Andrew Heard

Insolvency laws should encourage rehabilitation

Many readers will likely be familiar with the press articles written over the past few years concerning enquiries into the conduct of  liquidators, the effectiveness of the Australian insolvency regime and most recently, the parliamentary enquiry into the impairment of customer loans.

These enquiries appear to conclude that current insolvency processes and practices are not as conducive to rehabilitating companies as they could and therefore legislation amendments are required.

I don't wholly support this position, particularly as it relates to the traditional SME business failure experienced in our state. That said, we do accept that entering into a formal insolvency appointment within the current legal framework inevitably leads to a loss of economic value and in this way, inhibits the successful restructuring of companies in distress.

In my experience, successful company restructuring is best achieved outside of the current formal insolvency processes. For this to occur directors and advisers of companies are required to engage in the restructuring process earlier. An early involvement helps problems to be diagnosed and a clear and dispassionate assessment of outcomes to be discussed, which can lead to a restructuring that the directors themselves can control. Where the directors have been honest in their business, the process can be very effective in allowing them to get back to business quickly.

Given the current insolvency regime, if the directors consider their financial position from the view that the company is insolvent, or likely to become insolvent, only the voluntary administration procedure can be used as the restructuring tool.

The outcome I draw from this is that there can be effective legislation changes to help reduce the loss of economic value that occurs in a formal restructuring of a company, but those changes are quite some time from being drafted and enacted. In the interim, I continue to encourage directors of companies to view insolvency and restructuring professionals not as gravediggers for the terminally ill company, but as advisers to underperforming businesses that can be turned around.

(Source: www.heardphillips.com.au)

Introduction of safe harbour

In September 2017 beneficial restructuring legislation was passed in Australian Parliament that (when enacted) will enable Australian Corporate Law to strike a better balance between the protection of creditors and encouraging honest, diligent and competent directors to innovate and take reasonable risks.

The safe harbour for directors that has been created focuses on the behaviour of directors in trying to turn their company around.                      

Provided it can be demonstrated that directors were developing and taking a course of action that was reasonably likely to lead to a better outcome for the company than proceeding to immediate external administration, directors will be shielded from an insolvent trading claim if their efforts to turn around the company failed.  

How that is demonstrated will vary on a case-by-case basis.  

Safe harbour will only be available to directors who ensure their company complies with its obligation to pay its employees (including their superannuation) and is meeting its tax reporting obligations and complies with a range of formal obligations to an external administrator during a subsequent external administration if the company had been unsuccessfully turned around.

Government crackdown on illegal phoenixing

Illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.

Not all company failures will involve illegal phoenix activity, however where there are deliberate attempts to avoid liabilities by shutting down and transferring some or all of the assets to another company, the process and the decisions made by directors will come under close scrutiny for illegal actions.

The Turnbull Government has recently announced that it is intending to take additional action to crack down on illegal phoenixing activity and this sounds a warning to company directors thinking of restructuring options.

The intended reforms will include the introduction of a Director Identification Number (DIN) and a range of other measures to both deter and penalise phoenix activity.

The DIN is intended to interface with other government agencies and databases to allow ASIC to map the relationships between individuals and entities and individuals and other people (possibly including advisers). This will make the identification of phoenixing activity much easier.

 Other measures being contemplated include:

• creating a specific phoenixing offences to enable easier prosecution;
• improving the ATO’s power to recover monies from suspected phoenix operators;
• increasing the range of corporate taxes that directors can be made personally liable for; and
• reviewing who can act as liquidator for high risk individuals.

It is clear that there is a much strengthened will in the Government to stamp out illegal phoeninxing activities, and announcements from Government made in September 2017 lead us to conclude that meaningful law reform in this area can be expected.

(Source: www.heardphillips.com.au and press release from Kelly O’Dwyer, the Minister for Revenue and Financial Services )