Australian Corporate Insolvency: 2010 in Review

Author:

Scott Hedge and Lisa Gallate, Kemp Strang, Sydney

This year has seen significant political and legislative developments on the Australian corporate insolvency landscape, whilst there have been significantly fewer large external administrations compared to previous years.

Personal Properties Securities Act

The Personal Properties Securities Act, which was passed in December 2009, and is expected to take effect in May 2011, will have major changes to the registration and enforcement of security interests in personal property. It will have significant effect on insolvency administration procedures.

The PPS reforms will bring significant change to lending and credit, as it will change the way that businesses take security over assets.

The Act will affect various existing forms of secured finance including fixed and floating charges, chattel mortgages, finance leases, and the factoring of book debts. A radical change will be the abolition of the long standing concept of a floating charge. It will also affect other transactions, such as leases of personal property and retention of title arrangements.

A significant change for small to medium business will be the Register and its effect on retention of title. Whilst businesses typically include retention of title clauses in their supply contracts, those contracts will need to be registered in order to have priority over third parties in cases of insolvency.

Sons of Gwalia revisited

In June 2010 the Government introduced legislation that will reverse the effect of the decision of the High Court of Australia in Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232. This highly publicised decision determined that certain shareholders could prove for their debts in the liquidation where they suffered losses caused by the misleading and deceptive conduct of the insolvent company, and that those debts would rank equally with the claims of other unsecured creditors.

The legislation will amend section 563A of the Corporations Act 2001 to postpone "subordinate claims" made in external administration until all of the claims of the company are satisfied.

The new provision expressly defines "subordinate claim" broadly as being a claim in respect of a debt owed to a person in their capacity as a member of the company (by way of dividends, profits or otherwise), or any other claim "that arises from a person buying, holding, selling or otherwise dealing in shares of the company". The definition will have the effect that all shareholder claims are subordinated to the claims of creditors.

Senate Inquiry Report

The Senate Economics References Committee was commissioned with an inquiry into the functioning and performance of external administrators and the involvement of the Australian Securities and Investments Commission (ASIC) both pre and post business failure. The report was finalised and tabled on September 14 2010.

The Committee made a number of recommendations, including that :

• The corporate insolvency arm of ASIC be transferred to the Insolvency and Trustee Service Australia (ITSA – the government agency now responsible for the administration and regulation of the personal insolvency system in Australia) to form the Australian Insolvency Practitioners Authority.
• The Government commission an inquiry into the opportunities to harmonise Australia's personal insolvency and corporate insolvency legislation. Now, these regimes are contained in 2 separate Acts, the Bankruptcy Act 1966 and the Corporations Act 2001 and regulated separately by ITSA and ASIC.
• A flying squad be established within the new insolvency regulator, a unit to be responsible for conducting investigations of a sample of insolvency practitioners, some selected at random, others with the aid of a risk profiling system and market intelligence.
• The new Insolvency Practitioners Authority establish a licensing system for corporate insolvency practitioners similar to the system now used by ITSA.

The relevant Government agencies are now expected to review the Report and its recommendations, and determine which of those recommendations will be adopted. Any substantive changes will not occur before next year.

Economic Climate

Whilst there have been fewer high profile company collapses this year to previous years, there has been a significant increase in the number of voluntary administrations. Various economic indicators, including decreased retail sales and increased unemployment, suggest challenging business conditions. There is a perception that further increases in the cash rate, increased unemployment and slow retail sales will lead to more insolvency activity in the middle and consumer markets, although evidence of such activity is not yet apparent. It remains to be seen what changes will become apparent in 2011.