Senate Inquiry Report: Credit and financial services targeted at Australians at risk of financial hardship

On 22 February the Senate Economics Reference Committee inquiry into Credit and financial services targeted at Australians at risk of financial hardship issued its report, available here.

Much of the report deals with the regulation of credit providers, but one aspect will be of interest to Restructuring & Turnaround professionals, recommendation 8:

The committee recommends that the government implement a regulatory
framework for all credit and debt management, repair and negotiation activities
that are not currently licensed by the Australian Financial Security Authority,
including:

  • compulsory membership of the Australian Financial Complaints Authority, giving clients access to an External Dispute Resolution scheme;

  • strict licensing or authorisation by the Australian Securities and Investments Commission or the Australian Financial Security Authority;

  • prohibition of upfront fees for service;

  • prescribed scale of costs;

  • an obligation to act in the best interests of their clients; and

  • banning unsolicited sales.

There seems to be growing recognition of the problems caused by phoenixing, and growing concern about the role played by those unscrupulous “pre-insolvency advisers” who promote and facilitate phoenixing.

A regulatory framework ‘for all credit and debt management, repair and negotiation activities’ has the potential to apply to pre-insolvency advisers – although the detail suggests that it is personal credit which is the primary focus for the Committee.

Restructuring and Turnaround professionals who believe – as I do – that there is a pressing need for regulation of pre-insolvency advisers should take any opportunity via submissions or otherwise to ensure that legislators understand the link between phoenixing and pre-insolvency advisers, and the importance of any regulatory framework extending to business and corporate ‘debt management.’

Restricting Related Creditor Voting Rights

One of the worst problems caused by the Insolvency Law Reform Act 2016 – the ability to remove an insolvency appointee without Court scrutiny – appears to have been partly addressed by changes to the Insolvency Practice Rules effective from 7 December 2018.

It will no longer be possible for related parties to buy debt cheaply and then vote the full face value to replace an external administrator.  Instead, the related parties’ voting rights will be limited to the amount paid to acquire the debt.

This will be similar to the long standing position in personal insolvency – however in personal insolvency the restriction to the amount paid to acquire the debts applies to all debt sales, not just debt acquired by related parties.

Replacement by non- related creditors

There is still no Court scrutiny on liquidator replacement, so those unrelated creditors who work together to replace liquidators seen as too aggressive in pursuing preferences will not be affected by the changes.

Is ‘assignment’ broad enough?

The rules only apply to assignment of debt.  In modern financial practice there are a range of ‘sub-participation’ and risk sharing arrangements which may achieve a similar outcome but perhaps be outside the scope of the rules as drafted.

Impact on debt traders

Some active debt traders will take equity positions as well as acquiring debt.  In some cases that could mean that they have become a ‘related party,’ with the consequence that their voting rights will be very different under a scheme of arrangement (i.e. intact) compared to a deed of company arrangement (reduced).

Some market participants will recognise the differential treatments, and adjust their strategies to take advantage.  The form of restructuring vehicle may become the next battlefield!

What’s next?

It’s pleasing to see an effort made to fix some of the damage done by the ILRA.  Hopefully work is now underway to fix the other problems such as the  impractical cash handling rules and the odd requirement for registered liquidators to have bankruptcy experience, to name a few.

The impact of draft anti-phoenix measures on restructuring and corporate turnaround

‘Phoenixing’ – the process by which the assets of an insolvent company are transferred to another company so that creditors miss out – is a significant problem in Australia.  On budget night the government announced several headline anti-phoenix measures, with greater detail provided last week through the release of draft legislation for consultation.  Although the measures are aimed at those who act unscrupulously, they have a wider ambit, and there is the potential for them to have a broader impact if they do become law.

Overview of the measures

There is more detail here but in summary, the key concept is a ‘Creditor Defeating Disposition’ (‘CDD’).  A CDD is a transaction entered into either:

  • when the company was insolvent; or
  • in the twelve months prior to the company entering formal insolvency administration;

which prevents, hinders or significantly delays the property of a company from becoming available for the benefit of creditors.

