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The practise area of bankruptcy & insolvency is in constant flux. 2020 and 2021 saw some of the most significant reforms to Australia’s insolvency framework in 30 years, as businesses battled financially with the fallout from the COVID-19 pandemic.

Background – bankruptcy and insolvency

Insolvency reforms, commenced on 1 January 2021 created a new simplified liquidation and debt restructuring process for small companies/SMEs. They have provided directors with the control and flexibility they need to restructure their business or wind-up operations.

In essence, the reforms have enabled viable businesses to survive or wind up and move on more effectively, thereby maximising any returns available for shareholders and creditors.

It is unlikely that the same insolvency reform will occur in 2022 as the economy steadily recovers from COVID-19 and businesses adapt to working in a post-pandemic environment with both the challenges and opportunities it brings. However, the government has announced several bankruptcy & insolvency measures they seek to implement.

One-year bankruptcy

The Attorney-General has proposed to shorten the automatic bankruptcy term from 3 years to 1 year. This amendment was proposed in 2017, 2021 and most recently in February 2022. The advantages of a reduced term of bankruptcy are that it permits a party to no longer to declare bankruptcy and allows them to be directors.

However, the proposal may prohibit bankrupts from being eligible for the reduced term where, in the last ten years, they have:

  • been bankrupt,
  • been banned as a company director,
  • had their bankruptcy extended through an objection to discharge, or
  • have been convicted of offences.

The treatment of trusts

Treasury is seeking an evaluation of the treatment of trusts under insolvency law. Australia’s current corporate insolvency laws do not convey a transparent regime to cover the management of companies or corporate trusts during insolvency. An administrator typically must apply to the court for directions that can dissipate the funds obtainable for creditors. The uncertainty concerning trusts may impede investments in corporate trusts due to insufficient transparency or inhibit distressed companies from being able to apply the insolvency framework to turn around their business due to the court expenses involved.

The government’s consultation process aims to clarify:

  • when a trust is insolvent,
  • the role of an external administrator,
  • how trust liabilities and assets are to be administered, including a statutory order of priorities, and
  • removal of a trustee.

Of importance, the government pledged $7 million in the recent federal budget for these reforms.

Review of safe harbour provisions

Safe harbour provisions have been in force for four years in Australia and warrant review.

Accordingly, in 2021, Treasury sought stakeholder and industry feedback on the safe harbour regime via a formal consultation process. Some of the questions asked by the Treasury include whether the pre-conditions for a director to access safe harbour are appropriate and the advisers’ exact role.

Australia’s insolvency laws enforce a duty on company directors, under s 588G of the Corporations Act, to obstruct a company from trading whilst insolvent. Yet, the safe harbour provisions (ss 588GA and 588GB) are an exception in permitting financially distressed businesses to continue operating whilst reconstituting their affairs. The

The government allocated $0.8 million in the federal budget for these reforms in March 2022.

Improving schemes of arrangements

A scheme of arrangement involves a corporate restructuring process regulated under Pt 5.1 of the Corporations Act. You can use the scheme to assist financially distressed but solvent companies to restructure their balance sheets to avoid voluntary administration and liquidation.

Treasury is seeking feedback on whether it should apply an automatic moratorium (prohibition) to creditor claims or enforcement actions throughout the formation of a scheme. A moratorium protects against creditor actions and purveys financially distressed companies with some breathing space during the process.

Unfair preference claims and assets administrations

An unfair preference may arise when a company pays a particular creditor, or creditors, shortly before going into bankruptcy. If the payment puts those creditors at an advantage over other creditors, it may come across as an unfair preference.

The government strives to simplify the rules regulating unfair preference claims by liquidators. Through creditors who act honestly, the government will not pursue if the transaction is under $30,000 or made more than three months before the company enters administration. Thus, the government can no longer recoup the payment. These adjustments are consistent with the unfair preference rules under the simplified liquidation process, which commenced in 2021.

