The commencement of the Insolvency Law Reform Act 2016 (Cth) is generating confusion in the insolvency industry. This post discusses the commencement provisions and notes a recent decision in bankruptcy that considered commencement issues: Szepesvary v Weston (Trustee), in the matter of Szepesvary (Bankrupt) [2017] FCA 344.

The Insolvency Law Reform Act (ILRA) has been introduced with a split commencement, with some provisions starting on 1 March 2017 and some provisions starting on 1 September 2017. The ILRA reforms will make a large number of changes to insolvency practice, and with the Insolvency Practice Rules only being released in late December 2016, extra time was given by the Government for the industry to adjust to the new procedural rules around matters such as creditor meetings, remuneration approvals and reviews, communication with creditors and reporting obligations. These matters are largely dealt with in Part 3 of the Insolvency Practice Schedule (which is found in Part 1 of Schedules 1 and 2 of the ILRA). This covers Divisions 55 to 95 for corporations matters and Divisions 55 to 90 for bankruptcy matters.

There are also a large number of miscellaneous amendments to the Bankruptcy Act, the Corporations Act and other statutes made by Part 2 of Schedules 1 and 2 of the ILRA. A small number of these provisions commenced on 1 March 2017 but the bulk are scheduled to commence when IPS Part 3 starts (on 1 September 2017). This is because the amendments remove or replace provisions in the Corporations Act and the Bankruptcy Act with provisions in the new Insolvency Practice Schedule (IPS) and the Insolvency Practice Rules (IPR). If the IPS and IPR provisions don’t start until 1 September then we can’t repeal the existing rules in the Corporations Act and the Bankruptcy Act until 1 September 2017.

There is an argument that the deferred commencement machinery is invalid. Sydney insolvency barrister Jim Johnson has argues in the upcoming law reform special issue of the Insolvency Law Bulletin (of which I am co-editor) that subordinate legislation cannot amend Acts of Parliament.  In order to understand this argument we need to consider the statutory provisions that put in place the deferred commencement of the ILRA.

Deferred commencement

Section 2 of the ILRA provides for commencement, stating that Sch 1 commences either when proclaimed or within 12 months of assent (which would run to 1.3.17). Schedule 1 of the ILRA introduces the IPS (Bankruptcy) in Pt 1, makes consequential amendments to the Bankruptcy Act in Pt 2 and provides transitional provisions in Pt 3. The remaining provisions in ILRA s2 provide commencement for the changes made in ILRA Sch 2 and 3 (which concern corporate matters) to be linked back to s2 table item 2 (i.e. the commencement of the bankruptcy changes), although there are some miscellaneous provisions in ILRA Sch 2 Pt 2 (which amend the Corporations Act and other statutes) that commence at different times.

So from all of this, the default commencement is 1.3.17. However, both the bankruptcy changes in ILRA Sch 1 and the corporate changes in ILRA Sch 2 provide for regulations to be made (under s178 for Bankruptcy and s 1634 for Corporations). It is the regulations made under these provisions that defer the commencement of some provisions to 1 September 2017.  The relevant regulations are:

• Insolvency Law Reform (Transitional Provisions) Regulations 2016 (Cth)
• Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth)

What both of these regulations do is alter the transitional provisions in Part 3 of ILRA Sch 1 (for bankruptcy) and Sch 2 (for corporate) so that the transitional provisions in Part 3 set the commencement date of changes made by IPS Pt 3 (i.e. Div 55-90 for bankruptcy and Div 55-95 for corporate) to be 1.9.17 as well as specifically state that particular amendments in ILRA Sch 1 and 2 Pt 2 commence on 1.9.17. This is done using the regulations power inserted into the statute in s178 and s1634.

This issue was recently addressed by the Federal Court of Australia in Szepesvary, where Moshinsky J held that Bankruptcy Act ss178 and 179 (dealing with supervision of trustees) could be used because the case started before the ILRA commenced, but held that they were repealed from 1.3.17. Sections 178 and 179 appear in Pt VIII Div 4. ILRA Sch 1 Pt 2 item 54 repeals this Division (and Division 3). That item is included in Insolvency Law Reform (Transitional Provisions) Regulations 2016 (Cth) item 5 as being deferred in commencement until 1.9.17. This is necessary because the court supervision powers of the new Insolvency Practice Schedule (Bankruptcy) are in Div 90 which does not commence till 1.9.17 (see ILR(TP) Reg Sch 1 item 1).

This leaves the commencement provisions under a cloud of uncertainty. The government and the insolvency profession is working under the view that Pt 3 of the Insolvency Practice Schedule and the rules in the IPR that support these provisions as well as many of the changes to the Bankruptcy Act and the Corporations Act in ILRA Sch 1 Pt 2 and Sch 2 Pt 2 don’t commence until 1.9.17. What if that is wrong in law? Where does that leave us?

Which rules should IPs be applying for meetings, and for remuneration and for a whole range of matters provided for under IPS Pt 3, and what provisions should the courts be applying when giving directions to IPs? Should it be the new IPS Div 90 or provisions such as s447D and s479?

My personal view is that the deferred commencement applies. To cause further confusion, the Federal Register of Legislation and Austlii have both published consolidations for the Bankruptcy and Corporations Acts as including ALL of the ILRA changes (even those meant to start on 1.9.17) so if you look for ss178 and 179 in the Bankruptcy Act you won’t find them. It may be advisable for IPs to ensure that their proposed meetings are consistent with both the old and new rules, which is just ludicrous. It may well turn out that this confusion doesn’t result in any invalid actions, meetings etc. However, the fact that the law has been in place for over a month and we are not 100% confident about when it starts is a damning indictment on poor drafting and an appalling waste of time and resources for those needing to track through the spaghetti junction of amendments, regulations and rules. How much has the Government cost the economy by splitting the commencement to gain a few PR points in claiming that its ‘tough on IPs’ regulatory approach (see IPS Part 2) wasn’t delayed? Would anyone in the community really have noticed or cared if the whole package had simply started on 1 September?

A good way to drive up costs in insolvency is to make the start date for new rules to be so obtuse that IPs have to go off and get legal advice before they do anything!

*Thanks to Michael Murray and Jim Johnson for alerting me to Szepesvary. The views expressed in this note are mine alone and all errors and/or omissions are my responsibility.