (per section 444H of the Corporations Act).
Right to terminate a deed
Background
7.14 A DOCA will set out circumstances as to when it will terminate.
Additionally, the Court, upon application by a creditor of the company, the
company or an interested person, can order the termination of DOCA under
section 445D of the Corporations Act.
7.15 Creditors can also terminate a DOCA by passing a resolution at a
meeting called for that purpose under section 445F of the Corporations Act
(section 445C of the Corporations Act).
7.16 Currently, the deed administrator may convene a meeting under section
445F at any time, but must convene such a meeting if requested in writing by
creditors that make up at least 10 per cent in value of the company's total
claims.
7.17 There is a concern that a relatively small number of creditors could force
an administrator to convene a meeting of creditors and a majority of those
present and voting could terminate the DOCA, even where the company was
10 Re Garner's Motors Ltd [1937] Ch 594; Hill v Anderson Meat Industries Ltd [1972] 2 NSWLR 704
followed in Re Knebel Woodworking Company Pty Ltd (1985) 3 ACLC 739; Re Southern World
Airlines Ltd [1993] 1 NZLR 597; Gan v Sanders (1994) 15 ACSR 298; Re Andersens Home
Furnishing Company Pty Ltd [1996] 14 ACLC 1,710.
Corporations Amendment (Insolvency) Bill 2007 93
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complying with the terms. Recommendation 35 of the CAMAC Report (1998)
stated that this area of law should be clarified.
Key changes
7.18 To give greater certainty to the rehabilitation of companies through
deeds of company arrangement, creditors should only be entitled to terminate a
DOCA by resolution following a breach of the deed that has not been rectified
before the resolution has been passed. The law will be amended to this effect.
7.19 In addition, the law will be amended to explicitly provide that ASIC can
make an application for termination of a deed under section 445D of the
Corporations Act.
7.20 It has been argued that ASIC is not included as an `interested person' in
this context. Circumstances may arise where it is in the public interest for ASIC
to make such an application. An example is where creditors are unable, due to
lack of financial resources, to make such an application, or where ASIC has
information unavailable to creditors.
Notes on items
7.21 Item 33 will insert new section 445CA of the Corporations Act that
provides that creditors are not entitled to pass a resolution terminating a deed
unless there has been a breach of the deed and the breach has not been rectified
before the resolution is passed.
7.22 The new provision does not require the breach to be material. However,
it is envisaged that minor or technical breaches can be easily remedied before
the resolution is passed. Consequently, requiring the breach to be `material' is
unnecessary. This also avoids the need for administrators to determine (or,
potentially, seek court adjudication on) whether a particular breach is a material
breach of the deed. Similar questions in the area of contract law have proven to
be contentious.
7.23 Item 34 will amend subsection 445D(2) of the Corporations Act to add
ASIC as a party who may apply to the Court for an order to terminate a deed.
Notification when deed wholly effectuated
Background
7.24 Subsection 444A(5) of the Corporations Act provides that a DOCA is
also taken to include prescribed provisions unless it provides otherwise. The
prescribed provisions are set out in Schedule 8A of the Corporations
Regulations. Item 12 of Schedule 8A provides that when a deed is terminated
94 Corporations Amendment (Insolvency) Bill 2007
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because it has achieved its purpose,11 the administrator must certify to that
effect in writing and, within 28 days, lodge with ASIC a notice of termination.
7.25 As the requirement that a deed administrator notify ASIC when a deed is
wholly effectuated is a prescribed provision in the Regulations, it can be
excluded in the actual deed when executed. In practice the provision is
commonly excluded.
Key changes
7.26 It is important that the public record reflect that the company has come
out of external administration and that control of the company has reverted back
to directors. Accordingly, the requirement to notify ASIC will be made a
mandatory requirement.
Notes on items
7.27 Item 35 will insert new section 445FA of the Corporations Act, which
requires a deed administrator to notify ASIC, in writing, when the deed
administrator has applied all of the proceeds of the realisation of assets
available for the payment of creditors, or paid to creditors the full sum
determined by creditors to be received under the deed, or all the obligations
under the deed have been fulfilled. Under the new provision, the deed
administrator must lodge with ASIC a notice of termination of the deed within
28 days. This notice will be in a prescribed form, to be set out in the
Regulations. It is envisaged that this form will largely replicate the form
currently adopted in Item 12, Schedule 8A of the Corporations Regulations.
7.28 Items 31 and 32 will amend section 445C of the Corporations Act
relating to when a deed terminates, to ensure that it is consistent with
termination by way of a deed being wholly effectuated and notified to ASIC
under the new section 445FA.
Power to consent to a transfer of shares of the company
Background
7.29 There is currently a lack of consistency across voluntary liquidation,
court-ordered liquidation and voluntary administration, with respect to the
11 "If the administrator has applied all of the proceeds of the realisation of the assets available for the
payment of creditors or has paid to the creditors the sum of 100 cents in the dollar or any lesser sum
determined by creditors at a general meeting".
Corporations Amendment (Insolvency) Bill 2007 95
Finetuning voluntary administration
practitioner's power to consent to a transfer of shares or an alteration in the
status of members of a company.
· A transfer of shares in a company, or an alteration in the status of the
members of a company, that is made during the administration of a
company is void, unless the Court orders otherwise (section 437F of the
Corporations Act).
· By contrast, a transfer of shares in a voluntary winding up is permitted
with the consent of the liquidator (subsection 493(2) of the Corporations
Act).
· Finally, any transfer of shares in a court-ordered winding-up is void
(subsection 468(1) of the Corporations Act).
7.30 Recommendation 37 of the CAMAC Report (1998) called for improved
consistency in this area of the law.
Key changes
7.31 A consistent approach will be adopted across the three procedures, with
respect to authorising a transfer of shares or a change in the status of members
of a company. The intent is to provide maximum flexibility to practitioners in
each of the types of proceeding, while retaining core shareholder protections.
7.32 Under this approach, an administrator will have the power to consent to
a transfer of shares in a company in administration. The administrator will need
to be satisfied that it is in the best interests of creditors as a whole.
7.33 The ability to apply to the Court for an order authorising a transfer of
shares will be retained, but will only be available where the administrator's
consent has been unsuccessfully sought first. This will ensure the `least cost'
option for approval is explored first. The court's power will be exercisable on
application by the prospective transferor or transferee of shares, with the
administrator having standing to be heard on any application.
7.34 Administrators will also be granted a power to consent to an alteration in
the status of members of a company. Such an alteration may not be approved
unless it complies with the rules for the alteration of class rights in Part 2F.2 of
the Corporations Act.
7.35 The amendments to effect similar changes for a court-ordered
liquidation and a creditors' voluntary liquidation are found at items 81-82 and
85-87 of Part 3 of Schedule 1. The powers of deed administrators are generally
dealt with in the deed, however item 29 of Part 1 of Schedule 4 of the Bill will
96 Corporations Amendment (Insolvency) Bill 2007
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clarify an existing limitation to the deed administrator's power to transfer
shares.
Notes on items
7.36 Item 8 will replace section 437F of the Corporations Act with a new
provision which will regulate transfers of shares during administration
(subsections 437F(1)-(7)) and alterations in the status of members during
administration (subsections 437F(8)-(15)).
7.37 In relation to a transfer of shares, new subsection 437F(1) will provide
that a transfer is void unless the administrator gives written consent to the
transfer, or the Court makes an order authorising the transfer. New subsection
437F(2) will provide that the administrator must be satisfied that it is in the best
interests of creditors as a whole before granting his or her consent. New
subsections 437F(3) and (5) will give the prospective transferor or transferee or
a creditor standing to apply for a court order authorising the transfer if the
administrator refuses consent or a court order setting aside any conditions
imposed by the administrator. New subsections 437F(4) and (6) will empower
the Court to authorise a transfer after an administrator has refused consent to
the transfer, or has approved the transfer subject to conditions that have not
been met, where the Court is satisfied it is in the best interests of the creditors
as a whole to do so.
7.38 New subsections 437F(8)-(15) will provide that an alteration to the
status of members of the company will be void unless the administrator gives
written consent to the alteration. The administrator must be satisfied that the
alteration is in the best interests of creditors as a whole before granting his or
her consent and must refuse consent if the alteration would contravene the class
rights provisions in Part 2F.2 of the Corporations Act (new
subsection 437F(8)). Provision will also be made for the Court to authorise
alterations where a liquidator has refused to grant consent, and to set aside
conditions to which the liquidator's consent is subject.
