The Insolvency Law Reform Act 2016 (Cth) (ILRA) makes significant changes to how creditors’ voluntary liquidations are commenced from 1.9.17. This post will outline the changes to the commencement of CVLs and compare them to the prior law.
CVLs are the most common type of corporate insolvency appointment with 5,628 appointments in FY16-17, which represents 49% of all forms of appointment (source: ASIC Insolvency Statistics, Series 2). Voluntary liquidations can be either a members’ voluntary liquidation (MVL) or a creditors’ voluntary liquidation (CVL), both under Part 5.5 of the Corporations Act 2001 (Cth). Liquidators can also be appointed by the Court under Part 5.4, or 5.4A of the Corporations Act 2001 (Cth).
Once appointed, the job of a court appointed and voluntary liquidator are similar (in terms of gathering in the assets, investigations, reporting, dealing with creditors and realising assets). The process for appointing different types of liquidators is not the same however. This post will discuss how the ILRA changes the appointment process for CVLs.
A members’ voluntary liquidation requires that directors pass a solvency declaration and members pass a special resolution to put the company into voluntary liquidation at a valid members meeting. There are various grounds under s490 that prevent a company appoint a voluntary liquidator. This post will not discuss MVLs in detail.
The pre-1 September law for CVLs
A CVL could be initiated in 4 ways:
- (under s496) following on from an MVL where the liquidator believed the company was in fact insolvent and the creditors’ agreed to proceed as a creditors’ voluntary liquidation (either with the same liquidator or after appointing a new liquidator). The liquidator had a duty to either apply for a court ordered liquidation, appoint an administrator or convene a creditors’ meeting under s496;
- (under s497) where a company’s board refused to pass a declaration of solvency, the members could still pass a special resolution appointing a liquidator, who then had 11 days from the date of the members’ meeting to convene a creditors’ meeting to consider whether to replace the liquidator and whether to appoint a committee of inspection;
- (under Part 5.4C) where ASIC orders that a company be wound up; or
- (under s446A) following from a period of voluntary administration (where the creditors voted to put the company in liquidation at the second meeting).
Therefore, the prior law only allowed creditors to initiate a CVL where the company proceeded from a voluntary administration. Where the company was already in an MVL, creditors could only elect to continue the voluntary liquidation already on foot, although they could replace the liquidator with their own appointment.
The current law for CVLs (from 1.9.17)
The ILRA makes significant changes to the commencement of CVLs. Of the 4 methods for appointing a CVL outlined above, no 2. is removed. No 1. remains largely in place, although there are some procedural amendments to s496 by removing subs(2),(3) of the former provision. Numbers 3 and 4 remain, although no. 4 has been supplemented by a new s446AA.
So what happens where a company’s members are prepared to pass a special resolution but the board is not prepared to make a declaration of solvency? Under the former law, a creditors’ meeting needed to be convened, but under the current law this is no longer necessary (from 1.9.17).
Section 497 has been completely replaced by a new provision that doesn’t require a creditors’ meeting within 11 days after the members’ meeting. All that is required now is for the existing liquidator appointed by the members to send a summary of affairs of the company to creditors (see Form 509) and a list of the names and details of creditors (as shown in the records of the company) and to lodge a copy of these documents with ASIC (see Form 5604). The list must identify which creditors (if any) are related entities of the company: s497(2).
It should be noted that under the new law, the liquidator may convene a creditors’ meeting at any time (IPS (Corporations) s75-10), and the creditors may require that a meeting be convened under new rules in IPS (Corporations) ss75-15 and 75-20.
The information must be sent and lodged within 10 business days of the members’ meeting: s497(1). Only creditors who are owed at least $1000 need receive these documents (unless the court others otherwise): s497(3).
Directors must lodge a RATA with the liquidator within 5 business days of the members’ meeting which appointed the liquidator: s497(4). The liquidator has 10 business days after receiving the report to lodge a copy of it with ASIC: s497(6).
So the ILRA reforms to CVL mean that where the directors refuse to pass a solvency declaration the liquidator must be appointed by the members (this is further confirmed by s499(1)). This does not mean that creditors lose their ability to replace the liquidator appointed by the members, but this power now comes under IPS (Corporations) s90-35 and can be exercised at any time, so there is no need to convene a creditors’ meeting after the members’ meeting.
It should be noted that such a voluntary liquidation cannot be an MVL and must be a CVL. This is because s9 defines a creditors’ voluntary liquidation as a voluntary liquidation ‘other than a members’ voluntary liquidation’, and the definition of a members’ voluntary liquidation (also in s9) requires that a declaration of solvency be passed by the directors.
Liquidators in a CVL must now also lodge a DIRRI with ASIC as soon as practicable after giving a copy of it to the creditors: s506A (Form 531).
Another change with the CVL is when the liquidator resigns their office. Under the old law, the creditors would fill the vacancy under s499(5), but under the new provisions the power to fill a vacancy by resignation (other than for a court appointed liquidator) is given to the court, the creditors or ASIC: s499(3). Where a voluntary liquidator’s registration is suspended or cancelled, only ASIC can fill the vacancy: IPS (Corporations) s40-111.
After appointment, the voluntary liquidator will have a range of new reporting obligations, including:
- the annual administration return (IPS (Corporations) s70-5; Form 5602);
- the end of administration return (IPS (Corporations) s70-6; Form 5603);
- the initial information given to creditors (IPR (Corporations) s70-30);
- the statutory report report within 3 months of appointment, which includes prospects of recoveries and dividends (IPR (Corporations) s70-40; Form 5601);
- initial remuneration notices (IPR (Corporations) s70-35); and
- reports to assist with remuneration determinations (IPR (Corporations) s70-45).
It should be noted that ARITA has produced a suite of practice documents and precedents to assist insolvency practitioners with the new requirements.
Of course, some of this information was required to be provided in different reports under the prior law (such as 6 monthly receipts and payments, remuneration reports and final reports). To this list we can also add the continuing obligations under s533 with respect to contraventions of the law.
It should be noted that savings will also arise from the removal of the requirement to convene annual meetings of creditors (although the prior s508 had allowed for a report to be prepared rather than a meeting for several years prior to ILRA) and the removal of the final meeting before deregistration (former s509-the new s509 provides for deregistration 3 months after the end of administration return is lodged).
While the changes to CVL commencement potentially save costs on creditor meetings (noting that while meetings might not be required as a default they can still be required by creditors), they more than make up for those savings by imposing a range of new reporting and compliance obligations, in addition to the costs associated with implementing the new IPS and IPR across dozens of forms and precedents. How much money will be spent simply changing section references on forms and documents?
The notion that ILRA would save tens of millions of dollars in compliance costs is simply fanciful. ILRA will prove to be an administrative cost on the Australian economy, even if it is a cost that comes with some benefits and efficiencies.