I recently presented a video podcast with my learned friend and fellow barrister Amanda Carruthers on the topic “PPS Issues in Insolvency”: see below. The format is to highlight the frequent PPSA issues that we see as barristers and how best to tackle them as a practitioner.
I had the pleasure of speaking to the first Zoom meeting of the CPA Insolvency & Reconstruction Group on Monday night about the Small business Insolvency Reforms, at the invitation of Hugh Milne. A copy of the paper I presented and the overheads from the night are linked below.
As yet there is no indication yet of the date when the final bill or the regulations will surface. Since the legislation is supposed to commence by 1 January 2021, and the last sitting of parliament is in the two weeks from 30 November, we could assume that we will see some drafts by the end of the month. Here is hoping anyway.
I suspect the bill will end up being delayed and the commencement date pushed back to a date in March. I have no reason to say that other than that the first draft was very undercooked, and that job keeper has been extended again. One wonders whether the moratoriums on statutory demands, bankruptcy notices and insolvent trading will be too.
Treasury invited submissions on the Bill providing only 5 days notice, after the exposure draft and EM had been released.
I am not normally prone to making legislative drafting submissions, but the rush in this case really warranted one given that I had read and considered the merit of the exposure draft. I suspect that the short time frame, plus the lockdown in Melbourne, will have substantially limited the ability of many usual contributors to respond.
Some of the key points of my submission are as follows.
The debt threshold for the application of restructuring and simplified liquidation needs careful thought and ought be lowered.
The final draft of the law must minimise the operative provisions of substance that are left to regulations.
Debts incurred in the trade on period must be given some priority, if no personal liability is to be imposed on the directors.
Applications to Court during the restructuring and the simplified liquidation must be limited, probably most effectively by requiring leave and subjecting the discretion to grant it to a purposive test.
Transition to liquidation needs to be clearer, and there should be no transition to VA.
The reporting obligations and the investigative powers of the restructuring practitioner need to be reasonably strong, if truncated for purpose.
The employee entitlements and tax filing threshold obligations should be scrapped.
The legislation should be delayed by 2 months to allow more work to be done on it.
A copy of my submission is available at this link:
After announcing the introduction of streamlined Debtor in Possession reforms for small corporate business insolvencies just 2 weeks ago (see my thoughts at the time of release here) by 1 January 2021, the Commonwealth has now released an exposure draft of the amending legislation and an explanatory memorandum. It really is a case of making sausages.
In summary, the exposure draft leaves a lot of work to be done by the drafters to get the legislation finalised. A lot of the meat (no pun intended) in terms of substantive changes to the existing law is left to regulation, probably sensibly the only way to get this process done with consultation within the industry in time. It seems to me that the exposure draft has been rushed out by using this device and that a lot of the hard yards will be done in the process of sifting through submissions to be made, due on Monday and in further consultation, hopefully with industry bodies and the legal profession.
My thoughts on the exposure draft:
To be completed by regulations: the draft is the ultimate “fixer upper” opportunity, being only about two thirds finished. The unfinished parts are to be filled by regulations to be made later. Presumably the idea is to permit more time for the Commonwealth to consult with the professions, industry and other SME stakeholders, which may be the only practical way to get the changes made so they can commence by 1 January 2021. This approach, whilst unorthodox for insolvency reform, is welcome given that there was little or no consultation before the package was announced.
A whole new insolvency office: The term for the appointee used in the part is “restructuring practitioner”. A new definition in s.9 of the Act is included to define that term. The term is used for an appointee both during the restructuring period and after the restructuring plan is accepted: there is no term akin to “deed administrator”.
A whole new part: Rather than adapting the existing processes for voluntary administration, the drafters have inserted an entirely new part, Part 5.3B, dealing with restructuring of a company under the debtor and position model. Again, this reflects the object of the reforms, which is a revolutionary, rather than an adaptive.
#tag – (Restructuring Practitioner Appointed): Section 457B requires a company subject to the restructuring process must add the words “(restructuring practitioner appointed)” after its name.
An act of insolvency: like a part X proposal for an individual in bankruptcy, a company who proposes a restructuring plan is taken to be insolvent – s455A(2).
