Chapter 11 for Australia?

Innovation Minister Christopher Pyne has declared changes to insolvency laws will be part of the innovation statement expected to be released by the government next month.

It is claimed business groups have lobbied the government to move Australian insolvency laws more toward the US model.

In our view it is unlikely the government will move Australian insolvency law too far toward the US Chapter 11 court driven debtor in possession model. The greatest criticisms of Australian insolvency law by stakeholders are the cost of the process, the destruction of value, the failure to save businesses and the meagre return if any to creditors. Chapter 11 is the subject of the same criticisms in the recent report of the American Bankruptcy Institute’s commission to study the reform of Chapter 11. Further, we believe a Chapter 11 regime does not lend itself to the vast majority of corporate insolvencies in Australia; this being those within the SME sector.

The director safe harbour proposal is being suggested as a potential recommendation to be addressed in the forthcoming statement. This proposal would shield directors of insolvent companies from personal liability to enable them to consult with a restructuring and recovery professional to plan either an operational or financial restructuring of the business or company.

Whilst considering these options perhaps consideration could be given to following changes to the existing system that may facilitate the survival of businesses and increase outcomes for all stakeholders.

  • Removing personal liability from company administrators for debts incurred during a voluntary administration unless the administrator is found to have acted either dishonestly or negligently. We believe this proposal is likely to decrease the costs of the administration as the administrator may be able to place greater reliance on the financial control systems of the distressed business.
  • We encourage consideration of a restriction on the right to enforce ipso facto clauses during an administration. That is giving the administrator of a company the option of deciding whether to continue with a contract during the course of an administration rather than counterparty to the contract.

Some commentators have highlighted changes made to UK insolvency law that are said to have encouraged the development of a turnaround culture. In the UK the rights of a secured creditor to appoint a receiver and manager were restricted in favour of providing the secured creditor with the capacity to appoint an administrator or replace an administrator appointed by the company.  

The pending insolvency reforms initiated under the Gillard Government and adopted by the Abbott Government were feared to be the government’s only interest in insolvency law reform. The recent reportage suggests there may be still life in this issue, with more developments to come.

Insolvency law has been touched on by a number of government business reviews. Insolvency law reform has enjoyed just piecemeal consideration to date. Insolvency law is a fundamental building block of a market economy.  We consider a full independent review of insolvency law is still warranted despite the lack of appetite shown to date by the government in tackling this critical issue.

If you have any questions in relation to this article, please contact your local RSM adviser or David Kerr.

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