The report recommends substantial changes to the present voidable transaction regime, and a raft of improvements to current legislation to achieve a fairer allocation of resources when a corporate insolvency event occurs.

Submissions on the report are due by Friday, 23 June. The report is detailed and makes over 30 recommendations. The key recommendations are:

Voidable transactions

• Remove the ‘gave value’ component of the s296(3) defence, so that it only operates where a creditor, in good faith and without suspicion of insolvency, relies on the payment itself.
• Reduce the clawback period for insolvent transactions from two years to six months where the preferred creditor is an unrelated party (four years for related parties).
• Require liquidators to file any voidable transaction claims (and other similar claims) within three years, rather than six.
• Simplify the ‘continuing business relationship’ rule in s292(4B) of the Companies Act by allowing a simple process of netting off debits and credits and removing the subjective element relating to the parties’ intentions.
• Require liquidators to provide more information to creditors served with voidable transaction notices.
• Provide that recoveries from reckless trading claims are not available to secured creditors (as they are now).

Ponzi schemes

• Once the Supreme Court releases its decision in McIntosh v Fisk, the Government should consider whether further changes are necessary to aid the recovery of funds, and also the establishment of a compensation scheme (like in the United States).

Other proposed corporate insolvency reforms

• Establish a new preferential claim for gift card and voucher holders.
• Clarify whether long service leave forms part of an employee’s preferential claim.
• Place a six-month limit on the preferential claims of Inland Revenue and Customs.
• Allow communication by electronic means between liquidators and creditors.

Please click here to access a copy of the IWG’s second report as well as other relevant documents.

Our comments

We are encouraged by the IWG’s recommendations. The proposed reform of the voidable transactions regime will appropriately re-set the balance between the collective interests of creditors affected by a liquidation and the interests of individual creditors who have received a payment in good faith. As the report notes, balancing these competing interests is difficult and voidable transactions will remain controversial and “sometimes emotive”. However, the proposed amendments (provided they are enacted together, as suggested by the IWG) will simplify the regime and address concerns about some liquidators who take too long to bring voidable transaction claims or use them exclusively to pay their fees.

We agree that it would be premature of the IWG to recommend changes to insolvency legislation to account for Ponzi schemes prior to the Supreme Court’s ruling in McIntosh v Fisk, which is expected sometime this year.

The changes proposed to achieve a fairer allocation of resources are all sensible. Priority for gift cards and vouchers will be popular with consumers, who were hard hit by retail collapses such as Sounds and Dick Smith. The reform that will make the most impact, if it is enacted, will be the proposal to limit the existing preferential claims for taxes and customs and excise duties to six months from the date that these debts fall due. As the report observes, “[t]his change will better protect the interests of other ordinary unsecured creditors because it will incentivise IRD and Customs to intervene earlier where it is evident that a company cannot be rehabilitated.” Where the IRD or Customs fail to take action, ordinary unsecured creditors won't be penalised for that inaction.

The Minister is also seeking feedback on an issue addressed in the IWG’s first report – whether to introduce a Director Identification Number. For our previous commentary on that point, please click here.

Kensington Swan will be making a submission on the IWG’s second report. If you would like assistance with making a submission, or would like to know more about the proposals in the report, please contact us.