Has the government missed its cue for making lasting insolvency law change?
The efficacy of new legislation, operative from 1 January with the aim of simplifying and reducing the cost of external administration for small businesses, isn’t apparent.
It allows directors to remain in control of their companies during post pandemic financial recovery, but uptake of this opportunity has so far been close to negligible.
There could be a number of reasons for this, but many insolvency practitioners believe a significant one is the cloud of legal uncertainty hanging over trust-structured companies in external administration.
Indeed there is a groundswell of opinion among practitioners that the Federal Government could have eliminated this problem by way of the new legislation, and in so doing have achieved easy, real, and lasting reform - especially given the plethora of omnibus bills parliament has been passing to deal with the economic impact of COVID-19.
It could have been reform aligned to prime purposes of the new legislation that include enabling of lower cost liquidations that result in increased returns for creditors/employees.
Some background insights
Trading trusts have long been common to many businesses, but inherently they have presented complexities to external administrators.
These complexities may extend to the personal finances of company directors, notably when assets are involved.
Trust deeds usually have termination clauses that trigger some form of external administration.
The effect of these clauses is to sever a company’s role as trustee of the trust, which results in assets being held as bare trustee by the company’s liquidator. (A “bare trustee” is a person who holds money, property, or other assets for someone only until the time they have the right to own it themselves. You could, for example, buy a house for your grandson and hold it for him as bare trustee until he is 18, when it would become his absolutely.)
However, complexities of termination clauses can becomemuddied waters for external administrators trying to deal with, and subsequently realise, trusts’ assets for creditors’ benefit.
And difficulties here often lead to problems with administrators being reimbursed for reasonable costs and expenses incurred in this work.
Options for consideration
In these circumstances there are two options.
The first is removal of a termination clause by amending a trust deed before an administrator’s appointment.
The second is a court application for necessary directions.
Although the first is obviously the quicker and cheaper alternative, the trust deed needs to be available and/or the appointment hasn’t been instigated by a court winding-up petition.
This first option has yet to be fully tested in court.
However, judges have gone so far as to suggest any attempt to change a trust deed immediately before appointment of an external administrator could appear highly questionable – or as most people would probably say, “wouldn’t pass the pub test”.
There is therefore an on-going risk an aggrieved party involved with option one could challenge it in court, and accordingly, risk-conscious insolvency practitioners will shy away from this option in favour of the second.
Option two’s downside
The trouble with option two is that more often than not it is cost prohibitive when courts request onerous disclosure requirements, and/or applications and hearings cost more than the value of a company’s assets.
It’s also often the case that option two can be a protracted process when hearing dates having been set, need to be rescheduled for various reasons. And so costs of liquidations mount.
The effect of all this is to defeat the fundamental purpose of new changes to insolvency law that simplify and reduce the cost of dealing with financially stricken companies.
It is Macks Advisory’s belief, shared by many others in the insolvency industry, that an opportunity has been missed to do better with this legislation.
In our opinion it is entirely possible for the government to legislatively clear muddied waters for administrators appointed to deal with trust-structured companies in external administrations
We suggest provisions that achieve clarity could be incorporated with recently changed legislation in an omnibus bill of real reform that permanently reduces winding-up costs for companies, and thereby increases likelihood of returns for employees and other creditors who aren’t getting them now.
Insolvencies are certain to increase in coming months as government support programs are reduced or terminated, so that procrastination on this is issue could be needlessly costly for increasingly large numbers of people.