Sep 032014
 

The Australian Restructuring Insolvency and Turnaround Association (ARITA) has released its second-round submission (26/8/2014) to the government’s Financial System Inquiry (FSI). ARITA has more than 2,200 members practising in, or interested in, the insolvency and restructuring industry. It’s full 32 page submission can be seen HERE. The Executive Summary from the submission appears below:

ARITA submission Part 1

ARITA-exec-summary-part2

ARITA-exec-summary-part3

 

Aug 292014
 

Background

In the brief External Administration section of its Interim Report in July 2014 the Financial Systems Inquiry (FSI) aired criticisms of Australia’s external administration regime as it applies to small and medium companies (SMEs), and sought views from interested parties. (See my previous blog on this subject.) Specifically it asked for views on “the costs, benefits and trade-offs of the following policy options or other alternatives: 1. No change to current arrangements. 2. Implement the 2012 proposals to reduce the complexity and cost of external administration for SMEs.” Also, the FSI sought more information in response to the question, “Is there evidence that Australia’s external administration regime causes otherwise viable businesses to fail and, if so, what could be done to address this?” The following is ASIC’s response to these questions, taken from it’s second submission to the FSI  on 26/8/2014:


ASIC logo

 Response by Australian Securities and Investments Commission (ASIC)

(Note: Headings added by author)

CLICK HERE to see copy of full ASIC second-round submission

The anticipated benefits of the 2012 insolvency law reform proposals

(Author’s note: These proposal are in the Insolvency Law Reform Bill 2013 )

Para.468     ASIC welcomes the anticipated benefits of the Australian Government’s 2012 insolvency law reform proposals, which largely aim to harmonise and align the systems of corporate and personal insolvency by introducing: (a) a streamlined model for winding up or restructuring small- and medium-sized enterprises; and (b) a review of current external administration options for restructuring large and complex, financially distressed companies to consider whether Australia could adopt attributes of external administration processes in other jurisdictions to achieve better outcomes.

Para.469     However, we note that these proposals do not fully address the issue of perceived complexity in Australia’s insolvency regime, or the issue of the costs of the regime. The law reform proposals arose out of the 2010 Senate inquiry into the conduct of insolvency practitioners and ASIC’s involvement. The 2010 Senate Inquiry’s terms of reference reflected concerns about registered liquidator conduct and ASIC’s supervision of registered liquidators, rather than more fundamental policy issues.

Para.470      The vast majority of external administrations occur in the small- and medium-sized enterprise market. For these companies, the opportunity exists to consider how the winding up and restructuring processes might be further streamlined to reduce complexity and costs. Initiatives to reduce costs while appropriately remunerating registered liquidators for their work, increasing competition and ensuring consistency in external administration processes would also help maximise the potential return to creditors and help build confidence in the insolvency regime.

Alternative funding models and professional standards

Para.471     ASIC suggests that in considering how the external administration process can be streamlined for small- and medium-sized enterprises, consideration should be given to: (a) alternative funding models, as discussed in ASIC’s main submission to this inquiry and which are the subject of recommendations made by the Senate inquiry into the performance of the Australian Securities and Investments Commission. The funding model affects, among other things, the supervision of registered liquidators and, potentially, their remuneration; and (b) professional standards and regulation, including those relating to investigation and reporting to creditors and to ASIC.

External administration regime and business failure

Para.472     ASIC is not aware of empirical evidence supporting the view that Australia’s external administration regime causes otherwise viable businesses to fail. If empirical evidence supporting the contention that viable companies unnecessarily enter external administration does exist, ASIC believes the Australian Government could consider legislative change that would address this, and that would achieve better outcomes for creditors.

Damage to entity value

Para.473     We are aware, however, of concerns in the market that unnecessary external administrations, which destroy entity value and result in significant cost, are the result of: (a) a lack of a ‘safe harbour’ from what are said to be stringent insolvent trading laws (which can make a director personally liable for a company’s debts); and (b) the positive obligation/duty on directors to appoint an external administrator if their company is insolvent, or might become insolvent.

Para.474     We acknowledge the possibility that the formal appointment of an external administrator can also reduce the value of a company’s business, and note that there is anecdotal evidence to support this view.

Voluntary administration as a ‘quasi liquidation’

Para.475     ASIC’s statistics on voluntary administration and deeds of company arrangement suggest that, for small companies, there is often not a viable business worth saving as many companies that enter voluntary administration end up in liquidation. This is supported by a recent review of 72 sample deeds of company arrangement (85% of which related to what might be described as small company insolvencies). The review found that 72% of these deeds were compromises akin to liquidation and involved no, or very limited, trading on of the business under the deed (although the dividend return paid to creditors was greater than that estimated if an immediate winding up of the company had occurred). In other words, the statistics show that companies often use the restructuring option of voluntary administration as a ‘quasi liquidation’.

Continuation of viable businesses

Para.476      The current insolvency legislation provides for the continuation of a viable business. Where there is a viable business of a company in liquidation, the liquidator has the ability to sell that business. Alternatively, the liquidator can appoint a voluntary administrator to facilitate the company’s restructuring with a view to its continued operation.

Reasons often cited as inhibiting corporate restructuring

Para.477     We note that four main reasons are often cited as inhibiting corporate restructuring in Australia: (a) the perceived stringency of our insolvent trading laws; (b) destruction of value by ipso facto clauses in contracts, which enable creditors to pursue enforcement action or enforce their contractual rights. This issue impacts on the extent of any moratorium on creditor claims during the period of a company’s restructuring; (c) a lack of formal ‘pre-pack sale’ regulation, which allows a sale of the business, or some company assets, to be negotiated prior to the appointment of an external administrator; and (d) the inability to bind third parties.