Restructuring Practitioner’s power to end it all: Interestingly, there is provision under subdivision C for the role of the restructuring practitioner to have the power to terminate a restructuring on certain grounds: see s453J. The grounds include at least if the company does not meet the eligibility criteria for restructuring, if it would not be in the interests of creditors to make a restructuring plan, or continue with a plan, or it would be in the interests of creditors for the company to be wound up. It will be interesting to see on what basis this power to terminate the restructuring of a company will be exercised in practice. One would imagine the type of situations in which a VA might recommend liquidation would be a basis – where businesses are dead and buried with no potential of saving, so that the appointment is misconceived, or cases involving substantial fraud or criminality.
Recycled nuts and bolts: A lot of basic mechanics dealt with in the new Part 5.3B are copies of similar provisions from 5.3A. An example: a person appointed as a restructuring practitioner must make a declaration of relevant relationships. The DIRRI provision, section 60, has been amended accordingly. Similarly, there are parallel restrictions on third party property and secured creditor action during the period of the restructuring process. See generally subdivision D.
So much to be provided by regulation: Some notable examples include:
The eligibility of a company to participate in a restructuring based on its liabilities, and the degree to which a director can have previously been involved in another restructuring – see 435C. The whole question of what liabilities count toward the threshold debt ceiling for eligibility, and even what the ceiling is to be, are not yet in the legislation;
Surprisingly, nearly all of the functions, duties and powers of the restructuring practitioner. There is a generic provision for basic functions like providing advice to the company on restructuring matters, assisting and preparing a restructuring plan, making a declaration to creditors “in accordance with the regulations” in relation to the plan and any other functions given to the practitioner under the Act. Apart from that, the regulations are to provide…;
The form, content, making, implementation, varying, lapsing, voiding, contravention and termination of restructuring plans. Regulations are also to provide for the role of the restructuring practitioner in relation to the plan. There are all very important issues for the success of the reforms. Whilst crossing the proverbial fingers, one would think that regulations are being used in order to allow consultation with the industry before the legislation is finalised, or perhaps allowing it to be easily tweaked after 1 January 2021. It will be interesting to see whether substantive text is used in the final draft of Part 5.3B rather than in regulations.
The Role of The Court is a work in progress:
There is a balancing act in any insolvency regime. On one hand it is desirable to allow creditors or other stakeholders to go to court to protect themselves from abuse of process. On the other hand, too much judicial oversight can make the process to expensive to use. Cost is a key complaint that has led to the reform package. The fact that the role of the Court is to be finalised in the Exposure Draft reflects, I think, a lot of thinking going on at government level and probably a desire to further consult on this issue with the profession.
The role of the Court is, in many respects, to be provided: there is division 6, which provides for the powers of the court in relation to restructuring plans to be subject to regulation. Among more mechanical sections of the part copied over from part 5.3A, the role of the Court is defined, for example regarding permitting or penalising dealing with assets or shares during the restructure that would otherwise not be permitted (Part 1 Subdivision D), effects of an appointment on a winding up (which are akin to a VA appointment) and secured creditor assets and leave to proceed.
Section 458A does provide that the powers of the Court will include at least a power to vary or terminate a restructuring plan and to declare a restructuring plan void.
Reporting Obligations to and from the Company and the Restructuring Practitioner are still to be finalised: Division 5 deals with information, reports and documents, in relation to the company. The draft provides for regulations to deal with these sorts of issues. Section 457A deals with the things that the regulations can provide for, and they do include matters such as reporting to the restructuring practitioner by the company or others, reporting to ASIC, reporting to creditors, and reporting generally about a restructuring or restructuring plan to the public by publication.
Secured Creditors Decision Period: there is an amendment to the dictionary in section 9 of the meaning of “decision period”. The decision period for restructuring is the same as for voluntary administration – that is 13 days after the day of appointment.
Relation Back Day: There are amendments to section 91 to accommodate the restructuring process into the relation back day definition for a company that goes into a subsequent liquidation. Basically, a restructuring appointment that is made after a winding up application starts preserves the relation back date of the application to wind up. Likewise, for a winding up which commences as a consequence of an application made after the beginning of a restructuring period, the relation back day is the date on which the restructuring appointment is made, called the section 513CA day.
