This Breakfast Seminar is proudly sponsored by

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1 This Breakfast Seminar is proudly sponsored by

2 MICHAEL MURRAY LEGAL DIRECTOR, ARITA A CRITICAL COMPARISON OF UNITED KINGDOM AND AUSTRALIAN INSOLVENCY LAW 15 APRIL 2015 HENRY DAVIS YORK SYDNEY

3 Overview Australian insolvency law, personal and corporate, comes from English law. The principles and structures are largely similar, based on the UK Cork Report, and the Australian Harmer Report. Major differences are in practitioner (IP) regulation, government involvement, some aspects of the law, and culture. England s focus is on itself, and Europe, and the US, and less so on Australian insolvency law and practice Australia s regime is lagging. and ARITA is pushing for reform But how are the regimes to be measured against each other anyway? 3

4 1. Country and legal structure In an initial comparison with the UK, Australian insolvency law and practice suffers from two major initial hurdles: i. Australia is a federation, with state laws eg WHS, transport, environmental, gaming often inconsistent or intruding; and ii. It has separate bankruptcy and corporate insolvency laws Bankruptcy Act 1966, Corporations Act 2001 (Ch 5), and separate government departments and ministers. Score: Australia 1 UK 2 4

5 2. Government role Australia has a government bankruptcy trustee the Official Trustee in Bankruptcy (80% of estates) with work also done by private trustees (20%). But it has no government liquidator, all corporate work is done by IPs, paid or unpaid, or is left undone. UK has a government trustee and liquidator - the Official Receiver, which conducts estates and which also refers estates to IPs. Score: Australia 1 UK 2 5

6 3. The Insolvency Courts Australia has quality judiciary High Court (personal and corporate), State Courts of Appeal (corporate), Supreme (corporate), Federal Court including appeals (personal and corporate), the Family Court, then the lower courts. UK has quality judiciary Supreme Court, Courts of Appeal, High Court, then the lower courts. Score: Australia 1 UK 1 6

7 4. Culture Australia s cultural view of business failure and non-payment of debt has been described as punitive, feudal, where creditors were the wealthy and powerful and based on Australia s island culture, where we overly regulate to protect. The entrepreneurial US approach that if you haven t been in Chapter 11 you ve never been in business, may not yet be accepted here? But what of an English judge s saying directors would be cowardly if they too readily appointed an IP? Score: Australia 1 UK 2 7

8 5. The Professions Australia has quality professions lawyers are regulated; IPs are licensed and regulated only by the two separate government regulators ASIC and AFSA, and regulated to a lesser extent by ARITA, CAANZ, CPA UK has quality professions though the entry point is more varied - lawyers are also regulated; IPs are regulated by the several professional bodies IPA, ICAEW, ACCA, SRA and more who are themselves regulated by the government Insolvency Service. Score: Australia 1 UK 1 8

9 Regulatory structures compared The Australian approach to regulation ASIC AFSA ARITA insolvency practitioners The English approach Insolvency Service Professional body/bodies insolvency practitioners 9

10 6. Trends Australia has falling numbers of bankruptcies, including even nonbankruptcy Debt Agreements, and overall figures are down dramatically; along with corporate insolvencies. Banks are quiet. There is some focus on workouts, restruturing advice, all avoiding formal insolvency, in both personal and corporate. UK also has falling personal insolvency numbers, made up to some extent by IVAs; and also falling corporate insolvencies. Banks are quiet. A large focus on restructuring with a significant aim to avoid formal insolvency. Both economies are flat and their governments are trying to inspire entrepreneurial activity : Productivity Commission, British Business Bank. Score: Australia 1 UK 1 10

11 7. Personal insolvency Australia has 3 year bankruptcy up to 8; income contributions; nonbankruptcy arrangements (debt agreements); accessible courts, including to the regulators, a focused regulator, increased internet based approach, but remuneration and funding difficult. UK has 1 year bankruptcy; income contributions; non-bankruptcy IVAs; lack of access by regulator to the courts, increased internet based approach, but remuneration and external funding is difficult; and bankruptcy tourism. Voidable transactions recovery provisions are similar. Score: Australia 2 UK 2 11

