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Sink or Swim? Key Updates in Insolvency and Restructuring
Substantive Law| What area(s) of law does this episode consider? | Recent trends in insolvency and restructuring. |
| Why is this topic relevant? | The world of restructuring and insolvency is always evolving, but with insolvencies on the rise and more companies entering external administration, it’s becoming increasingly important to keep up to date with the latest data and guidance on both informal and formal restructuring and insolvency options. Recent data not only shows what kind of current financial challenges businesses are currently facing and the size of the economic impact – it also provides insight into the kinds of behaviours and strategies that businesses are adopting to preserve value, manage their liabilities and ensure long-term viability. Regardless of whether you practise in this area of law or not, understanding these developments is more important than ever. Whether you’re advising on insolvency matters, working with SMEs, or exploring new innovative financial structures (for your own business or your clients), staying informed about the latest approaches and practices is key. |
| What legislation is considered in this episode? | Corporations Act 2001 (Cth) Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth) |
| What are the main points? |
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| What are the practical takeaways? |
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| Show notes | Australian Restructuring Insolvency and Turnaround Association, Code of Practice UK Government, Statements of Insolvency Practice 16 Australian Taxation Office, If you don’t pay campaign Australian Security and Investments Commission, RG 217, The Duty to Prevent Insolvent Trading |
DT = David Turner; SV = Stipe Vuleta; TH = Taylor Harding
| 00:00:00 | DT: | Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host, David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services and Hearsay the Legal Podcast is how we’re improving the experience of CPD. The world of restructuring and insolvency is always evolving but with recent trends of insolvencies on the rise and more companies entering external administration, it’s becoming increasingly important to keep up to date with the latest news. Recent data and trends not only show what kind of current financial challenges that Australian businesses are facing and the size of that economic impact, they’re also providing insights into the kinds of behaviours and strategies that businesses are adopting to preserve value, manage liabilities and ensure their long-term viability and survival. Regardless of whether you practice in this area or not, understanding these developments is more important than ever, whatever area you practice in. Whether you’re advising on. Insolvency matters, working with SMEs or exploring new financial structures for your own business or for your clients, staying informed about the latest approaches to business restructuring, survival and insolvency is important. Joining us to break down the current state of play is Stipe Vuleta, Managing Director at Chamberlains and a seasoned expert in restructuring and insolvency. Stipe, thank you so much for joining me on Hearsay. |
| 00:01:41 | SV: | Thanks for having me. |
| 00:01:42 | DT: | So the corporate insolvency statistics that are being reported by ASIC are showing a pretty remarkable rise in insolvencies, admittedly from a historic low during the COVID pandemic but the most recent data revealed that about 3,500 companies entered external administration for the first time during the first quarter of the 2024-2025 financial year – that’s a whopping increase of 45.6% from the 2,500 recorded in the same period in the previous financial year. What do you think are the biggest drivers for these numbers? |
| 00:02:10 | SV: | The sharp rise in insolvencies can be attributed to a combination of economic pressures, shifting market conditions and structural weaknesses in certain industries, particularly construction. Their administrative skills, their administrative infrastructure, their business skills tend to be lower. It’s usually people who are great builders, not great business people and so I’m very cynical about any assertion that your average builder magically knows how to do an illegal phoenix. |
| 00:02:40 | DT: | Yeah, absolutely. There’s overwhelmingly an unregulated advisory sector that is largely responsible for these schemes. |
| 00:02:48 | SV: | Yeah and so as a result of that, you get a lot of misinformation out in the market. People will see what their friend at the pub did and try to copy that without getting advice or people become, I guess, the subject of bad advice or illegal advice but personally, I’m a big believer in the use of legal pre-packs as one of the many restructuring tools that you can use to try to preserve the operations of a business and its value and its capacity to employ people. However, with legislative changes that have come in over the last couple of years and in particular, the advancement of the creditor defeating disposition, the use of accessorial liability laws for the first time in an incredibly long time by ASIC to at least send a signal they care about regulating this space. TIP: Okay, so Stipe just mentioned pre-packs. Pre-packs