May 082017
 

Before it is due to come into effect on 1 September 2017, section 60-20 of the Insolvency Practice Schedule (Corporations) (Australia) is to be amended.

Under the heading “Refining the Insolvency Law Reform Act 2016”, the Minister for Revenue and Financial Services has released draft legislation of amendments to the Corporations Act 2001 and Bankruptcy Act 1966.

The professional association representing insolvency practitioners has welcomed the amendments. The Australian Restructuring Insolvency & Turnaround Association (ARITA) says (on its website 5/5/2017):

The section would (have) require(d) external administrators and trustees to obtain consent from creditors prior to related entities obtaining any profit or advantage from any administration or estate – effectively requiring Insolvency Practitioners to seek creditor approval for their own firms to work on an appointment. We are delighted that Treasury have announced draft legislation specifically to resolve this issue. It is now clear that once remuneration is approved, further approval to share that remuneration with related parties (e.g. an Insolvency Practitioner’s firm or partners) is not required …. ARITA has been working very hard behind the scenes on this under strict confidentiality. The draft legislation is on The Treasury’s website for consultation. This is a significant win for the profession, achieved by ARITA.


Illustration of Change to Corporate Insolvency Law

I have set out below an illustration of the changes that are being made to section 60-20 of the Insolvency Practice Schedule (Corporations). Although “interested parties” have been invited to make a submission regarding the draft legislation by 17 May 2017, it is doubtful whether there will be any change to the draft.

Legend Of Text Colours Used In Illustration:

> black text means existing words;
> this means existing words deleted;
> this means new words added.

60-20 External administrator must not derive profit or advantage from the administration of the company
Deriving profit or advantage from the company
(1) An external administrator of a company must not directly or indirectly derive any profit or advantage from the external administration of the company.

Circumstances in which profit or advantage is taken to be derived
(2) To avoid doubt, an external administrator of a company is taken to derive a profit or advantage from the external administration of the company if:

(a) the external administrator directly or indirectly derives a profit or advantage from a transaction (including a sale or purchase) entered into for or on account of the company; or
the external administrator employs or engages a person to provide services in connection with the external administration of the company; and

(b) the external administrator directly or indirectly derives a profit or advantage from a creditor or member of the company; or
a related entity of the external administrator directly or indirectly derives a profit or advantage as a result of that employment or engagement; and

(c) a related entity of the external administrator directly or indirectly derives a profit or advantage from the external administration of the company.
one of the following is satisfied:

(i) the external administrator does not know, and could not reasonably be expected to know, that the related entity would derive that profit or advantage;

(ii) the creditors, by resolution, agree to the related entity deriving the profit or advantage;

(iii) it is not reasonably practicable in all the circumstances to obtain the agreement, by resolution, of the creditors to the related entity deriving the profit or advantage and the cost of employing or engaging the person to provide the services is reasonable in all the circumstances.

Exceptions
(3) Subsection (1) does not apply to the extent that:

(a) another provision of this Act, or of another law, requires or permits the external administrator to derive the profit or advantage; or

(b) the Court gives leave to the external administrator to derive the profit or advantage.

Note: Subsection (1) would not, for example, prevent the external administrator from recovering remuneration for necessary work properly performed by the external administrator in relation to the external administration of the company, as the external administrator is permitted to do so under other provisions of this Act.

(4) Despite paragraph (2)(c), subsection (1) does not apply to the extent that:

(a) the profit or advantage arises because the external administrator employs or engages a person to provide services in connection with the external administration of the company; and

(b) the person is a related entity of the external administrator; and

(c) one of the following is satisfied:

(i) the external administrator does not know, and could not reasonably be expected to know, that the person employed or engaged is a related entity of the external administrator;

(ii) the creditors, by resolution, agree to the related entity being employed or engaged;

(iii) it is not reasonably practicable in all the circumstances to obtain the agreement, by resolution, of the creditors to the related entity being employed or engaged and the cost of employing the related entity is reasonable in all the circumstances.

(4A) Despite paragraph (2)(c), subsection (1) does not apply to the extent that a related entity of the external administrator directly or indirectly derives a profit or advantage:

(a) from remuneration paid to the external administrator in accordance with section 60-5 of this Schedule; or

(b) from a profit or advantage covered by subsection (4).

(5) Subsection (1) does not apply to the extent that the profit or advantage is a payment that:

(a) is made to the external administrator by or on behalf of the Commonwealth or an agency or authority of the Commonwealth; and

(b) is of a kind prescribed.

Offence
(6) A person commits an offence of strict liability if:

(a) the person is subject to a requirement under subsection (1); and

(b) the person fails to comply with the requirement.

Penalty: 50 penalty units.
Note: A defendant bears an evidential burden in relation to the matters in subsections (3), (4) and (5) (see subsection 13.3(3) of the Criminal Code ).

Effect of contravention of this section
(7) A transaction or any other arrangement entered into in contravention of this section may be set aside by the Court.


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