12 8. Restructuring options Australia has its voluntary administration regime (Part 5.3A), initiated by the directors, comparable to the UK. Its outcomes are problematic 5-8c/$, including business rescue. Part 5.1 schemes are used, but less frequently. Pre-insolvency workouts exist, more in the larger companies. Litigation funding is available, but less so debtor finance. The UK has its similar VA regime, and CVAs for smaller companies, and a more significant use of schemes, and a greater effort to avoid formal appointments. Litigation funding is potentially problematic see the Jackson Report. Score: Australia 1 UK 2 12

13 9. Administrative receiverships Australia s retains the right of a secured creditor to appoint a receiver Corporations Act Part 5.2; the creditor could appoint an administrator but rarely does; the receivership will often run in parallel with a separately appointed administrator or liquidator; the receiver is accountable to the secured creditor but has serious obligations on sale s 420A. UK offers only limited rights of a secured creditor to appoint a receiver; the administrator appointed by the directors has obligations to the company and all creditors: Sch B1 [3] Insolvency Act From the perception of the community, directors, creditors and vis a vis remuneration, this is preferable? In practice and in law, has it made much difference? Score: Australia 1 UK 2 13

14 10. ipso facto or termination clauses In neither UK nor Australia are these prohibited, as they are under the US Bankruptcy Code, save for: o Australia, in bankruptcy; in corporate, some essential services, and leases and rent in voluntary administration. o UK, some essential services, and leases and rent in voluntary administration; and, now, significantly, internet services. ARITA sees this as an impediment to restructuring, and is high on its law reform list. Score: Australia 1 UK 1 14

15 11. Insolvent trading v wrongful trading In the UK, the director must be shown/ought to have known or concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, but the directors may show they took every step to minimise the potential loss to creditors as they ought to have taken: s 214 Insolvency Act An Australian director is liable, if an insolvent company incurs a debt, and there are reasonable grounds for suspecting its insolvency, for failing to prevent the company from incurring that debt: s 588G Corporations Act 2001 ARITA sees s 588G as an impediment to restructuring, and it is high on its law reform list Score: Australia 1 UK 2 15

16 12. Tax - Australia Australia has a particular tax regime: Directors can be personally liable for unpaid employee taxes if they either fail to pay, or fail to put the company into insolvency If the ATO has to repay a preference, the directors must repay the ATO: s 588FGA. The purpose of this is to recompense the ATO for the loss of its priority in 1993; and to induce directors to face up to insolvency and appoint an IP. Does it work? Yes, but if the ATO enforced more, it would be a significant insolvency regulator, more so than ASIC. 16

17 Tax - UK Such a regime or legal connection between insolvency and directors tax obligations does not exist in the UK. Perhaps it should, given the significance of tax liabilities in insolvencies; unpaid tax is a prime indicator of insolvency.. Score: Australia 2 UK 1 17

18 13. Independence Australia is strict about an IP s independence, based more on perception; disclosure is not a cure; and all relevant relationships and indemnities must be disclosed in writing. Hence pre-packs could not be handled by the one IP; prior tax or business advice by the firm could prevent an appointment. UK is less strict, its codes SIP 16 - perhaps provide means to navigate through concerns about independence. Comment: there are the commercial realities of a complex society, IPs are professionals bound by ethics and law, reasonable perception should prevail: ASIC v Franklin. Score: Australia 2 UK 1 18

19 14. Pre-packs Australia resists these because they are less transparent, they do not involve the unsecureds, they compromise independence, they focus on a commercial outcome only, and they threaten commercial and IP integrity. UK uses these because they recognise the need to try to preserve the business, and employment, with a good commercial outcome, and an IP can handle the conflict, and creditors are out of the money anyway. Courts endorse them. UK is in the process of trying to ensure their integrity Score: Australia 1 UK 1 19

20 15. Schemes of arrangement Used mainly for large companies often as a means of resolving a complex liquidation, HIH Insurance, or in their own right Centro, Channel 9. Their expense and time were a reason for the introduction of voluntary administration. They are now seen useful with possible law reforms proposed, eg a moratorium. UK has more opportunity to use schemes, in a larger more complex market; the courts take jurisdiction readily; and UK jurisprudence is more developed. Score: Australia 1 UK 2 20