An assetless administration occurs when a company has little or no, assets remaining when entering liquidation. The Assetless Administration Fund, initiated by the government, is orchestrated by ASIC. It funds preliminary reports and investigations by liquidators into the failure of companies with no or few assets, explicitly focusing on curbing illegal phoenixing and fraudulent activity.

Additionally, it can fund a liquidator to take action to recoup assets where possible.

In the latest federal budget, the government declared a total of $22 million for reforms to unfair preference rules, comprised of $20 million allocated to the Asset Administration Fund from 1 July 2023. As a result, liquidators can apply for a maximum grant of $5,000 per assetless administration.

In addition, following the pandemic, many companies have dissolved their assets and been automatically deregistered by ASIC. An insolvency practitioner can’t be assigned to a deregistered company, meaning it is more difficult for that company to be held accountable for its debts. Creditors must approach the court to have the company reinstated, which can result in further costs and may leave little assets.

Director penalty notices and the ATO

There is evidence that succeeding the pandemic, the Australian Taxation Office (ATO) is beginning to return to “business as usual” regarding collecting debts.

In March 2022, the ATO imparted 50,000 director penalty warning notices. A director penalty warning notice informs a director with notice of 21 days in which to act on their debts owed or face ATO penalties. These debts may be associated with GST, a Superannuation Guarantee Charge, or PAYG withholdings. If the director fails to take the necessary action within the specified duration, the ATO may issue a Director Penalty Notice (DPN).

A DPN is a formal notice that the ATO issues to a company director, which can personally enforce the director’s liability for the company’s tax debts.

If the ATO sustains its pursuit of debt collection activities more fervently, we could see a rise in insolvencies. Particularly in the latter half of 2022. An upheld balance will save viable businesses instead of simply unsuccessful businesses and not contribute to the economy.

Critical awareness?

Financial practitioners should also be conscious of the additional measures below.

Promoting Pt IX debt agreements

The government has put forward additional measures to promote debt agreements as a feasible alternative to insolvency. A debt agreement is a documented consensus between a party that owes money to their creditors on how companies will manage those debts. The agreement is a formal way of resolving most debts to avoid going bankrupt and represents a good option, particularly for smaller businesses that may still financially struggle following the pandemic.

The reason for this increased endorsement and promotion is the government’s concern about the reduced use of debt agreements.

Targeting untrustworthy advisers

This emphasis from the government to crack down on immoral financial advisers no doubt derives from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

To further discern and stamp out pre-insolvency advice by untrustworthy advisers, the Attorney-General is seeking stakeholder views on expanding the Bankruptcy Act to:

  • compel bankrupts to disclose details of pre-insolvency advice,
  • Compel registered bankruptcy trustees to make enquiries regarding pre-insolvency advice and deliver that information to the Australian Financial Security Authority (AFSA), and
  • make it an infringement for an adviser to aid or abet any person to commit, or attempt, any Bankruptcy Act offence. For example, assisting a client in defeating creditors by disposing of property, withholding information, or frustrating the bankruptcy process.

Virtual meetings are now a reality.

We are aware of the recent changes to the Bankruptcy Regulations 2021, allowing you to hold a virtual meeting permanently. The government previously introduced these amendments temporarily due to the COVID-19 pandemic. However, the permanent nature of these changes reflects the realities of working in a post-pandemic environment, mainly where hybrid workplaces are now standard. These changes commenced on 6 April 2022.

Additionally, some minor amendments to the Insolvency Practice Rules took effect on 5 July 2022.

Conclusion and key takeaways

As financial practitioners, we can help you stay ahead of the marketplace and be aware of what may be around the corner, which is essential to adequately:

  • Prepare your business by developing or adapting processes to deal with change (if necessary),
  • Advise clients accordingly on potential changes which may impact their business or themselves, and
  • Seek further information to fill in any gaps where required.

This foresight and knowledge give us a competitive edge in evincing you are across the current law and potential future developments, which provides real value to your business relationships.

Vogue Advisory Group – helping business owners navigate difficult times.

Our financial advisers can assist you with fiscal concerns in your business. Please contact us if you need advice.


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