are a restructuring tool where the sale of a distressed company’s assets or business is negotiated and agreed upon before, but in contemplation of, a formal insolvency process, the primary goal is to facilitate a smoother transition while preserving value, avoiding the business disruption that can come with a drawn out insolvency process. Key stakeholders involved in pre-packs typically include directors, shareholders, major creditors, key suppliers and customers. The main advantages of pre-packs include expediting asset transfers, retaining key employees, maintaining business continuity and avoiding unnecessary insolvency costs. By ensuring early engagement with creditors, particularly secured lenders, pre-packs can prevent aggressive enforcement actions that might otherwise derail a restructuring effort. However, despite their benefits, pre-packs are a little bit controversial in Australia. The Commonwealth government has not formally endorsed them due to concerns over potential fraudulent phoenix activity where businesses are deliberately collapsed to shed liabilities while assets are transferred to a related entity. The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) introduced anti-phoenixing provisions in the Corporations Act 2001 (Cth), which apply for company enters, liquidation after a pre-pack. However, these risks can be mitigated by structuring pre-packs through a receivership or voluntary administration. Receivership pre-packs involve a receiver selling assets under their statutory duty to obtain market value – that’s per section 420A of the Corporations Act. Compliance with this duty often requires a structured sales process but the involvement of receivers in early negotiations can streamline transactions. By contrast, voluntary administration pre-packs occur when a voluntary administrator exercising their power to dispose of assets facilitates a pre-agreed sale. To avoid conflicts of interest, administrators must comply with professional independence requirements. These are according to the Australian Restructuring Insolvency and Turnaround Association’s Code of Practice and section 448C of the Corporations Act. A Deed of Company Arrangement (DOCA) pre-pack can be used to restructure a company’s balance sheet, recapitalising it by converting debt into equity or issuing new shares. This form of pre-pack benefits from creditor oversight and provides for creditor claim releases while maintaining access to leased premises and contracts, however, statutory timeframes for DOCA approvals may slow implementation. Impediments to pre-packs include Australia’s insolvent trading laws, which impose personal liability on directors for debts incurred while insolvent. The safe harbour defense can mitigate this risk by allowing directors to pursue a restructuring plan that achieves a better outcome than liquidation. Australia takes a more cautious approach to pre-packs compared to the UK and the US. In the UK, pre-packs are common and guidelines like SIP 16 ensure transparency by requiring administrators to disclose details of pre-pack sales, particularly when selling to connected parties. In the US, pre-packs often occur within chapter 11 reorganisations where companies negotiate restructuring terms before filing. It’s really important for any solicitor who is involved in any form of informal restructuring activity, regardless of what the outcome is, regardless of what the client’s intentions are, to be incredibly expert at it because it’s a significant liability issue for solicitors in the space and getting it wrong can result in severe consequences for your client and as we’ve seen – though, probably too rarely – for solicitors and or advisors themselves. |
| 00:07:05 | DT: | A couple of points on that one. I think you’re right – the pre-pack is a little bit underrated as a tool when it’s used legitimately. It doesn’t have the same bad name elsewhere in the world – the UK has a well adapted regulatory approach to pre-packs. It occurs to me that the availability of less formal tools in the Corporations Act over the last 10 years or so has accompanied this increased scrutiny on the informal extra legislative tool like the pre-pack. As the small business restructuring regime becomes available, as simplified liquidation becomes available, even safe harbour going back nearly 10 years now, that itself suggests, well, you have all of the tools in the toolkit here that have been legislated, so there’s an increased scrutiny on anything that sits outside of that set of tools. |
| 00:07:53 | SV: | Yeah. Look, one of the reasons I love restructuring is that it gives you an opportunity to be creative and I believe that the, I guess, rhetoric – maybe the discourse generally – about that exact point you’ve issued, which is as you increase regulation, it doesn’t mean there are non-regulated tools that can comply with the law that lawyers shouldn’t be aware of, because ultimately, as a solicitor, it’s our job to understand all of the relevant laws that apply to a factual circumstance that we’re advising on and I guess maybe from an ethical perspective to endeavour to do the best for our client whilst advancing maybe a socially beneficial outcome and so to your point about this rise in both informal options within legislation but also the increase of regulatory and enforcement power in the legislation at the same