21 16. Elements of US Ch 11 Australian law contains no particular elements of Ch 11 formal restructuring requires insolvency, there is no debtor in possession, prompt sales only with court permission, process is quick and covers about 4-5 weeks, no broad cramdown, and no court hearings or representations, less cost. UK also has no elements of Ch 11 formal VA requires insolvency, some limited debtor in possession with CVAs, prompt sales only with court permission, process covers about 4-5 weeks, no cram-down, and no court involvement; the real comparison in the UK is with schemes. Comment: there are political comments and reports recommending consideration of elements of Ch 11 in Australia. The profession is resistant. Should it be? Score: Australia 1 UK 1 21

22 17. Technology Australian law is limited in its use of technology in insolvency; the FSI Report endorses a need for greater focus. AFSA is leading the way in einspections of trustee files, and the prospect of cloud based administrations. Both ASIC and AFSA provide on line notices. UK has recently legislated for more internet based communications, and meetings, filings. Increased focus on digital by default. On line notices available. Score: Australia 1 UK 2 22

23 18. International Australia retains letters of request, has adopted the Model Law, respects international treaties and impacts, has only limited crossborder issues Ackers v Saad - has general regard for international developments, but is not bound by them, and pays limited regard to its Asia-Pacific region. UK retains letters of request etc, has adopted the Model Law, respects international treaties and impacts, and has particular regard for its EU obligations by which it is bound; it readily accepts jurisdiction but its acceptance of foreign claims is the subject of Supreme Court attention: Rubin v Eurofinance. 23

24 o o o And how do we rate internationally? World Bank Report 1. Finland, 2. Japan, 3 Germany, 4. USA UK 14. Australia Is this the best assessment available? Or how otherwise do we test and compare the effectiveness of insolvency regimes? Score: Australia 1 UK 1 24

25 19. Statistics, research and knowledge of the outcomes Australia s knowledge of how its regime works is second rate, due to inadequate statistics and empirical research, the responsibility mainly of government, but also academia and the professions; and the attention given by government is limited and uninterested. But broader access to data is under review UK s knowledge of its regime is better, including its government insolvency and industry statistics; its has a focused policy department which commissions research; academia is more active; professional associations are better resourced. Attention given by government is more decisive. Open access to data is imminent. Score: Australia 1 UK 2 25

26 20. Where are we each at? Australia: we are awaiting the Productivity Commission, Treasury/government consideration of the FSIR, banking reforms, a decision on the PPSR, and more. It is being suggested that we need a Harmer Inquiry Mark 2 to pull all the current mixed issues together, and in what is a new market and economy from the last review, over 25 years ago. UK: has already legislated with the Deregulation Act 2015 and the Small Business Enterprise and Employment Act 2015; along with prepack-pools, revision of SIPs, opening up of company data, and consideration of EU restructuring directions. Score: Australia 1 UK 2 26

27 21. Summing up In my view, the UK is ahead because of its less complex country and regulator structure, despite its more complex professional body regime, and because of its greater government and regulator acceptance of funding and investigation responsibility, and its more pragmatic and less retributive culture, and greater public interest and involvement in progressing reform, beneficially influenced by Europe. Australia is less focused and resourced, and its reaching for higher standards, and focus on fault, may be too much at the expense of commercial outcomes. The discipline of insolvency and business rescue needs a patron, with resources, to push a more positive and proactive message, to raise the level of debate and promote the fundamentals of the regime. It remains a lucky country, pejorative meaning intended. Total Score: Australia 20 UK 28 27

28 Summing up. If the Australian government is not acting, then it may be a matter for the professions to push ahead to the extent possible, by way of broadening their professional codes the ARITA Code - and further extending and developing insolvency law and practice; the innovative use of s 444GA being one recent example. The UK profession took that approach with pre-packs, to the point of their now being accepted by the courts, albeit with qualifications - the UK legislature is only now trying to catch up; and with schemes of arrangement, with the courts readily broadening their jurisdictional catchment. 28

29 Contact Michael Murray Legal Director, Australian Restructuring Insolvency & Turnaround Association GPO Box 4340, Sydney au.linkedin.com/in/michaelmurray7 m e mmurray@arita.com.au or London, New York, Vienna, Berlin. 29

30 Michael Murray ARITA 30