Transition to VA and Liquidation: There is provision for transition to a voluntary administration or liquidation in the event that a restructuring plan is rejected. It is not clear to me exactly how this is to occur: it is to be provided for in regulations (s453A(b)). Amendments to the small business guide in Part 1.5 of the Act do provide that if creditors do not agree to the restructuring plan the company may be placed in voluntary administration or winding up. It appears that the rejection of the restructuring plan will amount to a resolution by creditors that the company be wound up unless alternative arrangements are made to transition to a voluntary administration. Logically it would be similar to the rejection of a DOCA proposal.
Voidable Transactions – Protection for ordinary course transactions in restructuring period: There is a significant change to voidable transactions for a liquidation which follows a restructuring. The main change is that there is a carve out for transactions entered into by the company whilst it is in the restructuring phase, in the ordinary course of business or with the consent of the restructuring practitioner. In voluntary administration there is a similar carve out for transactions entered into by a voluntary administrator or a deed administrator. Since the new process is a debtor in possession model, it does make sense for transactions entered into by the company in the ordinary course of its business or with consent of the restructuring practitioner to be similarly exempt. That is provided for in a new subsection 588FE(2C)(d) and (2D)(d).
Another safe harbour: There are amendments to the safe harbour provisions, and a new safe harbour for companies under restructuring in 588GAA(B). There is a carve out for insolvent trading in relation to transactions entered into during the restructuring period which are in the ordinary course of the company’s business or with the consent of the restructuring practitioner.
Liquidator Investigation: In terms of subsequent supervision, there is provision for a liquidator appointed after a restructuring to examine the restructuring practitioner on a mandatory basis under amendments to 596A and further consequential amendments in the examination provisions.
Insolvency Practice Rules A host of changes have been made to the insolvency practice rules, mainly to include restructuring practitioner where appropriate. However there are carve outs which indicate the limited nature of the simplified liquidation process. They include exempting completely from the simplified liquidation process any provision for committees of inspection. They simply do not apply to the simplified liquidation process.
Simplified Liquidation: Once again, future regulation is to play a large part in defining how the simplified liquidation process is to be implemented. The regulations are to provide in future for the eligibility criteria for the simplified liquidation process, simplified methods of dealing with proofs of debt and distribution of dividends, ASIC reporting, dealing with contributories, payment of dividends, and more limited basis of circumstances in which unfair preferences can be recovered. See generally a new subdivision B to be added at the end of Division 3 of Part 5.5 of the Corporations Act.
Virtually Done: As has been commented widely elsewhere, there are welcome changes that basically permit creditors meetings to be held virtually, notification and communication by electronic means and for “e signing” of documents electronically.
I would not ordinarily post a link to something I had not read, but this is a pandemic! The Commonwealth announced its proposed insolvency law reforms just 2 weeks ago and has now released an exposure draft of the amending legislation together with an explanatory memorandum.
Submissions on the draft are due on Monday, 12 October 2020!!! So get cracking! This makes the road runner look slow.
I will make some further comments in the next day or so once i have read it.
The outline of the Federal Government’s small business insolvency reform package, to introduce a debtor in possession model for incorporated businesses with less than $1 m in debt, have been covered elsewhere. This package was announced just after 4pm yesterday. A copy of the Treasurer’s media release can be found here. The lease also includes a link to a “Insolvency Reforms Fact Sheet” here. A useful summary of the proposed changes, by my colleague at the Victorian Bar, Carrie Rome-Sievers, can be found here.
Some thoughts that immediately spring to mind, from a PPSA perspective and generally follow.
Is the appointment of a “Small business restructuring practitioner” (SBRP) also going to trigger vesting under section 267 of the PPSA? Or will vesting not occur if and until an administration or liquidation occurs. A security interest which is unperfected vests in corporations which are wound up or enter into a voluntary administration or DOCA (s267(1)). The underlying policy principle behind vesting is to aid unsecured creditors in the insolvent administration left unaware of the unperfected security interest.