If there is a CDD:

  • Officers whose conduct resulted in a CDD will commit an offence.
  • Those involved in ‘procuring, inciting, inducing or encouraging’ a company to engage in a CDD will commit an offence
  • Both ASIC and the Courts will have power to make orders to reverse the transaction to recover the property.

A CDD will not be voidable if the sale was for market value consideration, or was entered into by a liquidator, under a deed of company arrangement or scheme of arrangement, or as part of a Safe Harbour restructuring plan.

Market value

‘Market value’ sounds like an objective measure but in the absence of a public sale process it will be assessed retrospectively.  By comparison, the duty of care imposed upon receivers requires them to conduct an effective sale process but it does not mandate an outcome.

Safe Harbour is a defence

Specific protection for transactions entered into by liquidators and deed administrators is obvious and as expected.  A similar exemption for companies in Safe Harbour (more detail here) is a sensible and consistent policy alignment.

Application to transactions with third parties

Many would think of a phoenix transaction as a sale to a related party, but significantly it seems that the draft legislation has the potential to apply to sales to third parties, if the proceeds of sale are ‘diverted.’

The type of transaction described in an extract from hypothetical email from a CFO to a CEO highlights some of the real world issues:

We have a received an unsolicited offer for our New Zealand operations.  The offer is less than I think we would get if we took the business to market but that would take another six months, and a sale now would leave us one less headache to manage, so I recommend that we accept….

If those sales proceeds are used to pay the trade creditors of the New Zealand business, and the Australian business collapses a month later with employees unpaid, should that transaction amount to a CDD which can be reversed?  Is that email the ‘smoking gun’ which might expose directors and advisers to the transaction to the risk of prosecution?

Potential purchasers who believe a vendor to be under financial pressure may be concerned about whether they can take clear and irreversible title to business assets, or whether there may be a risk of later claw back.  Such a purchaser has a theoretical access to the general good faith defence that is available to purchasers without ‘knowledge of insolvency’, but they may need to think carefully about when exactly a suspicion about financial stress might amount to ‘knowledge of insolvency.’   Some potential acquirers may decide they need more information, or details of how the funds will be dispersed, and some may decide that it is safer to walk away and wait for a formal insolvency to deliver clear title.

Conclusion

Measures to address the serious problem of phoenixing are appropriate, and alignment with Safe Harbour measures is commendable. However, phoenixing by its very definition involves transaction with related parties. Extending the ambit of anti-phoenix measures so that they also apply to transactions with third parties risks the ability of stressed companies to promptly execute genuine sales, and should be implemented with great care.  If anti-phoenix measures need to be applied beyond those currently defined as ‘related parties,’ perhaps a better approach might be to broaden that definition.

Anti-phoenix measures open for consultation

On 16 August the government released draft legislation intended to implement the anti-phoenix measures that were announced on budget night.

The legislation does not include the widely supported idea of a Directors Identification Number – but that is as expected, the DIN was the subject of an earlier consultation process which ended on 16 August.

The draft legislation does not go beyond the measures announced on budget night so in that sense there are no surprises. but there are some noteworthy aspects of the implementation of those headline measures.

A new type of voidable transaction

The legislation will create a new type of voidable transaction, a ‘Creditor Defeating Disposition’ (‘CDD’), defined as a transaction which has the effect of:

(a) preventing the property from becoming available for the benefit of the company’s creditors in the winding‑up of the company; or

(b) hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding‑up of the company.

which will be potentially voidable if one of the following applies:

(i) the transaction was entered into, or an act was done for the purposes of giving effect to it, when the company was insolvent;

(ii) the company became insolvent because of the transaction or an act done for the purposes of giving effect to the transaction;

(iii) less than 12 months after the transaction or an act done for the purposes of giving effect to the transaction, the start of an external administration (as defined in Schedule 2) of the company occurs as a direct or indirect result of the transaction or act;

The absence of any requirement to prove insolvency in relation to transactions entered into in the twelve months before formal insolvency may assist liquidators – although they may still need to disprove solvency if the other party claims the good faith defence.