Administrator's right of indemnity
Background
7.39 Division 9 of Part 5.3A of the Corporations Act deals with the
administrator's liability and indemnity for debts of the administration. Under
section 443D of the Corporations Act an administrator is entitled to be
indemnified out of the company's property for debts for which they may be
liable. These debts include:
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· general debts in the performance or exercise of the administrator's
functions or powers for goods bought, services rendered or property
hired, leased, used or occupied (section 443A);
· payments for property used, occupied or in possession of the company
where an agreement has been made before the administration began
(section 443B); and
· certain taxation liabilities (`remittance provisions') per section 443BA.
The right of indemnity also extends to the administrator's fixed remuneration.
7.40 Section 443E of the Corporations Act grants a priority for these debts to
the administrator, subject to the priority ranking order in section 556.
7.41 Section 443F of the Corporations Act grants the administrator a lien
over the company's property to secure these rights of indemnity. However, the
administrator has no statutory right of indemnity out of the company's property
in respect of liabilities that fall outside section 443D.
7.42 In Commonwealth Bank of Australia v Butterell (1994), an administrator
who on-sold stock in the company's possession that was the subject of a
retention-of-title (ROT) clause was possibly liable in conversion to the person
holding the benefit of the ROT clause.12
7.43 Young J held that since the claim was for conversion, it was not a
liability for goods bought or property hired, leased, used or occupied within the
meaning of section 443A. The administrator had no statutory right of indemnity
out of the company's property in respect of that liability under section 443D.
7.44 Although in Butterell, the administrator was held to have an equitable
lien over the proceeds of the on-sale, the decision served as an indication that
there may be limits to administrators' rights of indemnity in other areas of
tortious liability. Recommendation 41 of the CAMAC Report (1998)
recommended law reform to deal with this issue.
Key changes
7.45 The draft Bill amends the law to provide that an administrator is not
liable in conversion for the sale of property subject to a lien, pledge or retention
of title clause (paragraph 7.162 refers).
12 35 NSWLR 64; 14 ACSR 343; 12 ACLC 727.
98 Corporations Amendment (Insolvency) Bill 2007
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7.46 However, there are other torts that may not be covered by the existing
provisions. The law will be amended to extend the administrator's right of
indemnity to include any personal liabilities incurred in the due performance of
the administrator's duties (except liabilities incurred negligently or in bad
faith).
Notes on items
7.47 Item 22 will amend section 443D to include a right of indemnity for any
other debts or liabilities incurred, in good faith and without negligence, by the
administrator in the performance or exercise, or purported performance or
exercise, of any of his or her functions and powers as administrator.
7.48 Item 45 will make a consequential amendment to paragraph 556(1)(c) of
the Corporations Act.
Deed administrator's ability to sell the company's shares
Background
7.49 The model deed of company arrangement in Schedule 8A of the
Corporations Regulations provides that a deed administrator has the power to
enter into and complete any contract for the sale of shares in the company
(clause 2(zc)).13
7.50 This clause does not give deed administrators a power to issue shares
directly. It authorises the administrator of the deed to deal in existing shares
consistently with the deed. It also literally empowers the administrator to deal
in shares of a shareholder. If a deed made provision for the disposition of shares
of shareholders, the administrator may enter into and complete contracts for
their sale/disposition.
7.51 In relation to the issue of new shares, deed administrators are not
directly empowered to issue shares but the deed may provide for the issue of
securities by the directors. A deed is binding on company officers (the
company) as well as the company's creditors and members (section 444G).
7.52 Unless the deed contains a contrary provision, the administrator has the
power to carry on the business of the company for the purpose of administering
the deed. Although it is the company (ie the directors) that is empowered to
issue new shares, the deed administrator can cause this to happen.
13 These prescribed provisions can be excluded per subsection 444A(5).
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7.53 There is a question as to whether the current law constitutes a power for
the deed administrator to sell existing shares in the company without the
consent of their holders (a compulsory sale power). In cases where the courts
have considered the matter, it has been held that a deed administrator had no
power to sell members' shares without their consent.14
7.54 A compulsory sale power may be beneficial to deed administrators, as it
allows administrators to ensure trading of the shares resumes. It may be
essential to the success of a deed that a share sale proceeds. For example, the
DOCA may be based on an investor acquiring all (or a minimum proportion) of
the shares in a company in return for a lump sum payment to creditors.
7.55 Often, the shares of a company under administration will have little
residual value and members will not participate in any distribution. It may be
argued that their consent should therefore not be required. However, a
compulsory sale power may be open to abuse. For instance, a deed that involves
creditors swapping their debt for equity in the company may unfairly advantage
creditors if the underlying business of the company is strong.
7.56 Other considerations are that members have a proprietary right in the
existing shares, and that other external administrators such as liquidators and
receivers do not have comparable powers. Importantly, such a power could
unfairly prejudice shareholders particularly where there is some residual value
in the company.
Key changes
7.57 The law will be clarified to provide that the deed administrator is able to
sell shares in the company with either the consent of the holders of those shares,
or with leave of the Court in the absence of shareholder consent. This is
consistent with recommendation 42 of the CAMAC Report (1998).
7.58 The Court may only grant leave if it is satisfied that the sale would not
unfairly prejudice the interests of shareholders. This is intended to direct the
Court to consider the impact of a compulsory sale of shareholders where there
may be some residual value in the company.
7.59 Under the new approach, members, creditors and ASIC will have
standing to oppose a court application for leave. These parties will also be able
14 Mulvany v Wintulich (unreported, Fed C of A, O'Loughlin J, SG 3184 of 1995, 29 September 1995,
BC9507148); see also Cresvale Far East Ltd (in liq) v Cresvale Securities (subject to DCA) (2001) 37
ACSR 394.
100 Corporations Amendment (Insolvency) Bill 2007
Finetuning voluntary administration
to apply to the Court to have an oppressive or prejudicial DOCA terminated
under section 445D of the Corporations Act.
Notes on items
7.60 Item 29 will insert new section 444GA of the Corporations Act which
will permit a deed administrator to transfer shares in the company if the owner
of the shares consents in writing or leave of the Court is obtained. A member or
creditor of the company, any interested person or ASIC may oppose the
application for leave.
Lodgement of accounts with ASIC
Background
7.61 There is no requirement for administrators to lodge with ASIC accounts
of receipts and payments of the administration. In relation to deed
administrators, the prescribed provisions in Schedule 8A require lodgement of
accounts.15 As noted previously, these provisions may be excluded.
7.62 Liquidators (per section 539 of the Corporations Act) and controllers
(per section 432 of the Corporations Act) are required to lodge accounts on a
six monthly basis.
7.63 The prescribed provisions in relation to lodgement of accounts by deed
administrators are rarely adopted. The absence of a mandatory requirement for
administrators and deed administrators to lodge accounts of receipts and
payments with ASIC is inconsistent with other forms of insolvency
administration. For external administrations where there is a requirement to
lodge accounts, accounts are accessed by the public on a regular basis.
Key changes
7.64 To improve transparency and facilitate creditor monitoring, the law will
be amended to ensure the accounts of administrators and deed administrators
are lodged with ASIC and placed on the public record. The provisions requiring
the lodgement of accounts on a six monthly basis will be modelled on the
current requirements for liquidators under section 539. This is consistent with
recommendation 43 of the CAMAC Report (1998).
15 Clause 10: refers to section 432, stating that it operates as if the deed administrator was the
`controller'.
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Notes on items
7.65 Item 10 will insert new section 438E of the Corporations Act requiring
administrators to lodge accounts with ASIC. Item 36 will insert new Division
11A containing new section 445J of the Corporations Act requiring deed
administrators to lodge accounts with ASIC.
7.66 As with current section 539 in relation to liquidators, the new provisions
require administrators to lodge accounts on a six monthly basis. The new
provisions also provide for ASIC to be able to cause an audit of the accounts. In
relation to voluntary administration, the costs of an audit will form part of the
expenses of the administration (new subsection 438E(7) refers). In relation to a
company subject to a deed of company arrangement, such costs are payable by
the company (new subsection 445J(7) refers).
Reporting to creditors
Background
7.67 Concerns have been expressed that insufficient information may be
provided to creditors where a company is put into voluntary administration. It
has been suggested that reports sent by administrators when convening the
major meeting of creditors should be required to include `any other matter
material to the creditors' decision'. The proposal is consistent with the
Statement of Best Practice on the Content of Administrator's Reports produced
by the IPAA. It is also consistent with recommendation 58 of the CAMAC
Report (1998) and recommendations 35 and 37 of the CAMAC Report (2004).
Key changes
7.68 The information made available to creditors will be enhanced by
including a requirement that the statement provided to creditors under
paragraph 439A(4)(b) of the Corporations Act must include other information
known to the administrator that will enable creditors to make informed
decisions about whether to execute a deed of company arrangements, end the
administration or wind up the company.
