House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Minister for Revenue and Financial Services, Senator the Hon Mathias Cormann)

Chapter 2 - Amendments relating to insolvency

Outline of chapter

2.1 Schedule 2 to this Bill amends the insolvency law provisions in the Bankruptcy Act 1966 and Corporations Act 2001 .

Context of amendments

2.2 The Insolvency Law Reform Act 2016 (Reform Act) amended the Bankruptcy Act 1966 (Bankruptcy Act) and Corporations Act 2001 (Corporations Act) to create common rules that would:

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remove unnecessary costs and increase efficiency in insolvency administrations;

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align registration and disciplinary frameworks that apply to registered liquidators and registered trustees;

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enhance communication and transparency between stakeholders; and

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improve overall confidence in the professionalism and competence of insolvency practitioners.

2.3 The Reform Act commenced on 1 March 2017. However, some of the provisions have a delayed commencement date of 1 September 2017 as a result of transitional arrangements in regulations (for example item 5 of schedule 13 of the Corporations Regulations 2001 ).

2.4 The Reform Act created prohibitions on external administrators and trustees of debtors' estates deriving profits or advantages except as allowed under the Bankruptcy Act and Corporations Act (following the amendments in the Reform Act).

2.5 Under the current provisions, a single profit or advantage received by an external administrator or trustee would need multiple creditor approvals if the benefit is received by multiple related entities. This will create unintended and unnecessarily high compliance costs for insolvency practitioners using common business structures.

2.6 For example, this results in the perverse outcome where an insolvency practitioner would be unable to pay employees in the usual course of their employment without first obtaining a separate creditor approval.

2.7 To address this, the Bankruptcy Act and Corporations Act will be amended to:

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remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

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extend creditor's ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

2.8 The Reform Act also removed the requirement for annual and end-of-control returns by controllers to be included on ASIC's public register (although they are still required to be lodged with ASIC). The unintended consequence of this would be to delay aspects of the Fair Entitlement Guarantee Recovery program as it relies on access to controller returns to determine whether controllers have complied with their statutory obligations. Therefore, amendments to the Corporations Act are needed to reinstate the requirement for annual and end-of-control returns by controllers to be included on ASIC's public register.

2.9 There are also three technical errors in the Corporations Act following the amendments in the Reform Act which need to be corrected.

Summary of new law

2.10 The new law will amend the Bankruptcy Act and the Corporations Act to:

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remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•

extend creditor's ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

2.11 The new law will also amend the Corporations Act to:

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reinstate the requirement for annual and end-of-control returns by controllers to be included on ASIC's public register; and

•

make minor technical fixes to the Reform Act amendments.

Comparison of key features of new law and current law

Detailed explanation of new law

2.12 The Bankruptcy Act and the Corporations Act are amended to:

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remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•

extend creditor's ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

[Schedule 2, item 1 paragraphs 60-20(4)(a) to (c) of Schedule 2 to the Bankruptcy Act; item 2 subsection 60-20(4A) of Schedule 2 to the Bankruptcy Act; item 6, paragraphs 60-20(4)(a) to (c) of Schedule 2 to the Corporations Act; and item 7, subsection 60-20(4A) of Schedule 2 to the Corporations Act]

2.13 This amendment will remove the unintended and unnecessarily high compliance costs for insolvency practitioners using business structures common in the industry as they will not be required to get multiple approvals for a single profit or advantage where that benefit is also received by related entities.

2.14 The provision removing the requirement for annual and end-of-control returns by controllers to be from ASIC's public register is repealed. [Schedule 2, item 4 subparagraph 1274(2)(a)(iab) of the Corporations Act]

2.15 This will ensure that the Fair Entitlement Guarantee Recovery program continues to operate as it currently does.

Technical corrections

2.16 Section 411(9) of the Corporations Act provides that certain prescribed provisions of the Corporations Act should apply to a person appointed to administer a scheme of arrangement as if they were a receiver. One of the prescribed provisions is section 432 which deals with the requirement to lodge controller accounts.

2.17 Under the Reform Act the requirements in section 432 were extended into section 422A and 422B. The consequential amendment to section 411(9) was not however made and this section still only refers to section 432.

2.18 Section 411(9) is therefore being corrected so that it refers to sections 422A and 422B as well as to section 432. [Schedule 2, item 3 paragraph 411(9)(a) of the Corporations Act]

2.19 Section 40-110 of Schedule 2 to the Corporations Act has an error as it provides that the Insolvency Practice Rules may prescribe industry bodies for this section. This is being corrected so that it provides that industry bodies can be prescribed for the Subdivision. [Schedule 2, item 5 section 40-110 of Schedule 2 of the Corporations Act]

2.20 Similarly, subsection 70-6(4) of Schedule 2 to the Corporations Act has an error in cross referencing subsections within the subsection. This is being corrected so that the subsection refers to subsection (5), which is the correct subsection, rather than subsection (6). [Schedule 2, item 8 subsection 70-6(4) of Schedule 2 of the Corporations Act]

Application and transitional provisions

2.21 The amendments take effect from the day of Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Amendments relating to insolvency

2.22 Schedule 2 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.23 This Schedule amends to the Bankruptcy Act 1966 and Corporations Act 2001 to:

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remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•

extend creditor's ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

2.24 The Schedule will also amend the Corporations Act to:

•

reinstate the requirement for annual and end-of control returns by controllers to be included on ASIC's public register; and

•

make minor technical fixes to the Reform Act amendments.

Human rights implications

2.25 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.26 This Schedule is compatible with human rights as it does not