Administrative Recovery process

The proposed amendments will create a regime by which a liquidator can ask ASIC to make administrative orders to recovery property that was transferred as a result of a CDD.

Liquidators will welcome a recovery regime which has the potential to avoid the costs and delays of Court processes, but there is little detail here about what ASIC’s own processes will be.  For example, the legislation does not seem to require ASIC to allow the other party a ‘hearing’ – but ASIC may form the view that it should.

Also worth noting is that a failure to comply with such an administrative order will expose a party to the civil penalties and offence regimes, which should assist with a more cost-effective and timely recovery.

New Offences

The draft legislation will introduce new offences for:

  • Officers who engage in conduct that results in a CDD.
  • Non-compliance with administrative orders.
  • ‘Procuring, inciting, inducing or encouraging’ a company to engage in CDDs.  This is a measure specifically targeting those Pre-insolvency Advisers who actively promote phoenixing.

These new offences go part of the way, but ASIC will need to have the resources to investigate potential offences and prosecute where appropriate.  Today ASIC is able to act on only a very small proportion of the potential offences that liquidators currently report, and so adding to the already long list of potential offences without an appropriate enforcement budget will have little real impact.

Safe Harbour a defence

Effective 16 September 2016 there is a ‘Safe Harbour’ (discussed here) which protects directors from insolvent trading claims.  The CDD recovery regime will exclude transactions which are entered into whilst a company is within that ‘Safe Harbour’ – a commendable policy alignment.

Other changes

The proposals also include:

  • A 28 day limit on backdating director resignations.
  • Prohibition on director resignations that would leave the company with no directors.
  • Related parties who acquire debt can only vote for the amount paid – not the face value of the debt – when voting on resolutions dealing with the appointment, removal or replacement of an external administration.
  • The current Director Penalty Regime will be extended to cover GST, luxury car tax and wine equalisation tax.

Details of the proposals can be found here.  Submissions are due by 27 September 2018.

Ipso Facto regulations: now with a ‘mega-project’ exemption

The ipso facto regulations – more technically, the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 – were released on 22 June 2018.

The regulations represent the last stage of reforms that are intended to limit the availability of so-called ipso facto clauses (aka ‘insolvency event’ or ‘termination for insolvency’ clauses, and discussed in more detail here), providing a list of exemptions: contracts to which the reforms will not apply.

Such clauses allow a party to terminate a contract if the other party becomes insolvent – even if there is no other default – making it harder to restructure a business that enters formal insolvency administration.

Those responsible for updating existing contracts (which disappointingly will remain unaffected by the ipso facto reforms) will say that the eight-day gap between the release of the regulations and their taking effect will leave very little time to make those changes, but perhaps that was intended.

SPV exemption tightened

The draft regulations included a very wide exemption for ‘a contract, agreement or arrangement of which a special purpose vehicle is a party.’  Sensibly this has been narrowed to securitisation, public/ private partnerships and project finance arrangements.

National Security

The final version of the regulations adds an exemption for contracts relating to ‘Australia’s national security, border protection or defence capability.’ 

Such an exemption suggests that the ipso facto reforms are seen by some as having the potential to threaten Australia’s current security arrangements and capability, when in fact they could equally operate to ensure that current security arrangements are maintained!

‘Mega-Projects’

The final version also adds a five-year exemption for construction contracts where the total payments ‘under all contracts, agreements or arrangements for the project’ is more than $1 billion. 

ipso facto racehorse
Retired racehorse Ipso Facto is unperturbed by the mega-project exemption

There is no mechanism to ensure that sub-contractors to such mega-projects will know whether the key billion dollar threshold will be reached, and whether the exemption will therefore apply.  The consequences of acting in ignorance of such an exemption would seem problematic, but thankfully in practice there will be only a small number of such mega-projects.

 

 

The final version of the regulations is available here.

 

 

 

Safe Harbour Restructuring Plans: Would the Carillion turnaround plan pass muster?