Notes on items
7.69 Item 12 will require administrators to include any other information
known to them that will enable creditors to make an informed decision about
the matters in subparagraphs 439A(4)(b)(i)-(iii) of the Corporations Act.
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Finetuning voluntary administration
Fundraising in administration
Background
7.70 Currently, any offer by an administrator of a DOCA to creditors to
substitute equity for all or part of their debt (an equity for debt offer) is subject
to the fundraising provisions in Part 6D.2 of the Corporations Act.
7.71 An offer of securities under a Part 5.1 scheme of arrangement is exempt
from the disclosure requirements in Part 6D.2 (subsection 708(17) of the
Corporations Act). The rationale is that the offerees will have already received a
detailed court-approved explanatory statement under section 412 of the
Corporations Act. Also, a court must approve the final scheme.
7.72 A similar exception is desirable to facilitate equity for debt swaps in
voluntary administrations. A similar exemption to that for a scheme of
arrangement will enhance an administrator's capacity to issue a company's
securities in a manner most beneficial to creditors. The exemption would not be
available for offers or invitations to other parties. Recommendation 58 of the
CAMAC report (1998) and recommendations 35 and 37 of the CAMAC Report
(2004) stated that there should be an exemption from the fundraising provisions
for offers or invitations to creditors to exchange debt for equity under a DOCA.
Key changes
7.73 The fundraising provisions in Part 6D.2 of the Corporations Act will not
apply to offers to creditors to exchange their debt for equity under a DOCA. An
administrator making an equity for debt offer will only be required to provide a
statement setting out all the information that is known to the administrator
about the merits of the offer. The administrator's statement should indicate that
it is not a prospectus and therefore may contain less information than a
prospectus.
Notes on items
7.74 Item 46 will insert new subsection 708(17A) into the Corporations Act.
An offer of securities made to any or all of a company's creditors under a deed
of company arrangement will not require detailed disclosure under Part 6D.2 of
the Corporations Act. The exemption will only apply where the offer does not
require accepting creditors to contribute any further consideration. An
administrator making an equity for debt offer will be required to provide a
statement that sets out all relevant information about the offer that is within the
knowledge of the administrator. The statement must indicate that it is not a
prospectus and therefore may contain less information than a prospectus.
Corporations Amendment (Insolvency) Bill 2007 103
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7.75 The effect of section 444D of the Corporations Act is that, once
approved by creditors, a DOCA is binding on all creditors of the company in
relation to claims arising on or before the date specified in the deed irrespective
of whether a particular creditor voted in favour of or against the deed. On one
view section 444D should be read subject to other provisions of the
Corporations Act. On this basis, section 231 of the Corporations Act which
contemplates a person becoming a shareholder through voluntary agreement
may protect a creditor from being required to become a shareholder under a
deed of company arrangement. Item 27 inserts new subsection 444D(4) into the
Corporations Act, which will provide that section 231 does not operate to
prevent a creditor from becoming a member of the company as a result of a
creditor accepting an offer of shares in the company.
Appointment of administrator by directors and chargees
Background
7.76 The directors of a company that is being wound up (either under the
order of the Court or after members have resolved that the company be wound
up voluntarily) cannot appoint an administrator (subsection 436A(2) of the
Corporations Act). This is because once winding up proceedings commence,
the company's affairs are under the control of the liquidator, and this rule
avoids a conflict between the two external administrations.
7.77 The directors of the company can appoint an administrator between the
filing of an application in Court and the making of a winding up order. This
reasoning is based on the ordinary meaning of the phrase `is already being
wound up' in section 436A of the Corporations Act.
7.78 After an application for a winding up order is filed, the Court can
appoint a provisional liquidator to preserve the company's property pending the
hearing of the application. This occurs before the making of a winding up order
by the Court (subsection 472(2) of the Corporations Act).
7.79 In a similar fashion to the provisions relating to the appointment of an
administrator by directors, persons who are entitled to enforce a charge over all
or substantially all of the company's property (substantial chargees) cannot
appoint an administrator where the company is being wound up (subsection
436C(2) of the Corporations Act).
7.80 There is no provision expressly preventing the appointment of an
administrator by directors of the company or chargees where the company has a
provisional liquidator appointed.
7.81 Directors of a company under provisional liquidation should not be able
to appoint an administrator, just as directors of a company under liquidation are
104 Corporations Amendment (Insolvency) Bill 2007
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not permitted to appoint an administrator. This is because only a provisional
liquidator should be permitted to exercise the powers of officers of the company
(including the power to appoint an administrator) whilst he or she is acting.
7.82 Further, voluntary administration and provisional liquidation should be
regarded as mutually exclusive16 and any continuing power of the directors to
appoint an administrator is inconsistent with this notion.
7.83 However there is conflicting authority on the matter. In Object Design
Inc v Object Design Australia Pty Ltd (1997) a single judge of the Federal
Court considered that directors of a company under provisional liquidation
could appoint an administrator.17
7.84 The judge in that case based his conclusion on his reading of subsection
471A(2A) of the Corporations Act, reasoning that the Corporations Law (as it
was then) expressly contemplates that an administrator may be appointed
notwithstanding that a provisional liquidator is in place.
7.85 Subsection 471A(2A) refers to `an administrator appointed...beginning
after the provisional liquidator was appointed' in relation to a power of an
officer that is not suspended. However, it can be argued that this provision
refers to the provisional liquidator's power under section 436B to appoint an
administrator, rather than a residual power of the directors to do so.
7.86 In relation to substantial chargees, a person (other than a provisional
liquidator, an administrator appointed after the appointment of the provisional
liquidator, or a person acting with the approval of the provisional liquidator or
the court) cannot exercise powers as an officer of a company while a
provisional liquidator is acting (subsection 471A(2)). However, neither a person
entitled to enforce a charge nor a receiver and manager appointed by that person
is an `officer' of the company.
7.87 The court in Aloridge Pty Ltd (prov liq apptd) v Christianos18 accepted
that a chargee over all or substantially all the property of a company in
provisional liquidation had the power to appoint an administrator under
section 436C of the Corporations Act.
16 See subsection 440A(3).
17 78 FCR 60; Compare to Walker v Midlink Nominees Pty Ltd (prov liq apptd) (2000) 22 WAR 318;
where a single judge of the Western Australian Supreme Court held that they could not: Followed in
Brolrik Pty Ltd v Sambah Holdings Pty Ltd (2002) 40 ACSR 361, NSWSC.
18 (1994) 13 ACSR 99, 12 ACLC 237.
Corporations Amendment (Insolvency) Bill 2007 105
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Key changes
7.88 There is a need for a uniform prohibition for both directors and
substantial chargees appointing an administrator where a company has already
had a liquidator or provisional liquidator appointed. The same conflicts between
the two appointments will apply, whether the appointment is made by a director
or substantial chargee.
7.89 The law will be amended in this area, to make it clear that directors and
substantial chargees may not appoint an administrator once a provisional
liquidator has been appointed. This is consistent with recommendations 45
and 46 of the CAMAC Report (1998).
Notes on items
7.90 Item 2 will amend subsection 436A(2) to provide that a resolution of the
board to appoint an administrator under subsection 436A(1) does not apply to a
company to which a liquidator or provisional liquidator has been appointed.
7.91 Item 4 will amend subsection 436C(2) to provide that a person entitled
to enforce a charge over the whole, or substantially the whole, of the company's
property may not appoint an administrator to that company if a liquidator or
provisional liquidator has previously been appointed.
Transition from liquidation to voluntary administration
Background
7.92 Section 436B of the Corporations Act permits a liquidator or provisional
liquidator to appoint an administrator to the company. Subsection 436B(2)
provides that a liquidator or provisional liquidator must obtain leave of the
Court to appoint himself or herself as administrator where it appears that
voluntary administration is the appropriate procedure for a company. In
practice, liquidators call creditors meetings to discuss the company's affairs
before appointing an administrator.
7.93 While section 436B would appear to allow liquidators and provisional
liquidators to appoint their business partner, employer, or employee as
administrator without first obtaining leave of the court, subsection 448C(1) of
the Corporations Act disqualifies certain people related to the company from
being appointed administrator without leave of the Court.
7.94 Subsection 448C(1) utilises the term `officer', and disqualifies, inter
alia, persons who are `partners, employers, or employees of officers of the
corporation' (paragraph 448C(1)(g)). The term `officer', as defined in section 9,
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includes liquidators but not provisional liquidators. In any case, provisional
liquidators are supervised by the Court.
