It Won’t Happen Overnight, But It Will Happen - Update On Law Reform Following Joint Committee Inquiry Into Insolvency Laws

In our articles of 22 March and 31 July last year we followed the progress of the Parliamentary Joint Committee on Corporations and Financial Services (Joint Committee) inquiry into corporate insolvency in Australia and the potential law reform that might flow on from that inquiry. 

The Joint Committee’s report of 12 July 2023 recommended, among other things: 

• a comprehensive review of personal and corporate insolvency law in Australia; and
• some specific law reform to corporate insolvency in the meantime, including calling on the government to provide its response to the Whittaker 2015 Review of the Personal Property Securities Act 2009 Final Report (Whittaker Report).

Since that time, the Government has:

• sought submissions on its proposed reform packages in respect of:
  • its response to the Whittaker Report; and
  • the Bankruptcy Act 1966 (Cth) (Bankruptcy Act); and
• passed legislation amending the Bankruptcy Act to provide more certainty in respect of the calculation of bankruptcy discharge dates.

While further details of the proposed comprehensive review have yet to be released, this article takes a look at some of the recent developments in relation to the response to the Whittaker Report and in relation to the Bankruptcy Act.

Response to the Whittaker Report

One of the key themes of the Whittaker Report was the overly technical and unnecessarily complex operation of the Personal Property Securities Act 2009 (Cth) (PPSA).  The Whittaker Report made 394 recommendations for simplifications and improvements to the PPSA, the Personal Property Securities Regulations 2010 (Cth) (PPS Regulations) and the Personal Property Securities Register (PPSR).  However, only four of the 394 recommendations have been implemented to date.

Following the Joint Committee inquiry, the Government sought submissions late last year on a reform package which would:

• accept 345 of the recommendations, at least in part;
• reject 38 of the recommendations, whilst providing clarification in respect of nine of those rejections; and
• see no action taken in respect of the remaining seven recommendations (which the Government considers to be redundant)¹.

Broadly speaking, the proposed amendments to the PPSA would (at least in theory)²:

• improve consistency and clarify the interests captured by the operation of the PPSA, including:
  • amending the key definitions of “personal property” and “security interest”; and
  • removing the reference to bailments as a form of PPS lease;
• clarify the requirements for creating an effective security interest in personal property, including:
  • amending definitions of particular types of personal property such as “intermediated securities” and “investment instruments”; and
  • expanding the definition of “ADI” (authorised deposit‑taking institution) to apply to authorised foreign banks and the Reserve Bank of Australia;
• improve the operation of the PPSA in relation to dealings in collateral, including:
  • clarifying that the knowledge component in relation to whether a purchaser can take collateral free of a security interest may be satisfied by actual or constructive knowledge; and
  • amending provisions relating to purchase money security interests (PMSIs) in a number of respects such as replacing the different timing requirements for registering a PMSI (which currently depends on whether the PSMI is claimed over inventory or not) with a universal 15 business day timeframe;
• clarify how security interests may be enforced upon default under a security agreement by repealing and replacing the whole of Chapter 4 of the PPSA, including clarifying:
  • which enforcement provisions under (the replacement) Chapter 4 are mandatory and which may be contracted out of; and
  • that security interests captured by the National Credit Code are not subject to enforcement under Chapter 4 of the PPSA;
• improve the registration process for perfecting security interests including changes to the PPS Regulations (discussed further below) and:
  • dispense with the distinction between commercial and consumer property; and
  • remove the provision rendering a registration defective if a PMSI is incorrectly claimed;
• expand the current regulatory powers of the PPS Registrar; and
• clarify the interaction of the PPSA with other laws and for determining whether the laws of Australia or a foreign jurisdiction govern a transaction, including moving provisions relating to circulating assets into the Corporations Act 2001 (Cth) (Corporations Act).

The Government also proposes to repeal and replace the existing PPS Regulations so that, among other things, the information required when registering a financing statement will be simplified. 