The investigation in the UK  into the collapse of Carillion Plc by a House of Commons select committee provides rare public access to the restructuring plan for a large company.  Would the plan meet the requirements of Australia’s Safe Harbour regime?

The Collapse of Carillion

Carillion was a UK-headquartered construction company with worldwide operations employing 43,000 staff.  It was placed into liquidation on 15 January 2018 following the UK government’s refusal to provide emergency funding,

With only £29 million in cash and creditors of more than £4.6 billion the position was so dire that – according to the select committee report – the company was forced into liquidation because it could not find a administrator prepared to take on the job in light of uncertainty about whether there was enough money to cover their costs.

Investigations into the conduct of the directors and auditors by the Insolvency Service, Financial Reporting Council, Financial Conduct Authority, and the Pensions Regulator are underway.  In addition, the House of Commons Work and Pensions Committee launched an inquiry within a fortnight of the collapse.

As discussed here, the 16 May committee report (available here) is scathing in its criticism of directors, auditors, and regulators.  The Inquiry has also made public a large number of documents which would not ordinarily be available – most notably including the 100 page turnaround plan.

Australia’s Safe Harbour regime

Australia’s severe insolvent trading laws make company directors personally liable for debts incurred when a company is insolvent.

By comparison the UK’s ‘wrongful trading’ regime imposes liability if directors ‘knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation’ and did not take ‘every step with a view to minimising the potential loss to the company’s creditors.’

The Australian Safe Harbour regime provides company directors with protection against insolvent trading claims but only if their conduct and actions, and the conduct of the company, meet minimum standards.

Would the Carillion plan meet the Australian Safe Harbour requirements?

The plan does articulate an appropriate objective that is clearly a better outcome than liquidation, and it does identify the use of a big 4 accounting firm as an appropriately qualified adviser.

However the plan is silent about any steps the directors had taken to conclude that they are properly informed about the financial position of the company, or that they proposed to take to stay informed.  The document identifies a number of actions that have been taken, but it doesn’t really set out a future action plan, identify those responsible for each action, or set milestone dates.

Those omissions may not be fatal – perhaps there were other documents that provide appropriate detail.  The biggest difficulty that the directors would have in meeting the Australian criteria is that the forecasts in the plan exclude employee pension contributions from the company budgets, and paying employee entitlements ‘as they fall due’ is a key requirement of the Australian regime.

Too little, too late

Of course the Carillion turnaround plan was never designed to meet the Australian requirements, so it’s not a huge surprise that it doesn’t.  But nonetheless, that ‘failure’ highlights that it is essential for directors seeking to access safe harbour to ensure that they have a plan that is fit for that purpose.

In the case of Carillion, history shows that the plan was too little, too late: the company was in liquidation within a fortnight of the plan being finalised.


First published here

Two strikes? Queensland-only anti-phoenix regimes

As well as regulating labour hire, Queensland’s new Labour Hire Licensing Act  includes an anti-phoenix element.  This is not Queensland’s first use of industry-exclusion to address phoenixing, a similar structure was used in the 2017 Building Industry Security of Payment legislation – but the ambit of the labour hire regime is far broader than many would anticipate.

Building Industry Fairness (Security of Payment) Act 

As discussed in more detail here, the Building Industry Fairness (Security of Payment) Act 2017 implemented a range of measures aimed at protecting sub-contractors from the risk of non-payment.

The anti-phoenix element arises from exclusion from the building license regime if an office bearer of a company acted as a director or secretary of a construction company that entered into insolvency administration in the prior two years.

Labour Hire Licensing Act 2018

The Labour Hire Licensing Act 2018 which commenced on 16 April 2018 to introduce a regime for registration of labour hire participants likewise includes an anti-phoenix element.  The requirement that all directors of a company must be ‘fit and proper persons’ is hardly unusual, but the criteria includes two that are particularly focused on insolvency, referencing prior directorship of a company that:

  • entered into a formal insolvency administration.
  • has failed to pay tax or superannuation due to its employees.