Presumably voidable transactions will continue to be recoverable only in liquidation. When will the relation back period commence for a subsequent liquidation? Will it be from the appointment of the SBRP, or will it be the date on which the voluntary administration is taken to commence? If it is the latter, the appointment of a SBRP will be a tool that can be used to manipulate the relation back period to protect voidable transactions. See the discussion in my article on this issue, relating to the manipulation of the relation back period by VA appointments.
The proposal requires all employee entitlements to be paid before a SBRP can be appointed. What entitlements? Arrears of wages and superannuation? What about unpaid accrued leave entitlements? Presumably contingent claims like amounts due on retrenchment are not included. Are such payments protected from preference claims in future liquidation?
Whilst the debtor is in possession, the business continues to trade for 20 business days whilst devising a turnaround plan. What is the status of debts incurred in this period? Is the owner/director personally liable, because the SBRP is not. This seems to be a serious flaw compared to the personal liability of administrators in the same position. It would seem to me that trade creditors would be reluctant to extend any credit once a SBRP was appointed without some security.
The new regime is set to apply from 1 January 2021, yet as others have noted today, there has been little or no industry consultation with respect to devising the proposal. Presumably that will follow in coming months, however the process of baking the pie seems somewhat arse end around (apology for the mixed metaphor).
The regime includes a transitional period from 1 January 2021 to 31 March 2020, anticipating that there will not be enough trained SBRPs to meet the demand at the start. In this period businesses will be able to declare an intention to access the new process and thereby extend statutory demand and insolvent trading relief for the same period, as long as they appoint someone before 31 March. It seems to me the transition will introduce an added layer of uncertainty. I would imagine many business owners will choose the transition option to buy another 3 months of trading time.
It has been suggested, but I have not verified, that the proposal is a lift from a similar reform brought into law in the UK in June. See the attached link to a summary of the Corporate Insolvency and Governance Act 2020) (UK) prepared by Norton Rose Fulbright. It certainly looks very similar. That may explain how this proposal has been put together inside Treasury without much external input.
SBRPs appear to be paid a fee bargained with the debtor as a percentage of the “disbursements under the plan”, presumably a percentage of the payments made to creditors. What happens if the SBRP is not content with the fee offered?
The process is said to be available only to incorporated businesses. Sole traders are not mentioned. Yet sole traders make up a sizeable proportion of small businesses in Australia. Are parallel changes going to be made in bankruptcy? Part X arrangements going to be harmonized for example?
Only incorporated businesses with liabilities less than $1 million can use the process. How is the debt under the cap calculated? Is it limited to actual debts of that amount, or are contingent debts included? Will uncrystallised claims count, say under a premises lease or equipment lease? What about liquidated damages or penalties accruing in default under operational contracts, such as in construction?
The role of SBRP can be filled by persons other than a registered liquidator: who in practice is going to take on the role other than registered liquidators? Remembering that at law, if not in practice, voluntary administrators are not limited to registered liquidators, yet the latter are nearly always used.
I delivered a case law update to the Leo Cussens PPSA Half Day Seminar on Thursday morning, along with some excellent other presenters. One of the cases considered is Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia  WASC 132, a case involving an iron ore project in WA and security interests in funds paid into trust pending an arbitration over construction work. A copy of the paper is at the link.
The Dalian decision is particularly important for solicitors acting for judgment or arbitration creditors who obtain security for their claim prior to trial. The WA Supreme Court recognised that security lodged with a trustee (eg a solicitor acting for a party) by agreement will constitute a security interest for PPSa purposes. In this case Dalian failed to register but, through fortunate circumstances of the case, had become seized of full beneficial ownership of the security amount before the appointment of a liquidator. A happy $27 million piece of luck.
On 23 June 2020, here in Melbourne, in the calm between the lockdowns (which seems like an eternity ago now) I delivered an update to lawyers on COVID implications for the operation of the PPSA to the Leo Cussens Institute via Zoom. A copy of the paper presented is attached at this link.
The key takeaways were:
as a practitioner, know the basics: what is a security interest, why to register and how to register
make sure that clients take steps to protect themselves from simple mistakes;
in an environment where a pandemic of insolvency is a real risk, errors in dealing with the PPSA will be costlier than ever.