Key changes
7.95 To streamline the transition from liquidation to administration, the
Corporations Act will be amended to allow a liquidator to appoint himself or
herself as administrator without leave of the court where the appointment is
supported by creditors. This is consistent with recommendations 47 and 48 of
the CAMAC Report (1998).
7.96 The Corporations Act will also be amended to treat equally any
appointment of a business partner, employer or employees of the liquidator or
provisional liquidator, or his or her firm or corporation.
7.97 As liquidators in practice call creditors meetings to discuss the
company's affairs before appointing an administrator, this meeting provides an
appropriate forum to seek creditors' approval to enter voluntary administration.
7.98 This meeting would also afford creditors the opportunity to reject the
appointment of that person as administrator. Liquidators will continue to have
the right to seek leave of the Court for their appointment as administrator in the
absence of a formal resolution of creditors.
Notes on items
7.99 Item 3 will repeal current subsections 436B(2) and 436B(3) and replace
them with a new subsection 436B(2) which provides that the liquidator,
provisional liquidator or certain related persons cannot be appointed
administrator without either creditors' consent (by passing a resolution at a
creditors' meeting), or with leave of the Court.
7.100 New paragraphs 436B(2)(a)-(e) will identify the types of persons the
subsection applies to, namely the liquidator or provisional liquidator himself or
herself, a partner, employee, employer or director, secretary, senior manager or
employee if the insolvency practice is incorporated.
7.101 Item 39 will make a consequential amendment to subsection 448C(4) to
ensure that `officer' in paragraphs 1(g) and (h) does not include liquidator.
Stay and termination of a liquidation
Background
7.102 A liquidator or provisional liquidator can appoint an administrator
where it appears that voluntary administration is the appropriate procedure for a
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company. If the company then executes a DOCA, an application must be made
to the Court for a stay or termination of the winding-up (under section 482 of
the Corporations Act).
7.103 Under subsection 482(1A), the liquidator, a creditor or a contributory of
the company has standing to make such an application. Deed administrators do
not have standing to apply to the Court for a stay or termination of a winding up
unless they are also the liquidator.
Key changes
7.104 The law will be amended to provide that once creditors have resolved to
execute a DOCA, the deed administrator has standing to make an application
for a stay or termination of the winding-up. This will ensure a smooth transition
from liquidation to administration. This is consistent with recommendation 49
of the CAMAC Report (1998).
7.105 When considering an application to terminate the winding up of a
company subject to a DOCA, the Court will be directed to have regard to a
non-exhaustive list of factors such as any misconduct by the company's officers
and the commercial decision of creditors accepting the deed. The Court would
also have regard to whether the company would remain insolvent after the
termination of the winding up (following creditors' acceptance of the DOCA).
This reflects the general position of the courts in relation to not permitting
insolvent companies to return to commercial life.
Notes on items
7.106 Item 43 will amend subsection 482(1A) to include deed administrators
as persons who may make an application for a stay or termination of a
liquidation.
7.107 Item 44 will insert new subsection 482(2A) which provides a list of
non-exhaustive factors the Court must consider when considering such an
application for a company subject to a DOCA:
· new paragraphs 482(2A)(a) and (b) will cover alleged misconduct by
company officers reported to the Court by an administrator, liquidator or
ASIC;
· new paragraph 482(2A)(c) will relate to the commercial nature of the
decision of the company's creditors; and
· new paragraph 482(2A)(e) will require the Court to consider whether the
DOCA is likely to result in the company becoming or remaining
insolvent.
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Application to replace administrator
Background
7.108 Under section 449B of the Corporations Act, ASIC or a creditor of the
company may apply to the Court for an order to replace an administrator.
7.109 In addition, a member of the company can also apply to the Court for
the administrator to be replaced where an administrator is acting in a manner
prejudicial to some or all of the company's members or creditors. This utilises
the court's general supervisory powers under section 447E, and permits the
court to make an order as it thinks just.
Key changes
7.110 Liquidators and provisional liquidators of a company may be in a good
position to assess the performance of an administrator of the company.
Accordingly, the law will be amended to add these persons to the list of persons
able to apply to the Court to replace the administrator. This is consistent with
recommendation 50 of the CAMAC Report (1998).
Notes on items
7.111 Item 40 will amend section 449B to include a liquidator or a provisional
liquidator of the company as a person who may apply to the Court to remove
from office an administrator and appoint someone else.
Meetings
Background
7.112 The current law requires the administrator to hold a first meeting of
creditors within five business days after the administration begins (subsections
436E(1)-(2) of the Corporations Act), and a second meeting to determine the
company's future within 28 days (in the usual case) or 35 days (where
Christmas or Easter intervenes) of his/her appointment (subsection 439A(1) of
the Corporations Act). Creditors must receive at least two business days' notice
of the first meeting (subsection 436E(3) of the Corporations Act).
7.113 The administrator has 21 days (or 28 days if the administration begins
just before Christmas or Easter) to convene the second meeting (subsections
439A(1) and (5) of the Corporations Act). The second meeting must be held
within 5 business days after the end of the convening period (subsection
439A(2) of the Corporations Act). The law allows for administrators to apply to
the court to extend the convening period for the second meeting (subsection
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439A(6) of the Corporations Act), and once held the second meeting may be
adjourned for up to 60 days (subsection 439B(2) of the Corporations Act).
7.114 The setting of tight time frames and milestones for completion of the
various tasks in an administration is an important feature of the voluntary
administration procedure. On the one hand it is beneficial for stakeholders that
the process be conducted without delay. It avoids the delays, abuses and
expense that may occur if a much longer or unrestricted time frame is allowed.
7.115 On the other hand a limited extension of the period of time for holding
the statutory meetings may increase creditors' opportunities to participate, and
allow administrators more time to conduct an examination of the company's
financial circumstances and consider the best options for its future.
Key changes
7.116 The Bill will allow a slightly longer time for holding the first and second
meetings of creditors. The first meeting will be held within eight business days
after the beginning of the administration, with a requirement for five business
days' notice of the meeting to creditors. The period for holding the second
meeting of creditors will be extended to 25 business days with a new convening
period of 20 business days.
7.117 These reforms are informed by recommendations 2, 6, 7 and 8 of the
CAMAC Report (1998), recommendation 7 of the CAMAC Report (2004) and
recommendations 15 and 16 of the PJC Report.
7.118 For consistency, references to `days' in relation to meetings will be
amended to `business days' where appropriate. This is consistent with
recommendation 59 of the CAMAC Report (1998).
7.119 In addition, the Bill will allow more flexibility for holding the second
meeting under section 439A by permitting the meeting to be held within 5
business days before or after the end of the convening period. This facility may
be used in simple administrations, where the full convening period is not
required to conduct the necessary investigations and prepare the necessary
reports.
7.120 In summary, the reforms are as follows:
First meeting Current New
Timing of meeting 5 business days 8 business days
Notice of meeting 2 business days 5 business days
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Second meeting Current New
Convening of meeting 21 or 28 days 20 or 25 business days
Notice of meeting 5 business days No change
Timing of meeting Within 5 business days Within 5 business days
after the end of the before or after the end
convening period of the convening period
Adjournment period 60 days 45 business days
Notes on items
7.121 Item 5 will amend subsection 436E(2) to extend the period of time for
holding the first meeting of creditors from 5 to 8 business days. Item 6 will
amend subsection 436E(3) to extend the convening period for holding the first
meeting of creditors from at least 2 business days to at least 5 business days.
7.122 Item 11 will amend subsection 439A(2) to allow the second meeting of
creditors to be held be held within 5 business days before or after the end of the
convening period.
7.123 Item 13 will amend subsection 439A(5)(a) to provide that the convening
period is calculated from the day after the administration begins. Currently the
convening period for the second meeting of creditors is calculated from the day
when the administration begins. It is more usual to calculate the period from the
day after the administration begins. The current method of calculation may
jeopardise some administrations. The proposal is consistent with
recommendation 7 of the CAMAC Report (1998).
7.124 Item 14 will amend subsection 439A(5) to extend the convening period
from 28 days to 25 business days where the administration begins before
Christmas or Easter. Item 15 will amend subsection 439A(5) to clarify the
extent of the convening period in keeping with the change in terminology from
`days' to `business days'. Item 16 will amend paragraph 439A(5)(b) to extend
the convening period from 21 days to 20 business days. Item 17 will amend
paragraph 439A(5)(b) to provide that the convening period is to be calculated in
the usual case from the day after the administration begins and to clarify the
extent of the convening period in keeping with the change in terminology from
`days' to `business days'.
