Looking back at 2021
As we start 2022, it’s a great time to look back at the major events that shaped the insolvency market in 2021. It was an eventful year with new appointment types, continues depressed appointment numbers, and several major court decisions.
Small Business Restructuring and Simplified Liquidation
On 1 January 2021 two new appointment types were introduced, Small Business Restructuring and Simplified Liquidations. Both new reforms were rushed in response to an expected surge in business failures as a result of the pandemic. While a welcome reform, both new appointment types have seen little demand. In particular, the headline reform introducing a debtor in possession insolvency option for small business have had almost no traction. There were only 33 Small Business Restructuring appointments in 2021.
Clarity on the Peak Indebtedness rule
On 10 May 2021, the Full Court of the Federal Court of Australia declared in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (In liq) (receivers and managers appointed) that the ‘peak indebtedness rule’ which has been a long-standing precedent in preference claims, was abolished with the introduction of section 588FA of the Act.
The prevailing position (first articulated in Rees v Bank of New South Wales (1964) 111 CLR 210) had been that the liquidator was entitled to nominate the date from which the ‘running account’ starts when calculating the unfair preference. Practically, this resulted in Liquidator’s choosing the date during the relation back period when the debt owed by the company to the creditor was at its highest, resulting in the largest possible unfair preference claim.
While this decision complicates the calculation of preference claims for liquidations, it does provide a more equitable approach to calculating preference claims.
Introduction of Director Identification Numbers
From 1 November 2021 company directors were able to obtain a Director Identification Number. This reform is designed to bring greater accuracy to the ASIC company register and prevent the use of fictitious director identities.
Clarity on Unfair Preferences and set-off
After several years of back and forth decisions on this issue, the Full Court of the Federal Court of Australia finally provided clarity in Morton as Liquidator of MJ Woodman Electrical Contractors Pty Limited v Metal Manufacturers Pty Limited on 16 December 2021.
The Court ruled that a creditor cannot rely on the statutory set-off under s553C(1) of the Corporations Act 2001 (Cth), to reduce the claim of a liquidator for an unfair preference under section 588FA of the Act.
Government Reviews
Through the year, the government was active with reviews into the insolvency legislative framework. First with a review of the bankruptcy system and the impacts of coronavirus, ending in February 2021.
Second was a review of the insolvent trading safe-harbour, with an independent panel appointed to report to the government on whether the safe harbour provisions remain fit for purpose and how its benefits can be extended to as many businesses as possible
Third, was a review of corporate trusts and insolvency. On 5 October 2021, Treasury opened a consultation seeking stakeholder views on whether the treatment of corporate trusts in Australia’s insolvency law needs to be clarified and input on the benefits this could deliver and how any new framework might operate.
Depressed appointment numbers
The Australian economy held up surprisingly well through the various challenges it faced during 2021. Business failures and personal bankruptcies both remained well below historical trends, with bother seeing approximately 40% less appointments than the historical average.
Given the impact of the lockdowns, other COVID-19 restrictions, and supply chain challenges, it was surprising to see both personal and corporate insolvencies stay so low. However, government support and stimulus did its job and kept business alive during the uncertainty.