I suggested the minimum basics that a practitioner should know were:
The main impact of the PPSA is difficult times is in insolvency. The first thing a liquidator, administrator or bankruptcy trustee will do when appointed is search the PPSR for relevant registrations.
In most appointments of liquidators or bankruptcy trustees, unsecured creditors will either receive nothing or very few cents in the dollar. Therefore, if you propose to offer funds or goods to a person or entity on credit, considering security for the obligation should be the first thing at front of mind.
A first-ranking secured party can then generally choose whether to enforce their security and take the property or get priority of payment from the sale of the property.
To take security over personal property, clients will need two things:
a security agreement that is well drafted: usually within the terms of trade, or in a separate document; and
In February 2020 I delivered a now annual seminar providing an update on recent PPSA developments at the Leo Cussen Institute. The seminar covered three interesting recent cases:
Bluewaters Power 1 Pty Ltd v The Griffin Coal Mining Company Pty Ltd  WASC 438 (Bluewaters)
BMW Australia Finance Limited v @Civic Park Medical Centre Pty Ltd as trustee for @Civic Park Medical Centre Unit Trust  FCA 999 (Civic Park)
In the matter of Beechworth Land Estates Pty Ltd (admins apptd) and Griffith Estates Pty Ltd (admins apptd); Cussen and of Beechworth Land Estates Pty Ltd v Douglas Estate Holdings Pty Ltd and Others  NSWSC 1129 (Beechworth)
Topics covered in the seminar included:
the breadth of a “security interest”: do step-in rights require registration on the PPSR? The decision in Bluewaters;
PMSIs – traps where the debtor is the trustee of a trust: extension of time to register in the decision in Civic Park;
Administrators’ Lien over interests in land and proceeds of its sale: the decision in Beechworth;
Inventory security: issues of priority and vesting in relation to processing raw materials
A copy of the paper is attached at the following link:
I recently presented a paper to Leo Cussens during a half day PPSA conference on the topic recent developments in the PPSA. A full copy of the paper can be found at this link: Leo Cussens – PPSA – 23.5.19
The PPSA is relatively new (for a law at least) and so the Courts are still working through the legislation as cases come before them. Many recent cases consider relatively straight forward aspects of the legislation.
As such, they are not of great significance other than as a demonstration of principle. In the matter of O’Keefe Heneghan Pty Ltd (in liq) & Ors (2018) NSWSC 1958 (O’Keefe) is one of those cases, considering the continuing super-priority of approved deposit taking institutions (ADI) (usually banks or non-bank financial institutions) under the Act.
One significant development has been repeated demonstration of the drastic consequences of failing to identify a grantor by its proper identification number, leading to a lot of decisions considering efforts to overcome such errors. The problem was identified to drastic effect for the secured creditor in OneSteel Manufacturing Pty Ltd (administrators appointed) (2017) NSWSC 21.
There has been a rash of subsequent cases grappling with the same issue from different angles, and the recent case of Psyche Holdings Pty Limited (2018) NSWSC 1254 (Psyche) is one of them.
Takeout: An ADI has super priority over ADI Accounts under its control, even where it has failed to register its security interest, since it is able to perfect its security interest by control of the ADI account. That follows since the account is held with it and is at all times the balance is under its direct control. An ADI which has perfected by control is entitled to follow its security interest out of the account into the control of others without losing its priority. Secured creditors who are not ADIs should be on notice that their priority will virtually always be secondary when competing against an ADI which has perfected by control, even after registration of their secured interest.
Takeout: It is very important to register a security interest in accordance with the requirements of the PPSA, particularly with regard to time limits and the form of application. That is particularly so with regard to use of an ABN or ACN in appropriate cases. If a security interest is not validly registered within time limits set by the PPSA, the secured party may lose priority or may lose the interest completely. While the Court has a discretion to order an extension of time for registration, the ability of the Court to grant extensions is limited and uncertain. Practitioners should not assume that an extension of time will be available on application to the court.
Over the past 6 months I have made several presentations to client law firms, and delivered a CPD session for Foleys List, on the basics of caveats. The presentation lasts about 40 minutes and takes an overview of the subject, accompanied by a more detailed paper to be read afterward.
After some years of scepticism I am a recent convert to electronic shifting. My new bike came with the Ultegra 6870 Di2 group set
The best part about Di2 is that the gear changes are made electronically rather than manually. Electric motors in the front and rear derailleurs do the shifting for you rather than shifting by manually pulling cables. The cabling connection from the shifters to the derailleurs is purely to pass on power and the electric signals.
This means that each shift occurs with absolute precision and the gears require much less adjustment than manual gears do. The system is powered by a battery and computer that sits inside a junction box. Connecting cables plug into that box and go into the front left and right shifters and also into the derailleurs at the front and rear of the system. The whole thing is designed to be “plug and play” so all you have to do is connect the various parts to the junction box with Di2 cabling and the whole thing works. No need for the hassle of adjusting cable tension etc.
The junction box is small enough to sit inside a seat post or a down tube so that it doesn’t have to sit mounted on the outside of the frame as earlier Di2 systems did. It is still possible to fit the junction box to the outside of the frame as it is waterproof but it is much more aero if it can be shoved inside a seat post or a down tube. Most bikes nowadays are designed to work with Di2 and even older bikes can be set up with a Di2 system by your local bike shop.
The cost of the system when buying a new bike is not that much greater than a mechanical group set. It costs roughly an extra $500. The retail price of an Ultegra Di2 system is about AUD$2,000 but in reality you can buy them on-line for half that. When looking around for a Di2 system when I bought my last bike six months ago you could buy a Di2 complete Ultegra system for about $900. That is about the same price as a complete Durace mechanical system (not the new 9100).
So what’s it like to ride? Well it’s fantastic. The gear shifting is absolutely precise. It’s quicker than a manual shift, the shift is instant. Unlike a manual system where you’ve got to throw the shifter lever a fair distance to make a shift and quite often the gears quickly get out of adjustment and the amount of pressure you have to apply changes, a Di2 system is always the same. You just press the shifter, you click a button where the lever used to be and the shift occurs.
The battery life is really good. In practice I found that I have never got close to having the battery running out of power. I usually charge the battery once a week but if you read the literature Shimano claim the battery will last about 1800km on a single charge. The exact battery life depends on how often you shift gears but I did read recently that a Shimano Di2 equipped bike in the Tour de France did the entire tour without a recharge of the battery without any problems.
The junction box has a light indicator on it to tell you how much charge is remaining. It has a solid green light if the battery is 100-50% charged, a blinking green light if it is around 50%, a solid red light if it is around 25% and a blinking red light to indicate that it needs charging ASAP. There are still 200 shifts available on the blinking red light and when the battery gets really low the front derailleur is disabled first so that there are still a couple of hundred shifts available on the rear cogs before the battery fails.
The only reason you should ever run out of battery on Di2 systems is if you neglect to charge it at all for months and you ignore the warning lights.
You can get an adaptor that allows the Di2 junction box to connect wirelessly with other devices via ANT+. I have installed this. It costs about $50 and it will talk to my Garmin bike computer and also my Garmin watch. That allows the Garmin bike computer to give you a heap of data on the go. This includes what gear you are in, your gear ratio (that is the mechanical advantage from front gear to the rear gear), the battery charge percentage, the number if shifts you have made on the front derailleur and the rear derailleur during the ride and a few other sort of useless bits of data that are entertaining to data nerds like me.
For example on a bunch ride to Mornington and back of ab
out 84km, I made eight shifts on the front derailleur for the whole ride and 844 shifts on the rear derailleur for the whole ride. So that is 852 shifts over a three hour ride. I’m not sure exactly what that means but that to me is pretty interesting that I would change gears 844 times in 180 minutes.
The newer Di2 systems in future will allow for more advanced gear shifting systems. You can already program a Durace Di2 system to make combination gear shifts. The same is available in the r8070 Ultegra system. For example, press a function key and have the front derailleur change down and have the rear derailleur change three cogs up at the same time. The technology allows for a semi-automatic or fully-automatic gear changing system that responds to the load that you put through the chain and select the appropriate gear. You might imagine a system that automatically changes you down to the small ring on the front and drops you down a couple of gears on the back when you start climbing. The current Di2 technology would work with that with some software adaption but future systems will do that straight out of the box.