The changes are noteworthy because the LHLA has a reach that is far broader than would be anticipated from its name.  The regime is not limited only to external labour hire arrangements, it appears that it extends to internal arrangements that are very common in corporate groups: the use of a designated payroll company.  As a result it seems that a group employer in any industry – whether headquartered in Queensland or not – will need to register and comply with the regime in respect of any Queensland employees.

At a time when the Federal Government is implementing changes intended to reduce the stigma of business failure, it seems that the Queensland government is heading in the opposite direction – further expanding a ‘one-strike’ regime that will restrict those involved in a financial failure from acting as company directors.

No doubt the Federal Government’s Anti-Phoenix Taskforce is aware of the Queensland approach and will be watching the outcome with great interest.  If the industry-exclusion model does appear to provide a more effective means to deal with the problem of phoenixing, there may be moves to implement it more broadly.

Draft ipso facto regulations – for consultation

The final piece of the ipso facto reform is almost in place, following today’s release of a draft-for-consultation version of the regulations.

Ipso facto clauses (also known as ‘termination for insolvency’ clauses, and discussed in more detail here) allow termination of a contract if a party to the contract becomes insolvent – even if there is no other default.

Such clauses can be immensely damaging to businesses that enter formal insolvency administration because essential assets and services can be unilaterally withdrawn: landlords can lock out insolvent tenants, franchisors can withdraw access to franchise systems, and lessors can repossess leased equipment.

It’s true that voluntary administration will ‘stay’ such action – but the effect is only temporary.  The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill passed in September 2017 creates a permanent stay – albeit only for clauses in contracts entered into on or after 30 June 2018.

It was always intended that final detail – a list of exemptions – would be left to the regulations (now available here).  The most notable aspects are:

  • The ipso facto stay will not apply to derivatives, margin lending facilities, and invoice finance arrangements.  This is sensible, and as expected.
  • The draft regulations propose an exemption for ‘a contract, agreement or arrangement of which a special purpose vehicle is a party.’  This will be under careful scrutiny: it can’t be intended that the ipso facto stay can be defeated by simply adding an SPV entity to any contractual arrangement.
  • The stay will not affect contractual rights to combine, set off, or net out, multiple accounts.  Again, this is sensible and expected.
  • As anticipated, there is a specific protection of a secured creditor’s ability to appoint a controller, and step-in rights are likewise protected.

The most significant deficiency in the ipso facto reforms – that the stay will not apply to contracts entered into before 30 June 2018 even if they are modified after that date – remains unaddressed.

Submissions on the proposals may be made until 11 May 2018.


(For those who noticed the photo: I haven’t tried Ipso Facto wines but the Cabernet gets great reviews!)

Receivers: escaping the One Nation ‘net’?

On 28 March Pauline Hanson’s One Nation party proposed amendments that were intended to make receivers and managers, investigative accountants, and valuers, all subject to the Australian Financial Complaints Authority scheme.

AFCA is a single external dispute resolution scheme that will replace three existing schemes: the Financial Ombudsman Service, the Credit & Investments Ombudsman, and the Superannuation Complaints Tribunal, discussed in more detail here.

The ‘technical difficulties’ with the PHON proposals, referenced by Senator Cameron in speaking against the proposal, might include that:

  • Valuers and Investigative Accountants only provide opinions – they do not ‘take action,’ and so any redress for wrongful action taken by others should not be borne by them.
  • In any event, it would be quite difficult to develop a process by which an opinion could be mediated or arbitrated.
  • AFCA would need to develop and maintain very significant technical skills to undertake a meaningful assessment of the work performed by valuers, restructuring and turnaround professionals.

Senator Fierravanti-Wells rebuffed the PHON assertion that receivers were ‘largely unregulated’ – noting that receivers were ‘registered with and directly overseen by ASIC, the companies regulator.’  As discussed here, ASIC has allocated $10.196m to the regulation of 711 registered liquidators – almost double the amount it spends regulating six times as many registered auditors.

The proposal was defeated comfortably: 43 – 2.  But the discussion (copy below) highlights that the technically complex insolvency regimes can be confusing to outsiders, and clearly demonstrates the challenges for the restructuring & turnaround profession as we try to educate the general community about the problems caused by ‘non-mainstream’ and pre-insolvency advisers.


 

The hansard proof is available here and is reproduced below (with some minor formatting changes):

“Senator GEORGIOU (Western Australia) (17:34): On behalf of Pauline Hanson’s One Nation, I move amendment (1) on sheet 8383:

(1) Page 45 (after line 26), after Schedule 2, insert:

Schedule 3—Amendments relating to the appointment of receivers and valuers in the AFCA regime

Corporations Act 2001

1 After paragraph 1051(2) (a)

Insert:

(aa) the membership of the scheme is open to every person who is appointed to act in the capacity of a receiver and manager, investigative accountant or a valuer, of an entity mentioned in paragraph (a); and

2 Application

The amendment made to the Corporations Act 2001 by this Schedule applies in relation to the appointment of receivers, investigative accountants or valuers made after the commencement of the item.

Senator CAMERON (New South Wales) (17:34): Labor will not be supporting this amendment. This amendment would amend the legislation regarding the Australian Financial Complaints Authority. When the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Bill 2017 was debated, Labor noted that the bill would unfortunately not make much difference in relation to the way banking disputes were handled. The average banking customer would not see much difference between the Financial Ombudsman Service and the government’s Australian Financial Complaints Authority once it is established. We noted that, in relation to banking disputes, the bill was basically a rebadging exercise and the name ‘authority’ was a misnomer. This amendment seeks to include valuers, investigating accountants and receiver managers in the AFCA scheme. However, stakeholders, including the Institute of Public Accountants, in their reply to the Ramsey review, raised a number of technical issues with regard to including such third parties in the AFCA framework. While we cannot support this amendment today, we acknowledge concerns about the conduct of banks, which is why we have fought so hard for a royal commission.

Senator GEORGIOU (Western Australia) (17:36): This amendment includes valuers, investigating accountants and receiver managers in the Australian Financial Complaints Authority, AFCA, scheme. Bank appointed valuers, investigating accountants and receiver managers act in a largely unsupervised environment. Misconduct in this sector has been raised in numerous past government and Senate inquiries. The Australian Small Business and Family Enterprise Ombudsman has recommended changes, and so have various other inquiries.

If we are serious about stopping white-collar and banking misconduct in Australia, we should support these changes, and we call for your support to do this with us. The problem is that the new AFCA, in its current form, will not investigate misconduct by bank appointed valuers, investigating accountants and receiver managers. The Financial Ombudsman Service, FOS, will not investigate cases of misconduct by valuers or accountants or receivers, even when the bank is aware that there has been misconduct. AFCA will be the same under the existing proposals. So, in some respects, it is a toothless tiger. As an example, I have a letter from FOS showing they will not investigate because, once the receiver is appointed, the receiver acts as an agent for the company and not the person who appointed it. In other words, the bank could appoint the most corrupt and incompetent receiver and be aware of misconduct and yet be totally unaccountable. The ombudsman cannot help unless the bank gives the regulator permission to investigate the crime. In the example submitted, Bankwest informed FOS that it is not prepared to waive the issues that may exist to enable a fresh dispute to be considered by FOS. So, if the bank wants to prevent an investigation, it can do so with a loophole in the legislation.

To add insult to injury, if the damage caused by the misconduct is greater than the limit of FOS, it can fall outside the jurisdiction. This limit could encourage greater misconduct. To avoid investigation, a bank or the agent has to ensure that they create a level of damage above the limit. With the banking royal commission now underway and further cases of misconduct being exposed, now is the time to strengthen legislation and regulate this troubled industry. The Australian Small Business and Family Enterprise Ombudsman has confirmed in discussions that there is very little regulation on these banks and appointed entities. They admit that, in some cases, receivers just refuse to provide details of their work to the owners of companies they are appointed over. They often charge hundreds of thousands or millions of dollars for their work, with no accountability for what they have done. We have seen cases where receivers have employed the same lawyers the banks employed and then they act for the companies they are the receiver over—a conflict of interest in itself—and then they refuse to disclose to the owners and companies what the lawyers have done.

I refer to a letter from the Australian Small Business and Family Enterprise Ombudsman to Senator Jane Hume, Chair of the Senate Economics Legislation Committee, dated 29 September 2017. It reads: ‘Despite the welcome step of establishing AFCA, we believe there are important considerations which are still missing from the jurisdiction of the proposed authority, namely the role of third party agents such as valuers, investigating accountants and receivers.’ The ombudsman’s inquiry report into small-business loans dated 12 December 2016 made a series of recommendations, including recommendation 13 that:

External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigative accountants and receivers …

Current state

  • The jurisdiction of the FOS does not allow consideration of disputes:

 (a) between a small business and a third party such as valuers, investigative accountants and receivers appointed by the bank … … …

  • The only alternative for small business in these cases is the court system, yet:
  • small businesses do not have the expertise to challenge banks through the court system
  • there is a substantial asymmetry of power between banks and small businesses
  • small businesses do not have the financial capacity to hire expert legal advice to help them balance this asymmetry of power.

Recommended change

That the independent EDR – external dispute resolution one-stop-shop – that is, AFCA – have jurisdiction to consider disputes between small businesses and banks, where disputes relate to the conduct of third parties appointed by banks.

This clearly indicates that our amendments need to be supported. The Australian Small Business Ombudsman said:

  • Many problems identified during the Inquiry relate to the conduct of third parties appointed by banks.
  • Currently, there is no realistic way to seek redress for these actions. ASIC does not take action on behalf of individuals and the court system is not a viable alternative.
  • The lack of accountability must be addressed.

The Australian small business ombudsman would support legislative changes to the AFCA to make banks responsible for the conduct of their appointed valuers, investigative accountants and receivers.

The LNP have argued that these changes are unconstitutional. However, the Senate Procedure Office have said they can’t see any constitutional problems with this amendment and they believe it is compatible with corporations law. Also under section 51, heads of power, banks, financial institutions and service providers are covered federally. We have run this by the Parliamentary Library. They have advised that our amendment is a solution to the issues raised by the ombudsman and they cannot see any constitutional reason why it can’t work. The government objects to this amendment on the basis that it is unconstitutional. We have repeatedly asked the government to identify any reasons that this amendment may be unconstitutional and they have failed or refused to clarify these reasons. The only explanation can be that this amendment in fact is constitutional.

This amendment needs to be supported if we want to help those affected by bank misconduct. Given the bank and receiver misconduct covered by numerous past government inquiries and the misconduct now being revealed by the banking royal commission, we request the Senate support the proposed constructive changes to bring this largely unregulated sector under control. This chamber should take the word of the Parliamentary Library, the ombudsman and the Senate Procedure Office ahead of a government who would rather protect their banking mates.

Senator FIERRAVANTI-WELLS (New South Wales—Minister for International Development and the Pacific) (17:43): The government will not be supporting this amendment. Valuers and accountants are regulated under state and territory based professional conduct frameworks. Receivers and liquidators are registered with and directly overseen by ASIC, the companies regulator. They are subject to the regulatory framework contained in the Insolvency Law Reform Act. The new AFCA scheme provides an out-of-court dispute resolution scheme for consumers who are in dispute with a licensed financial product or service provider. Valuers, accountants and receivers are not licensed providers of financial products or services to retail clients.

Senator HANSON (Queensland) (17:44): Everyone has been calling for a royal commission into the banking sector, and the coalition government have actually instigated that. Labor say they’ve been calling for a royal commission into the banking sector, as have the Greens and One Nation and, I believe, Senator Hinch and others, and we were very pleased to see it happen. Now we are talking about the valuers and liquidators involved in this. In the Senate inquiry that One Nation had last year, it came out that they played a very big role in the devastation that shut down a lot of people in the farming sector who lost their properties, yet nothing was done about it.