7.125 Item 18 will amend subsection 439A(6) to allow the Court to extend the
convening period for the subsection 439A meeting on an application made after
the convening period has ended. Item 19 will clarify that an extension granted
on an application after the convening period has ended will be limited to
situations where there would otherwise be substantial injustice to creditors. The
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court will be required to have regard to the administrator's conduct and any
other relevant matters when considering the costs of an application. This is
consistent with recommendation 8 of the CAMAC Report (1998).
7.126 Item 20 will amend subsection 439B(2) to clarify the power of an
administrator to adjourn a meeting for up to 60 days, or to a notified date within
the 60 day period. It will replace the current reference to 60 days with
45 business days consistent with the change in terminology from `days' to
`business days'.
Decision period for chargee to enforce a charge
Background
7.127 Section 441A of the Corporations Act permits the holder of a charge
over the whole or substantially the whole of the property of a company to
enforce the charge without regard to the administration provided that the
chargee does so within the `decision period'. The decision period is defined in
section 9 of the Corporations Act, and generally means the 10 day period
following notification being provided to the chargee of the appointment of the
administrator.
7.128 Item 5 of Schedule 4 of the Bill will extend the time for holding the first
meeting of creditors from 5 business days to 8 business days after the
commencement of the administration. A consequence of this amendment is that
a chargee will have a reduced period of time after the first meeting of creditors
to decide whether to enforce the charge. That is, the chargee will generally have
to elect whether to enforce the charge within 2 business days after the first
meeting of creditors. A substantial chargee should have a similar period of time
after the first meeting of creditors to make a decision as provided under the
current law.
Key changes
7.129 Item 1 of Schedule 4 will amend the definition of `decision period' in
section 9 so as to allow a decision period of 13 business days.
Conversion of `days' to `business days'
Background
7.130 Part 5.3A of the Corporations Act currently uses two different types of
methodology for establishing periods or dates in the course of an
administration, namely `business days' and `days'. It would be preferable for a
consistent terminology to be adopted. References to `days' in Part 5.3A of the
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Corporations Act will be replaced with reference to `business days'. This is
consistent with recommendation 59 of the CAMAC Report (1998).
Key changes
7.131 In subsections 438B(2), 443B(2), 443B (3) and 446A(5) of the
Corporations Act, `7 days' will be changed to `5 business days'. In paragraphs
444B(2)(a), 444B(2)(b) and 446A(5)(b) of the Corporations Act, `21 days' will
be changed to `15 business days'.
Notes on items
7.132 Items 9, 21, 24, 37 and 38 substitute business days for days, as outlined
above.
Role of administrator and administrator of deed
Background
7.133 The roles of the administrator and the administrator of the deed of
company arrangement overlap. The period of administration is defined in
subsection 435C(1) and (2) of the Corporations Act, and extends to the
execution of the deed of company arrangement. Subsections 444A(3) and
444B(5) of the Corporations Act impose obligations on the administrator of the
deed before the relevant instrument is executed.
Key changes
7.134 The role of the administrator of the deed of company arrangement
should commence when the deed of company arrangement is executed by the
company and the deed's administrator. The obligation under subsection
444A(3) will be made an obligation of the administrator of the company and the
references to in subsections 444B(5) and (6) to the administrator of the deed be
replaced with references to the `proposed' administrator of the deed.
Notes on items
7.135 Item 23 will amend subsection 444A(3) so that it refers to `The
administrator of the company' rather than `The administrator of the deed'.
7.136 Consequential amendments are made to subsections 444B(5) and
444B(6). Item 25 will amend subsection 444B(5) so that it refers to `The
proposed administrator of the deed' rather than `The administrator of the deed'.
Item 26 will amend subsection 444B(6) so that it refers to `the deed's proposed
administrator' rather than `the deed's administrator'.
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Notification that a company is subject to a deed
Background
7.137 Companies subject to a DOCA must indicate that fact on all of their
public documents and negotiable instruments after the company's name where
it first appears (subsection 450E(2) of the Corporations Act). This serves as an
indication to any prospective creditors dealing with the company.
7.138 The notification that a company is subject to a DOCA may have adverse
impacts on a company's goodwill and reputation. This will, in turn, affect the
company's ability to continue trading and impinge on the rescue of the
business, ultimately reducing the amount available to creditors.
7.139 It is acknowledged that there may be circumstances where a deed is still
yet to be terminated but there is little risk to prospective creditors. An example
of such a situation may be where a deed administrator has received the money
to be paid to creditors but cannot pay such money because of unresolved
disputes over proofs of debt.
7.140 In Re Brashes Pty Ltd19, Hayne J held that the court could exercise its
general discretion under section 477A of the Corporations Act to exempt a
company from the obligation to include the words `subject to deed of company
arrangement' on its public documents.
7.141 To remove any uncertainty, the Corporations Act will be amended to
provide the company with an express right to apply to the court for an order that
the company be exempt from including the relevant words in its name. This is
consistent with recommendation 33 of the CAMAC Report (1998).
Key changes
7.142 Section 450E will be amended to provide that a company under a deed
of company arrangement can apply to the Court for an exemption from the
requirement to indicate that fact on all public documents and negotiable
instruments after the company's name.
7.143 The Court may grant such an exemption if it is satisfied that the granting
of leave will not result in any significant risk to the interests of the company's
creditors as a whole. The Court must also consider the interests of prospective
(post-deed) creditors, who are at the most risk. Pre-deed creditors have had the
benefit of notification so their interests are unlikely to be at risk in this context.
19 (1994) 15 ACSR 477 at 483, 13 ACLC 110 at 115--116.
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(A similar ability to apply to the Court has been provided in relation to the
requirement to disclose former names at item 50 of Part 3, Schedule 1).
Notes on items
7.144 Items 41 and 42 will amend section 450E to provide that a deed
administrator or any interested person can seek leave of the Court for an
exemption from the requirements of subsection 450E(2).
Resolutions for removing an administrator
Background
7.145 Currently, the replacement of an administrator at the first meeting of
creditors may require creditors to pass two resolutions:
· the first to remove the existing administrator; and
· the second to appoint the replacement administrator.
7.146 Consequently, an administrator could be removed without a
replacement being appointed.
Key changes
7.147 Uncertainty in this area will be addressed by amending the Corporations
Act to provide that the removal of a current administrator and the appointment
of a replacement administrator must be effected through a single resolution.
This is consistent with recommendation 3 of the CAMAC Report (1998).
Notes on items
7.148 Item 7 will amend section 436E(4) of the Corporations Act to clarify
that the removal of a current administrator and the appointment of a
replacement administrator must be effected through a single resolution.
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Part 2 -- Rights to property during administration
Right of a person to retain pledged property
Background
7.149 Under sections 440B and 440C of the Corporations Act, chargees and
owners or lessors of property used, leased or occupied by the company are
prohibited from exercising their rights once an administrator has been appointed
to the company. Exceptions to this rule are where the administrator consents, or
where the person acts with leave of the court.
7.150 There remains some uncertainty regarding the application of
section 440B to lienees and pledgees. A key purpose of taking possession of
property under a lien or pledge is to provide additional security for the lender.
However, this must be balanced against the need to facilitate the rescue of a
viable company in the interests of other creditors and stakeholders. In some
cases, the ability to continue to trade in stock in the ordinary course of business
is essential to the continued viability of the company.
Key changes
7.151 The Bill will clarify that a lienee or pledgee retains the right to retain
property subject to a lien or pledge upon insolvency of the debtor. The right to
retain property will be subject to a restriction upon the sale of the property
during the course of a voluntary administration. These reforms recognise the
purpose of a lien or pledge in providing additional security for a loan whilst
also protecting the interests of other creditors.
Notes on items
7.152 Item 48 will insert new sections 440BA and 440BB into the
Corporations Act. New section 440BA will provide that a person in possession
of company property held under a lien or pledge will be entitled to retain
possession of the property, but must not sell the property without leave of the
Court or the consent of the administrator. New section 440BB will provide that,
if a company in administration is a lessee of property, distress for rent may not
be carried out against the property without the administrator's written consent
or the leave of the Court.
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Power of an administrator to sell property subject to a lien, pledge or
retention of title clause
Background
7.153 Section 442C of the Corporations Act prohibits an administrator
disposing of property that is subject to a charge, that is used or occupied by the
company, or is in the possession of the company but of which someone else is
the owner or lessor. Exceptions to this rule include where the sale is in the
ordinary course of the company's business, where the administrator has the
written consent of the chargee and where the administrator has the leave of the
court.
7.154 It has been suggested that there is a need to clarify the law in relation to
the operation of this provision in respect of property subject to a lien, pledge or
retention of title clause. The reforms need to strike an appropriate balance
between protecting the interest of the owner and security holder, and facilitating
the rescue of viable companies in the interest of other creditors and
stakeholders.
