What's up in Australian insolvency law, and why should we care?

As New Zealand inches sloth-like toward a more regulated regime through the Insolvency Practitioners Bill, introduced in April 2010 and yet to have its third reading, Australian court decisions may become more relevant here.

After regulation, our two systems will still be different but less so than they are now, and already Australia provides a pointer to some of the issues which may arise here.

With that in mind, we have identified the top six insolvency law developments in Australia as we see them.

1. Disclaimer of assets

   The High Court of Australia (their equivalent of our Supreme Court) has ruled that liquidators may disclaim unprofitable leases that were granted by the company as lessor, extinguishing the tenant's interest in the land.1 This creates risk for both the lessee and any lender who takes security over the leasehold property.

   Traditionally the ability to disclaim assets has been used only as a tool to allow a liquidation to be resolved quickly. This judgment, by contrast, seems to allow liquidators to claw back assets to increase the funds available for distribution.

   Preferring unsecured creditors over those with rights in real property in this way is a troubling move from Australia's highest court.

2. Scope of the requirement to be independent

   ASIC has reconfirmed its intention to enforce rigorously the requirement that insolvency practitioners be, and be seen to be, completely impartial by seeking through the Federal Court of Australia to have liquidators removed on the basis of a "reasonable apprehension" of a lack of independence.2

   The liquidators had been appointed on the referral of a financial advisory firm which, prior to the liquidation, had advised the troubled company to transfer assets to entities associated with the financial advisers. ASIC contended that the liquidators, who secured a significant amount of work through the firm, were engaged in an "ongoing commercial relationship" so could not be relied upon to apply appropriate scrutiny to these transactions.

   The Court declined the application, finding that a fair minded observer would be satisfied that the liquidators would discharge their statutory duties impartially. The Court noted that the reality of the market was that liquidators were commonly referred work by solicitors, business advisors and accountants.

   ASIC has already lodged an appeal.

   The tensions around independence in a regulated profession would likely be even more acute in the smaller New Zealand...