“Out with the old, in with the new: courts begin applying major insolvency reforms”

A suite of recent cases judicial decisions has the need for greater familiarity of the Insolvency Law Reform Act 2016 (Cth) (Reform Act) and its related amendments because some courts are applying the provisions earlier than expected.

The Reform Act contains a number of long-anticipated reforms to bankruptcy and insolvency law in Australia. Federal Parliament initially scheduled the provisions of the Reform Act to come into effect in two tranches; the first to come into effect on 1 March 2017, the second, including rules governing insolvency practitioner remuneration, reports, meetings, committees of inspection, and review, on 1 September 2017 – but would then operate retrospectively as if they had come into effect on 1 March.

Nonetheless, several recent decisions have indicated courts Australia-wide are applying provisions of the Reform Act scheduled to commence in September as if these amendments had already commenced.

Gleeson JA of the New South Wales Supreme Court held in Re Golden Sands Hospitality Pty Ltd (in Liq)¹ that a liquidator’s application to resign and be replaced was to be determined under sections 473, 473A and 600K of the Corporations Act 2001 (Cth) (Corporations Act) as amended by the Reform Act, and that these amendments had been operative from 1 March 2017.  This conclusion was reached without reference to regulation 10.25.02(3)(g) of the Corporations Regulations 2001 (Cth) (Corporations Regulations), which defers the Reform Act’s amendments concerning these sections until 1 September 2017.

In Linc Energy Ltd (in Liq): Longley & Ors v Chief Executive Dept of Environment & Heritage Protection,² Jackson J of the Queensland Supreme Court observed that section 511 of the Corporations Act had been repealed on 1 March 2017.  His Honour did not refer to regulation 10.25.02(3)(h) of the Corporations Regulations, which also defer the relevant section’s repeal until 1 September 2017.  However, as the litigation in the case had commenced before March, Jackson J found (correctly) that the old section 511 applied.  This position was adopted in Re Queensland Nickel Pty Ltd (in Liq),³ where Bond J also of the Queensland Supreme Court held that the ‘recent repeal’ of sections 479 and 511 on 1 March 2017 did not affect proceedings, because they had commenced before that date – despite the Reform Act and related provisions of the Corporations Regulations deferring the repeal of the sections under consideration until September.

In Szepesvary v Weston (Trustee), in the matter of Szepesvary (Bankrupt),⁴ the Federal Court considered an application for an inquiry into conduct of a bankruptcy trustee under section 179 of Bankruptcy Act 1966 (Cth).  Schedule 2 Item 54 of the Reform Act repealed this section, and regulation 5(2)(p) of the Insolvency Law Reform (Transitional Provisions) Regulation 2016 (Cth) provided that the repeal would become effective on 1 September 2017.  Nonetheless, Moshinsky J held that section 179 had been repealed on 1 March 2017, although because the litigation had commenced before this date, the old section 179 still applied. Regulation 5(2)(p) was not considered in the judgment.  

Markovic J of the Federal Court in Campbell-Wilson v Australian Securities and Investments Commission⁵ considered an application under section 509 of the Corporations Act to deregister a company in voluntary liquidation.  Regulation 10.25.02(3)(g) of the Corporations Regulations purported for this section to be repealed and substituted with a new procedure for deregistration on 1 September 2017.  Nevertheless, Markovic J held that the Reform Act’s repeal and substitution of section 509 applied where the external administration of the company ended during a financial year starting on or after 1 July 2017 – two months before 1 September.  In this case, the company had lodged accounts before 1 July 2017.  As a result, his Honour applied the procedure under the old section 509.  The Corporations Regulations were not considered.

However, despite these judgments, Black J of the New South Wales Supreme Court in Re Hayes Steel Framing Systems Pty Ltd (Administrators Appointed)⁶ found an application could be brought under the old, un-amended section 600A of the Corporations Act because the section would not be repealed until 1 September 2017 as scheduled.  His Honour held at [41] that:

“[section 600A] was repealed by the Insolvency Law Reform Act 2016 (Cth), with effect from 1 March 2017, but reg 10.25.02(3)(i) of the Corporations Regulations 2001 (Cth), inserted by Schedule 2 of the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth) preserves the application of that section in relation to external administrations until 1 September 2017.”

Lavan Comment

Parliament’s intention to delay the implementation of significant changes until 1 September 2017 does not appear to have been considered in a significant proportion of recent cases concerning the affected provisions.  There is an absence of reference in these judgments to the regulations that Parliament implemented purporting to delay the reforms’ implementation.

Accordingly, Australian companies would do well to seek advice on the implications on the incoming changes to the Corporations Act,  particularly litigation commenced after 1 March 2017 – the date from which these judgments discussed have deemed the full gamut of amendments to have taken effect.  Companies, secured creditors, administrators, receivers and liquidators who commence litigation this year may find themselves mired in unfamiliar territory if proper consideration is not given to the myriad of changes the Reform Act will bring about to insolvency practice in Australia.