Key changes
7.155 Section 442C of the Corporations Act will be amended to provide that
the administrator may sell property subject to a lien, pledge or retention of title
clause, in the ordinary course of the company's business, or with the written
consent of the owner or security holder, or with the leave of the Court. The
amendments will also allow for a chargee, lienee, pledgee, lessor or owner to
apply to the Court for an injunction if a proposed sale of the property would
prejudice their interests. The administrator will be provided a right of inspection
for property held under a lien or pledge, and a right to take possession to sell
such property in order to effect a sale. The purchaser of the property would take
clear title.
7.156 To protect the interests of the security holder, the administrator will be
obliged to retain the amount secured by a lien or pledge, for payment to the
holders of those securities, when a power of sale is exercised over property
subject to a lien or pledge. The administrator will be required to act reasonably
in exercising the power of sale. Similar provisions will be introduced for
property that is in the possession of the company but owned by a third party due
to the operation of a retention of title clause.
Notes on items
7.157 Item 47 will amend section 9 of the Corporations Act to define
`retention of title clause'.
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7.158 Items 55, 56 and 57 will amend section 442C of the Corporations Act to
clarify that the provisions stating when an administrator may dispose of
encumbered property also apply to property subject to a lien or pledge.
7.159 Item 58 will insert new subsections 442C(4), 442C(5) and 4442C(6) into
the Corporations Act to provide for a court injunction where a proposed
disposal of property would prejudice the interests of an owner, lessor, chargee,
lienee or pledgee.
7.160 Item 58 will also insert a new subsection 442C(7) into the Corporations
Act to provide that a disposal of property by an administrator is sufficient to
extinguish a charge, lien or pledge. This new subsection will ensure that
persons acquiring property from the administrator of a company will obtain
clear title to that property.
7.161 Item 59 will insert a new subsection 442CA(1) into the Corporations
Act to provide for a right of inspection where an administrator proposes to sell
property subject to a lien or pledge.
7.162 Item 59 will also insert a new subsection 442CA(2) into the
Corporations Act to provide an administrator with a right to obtain possession
of property of a company that is subject to a lien or pledge in order to effect a
sale. This subsection will provide an administrator with immunity from any
action in conversion that might otherwise arise from actions taken to sell
property of a company that is subject to a lien or pledge.
7.163 Item 59 will also insert a new section 442CB into the Corporations Act
to provide that an administrator must act reasonably in exercising a power of
sale over property subject to a lien, pledge or retention of title clause.
7.164 Item 59 will insert new section 442CC into the Corporations Act to
provide for the treatment of the proceeds of a sale of property subject to a lien
or pledge. The administrator will be required to set aside the net proceeds of the
sale, to the extent required to satisfy the debt secured by the lien, pledge or
retention of title clause, or any other security that has a priority over the debt
secured by the lien, pledge or retention of title clause. If the net proceeds of the
sale are insufficient to meet these debts, the entire amount must be set aside to
pay those debts in order of priority.
Right of a creditor to sell property subject to a lien or pledge
Background
7.165 Under the amendments discussed above, it will be clarified that a lienee
or pledgee may not sell property subject to a lien or pledge without the
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agreement of the administrator. If the administrator agrees to the sale, a
question arises about the treatment of the proceeds of the sale.
Key changes
7.166 Where the administrator agrees to a lienee or pledgee selling property in
their possession, the power of sale will be subject to a requirement to return to
the administrator any sale proceeds in excess of the debt secured by the charge.
The power of sale will not be exercisable where there is a security over the
property that has a higher priority in liquidation.
Notes on items
7.167 Item 54 will insert new sections 441JA into the Corporations Act to
regulate the sale of property subject to a lien or pledge by a lienee or pledgee.
New section 441JA will permit the holder of the lien or pledge who sells the
property to retain the net proceeds where they equal or fall short of the debt
secured. Where they exceed the debt secured, the holder will be required to pay
to the administrator the excess. Where the net proceeds fall short of the debt
secured, the holder will be able to prove for the balance as an unsecured
creditor.
General moratorium for bankers' liens and collateral lodged with clearing
and settlement facilities
Background
7.168 Bankers' liens over, inter alia, unpresented cheques and bills of
exchange would be unworkable if the banker needed to obtain the consent of an
administrator or prior leave of the court under new section 440BA of the
Corporations Act in order to dispose of such instruments.
7.169 Shares are often lodged as security with the Options Clearing House
(OCH). OCH has indicated that it cannot accept shares or money market
securities as collateral should administrators be permitted to sell property that is
subject to a lien or pledge under section 442C.
Key changes
7.170 The Corporations Act will be amended to provide that bankers' liens are
exempt from the moratorium under Part 5.3A of the Corporations Act.
7.171 Securities lodged as collateral with a clearing and settlement facility will
also be exempt from the moratorium under Division 6 of Part 5.3A of the
Corporations Act.
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Notes on items
7.172 Item 49 will insert a new section 440JA into the Corporations Act to
exempt property that is the subject of bankers' liens and securities held as
collateral by a clearing and settlement facility from Division 6 of Part 5.3A of
the Corporations Act.
Clarifying the injunction power allowing a court to prevent enforcement
of a charge
Background
7.173 Where a chargee takes action that falls within section 441B by dealing
with property under a charge, the administrator may apply to a court for an
injunction to prevent that action. A court's injunction power under paragraph
441D(1)(a) of the Corporations Act covers actual, but not foreshadowed,
enforcement action by a chargee over particular property. In some
circumstances an administrator may have notice of conduct of a chargee that is
likely to occur in the future that would adversely affect the interests of
creditors. It is desirable that the power of the court to grant an injunction be
extended to cover injunctions against threatened enforcement action by a
chargee.
Key changes
7.174 The Corporations Act will be amended to clarify the power of a court to
grant an injunction to prevent threatened enforcement action by a chargee.
Notes on items
7.175 Item 53 will amend paragraphs 441D(1)(a) and 441D(1)(b) to provide a
court with power to grant an injunction where a person proposes to engage in
conduct to enforce a charge of a type that is listed within subsection 441B(1) of
the Corporations Act.
Clarifying the powers of a court to allow the enforcement of a charge
Background
7.176 A chargeholder over all or substantially all the property of a company
can continue enforcing its charge if it commenced enforcement before or during
the 10 day decision period that follows the commencement of the
administration (this is known as the substantial chargeholder's exception). This
exception is contained within section 441A of the Corporations Act.
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7.177 Other chargeholders can continue enforcing their charges under the
circumstances identified in section 441B of the Corporations Act.
7.178 The case of Albert v Namba Pty Ltd (1997) 24 ACSR 577 raised the
possibility that chargeholders may not be able to enforce their charges through
court proceedings, given the separate prohibition on court enforcement
procedures in sections 440F and 440G of the Corporations Act.
7.179 Chargeholders who are permitted by the Corporations Act to enforce
their charges should be able to do so during the administration period through
court enforcement, as well as extra-curial action.
Key changes
7.180 The Corporations Act will be amended to clarify that a chargeholder
who is permitted to enforce a charge under sections 441A or 441B is able to do
so through court enforcement as well as the extra-curial action provided for in
those sections.
Notes on items
7.181 Items 51 and 52 will amend subsections 441A(3) and 441B(2) to clarify
that court enforcement of a charge is not prevented by the prohibition on court
enforcement procedures in sections 440F and 440G of the Corporations Act.
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Part 3 -- Liquidation following administration
Priority for debts incurred during a DOCA
Background
7.182 There is some uncertainty about the priority of post-deed creditors,
where a liquidation follows a DOCA.
7.183 Although the provability of debts incurred by a company under a DOCA
was addressed through the enactment of subsection 553(1A) of the
Corporations Act, that provision does not deal with priorities.
7.184 A provision will be included to clarify that post-deed creditors have no
statutory priority over pre-deed creditors, except where the deed administrator
is personally liable for debts that fall within paragraph 556(1)(a) of the
Corporations Act.
Key changes
7.185 Section 556 will be amended to state that, where a liquidation
immediately follows a deed of company arrangement, the statutory priority
afforded to debts owed to post-deed creditors under paragraph 556(1)(a) only
applies in circumstances where the deed administrator is personally liable for
those debts.
Notes on items
7.186 Item 67 will amend subsection 556(1) to provide that the priority
afforded to post-deed creditors under paragraph 556(1)(a) only applies to
expenses incurred by the deed administrator, or claims made under
section 553(1A) for debts incurred during a DOCA, if the deed administrator is
personally liable for the expenses.