For example, it is proposed that the PPS Regulations be amended to³:

• streamline the current collateral classes (of which there are nine) and sub-categories to six classes;
• remove tick boxes that indicate whether collateral may include inventory and whether a PMSI is claimed;
• require that a registration over trust assets be made against the relevant details of the trustee rather than the trust’s ABN; and
• amend the definition of “motor vehicle” so that it only captures road vehicles with a vehicle identification number (VIN), with the Government considering whether to establish a separate register of construction and heavy industry machines.

The Whittaker Report recommendations rejected by the Government include⁴:

• the proposed repeal of section 588FL of the Corporations Act so that a security interest granted by a company does not vest upon an external administration due to failure to register the security interest within 20 business days after the security agreement came into force or at least six months before the external administration commenced; and
• simplifying and limiting the categories of personal property that are circulating assets.

Consultation in respect of the reform package opened on 22 September and closed on 17 November 2023.

The Government’s proposed reform package does not appear to have received universal support.  For example, neither the Australian Institute of Credit Managers (AICM)⁵ nor the Business Law Section of the Law Council of Australia (BLS)⁶ support the proposed changes:

• restricting motor vehicles to those with VINs;
• creating a separate register of yellow goods; or
• altering the relevant trust registration details from the trust ABN to the trustee’s details. 

Further, the AICM does not support the significant number of proposed changes to the information required to register a financing statement on the PPS Register, and has queried the benefits of the changes given that many users have now had 12 years to become familiar with the existing process⁷. 

The BLS also maintained its support of the Whittaker Report recommendation that section 588FL of the Corporations Act be repealed and has urged the Government to reconsider its position in this regard⁸.

Bankruptcy Act Reform

The Government also sought submissions in September 2023 on its proposed Bankruptcy Act reforms⁹ including:

• increasing the bankruptcy threshold value from its current $10,000 to $20,000;
• increasing the period of time in which a debtor may respond to a bankruptcy notice from its current 21 days to 28 days;
• a reduction in the period of time the details of a bankruptcy are publicly available on the National Personal Insolvency Index (NPII) from the current position (records are permanently retained on the NPII except in limited circumstances) to removing the NPII record seven years after discharge from bankruptcy.  While it is proposed that the NPII records of discharged bankruptcies will not be publicly available seven years after discharge, the records will remain available for use by at least some Commonwealth agencies; and
• removing two current acts of bankruptcy from section 40 of the Bankruptcy Act to encourage the use of debt agreements as an alternative to bankruptcy so that a debtor does not commit an act of bankruptcy by either:
  • giving the Official Receiver a debt agreement proposal; or
  • creditors accepting such a debt agreement proposal. 

The consultation period has closed, with 21 responses currently published on the Attorney‑General’s Department website¹⁰.  Based on those responses it appears that:

• there is no clear support for the proposed increase in the bankruptcy threshold to $20,000, with many submissions preferring the threshold remain at $10,000; and
• broadly speaking, the majority support the remaining proposed changes, with the strongest support being in favour of the reduction of time bankruptcy details are publicly available on the NPII (subject to exceptions for serial bankruptcies).

In addition, the Bankruptcy Act was amended in November 2023 to clarify the calculation of the date of an automatic discharge from bankruptcy as three years and one day after acceptance of a debtor’s petition or, in the case of creditor-initiated bankruptcy, the date that an accepted statement of affairs is filed.  The amendment was made to rectify a difference between the administrative processes of the Australian Financial Security Authority in the lodgement and acceptance of statements of affairs and the provisions of the Bankruptcy Act, in order to align with existing practice¹¹.

Lavan comment

Developments and reforms to personal and corporate insolvency laws are continuing and should be expected to continue given, among other things, current economic factors and cost of living concerns.  Watch this space for further updates.

If you have any questions about the matters in this article or the Joint Committee inquiry and the looming reforms to the insolvency laws of Australia, the experienced Lavan team is here to help.