time, I think it’s quite wise by legislators to do that. You can’t just be seen to be giving people more options but also I guess not being seen to also establish more tools to ensure people are doing the right thing. So I think that’s important but there are so many things outside of pre-packs that can be done in the context of the restructuring space and to your point around residential building. It’s such a heavily regulated sector as far as the consequences of business distress and failure with respect to licensing and insurance now, that being smart about structuring and being smart about long-term planning and the use of informal tools. hive downs, pre-packs, the use of informal stakeholder engagement processes which I think lawyers are notoriously bad at. Assisting a client to liaise with other stakeholders, not through a court, not through a legal letter. Training them to understand what they need to do to get an outcome whilst complying with the law but getting a better outcome than maybe immediately going through a formal process and I think that’s why something like safe harbour, as much as I have a lot of issues with what it actually does, as a concept, it’s been really good because it’s given people a reason to think about things that aren’t just those things that are in the objective toolkit in the Corporations Act or in the Bankruptcy Act and that’s been a good change. |
| 00:10:08 | DT: | Yeah, absolutely. It’s given a basis to tell a board of directors that this is an option open to them rather than the ROTE speech around insolvent trading liability that would’ve preceded it. It’s funny what you say about stakeholder engagement, not through the courts, not through a legislative process but as an informal measure being something that lawyers are bad at. I think often we also almost look at it as the cause of the distress, like we look at will the client’s creditors give them additional time to pay or a payment plan or some variation to their responsibility to pay their debts as and when they fall due, not as a tool for restructuring the business but kind of evidence of their solvency issues – which is what we’re trained to do, right? That those sorts of arrangements are evidence of insolvency, “oh, you know, that’s a bad thing. Don’t want to create that,” are themselves an important tool that actually talking about the construction industry, our clients are relatively good at it. There’s fairly widespread practices of having those discussions, maybe not always early, maybe not always in the most constructive terms but having those discussions about cashflow and revised arrangements for payment fairly frequently but you’re right, we don’t often think about it as a tool in our toolkit. |
| 00:11:21 | SV: | Yeah. Well, I mean, one thing I’m always surprised about is the lack of engagement by the legal profession with practical solutions that require adjacent legal advice in the context of restructuring. So, one of the biggest issues I tend to find, say if you’re looking at restructuring a smaller building construction industry participant, is personal guarantees for various supply arrangements. Those type of suppliers, normally very low margin. They’re also normally pretty well advised and they’re usually a lot bigger than the client that you’re restructuring and a lot of solicitors will immediately say, “okay, my client’s in distress,” explore immediately going into voluntary administration or explore immediately going into liquidation. Rather than looking at, for example, the opportunity to talk to their suppliers and say, “what will happen when this goes into voluntary administration? Are you going to support them through? If this goes into liquidation, my director doesn’t have a lot of equity in his own home and there’s other suppliers, would you get behind supporting this person? Do you think that they’re good at what they do? Would you get behind supporting this person to continue to trade this business or try to salvage what’s left of the business to put themselves in a position to be able to pay you back in the future and to continue to be a customer?” And you’d be surprised at how often the answer to that question is “yes.” |
| 00:12:54 | DT: | Yeah. |
| 00:12:54 | SV: | But once it starts to get into acrimonious, guns at 10 paces type traditional enforcement and insolvency litigation, particularly on the credit management side, it’s often too late. |
| 00:13:07 | DT: | Yeah, absolutely and speaking as someone who’s advised the other side of that – advised suppliers who are proving in a liquidation or proving for voting purposes in an administration as a solicitor, you might advise the distressed client, “well, this is the tool that’s available to you. You can put the company into voluntary administration that will give you the benefit of a moratorium etc etc,” but from the other side of that, suppliers often view that as something underhanded that has been done without notice and there’s a bit of a betrayal. Where there’s a longstanding relationship there, I think not only can the client benefit from that kind of conversation but suppliers often expect it. |
| 00:13:42 | SV: | Yeah, absolutely. I mean, I think a good off the rack Deed of Assignment or Deed of Novation is a really useful practical tool in the context of negotiating debtor and creditor issues and one that I see not often enough. |
| 00:13:58 | DT: | Let’s talk a bit about the ATO. We mentioned the ATO’s changed focus, to say diplomatically, towards enforcing tax debts in the last couple of years. Their recent, ‘If you don’t pay’ campaign, cracking down on unpaid tax debt is a big pressure point for many businesses. What are you seeing at the coalface when it comes to the ATO’s approach to, I suppose, formal insolvencies – how they behave from the perspective of their role as a voting creditor in formal insolvency processes – but also as a creditor enforcing a debt? |
| 00:14:28 | SV: | Yeah. Well, to your earlier question around what is driving formal insolvencies, there’s absolutely no doubt that the ATO in particular is the largest driver of formal insolvency appointments in the country, whether that’s through the issuing of DPNs to directors, or Director Penalty Notices, or whether it’s through winding up processes, we’re starting to see it also ramping up in the personal insolvency space as well. The District Court is starting to get quite full with ATO debt recovery cases and I’ve heard similarly about the County Court in Victoria. So certainly there’s an increased formal enforcement appetite from the ATO, which I haven’t seen anything like it, really ever. TIP: Stipe’s right and the stats backing up. In fact, the ATO tops the list as the biggest creditor in the personal insolvency system with a hefty $2.5 billion in liabilities for the year of 2023-24 – that includes $1.7 billion tied to business related cases and $0.8 billion from personal insolvencies unrelated to business. I think it’s an incredibly bad policy decision for three reasons. The ATO in my experience, for the period between say 2008 and 2016, was incredibly well resourced with a high concentration of really experienced practitioners who were dealing with insolvency in a sustainable way and so not so much as far as it as an entire organisation but the people they had on the ground in their legal teams, in their debt teams, who actually had really good experience in the space, you could pick up the phone, you could call them and they had a good understanding at a practical level of what decisions needed to be made to advance whatever policy directive they were given that time in a meaningful fashion. My observation of the ATO at the moment is that they’re quite understaffed. Where you used to be able to pick up the phone to the ATO during a voluntary administration, reports from clients who are external administrators are that often the phone doesn’t get picked up, often an ATO officer is not appointed to actually review a report to creditors in an administration or a small business restructure until the morning of and so, as a result of that, you get some really unreliable outcomes as far as the implementation of the ATO’s policy and so whether the ATO’s policy is good or bad is irrelevant. The current volume of enforcement that’s going on right now, I don’t think is sustainable to be administered in a way that’s actually going to result in the highest return to the Australian taxpayer on unpaid debt. We see a lot of good restructuring opportunities missed because of a lack of resourcing on the part of the ATO. |
| 00:17:18 | DT: | I suppose there you’re talking about both the ATO’s role in bringing creditors’ petitions, placing companies into liquidation by order of the court but also their role as a voting creditor in a voluntary administration in particular, I suppose, and that’s a concerning practice, that they may not be looking at the matter and a report to creditors until the day that that creditors meeting might be being held because frequently the ATO is really holding the balance of power in a vote. They may be one of the most substantial, unsecured creditors that the company has. |
| 00:17:54 | SV: | Absolutely. Often the ATO is the largest creditor. There’s no doubt about that. I don’t have a statistic but anecdotally in my work, big or small, the ATO is often the largest creditor and given that we are in a services economy in Australia, whether we’d like to admit it or not, it makes sense. As you said, they’re one of the largest “lenders” in the country and businesses experiencing financial distress tend not to pay the ATO and it’s usually driven by the fact they have a disproportionate exposure to PAYG tax and so when the ATO, regardless of what its policy is, is not appropriately resourced to administer that policy, well, it can result in really choppy decision-making during those restructuring processes. We’re also finding it even in the context of enforcement. So for personal insolvency matters, a lot of court applications with respect to the enforcement of a debt against an individual are not actually having a file solicitor appointed to those files until well after pleadings are closed. |
| 00:18:58 | DT: | Wow. |
| 00:18:58 | SV: | So if you are looking at trying to engage with the ATO to, for example, work with a client to explore a personal insolvency agreement and try to mitigate the cost of figuring out how to put a defence on, if any, that they might have to an enforcement action for a tax debt, it increases cost for the punters and ultimately it puts money in the pockets of lawyers and takes some of that money out of the pockets of taxpayers for outstanding tax debts and so the ATO is definitely the biggest driver of formal insolvency appointments in the country at the moment and they’ll continue to be so, unless there’s both a significant shift in either policy or the administration of that policy at a practical level. |
| 00:19:42 | DT: | In a circumstance where the ATO is playing such a major role in the increase in both personal and corporate insolvencies but at the same time they’re under-resourced to pay close attention to the insolvencies that they are involved in. Do you have any practical tips for our listeners on, I suppose, how to get that attention when you need it? If the ATO is the largest creditor in the voluntary administration that you’re advising on and you really need to get them invested in voting in favour of a DOCA, have you had any success in getting their attention where it matters? |
| 00:20:13 | SV: | Yes but it’s a factor of time and I’m sure the insolvency practitioners out there have their own strategies in the context of their roles and their formal profession but what I tend to find is if you have time, if you are engaging in an informal advisory process prior to a formal restructure and you have time to engage with the ATO, you will eventually find the right person but it requires a really good understanding of all of the administrative processes of the ATO. So understanding what forms you need to lodge where, what needs to be lodged by the accountant or tax agent, what needs to be lodged by the director, what you can lodge yourself. Writing a letter to the ATO at a time before a company has gone into a formal administration or any form of external administration is often wasted time. So there’s lots of little things you could do and in the context of engaging with the ATO during voluntary administrations, what we tend to find, obviously that’s often the role of insolvency practitioners during formal appointments but if you’re talking about directors that might have exposure for director penalty notices and so on, engaging proactively at the director level with respect to personal liability for tax debts concurrently with an external administration can actually get really good results. Less so at the corporate level but the ATO has had the second mortgage debt restructuring option available to it for some time – I think six or seven years, maybe longer, I can’t quite recall – and it’s a type of tool which a lot of people don’t use, a lot of tax practitioners, a lot of lawyers don’t really ever suggest to their clients, “well, why don’t you explore a second mortgage to the ATO to support a payment plan?” And I understand why to some extent it can be a bit scary from a personal liability or professional liability perspective to tell a client to turn a unsecured debt into a secured debt but if you’ve got someone who has $½ million dollars worth of assets and $2 million worth of tax debt and they’re about to get sued and they’re going through a form of external administration… |
| 00:22:21 | DT: | It’s a distinction of that difference, isn’t it? |
| 00:22:22 | SV: | Absolutely and so actually offering something like that during a process can be really helpful because the client’s ATO file gets updated with some favourable notes, you’re actually putting the Commissioner in a position where they have certainty about getting money in their pocket rather than them, at least I’m personifying an organisation but I guess I get the impression of them feeling or being directed to present as if they feel like the only course of action is liquidation because the punitive and investigatory elements of liquidation regime need to be used to whip that director into shape or to send a signal to the rest of the market. |
| 00:23:02 | DT: | So far we’ve been talking about the role of trade debts and tax debts in driving insolvency in the role they play in a business rescue and we’ve not talked so much about the way the business is financed as an input in that formula. I want to talk about that from a few perspectives now. As we said at the top of the show, the explanation for the rise in insolvencies is not solely or even primarily attributable to a rise in interest rates but a rise in interest rates can have an impact on the availability of finance, either because there’s an issue with serviceability or with a sensitised consideration of serviceability and that can drive some businesses seeking finance to alternative financiers – your so-called “second tier lenders.” What are you seeing in the market around the finance that’s available and how’s that influencing insolvency practice? |
| 00:23:50 | SV: | Yeah, I mean, the private credit space and the alternative finance space has been growing pretty consistently since about 2012 and in my view and I guess a banking and finance lawyer’s probably more well placed but that’s been driven predominantly by a shift in business appetites by traditional lenders and also the products on offer in the market. We’ve seen so many providers of, for example, receivables finance or invoice finance exit that market over the last 10 years and that’s naturally been pushed to, I guess, the second tier of the market. As a result of that, there are a lot of really good finance options available to people which are now, by necessity, more expensive than they were 10 years ago relative to whatever the baseline RBA interest rate is and so I think that, from a government planning perspective, from a, I guess dynamism of the economy, investing in the economy, to be able to be, I guess, quick and agile, is a bit of an error on the part of regulators and legislators but ultimately, yeah, people are being pushed to a lot of short-term financiers when they’re in financial distress and that does occasionally result in formal insolvency appointments, particularly receiverships or voluntary administrations when there’s a default, but ultimately what you tend to find is, well, my experience at least, is these particular financiers, they know that this is a big part of their exposure and they’re actually quite good at dealing with it. So unlike trade creditors, unlike the ATO, they usually engage well-experienced lawyers and they normally have very competent credit managers and risk staff that have experience in the insolvency sector and so they’re able to be a lot more constructive around what a restructure looks like, what maybe the consequences of liquidation are. It’s not to say things don’t go bad and often they do but my experience is the engagement you get from the second tier lending space is quite a positive one, as long as you’ve got something meaningful to add to the conversation. |
| 00:25:54 | DT: | Yeah and I suppose in many circumstances they’re kind of the moving party as well, especially if we’re talking about a receivership. |
| 00:25:59 | SV: | Yeah, that’s right. |
| 00:26:00 | DT: | If I can just go back for a moment, tell us a little bit about the kind of alternative financing arrangements that you are seeing in the market. You mentioned that those kind of invoice factoring type of products, some of those have exited the market, some of those in quite spectacular fashion. What sort of short-term financing options are you seeing businesses turn to in distress? Is it similar products offered by smaller, higher-priced lenders or is it something else? |
| 00:26:23 | SV: | No, it’s predominantly similar products offered by a smaller, you know, higher-price lenders. You’ve also got the appification of lending, I think. I’m seeing a lot of businesses, a lot of clients that have multiple small business loans now because it’s so easy to go to an online business lender and get a $50-100,000 loan. |
| 00:26:42 | DT: | Yeah. |
| 00:26:42 | SV: | And you know, you could probably get four of them, rather than bothering to go to the NAB and asking for a $400,000 loan, which you may very well end up being eligible for. So there are sort of these new, smaller, higher-price products or online innovations or innovations in the way products are communicated, which is changing the way the average customer’s balance sheet looks like, I think, but ultimately, I don’t necessarily see the alternative lending space as one that’s really driving insolvency. In a lot of matters that I work on. It might be one smaller lender is contributing to a push towards a form of external administration and then concurrently, another alternative lender is involved in saving the operations of that business. So I mean, as a whole, I think it’s a space that provides a really valuable service and a number of really valuable products. I haven’t seen products which are overly exotic or exciting in a way that makes me think, “oh wow, these guys are really innovating the space” but I think the turnaround times on settlement approvals, turnaround times on having hard conversations, that’s the real innovation. |
| 00:27:58 | DT: | Interesting. It sounds like the net neutral impact, in the sense that those same higher price credit options maybe contribute to one business’s cashflow difficulties but might be the solution to another business’s cashflow difficulties. That kind of anecdotal evidence of an increased number of small loans owed to different digital lenders, that both sounds pretty plausible, it also sounds a little bit at odds with what you would expect would be happening when we think about Design and Distribution Obligations for financial product licensees, Target Market Determinations, the kind of increased responsibility for writing loans that we’re supposed to be seeing with changes to the Corporations Act for financial products and financial services over the last 10 years. |
| 00:28:45 | SV: | I guess that’s why I do think we are going to see a little bit of a snapback as far as regulation with respect to the private credit space in particular. TIP: Recently we spoke in depth about target market determinations and the designer distribution obligations in an episode with Kerensa Sneyd. If you’re interested in that, check out that one after this one. It’s episode 143 and it’s called ‘Giving Credit Where Credit’s Due: Navigating Buy Now, Pay Later Reforms’. Business finance isn’t the subject of the same level of regulatory scrutiny as other types of finance and there’s also, if you’re a lender with under $50 million in your book, one might say from a practical perspective, you’re almost unregulated and obviously that figure will change and we’ve had issues and changes with AUSTRAC recently and there is a push to regulate that sector more but ultimately, I think with the advent of unfair contracts legislation, I find the benefits of a dynamic alternative finance sector tend to be much better than the detriments. There have been some bad actors. I believe there’s a regulatory issue with one which no longer exists, which was doing effectively consumer finance or retail credit under the guise of business. So there’s always people that do the wrong thing but it’s quite a useful tool for us as restructuring lawyers to try to get good outcomes where possible. TIP: So Stipe just mentioned a few changes that came in for AUSTRAC – Australia’s financial intelligence and anti-money laundering regulator. As of January 7th, 2025, it now has significantly stronger investigative and enforcement powers. That’s thanks to the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth). This puts AUSTRAC on a level playing field with other major regulators like ASIC and APRA, just as the number of businesses under its watch expands from 17,000 to nearly 100,000. So what actually changed? Well, first, AUSTRAC now has more muscle when it comes to gathering information. It can demand documents, require individuals to appear for questioning and proactively investigate businesses, even if there’s no immediate suspicion of wrongdoing. It can also issue notices to anyone it believes has relevant information, not just regulated entities. On top of that, AUSTRAC can now investigate offences under the Crimes Act and the Criminal Code, meaning its reach, extends beyond financial crime to areas like bribery, human trafficking and fraud. One of the more controversial changes is the removal of the privilege against self-incrimination, so individuals can be forced to provide evidence even if it implicates them. While this evidence can only be used for money laundering or terrorism financing cases, it’s still a significant shift in regulatory power and if businesses or individuals don’t comply well, they could face penalties of up to two years in prison or other hefty fines. This all signals a more aggressive approach from AUSTRAC. |
| 00:31:32 | DT: | Anecdotally, at least, I’m hearing that debt-for-equity schemes are becoming more common – something that well, certainly I didn’t see much of at all in practice in the 2010s. Tell us a little bit about how that sort of scheme works, I suppose from a substantive law perspective, what the legislative mechanism is and more importantly, why they’re gaining traction. |
| 00:31:49 | SV: | Yeah, look, in the context of debt-for-equity schemes – I’ll maybe put another way – debt-for-equity transactions or approaches to restructuring both formally and informally are on the rise, I think, because businesses that are good that should be saved are now getting the benefit of a more educated, more understanding stakeholder community. So there’s a lot of scenarios where people or other parties or businesses have made debt investments in a company or a venture that really does continue to have incredibly good long-term prospects and ultimately would be helped by the, I guess, release of pressure on its balance sheet by converting debt to equity and without going into, I guess, the legislative requirements too much because it presents various tax consequences, it presents various issues under the Corporations Act, it’s most commonly done either through a formal restructure, so by way of a voluntary administration and a court approval process with respect to the compromise of certain deaths and the involuntary or voluntary transfer or shifting of interests. It’s less commonly done through schemes of arrangement and if we had a cheaper court system, I imagine we would see more schemes of arrangement used but I see it most commonly done as part of an informal restructuring process, particularly in businesses that don’t end up going through an external administration and so getting an understanding of the tax consequences and I guess the regulatory requirements in implementing them is really important. TIP: So we just mentioned a debt-for-equity swap, which allows a creditor to exchange a debt owed by a company for shares in that company. Stipe mentioned some tax benefits. The Income Tax Assessment Act 1936 (Cth) provides certain provisions regarding deductions for losses incurred in these kinds of transactions. These include section 63E and 63F. These apply to debt-for-equity swaps made after the 26th of February, 1992. A taxpayer can claim a deduction for the difference between the debt amount and the market value of the equity received. I’ll give you an example. I did a restructure of a business which owns a patent in a really unique sector. It makes really good revenue, really solid growth, never had any major problems other than the fact that it’s grown too long and had a couple of projects,which didn’t go its way and it had $7/8 million of debt sitting on its balance sheet from non-institutional family offices effectively and as part of the restructure, we were able to actually negotiate with those parties to do a whole debt-for-equity swap and then find institutional debt for this business as part of restructuring its various subsidiaries and that actually meant that at the end of the transaction, yes, the founders had less equity but they also had better long-term support from more well-funded co-equity holders and they also ended up with a tier one institutional lender on their books for less debt than they originally had to begin with. So their balance sheet looked better at the end and their relationships from a strategic perspective were much better aligned. |
| 00:35:01 | DT: | Sounds like a great result. |