7.187 Item 64 will add a note at the end of subsection 553(1A) to signal that
the paragraph 556(1)(a) priority applies only to debts incurred under a deed of
company arrangement for which a deed administrator is personally liable.
Priority for borrowings during administration
Background
7.188 During administration, it is very often vital in order to maintain the
business of a company that it obtains new finance. However, lenders may be
reluctant to advance funds to a company in administration on an unsecured
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basis unless they will receive priority treatment in the event that the company
ultimately fails.
7.189 To deal with this issue, recommendation 31 of the CAMAC Report
(2004) stated that a post-administration lender should be given priority over
pre-administration creditors provided a special majority of the
pre-administration creditors agreed. However, a possible difficulty with this
proposal is that it requires a meeting of creditors, which is expensive to
organise and may not be practical within the commercial time constraints.
7.190 An alternative solution to this issue would build on the system of
personal liability, indemnity rights and priority already in place regarding
certain debts incurred by an administrator.
Key changes
7.191 A deed administrator is personally liable for debts he or she incurs in the
course of the administration, but only for services rendered, goods bought, and
property leased or hired (subsection 443A(1) of the Corporations Act).
Administrators have a right of indemnity from the company's property to cover
those expenses under section 443D of the Corporations Act. If the company
does proceed to liquidation, such expenses are generally entitled to a priority
under paragraph 556(1)(c) of the Corporations Act. In some cases they may be
entitled to a higher priority under paragraph 556(1)(a) or lower under
paragraph 556(1)(de) of the Corporations Act. By this mechanism, those debts
incurred by an administrator effectively receive priority over pre-administration
debts.
7.192 The amendment will include debts incurred by the administrator in
relation finance obtained during administration in section 443A, so that a
similar mechanism can be used to give borrowings priority over
pre-administration creditors. As the administrator will be personally liable for
those borrowings, it is expected that administrators would exercise appropriate
caution in using this option. However, in appropriate circumstances it would
provide an administrator with the facility to offer a lender enhanced comfort
that their funds will be repaid in the event of a failure.
7.193 Under current section 443E, debts covered by the administrator's right
of indemnity, in some circumstances, take priority over debts secured by a
pre-existing floating charge. However, it is not considered appropriate to allow
new borrowings to take priority over debts secured under a pre-existing floating
charge, unless the holder of the charge first consents to that result, as this would
introduce an unacceptable level of uncertainty as to the value of the floating
charge.
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Notes on items
7.194 Item 60 will insert new paragraphs (d), (e) and (f) in section 443A(1) to
make administrators personally liable for debts incurred by administrators in
relation to post-commencement finance. It is intended that this would cover not
only the borrowing itself, but also interest and other expenses related to the
borrowing. Through the operation of sections 443D and 556, those debts will
receive priority in a subsequent liquidation.
7.195 Item 62 will insert a new subsection 443E(4), which provides that the
right of indemnity in respect of borrowings under the new paragraph
443A(1)(d), (e) and (f) does not take priority over debts secured by a floating
charge on property of the company except to the extent the chargee has
consented in writing.
7.196 Item 61 will make a consequential amendment to paragraph 443E(1)(b).
Uncommercial transactions during voluntary administration and deed of
company arrangement
Background
7.197 Part 5.7B of the Corporations Act provides for the recovery of property
or compensation for the benefit of creditors of an insolvent company.
Transactions which may be `voidable' under section 588FE include
uncommercial transactions which are also insolvent transactions.
7.198 Companies might enter into uncommercial transactions during the
administration or, particularly, under a DOCA when the company remains in
the control of the directors. However, if the company later enters liquidation,
those transactions may not be voidable because of requirement that the
uncommercial transaction is also an insolvent transaction. Under section 588FC
of the Corporations Act, the company's own insolvency is an element of the
definition of an insolvent transaction.
7.199 Unfair loans and unreasonable director-related transactions are voidable
under subsections 588FE(6) and 588FE(7) of the Corporations Act respectively
regardless of whether they are also insolvent transactions.
7.200 Due to the potential for abuse, the Bill will allow uncommercial
transactions entered into during a voluntary administration or DOCA
immediately preceding a liquidation to be voidable, regardless of whether the
company was insolvent at the time of the transaction or became insolvent due to
the transaction. However, any transactions done by or under the authority of the
administrator or deed administrator will not be voidable. This is consistent with
recommendation 51 of the CAMAC Report (1998).
124 Corporations Amendment (Insolvency) Bill 2007
Finetuning voluntary administration
Key changes
7.201 New provisions will make voidable uncommercial transactions
occurring between the relation-back day and the date of the resolution or court
order for winding up, in circumstances where the winding up was immediately
preceded by voluntary administration or a DOCA. However, transactions
entered into by or on the authority of the administrator or deed administrator
will not be subject to the new rules.
Notes on items
7.202 Item 68 will add two new subsections to section 588FE.
Subsection 588FE(2A) will apply when the company concerned was under
administration immediately before the company resolved that it be wound up,
or the court ordered that it be wound up. Subsection 588FE(2B) will apply
when the company concerned was subject to a DOCA immediately before those
events.
7.203 If a liquidation is immediately preceded by a voluntary administration or
DOCA, any uncommercial transactions entered into by the company (or an act
done to give effect to the transaction) on or after the relation-back day, but
before the order or resolution to wind the company up, will be subject to
avoidance. However, transactions or acts done on behalf of the company by, or
under the authority of, the administrator or deed administrator will not be
voidable under the subsections.
Period for challenging voidable transactions
Background
7.204 A liquidator's power to challenge voidable transactions must be
exercised within three years after the relation-back day, or such further time as
the court permits (subsection 588FF(3) of the Corporations Act).
7.205 Where liquidation follows the failure and termination of a deed of
company arrangement, the relation-back day will generally be the day on which
the administration began. If the company is under a DOCA for a long period,
the liquidator may have only a short time frame in which to bring an action, or
the time for bringing an action may have even expired before termination of the
deed.
Key changes
7.206 To address situations where there is a long period between the
relation-back day and the termination of a DOCA, subsection 588FF(3) will be
amended to allow a liquidator either three years from the relation-back day or
Corporations Amendment (Insolvency) Bill 2007 125
Finetuning voluntary administration
one year from their appointment to challenge voidable transactions, whichever
is later.
7.207 This proposal is consistent with recommendation 50 of the CAMAC
Report (2004).
Notes on items
7.208 Item 69 will amend paragraph 588FF(3)(a) to allow a court to make
orders in relation to voidable transactions under an application made up to
three years after the relation-back day or 12 months after the appointment of a
liquidator, whichever is the later.
7.209 Item 70 will make a consequential amendment to paragraph
588FF(3)(b).
Report as to affairs
Background
7.210 Currently there is no requirement for creditors to be given an updated
report as to the affairs of the company if an administration or DOCA proceeds
to liquidation by way of a special resolution (which would usually be deemed to
have been passed pursuant to subsection 446A(2) of the Corporations Act).
Such a report may be of benefit to any new insolvency practitioner who
assumes control of the company's affairs and to creditors generally.
7.211 Recommendation 53 of the CAMAC Report (1998) proposed that the
officer in control of a company under administration (or under a deed of
company arrangement) should be required to lodge with ASIC at the time the
company goes into liquidation a copy of the section 439A report in relation to
the company, together with a further report on any additional matters or
material changes which affect the financial position of the company that the
person is aware of.
7.212 There is, however, no requirement currently to lodge the section 439A
report, as it may contain commercially sensitive information. Notwithstanding
that when the company is in liquidation this is likely to be less of a concern, it is
not proposed to require lodgement of the section 439A report as recommended
by CAMAC.
7.213 Rather, the Bill will allow a liquidator who takes office immediately
following a period of administration or a DOCA to request a report from the
administrator, deed administrator or any officer of the company about the
company's affairs as at a date specified in the notice. This is similar to the
power a court-ordered liquidator has under section 475 of the Corporations Act.
126 Corporations Amendment (Insolvency) Bill 2007
Finetuning voluntary administration
Key changes
7.214 The new provision is modelled on the current powers of a
court-appointed liquidator to seek a report as to affairs under section 475 of the
Corporations Act. The notice may require information about particular affairs,
or the affairs of the company more generally, at a particular point in time.
7.215 To avoid an administrator or deed administrator being required to report
on the affairs of the company as at a time prior to their appointment, the notice
may not specify a time that is earlier than the commencement of the
administration or DOCA respectively. This limitation is consistent with the
objective of the new provision to provide an update, rather than repeating all the
previous investigations conducted in the administration of the company.
7.216 There will be an obligation for company officers in receipt of such a
notice to provide the information sought. Failure to do so without reasonable
excuse will be an offence of strict liability.