We are now proposing an amendment to include those people in this bill. We have confirmation that it can be done under this bill. If Labor are so much for all the battlers out there, why don’t they want some accountability to ensure that these people are taken to task for their actions? Why aren’t Labor prepared to stand up for this? This is an amendment that calls for accountability, so that they cannot just do what they want to do and destroy people’s lives. The government, from the minister’s office, is saying that this is unconstitutional. We have asked: which part of the Constitution? Absolute silence! Nothing has come back to us. They can make a comment like that, but they can’t back it up with evidence.

They come under the Corporations Act—and that’s fine—but there is no reason why either side cannot pass this amendment. Do you really want to stand up and ensure accountability in this country from the banking sector? They hire these liquidators and receivers. They don’t pay for them, though; it’s the people who are going under who have to pay the bills for this. They rack up hundreds of thousands of dollars, and that’s why people lose their properties. But you sit here in deafening silence and you’re not prepared to make them accountability to the public. You sit there and say that you’re for the battlers and you call for a royal commission into the banking sector. Is this Labor? Is this what you really want?

Labor constantly accuses One Nation of being out there grandstanding and not being prepared to stand up for the battlers and the farmers. Yet, here we are, moving an amendment to legislation that is going to be so beneficial to people in this country. It will make them accountable, and Labor just sits there and does absolutely nothing about it. You know who’s really fighting for the people of this country, the battlers. It’s One Nation.”

1 year Bankruptcy and Debt Agreement Reform: The Senate Committee Reports

Today the Senate Standing Committee on Legal and Constitutional Affairs issued reports about two separate bills, both intended to reform personal insolvency regimes.

Debt Agreement Reform

Importantly, the Bankruptcy Amendment (Debt Agreement Reform) Bill 2017 (discussed in more detail here) will strengthen the regulation of Debt Agreement Administrators, more closely aligning it to the regulation of bankruptcy trustees.

Another, seemingly less well understood aspect will limit the length of payment arrangements to three years.  It is a well intentioned measure, but there is a risk that in practice it will operate to restrict a debtor’s ability to negotiate a Debt Agreement, because many creditors will not vote for a proposal unless it meets a minimum return requirement.

In the Inquiry hearings, one Debt Agreement Administrator referenced a minimum return requirement of 60 cents in the dollar.  Using this as an example, a DAA would tell an debtor with liabilities of $70,000 that they need to create a fund of $42,000.  A debtor with capacity to contribute $2,000 per month would be able to do this in 21 months – within the proposed three year limit, but a debtor who could only contribute $1,000 per month would need 42 months – outside the three year limit.

It may be that creditors will reduce their minimum return requirements, but if they do not, a measure presumably intended to offer debtors relief may operate in practice to stop some of them from entering into a Debt Agreement at all.

One Year Bankruptcy

The Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (discussed in more detail here) will shorten the default bankruptcy term from three years to one year.

The proposal echoes a previous initiative which allowed some bankrupts to apply for discharge after six months.  That measure was  scrapped in 2001 due to concerns that early discharge did ‘not reflect the serious nature of the decision to become bankrupt’ and that an ‘easy way out’ acted to ‘discourage debtors from trying to enter formal or informal arrangements with their creditors to settle debts.’

The Government proposes to maintain the current three year term of the income contribution regime – ie two years post-bankruptcy – but will leave trustees without any practical measures to collect information about a debtor’s income in the two years after discharge.  Without that information the trustee will be unable to calculate income contributions, none will be collected, and so returns to creditors will diminish.

The Report

The report (available here) does recognise that these issues, and others, were raised in the various submissions – but gives higher weighting to the original policy intentions.  The committee recommended:

  • that the Government give positive consideration to ASIC greater scope to impose director disqualifications, discussed in more detail here.
  • that the government consider amending the debt agreement reforms to allow debt agreements implemented under a three year cap to be extended by up to two years, by agreement.
  • identification of a range of specific factors that should be taken into account when setting a maximum payment to income ratio for a debt agreement.
  • that with those adjustments made, the legislation should be passed.

 

 


Other posts about the Bankruptcy and Debt Agreement reforms: