In brief

With the courts about to consider a significant and long standing controversy in the law of unfair preferences, suppliers to financially distressed companies, and liquidators, should be aware that there have been recent significant shifts in the law about getting paid in hard times.

Recent development

In brief

The new small business insolvency reforms enacted by the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Corporations Amendment Act) - which inserts a new Part 5.3B into the Corporations Act 2001 (Cth) (Corporations Act) - are due to come into effect on 1 January 2021.

In brief

In a recent decision 9354-9186 Québec inc. v. Callidius Capital Corp, 2020 SCC 10 , the Supreme Court of Canada affirmed that:

Directors of Australian companies face significant personal monetary – and potential criminal and adverse professional – consequences if they allow the company to trade whilst insolvent.

Australian insolvent trading laws are harsher, and more frequently utilised to prosecute directors personally, than in many other jurisdictions including in the US and the UK.

Accordingly, frequent assessment of a company’s solvency by its directors is crucial, particularly in financially difficult times, as are active steps to address any potential insolvency.

On 30 January 2020, the World Health Organization declared that the coronavirus outbreak constituted a public health emergency of international concern. The PRC and Hong Kong have been at the forefront of the coronavirus outbreak.

On 15 July 2019, UNCITRAL formally approved a new model law (linked here) for enterprise group insolvencies on how to administer group insolvencies across multiple jurisdictions. A lesson learnt from the 2008 global financial crisis when we saw the collapse of Lehman Brothers was the absence of legislation that dealt with group insolvencies. This has been identified as a major gap in UNCITRAL’s model law on cross-border insolvency (MLCBI).

KERPs (Key Employee Retention Plans) and KEIPs (Key Employee Incentive Plans), otherwise referred to as “pay to stay” compensation plans, are commonly offered by employers to incent key employees to remain with the company during an insolvency restructuring proceeding when so-called “key employees” may be tempted to find more stable employment elsewhere.

What you need to know

The Court of Appeal – Supreme Court of Western Australia has confirmed that the existence of a general security interest does not of itself destroy mutuality between a company in liquidation and its creditors and as a consequence section 553C of the Corporations Act 2001 (Cth) (Corporations Act) can apply to allow a creditor to set-off its debts against amounts owed to the company in liquidation.

In a comprehensive unanimous decision, the Court of Appeal confirmed the following propositions: