Submissions sought on changes to insolvency law

The Insolvency Working Group has released “Report No. 2” following its first report in July 2016. Report No. 2 recommends law changes to voidable transactions, Ponzi schemes and other corporate insolvency matters.

Submissions on the proposed changes are invited and are due by 23 June 2017.

Feedback is also sought on whether to introduce a director identification number. This is intended to make it easier to quickly and accurately search for companies by director, as well as assist directors of multiple companies in updating their details.

A link to the consultation page and consultation paper is available here and here.

Key proposed changes

Voidable transactions

The major change proposed for voidable transactions is to repeal the “gave value” test for the creditors’ defence against recovery of property under section 296(3) of the Companies Act 1993. This is intended to shift the interests of the voidable transactions regime towards the collective interests of creditors. The amended defence would therefore only apply where the creditor, in good faith and without suspicion of insolvency, relies on the payment itself (Recommendation 1).

In addition, the Insolvency Working Group recommends reducing the period of vulnerability for insolvent transactions from two years to six months (where the debtor company and preferred creditor are unrelated parties). Repealing the “gave value” test is not recommended without this change (Recommendation 2).

A number of other recommendations are also made relating to voidable transactions, including:

  • reducing the limitation period for liquidators to file claims from six years to three years (Recommendation 7);
  • removing the subjective element relating to parties’ intentions in the continuing business relationship rule in section 292(4B) of the Companies Act 1993 (Recommendation 10);
  • adding a defence for a creditor with a valid security interest who can demonstrate there was no preference at the time they received payment (Recommendation 9); and
  • providing that recoveries from reckless trading claims are not available to secured creditors (Recommendation 18).

Ponzi schemes

The Insolvency Working Group also recommends that following the release of the upcoming Supreme Court decision in McIntosh v Fisk, the Government should consider whether there is a need to make the following changes:

  • introducing a “Ponzi presumption” which establishes that Ponzi scheme investors are creditors without the need to prove an intent to defraud or the debtor’s insolvency;
  • moving to an objective standard for the good faith defence to clawing back property disposed to third parties; and
  • establishing a compensation scheme for investors who have suffered losses as a result of Ponzi schemes (Recommendation 16).

Other corporate insolvency matters

Other recommended changes for corporate insolvency matters include:

  • introducing a new preferential claim for gift cards and vouchers, ranking equally with lay-by sales following the collapse of Dick Smith Electronics (Recommendation 25);
  • clarifying whether long service leave forms part of the preferential claim for employees (Recommendation 24);
  • placing a six-month limit on preferential claims for taxes and customs and excise duties, to incentivise IRD and Customs to intervene earlier “where it is evident that a company cannot be rehabilitated” (Recommendation 26);
  • providing that recoveries from reckless trading cannot be distributed to secured creditors (Recommendation 18); and
  • clarifying that the priority for administrators’ cees and expenses continues to apply when a company is both in receivership and in administration (Recommendation 28).

If you have any questions on these changes, or on other law changes recommended by the Insolvency Working Group, please do not hesitate to contact one of our experts.