7.217 Reasonable costs of preparing the report may be claimed and paid by the
liquidator out of the property of the company as a priority debt.
Notes on items
7.218 Item 63 will insert a new section 446C into the Corporations Act. The
section will apply in circumstances where a company resolves that it be wound
up voluntarily while it is under administration or a DOCA. It is intended that a
deemed resolution under subsection 446A(2) would also trigger the provision.
7.219 The general framework of the new section 446C is modelled on
section 475 of the Corporations Act. Subsection 446C(2) will give a liquidator
of a company in a voluntary liquidation that follows an administration or a
DOCA the power to give a written notice to current or former officers of the
company requiring information to be provided about the affairs of the company.
7.220 Subsection 446C(3) will provide that the information sought must be
provided within 14 days of the officer receiving the notice. However, the officer
may apply in writing for an extension and, if there are special reasons for doing
so, a liquidator may allow a longer period (subsections 446C(4) and 446(5)).
7.221 Unless the officer has a reasonable excuse for failing to comply with a
notice (subsection 446C(9)), failure to provide the information within the time
period will constitute an offence, which is declared under subsection 446C(10)
to be an offence of strict liability. The new offence provision is comparable
with other offence provisions in the Corporations Act relating to similar subject
matter. For example, sections 448C, 448D and 471A are offences of strict
liability that attract the same maximum penalty. Item 71 will insert into
Corporations Amendment (Insolvency) Bill 2007 127
Finetuning voluntary administration
Schedule 3 a penalty for the breach of subsection 446C(3) of 25 penalty units or
imprisonment for six months, or both.
7.222 Subsection 446C(8) will allow the person in receipt of the notice to
claim from the liquidator reasonable expenses for preparing the report, which
will be paid out of the property of the company. Item 66 will provide for such
expenses to have a priority in the liquidation under a new paragraph 556(1)(da).
Priority for costs of making a winding up application
Background
7.223 The costs of making an application for a winding up order are generally
afforded priority in a liquidation. A decision of the New South Wales Supreme
Court, McDonald v Deputy Commissioner of Taxation (2005) 23 ACLC 324,
has indicated that the costs of an application for a winding up order will not
receive priority where an application for a winding up order is made, but prior
to court approval of the winding up the company is put into voluntary
administration and then into liquidation through the route of voluntary
administration rather than as a result of the application. The circumstance that
the court considered in that case is not uncommon.
7.224 To encourage members of the public to make applications for the
winding up of insolvent companies, it is desirable for the costs of a winding up
application which is not withdrawn or dismissed before the company enters
administration to be recoverable as a priority in a subsequent liquidation, even
if the liquidation was an outcome of the voluntary administration process rather
than as a direct result of the application.
Key changes
7.225 The costs of making an application for a winding up order against a
company will receive priority where the company is later liquidated in a
creditors' voluntary winding up initiated through the voluntary administration
procedure. This may occur if creditors resolve that the company be wound up
under paragraph 439C(c) of the Corporations Act and a deemed voluntary
winding up occurs through the operation of subsection 446A(2) of the
Corporations Act or if the company goes into liquidation following a DOCA.
This may arise in the circumstances set out in paragraphs 445C(a), (b) or (c)
because of the operation of subsection 446A(2) of the Corporations Act.
7.226 New paragraph 556(1)(ba) of the Corporations Act will have the result
that the costs of making an application for a winding up order attract priority
under that paragraph, where the company is placed into voluntary
administration after the filing of a winding up application and liquidated under
Part 5.5 through the operation of subsection 446A(2).
128 Corporations Amendment (Insolvency) Bill 2007
Finetuning voluntary administration
Notes in items
7.227 Item 65 will insert a new paragraph 556(1)(ba). Paragraph 556(1)(ba)
will give priority to the costs of a winding up application where the application
was made under section 459P during the 12 months ending when the winding
up that has come about through the operation of the voluntary administration
procedure commenced, the application has not been withdrawn or dismissed
and the Court did not make an order under section 459A that the company be
wound up in insolvency.
Corporations Amendment (Insolvency) Bill 2007 129
8
Miscellaneous
Priority of administrative expenses in voluntary
liquidation
Background
8.1 Sections 512 and 516(1) of the Corporations Act both purport to
determine the priority of amounts payable in a creditors' voluntary winding up.
The relationship between the provisions is currently unclear. Barrett J suggested
in McDonald v Deputy Commissioner of Taxation20 that consideration be given
to resolving the conflict between sections 512 and subsection 556(1). His
Honour stated: `I ... note briefly the obvious difficulty in reconciling ss 512 and
556(1) in a case of voluntary winding up. The former professes to identify items
payable `in priority to all other claims', while the latter refers to items that,
subject to other provisions of Division 6 of Part 5.6 (which does not include
section 512), are to be paid `in priority to all other unsecured debts and
claims''.
8.2 Subsection 556(1) was inserted in the Corporations Act in 1992 to
govern the ranking of debts in a liquidation. It covers voluntary liquidations
(see section 513). Accordingly, section 512 is no longer necessary.
Key changes
8.3 Section 512 of the Corporations Act will be repealed.
Notes on items
8.4 Item 7 will repeal section 512. The priority of administrative expenses in
voluntary liquidation is dealt with in subsection 556.
20 (2005) 23 ACLC 324.
Corporations Amendment (Insolvency) Bill 2007 131
Miscellaneous
Correction of anomalies
8.5 Item 1 will correct a cross reference in subsection 13(2) of the ASIC
Act. Items 2, 4, 9, 10, 12, 13 and 14 will remove references to the obsolete
`official management' procedure in the specified provisions. Item 3 will remove
an incorrect cross-reference in the definition of `administration' in section 9 of
the Corporations Act. Item 6 will correct a cross reference to subsection
443BA(2) in section 443D of the Corporations Act. Item 8 will correct a
drafting anomaly in section 533 of the Corporations Act. The `and' at the end of
paragraph 533(1)(a) should be `or'. Item 11 will remove the unnecessary word
`with' from subsection 539(3) of the Corporations Act. Item 15 will remove the
obsolete reference to `examinable officer' in paragraph 597A(1)(b) of the
Corporations Act.
Share capital reductions -- partly-paid shares
Background
8.6 Section 256B of the Corporations Act provides a general mechanism
allowing companies to reduce share capital where a reduction is not otherwise
authorised by a specific provision in Part 2J.1 of the Corporations Act.
8.7 A reduction of a company's share capital for consideration can have an
adverse impact on creditors, as it effectively reduces the pool of assets over
which creditors may make a claim. As such, if a company wishes to use the
section 256B process to reduce share capital, paragraph 256B(1)(b) provides
that a reduction for consideration may not proceed if it would materially
prejudice the company's ability to pay its creditors.
8.8 Flowing from this, where shares are cancelled for no consideration, the
company does not have to determine whether the cancellation will materially
prejudice the company's ability to pay its creditors. Generally, a cancellation of
a share for no consideration will have no effect on the amount of assets over
which creditors may make a claim.
8.9 On its face, this provision does not expressly distinguish between
fully-paid and partly-paid shares. Where shares are partly-paid shares, their
cancellation amounts to the cancellation of a right to claim monies from another
party and thereby reduces the pool of assets available to creditors.
8.10 The law is currently interpreted so that the cancellation of a partly-paid
share will always involve consideration. Even where no money is payed for the
partly-paid shares, the consideration will be provided by the company giving up
its right to make a call on the share (and the shareholder receiving the benefit of
not having to pay a debt). Following from this interpretation,
paragraph 256B(1)(b) will always apply to the cancellation of a partly-paid
132 Corporations Amendment (Insolvency) Bill 2007
Miscellaneous
share. However, there was some discussion of this issue in the context of the
James Hardie Inquiry.
Key changes
8.11 The Bill will amend the section to state expressly that, to avoid doubt, a
cancellation of a partly-paid share is taken to be for consideration. The effect of
this amendment is to provide express guidance that the share cancellation
process described in subsection 256B(1) can only be used to cancel partly-paid
shares if the cancellation does not materially prejudice the company's ability to
pay its creditors.
Notes on items
8.12 Item 5 of Schedule 5 to the Bill will insert a new subsection 256B(1A)
to provide expressly that to avoid doubt, a cancellation of a partly-paid share is
taken to be for consideration. The new subsection is intended to add
clarification to the current interpretation of the law, and not interrupt the law's
current operation. The amendment is strictly prospective.
Corporations Amendment (Insolvency) Bill 2007 133
9
Transitional provisions
9.1 Item 1 will set out transitional/application provisions for the
introduction of the amendments in the Bill.
Corporations Amendment (Insolvency) Bill 2007 135
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