Australia

Corporate Insolvency

In October 2005, the Government announced an integrated package of reforms to improve the operation of Australia's insolvency laws. There are four broad themes to the reforms:

• Strengthening creditor protections, primarily through enhancements to the General Employee Entitlements and Redundancy Scheme (GEERS). A government funded employee entitlements scheme was first introduced in January 2000 and since then, over 54,000 Australian employees have received in excess of $661 million in assistance for entitlements lost due to the insolvency of their employer;
• Deterring misconduct by company officers, primarily through the establishment of an assetless administration fund. The fund will be administered by ASIC and will be paid to private sector insolvency practitioners to enable them to conduct preliminary investigations and report suspected wrongdoing to ASIC. ASIC will also be funded to carry out follow-up enforcement action, particularly to deter phoenix activity;
• Improving the regulation of insolvency practitioners; and
• Fine-tuning the voluntary administration procedure.
  Full details of the proposed reforms are available at
  http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=1022

It is anticipated that draft legislation will be circulated for public comment in early 2006.

ASIC introduced new policy on the regulation of insolvency practitioners in late 2005. The policy statement can be viewed at:
http://www.asic.gov.au/asic/asic_infoco.nsf/byheadline/Insolvency+and+liquidators+homepage?openDocument

Key Legislation

• Corporations Act 2001
• Corporations Regulations 2001
• Australian Securities and Investments Commission Act 2001

Insolvency Procedures

Corporate Insolvency procedures

All insolvency procedures applying to corporate entities are provided for in Chapter 5 of the Corporations Act and Regulations. In summary they are:

• Corporate arrangements and reconstructions (Part 5.1);
• Receiverships and controllerships (Pt 5.2);
• Administrations of a company's affairs with a view to executing a deed of company arrangement (Pt 5.3A);
• Winding-ups (Members' voluntary; creditors' voluntary and court appointed windings-up, including provisional liquidation) (Pts 5.4, 5.4A, 5.4B, 5.5).

Corporate arrangements and reconstructions aim to obtain a binding agreement whereby the legal rights of the creditors and/or shareholders in relation to the company are modified or adjusted. This is an alternative to liquidation but the procedure is also available to solvent companies. The procedure involves a preparation of scheme documents; an initial court application; meetings of creditors and members (whichever are applicable) and final court approval.

Receivers and receivers and managers are appointed by secured creditors and act for those creditors. Those who act in such a capacity must be registered with ASIC. Controllers who are not receivers or receivers and managers also act on behalf of the secured creditors but they are not registered with ASIC.

Voluntary administration was introduced in 1993. It allows companies to come to arrangements with their creditors without court approval. The object of the procedure is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business continuing in existence, or if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. Generally, the directors of the company appoint an administrator when they determine a company is insolvent or likely to become insolvent. The directors are given an opportunity to propose a deed of company arrangement. Creditors rights are modified until creditors have had a chance to consider the proposal. The rights of creditors holding charges over the whole or a substantially the whole of company property are dealt with separately in the law. The administrator (who must be registered with ASIC) investigates the company's affairs, convenes meetings and reports to the creditors. The affairs of the company are in the hands of the administrator until a decision is made on its future. The administrator must express an opinion as to whether the creditors should support the deed of company arrangement, hand the company back to its directors or put the company into liquidation. If a deed of company arrangement is accepted, then a deed administrator is appointed to administer the terms of the deed.

Windings-up. There are three types of winding up procedure. A members' voluntary winding-up controlled by the members applies only to solvent companies. A creditors' voluntary winding up is controlled by creditors. A court winding-up is controlled by the court. All types of winding up are aimed at the ultimate dissolution of the company following an orderly process.

Voluntary administration is now the most commonly used type of insolvency procedure.

Personal Insolvency procedures

see ITSA

Roles

Role played by Government

ASIC regulates all corporations within Australia as well as financial system participants.

Included as part of its broad role, ASIC regulates the corporate insolvency system. It:

• Registers and regulates the activities of private sector practitioners as registered liquidators;
• Investigates allegations of misconduct against registered liquidators and refers cases to a specialist disciplinary tribunal (the Companies Auditors and Liquidators Disciplinary Board).
• Receives reports from receivers, controllers, administrators and liquidators and follows up allegations of misconduct by company officers.

ASIC does not administer any insolvency cases directly.

Role played by private sector practitioners

Private sector practitioners become registered with ASIC and are then able to be appointed as receivers, administrators and liquidators in individual cases. When they become registered with ASIC they become known as registered liquidators. There is a seperate category of liquidator, called 'Official Liquidators' who are the only liquidators permitted to conduct court windings-up.

It is not compulsory for registered liquidators to be a member of a professional accounting body or the Insolvency Practitioners Association, although many choose to become members. These bodies set some professional standards applicable to their members.

The criteria that must be met to become a registered liquidator and the role and duties of appointees to particular cases are set out in the Corporations Act.

Role played by the Court

The Court has a general oversight role in the corporate insolvency system. In addition, it has specific powers in relation to specific appointments. A court can order (a) that a practitioner remedy any act or omission or make good any loss; (b) amend the amount of remuneration a practitioner can draw; or (c) remove an administrator from a particular case.

The Companies Auditors and Liquidators Disciplinary Board (CALDB) is a specialist tribunal that hears cases relating to the conduct of registered liquidators. This body has the power to suspend or cancel the registration of a practitioner. It can also admonish or enter into an undertaking with a practitioner subject to an adverse finding. The CALDB cannot fine a practitioner for any wrongdoing or order that the amount of remuneration drawn by a practitioner should be adjusted. The Board cannot substitute its own decision for that of a practitioner.

Decisions made by ASIC to reject a registration application or a decision made by the CALDB to cancel a liquidator's registration can be appealed to the Administrative Appeals Tribunal (AAT) and ultimately, the Federal Court.

Both the Federal Court and State Supreme Courts can appoint liquidators in court windings-up. Practitioners are required to give their consent prior to being appointed. Those appointed to court windings-up must be official liquidators. ASIC registers a subset of registered liquidators as official liquidators.

At a Glance

Does the corporate insolvency system in Australia allow for:

1.	Different procedures for the insolvency of individuals and the insolvency of companies?
2.	Creditors to accept an arrangement outside of formal bankruptcy/liquidation proceedings?
3.	Priority payment for employee creditors?
4.	Priority payment for taxation debts?
5.	Automatic disqualification of directors of failed companies from managing other companies?
6.	Recognition of insolvency proceedings being conducted in another jurisdiction?
7.	A government agency to undertake insolvency administration work?
8.	Some form of licensing of private sector practitioners?
9.	A review of the remuneration claimed by an insolvency practitioner by either a court or other government regulator?
10.	A mandatory scale of fees applicable to insolvency practitioner remuneration?
11.	Surveillance of the work of private sector practitioners by a government regulator?
12.	Collation of insolvency statistics by a government regulator?