Road to 2017

It is anticipated that, by the middle of the year, Australia will see the most significant reform to the corporate and personal insolvency environment in two decades. The reforms, which appear likely to be supported by all sides of government, are designed to promote business preservation and allow greater flexibility in order to ‘turnaround’ distressed companies.

In 2014 the process of reform began with the Australian Productivity Commission’s release of an Issues Paper and subsequent Report on Business Set-Up, Transfer and Closure. In December 2015 the draft Insolvency Law Reform Bill (the Bill) was released.

The perception among the business community is that the existing insolvency landscape stifled entrepreneurship and forced distressed companies into insolvency at the expense of restructuring. While some commentators lament the missed opportunity to go further and adopt more comprehensive reforms, consensus is that the new legislation will resolve some of the market’s biggest concerns and will encourage a turnaround culture. It is also likely to generate increased interest in the domestic distressed debt market.

Key elements of the Insolvency Law Reform Act 2016 include:

  1. Reduction of the bankruptcy period from three to one year
  2. Introduction of a ‘safe harbour’ defence for directors. Directors will avoid personal liability for insolvent trading if they appoint an adviser to assist with business turnaround.
  3. Unenforceability of certain ipso facto clauses. The proposed new laws will prevent a party from terminating a contract based solely on an insolvency event. Certain contracts such as prescribed financial contracts may be excluded from this restriction.

One of the Productivity Commission’s more controversial recommendations (and which did not make it into the draft Bill) is the introduction of a duty of receivers “to not cause unnecessary harm to the interests of creditors as a whole.” This and other more substantive reforms will be subject to further consultation as the Government has committed to another review. The passage of the Bill will meanwhile continue to shine a spotlight on the more substantive reforms proposed.

In addition to the commencement of the Insolvency Law Reform Act 2016, certain class action proceedings in the Federal Court of Australia are likely to intensify in 2017 in the lead up to a hearing on common issues in 2018. Squire Patton Boggs advises the applicants and most group members in seven class action proceedings that have arisen out of the rating of several structured financial products by Standard & Poor’s (S&P) and Fitch Ratings (Fitch). These follow a successful settlement reached in similar proceedings against S&P, following a landmark win in the main proceedings and a further appeal to the Full Federal Court.

The majority of the claims in these proceedings arose following the global financial crisis and the collapse of underlying reference entities including Fanny Mae and/or the swap counterparty Lehman Brothers Australia (in liquidation) (LBA). As a large number of Australian organisations held these products, a number of insolvencies resulted from their collapse in value and/or wipe out and Squire Patton Boggs has acted for creditors of LBA in the insolvency proceedings that ensued to recover money for creditors with these claims.

The products that are the subject of these proceedings include a constant proportion portfolio insurance (CPPI) and synthetic collateralised debt obligations (SCDOs) which were assigned credit ratings by S&P or Fitch. The applicants allege that the ratings agencies were negligent and engaged in misleading and deceptive conduct in assigning high ratings to these products. They contend that had the products not received such high ratings, they would not have invested. S&P and Fitch deny these allegations.

These proceedings have had and will continue to have widespread domestic and international significance due to the number of structured financial products that were sold around the world and were rated by the large ratings agencies using similar methodology. Actions against S&P have been filed in other jurisdictions, including by European institutional investors in Amsterdam, setting a global trend that is likely to continue into 2017. This trend involves ensuring the accountability of credit rating agencies in their assignment of ratings to complex financial products, especially in areas where regulators have as yet failed to achieve similar outcomes. As a result, the continuing progress of these class actions in 2017 is likely to produce lasting implications, in particular further consideration as to the regulation of credit rating agencies.

Continue watching this blog throughout the year to come for updates about these and other topics from our offices across Australia, EU and Europe, UK and US.