Para.478      In principle, we consider these matters worthy of further discussion and consultation noting they have proved contentious in the past.

US Chapter 11 style regime

Para.479     In terms of any legislative change, ASIC does not advocate a wholesale adoption of a US Chapter 11 style regime or other processes. However, we note that the US Chapter 11 regime, along with the administration regimes in the United Kingdom and Canada, might be worth examining to identify elements that could address the issues claimed to inhibit effective corporate restructuring in Australia.

Consider different laws for large and small companies

Para.480      We consider that a ‘one size fits all’ approach to the external administration or reorganisation of failed and distressed entities may not be appropriate. The framework for external administration needs to take account of the fact that issues affecting large proprietary and public companies differ from those affecting small- and medium-sized enterprises.

Para.481     Legislative changes to facilitate corporate rehabilitation might therefore consider the different characteristics of large and small companies, and policy settings may need to be specifically tailored for these sectors, in order to promote deregulation, facilitate efficient reallocation of resources and improve competition.


Jul 172014
 

Is there evidence that Australia’s external administration regime causes otherwise viable businesses to fail and, if so, what could be done to address this?

This is the question being asked about external administrations in the Interim Report of the Financial System Inquiry (FSI) (July 2014). The FSI says it would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:

  • No change to current arrangements.
  • Implement the 2012 proposals to reduce the complexity and cost of external administration for SMEs. [See below for details of these proposals.]

The brief section of the FSI’s report dealing with external administration may be viewed HERE.  (The full report in pdf format is available HERE.)

David Murray

David Murray, FSI chairman. Artwork from bluenotes.anz.com

US Chapter 11 regime?

Adoption by Australia of a US Chapter 11 style form of external administration could still be an option, although the FSI has already given it the thumbs down, as this extract from its interim report shows:

“The Inquiry considers adopting such a regime would be costly and could leave control in the hands of those who are often the cause of a company’s financial distress. Capital would be maintained in a business that is likely to fail, which would restrict or defer the capital from being channelled to more viable and productive enterprises. Adopting such a regime would also create more uncertainty for creditors by limiting their rights. The Inquiry notes that Chapter 11 has rarely enabled businesses to continue as going concerns in the long term. There is little empirical evidence that Australia’s voluntary administration process is causing otherwise viable businesses to fail. The Inquiry would like stakeholders to provide any empirical evidence that supports that view.”

Second round of submissions to FSI

Submissions in response to the Interim Report are due by 26 August 2014. Submissions can be lodged online using the Financial System Inquiry special facility,  or may be lodged by email or post: fsi@fsi.gov.au or Financial System Inquiry,  GPO Box 89,  Sydney NSW 2001.

Insolvency reform proposals of 2012

The 2012 insolvency reform proposals to which the FSI specifically refers in its request for second round submissions concern:

  1. Registration and discipline of insolvency practitioners (See note 1 at end of post for more information).
  2. Specific rules relating to external administrations (note 2).
  3. Regulator powers and miscellaneous amendments (note 3).

The Explanatory Material issued with the Insolvency Law Reform Bill  on 19 December 2012 can be viewed HERE.

“Thought leadership”

The Australian Restructuring Insolvency & Turnaround Association (ARITA) (previously known as the Insolvency Practitioners Association) says it has embarked on “a major project to drive thought leadership around our insolvency regime”.  It is asking insolvency practitioners who want to make a submission to FSI to work with the professional association:

“ARITA has embarked on a major project to drive thought leadership around our insolvency regime.  Along with some of ARITA’s excellent previous work, significant new work has already been completed and ARITA members will soon be asked for comment on key aspects of our policy positions. This work is, obviously, well timed to support the FSI request for submissions. ARITA will actively work to represent the views of its membership and the profession to the FSI. We would urge all members and their firms to work with ARITA on providing strong and consistent representation to the FSI. If you or your firm is looking at making its own submission, please let ARITA know so that we can collaborate with you.”  ARITA Press Release 15/7/2014



NOTES re Proposals in December 2012 Insolvency Reform Bill:

Note 1: Registration and discipline of insolvency practitioners

Common rules regarding:   the physical registers of insolvency practitioners;  registration and disciplinary Committees.

Note 2: Specific rules relating to external administrations

Common rules regarding: •

  • Remuneration and other benefits received by the insolvency  practitioner;
  • The handling of administration or estate funds;
  • The provision of information by insolvency practitioners during an external administration or bankruptcy;
  • The meetings of creditors during an external administration or bankruptcy;
  • Committee of inspection formed as part of an external administration or bankruptcy; and
  • The external review of the administration of an estate or insolvency.

Note 3, part (a): Regulator powers and miscellaneous amendments

Provide ASIC with further powers to assist it in its oversight of the regulation of registered liquidators. In particular, the Bill amends the ASIC Act to:

  • enable ASIC to require the provision of information and books as part of an ASIC proactive surveillance program;
  • enable ASIC to provide administration information to a person with a material interest in the information; and
  • improve the transparency of ASIC oversight of the corporate insolvency industry.

Note 3, part (b): Regulator powers and miscellaneous amendments

Amend the Bankruptcy Act to enable ITSA to provide information relevant to the administration of the corporate law to ASIC.

Note 3, part (c): Regulator powers and miscellaneous amendments

A range of miscellaneous amendments, including:

  • amending the Acts to strengthen the penalties for breach of a bankrupt’s or directors’ obligations to provide a report as to affairs (RATA), or the books of the company, to an insolvency practitioner;
  • amend the Corporations Act to provide a process for the automatic disqualification of directors that have failed to provide a RATA, or the books of the company, to a registered liquidator until they have complied with those obligations; and
  • amend the Acts to enable the assignment of an insolvency practitioner’s statutory rights of actions.