| 00:35:03 | SV: | Rare. |
| 00:35:03 | DT: | Yeah. Not necessarily representative but a great result and I guess this comes back to what we were talking about right at the top of the episode around the drivers of insolvency, right? We are comparing the absence of debt-for-equity schemes in our previous economic environment with, you know, the fact that there are some now in our current economic environment and the environment that we’re comparing the present day to was one of low economic growth, low interest rates, relatively low corporate insolvency rates and I think many of those corporate insolvencies were kind of non-cyclical, right? They were the result of mismanagement, shareholder disputes – not to say all of them – but not many of them the sort of businesses that had promising growth prospects that someone might reinvest in, whereas what we’re seeing now is an environment of strong economic growth, some volatility that accompanies that, some temporary cashflow difficulties that might accompany that but as you say, there’s the good bones of a sustainable business there. |
| 00:36:00 | SV: | That’s right and without being cynical, I think, was it Kerry Packer was very famous about having a very cynical public view with respect to the payment of tax debts. I think as Australians, if a business has paid everyone but the ATO, they’re not considered to be a bad future business partner. |
| 00:36:18 | DT: | Yeah, that’s right. |
| 00:36:18 | SV: | You know, the non-payment of other creditors, the absconding a responsibility to other stakeholders can still be, I think, culturally perceived as something that might limit the desire of someone to want to invest in a business but ultimately, I think, as Australians, we all know that we need to pay tax, we benefit socially from the payment of tax but, particularly at a corporate level, there is a culture, I think, of investors to say, “well, look, as long as you have done it as a result of these structural issues in the economy, we’re not going to punish you for that and let’s fund you and help you get out of it,” rather than doing the opposite. |
| 00:36:55 | DT: | Yeah. Speaking of a process that requires that level of buy-in and continued trust from stakeholders, we touched on the safe harbour provisions earlier and that your view was that they were a valuable tool to have and a worthwhile addition to the Corporations Act but you’re a little concerned about the sort of practical steps involved in bringing a business into safe harbour and advising directors on the extent to which they’re protected by it. ASIC has tried to clarify some of this – what it means to be in the safe harbour, what it means to be – it’s been a while since I’ve looked at the provisions but – adopting a plan reasonably likely to lead to a better outcome for the company than its immediate winding up. ASIC’s given this guidance under a new regulatory guide, RG 217 titled ‘The Duty to Prevent Insolvent Trading’, what, if anything, does that illuminate about the safe harbour process and what are some of the trends you’ve been seeing recently in the use of safe? |
| 00:37:46 | SV: | Look, it’s funny, I guess because as solicitors we look at these regulatory guides and they’re very important and we read them. They have to drive our decision-making in advising clients but ultimately for mem and I think it comes through in RG 217, is that most people, particularly unsophisticated directors, just thought you’re going to safe harbour, you’re not liable for any form of insolvent trading and because it’s a positive defense to a liability, which is already sort of arcane from a commercial perspective when you try to explain how it actually operates to a less sophisticated director, I have actually found that the most successful safe harbours are the ones where you have frank conversations with boards of directors or even sole directors in smaller scenarios and you say, “look, it could not help you in the slightest because it doesn’t reduce your liability for things you’re already liable for. It will give you an opportunity to feel like you have the freedom to think and make good decisions,” and I think a lot of the rhetoric by the government and the restructuring sector when safe harbour was introduced and for several years after heavily contributed to the misapprehension of what safe harbour actually is. |
| 00:39:04 | DT: | Yeah. |
| 00:39:05 | SV: | The scheme’s pretty straightforward. It’s only a couple of sections in the Act and it’s pretty easy to administer and ultimately I tend to find that if you’re having conversations with people that are more around, “this is an opportunity for you, the sins of the past will not be forgiven but this is an opportunity for you to maybe stick your neck out to remedy some of the problems or even get through all the issues that you’ve had,” then you can really have successful safe harbour outcomes. TIP: So we’ve just briefly mentioned the safe harbour. The safe harbour regime has been a crucial part of Australia’s corporate restructuring landscape since it was introduced in 2017. It gives directors protection from personal liability for insolvent trading if they’re actively working on a plan that’s reasonably likely to lead to a better outcome for the company than immediately appointing an administrator or liquidator. This has been especially important for boards of medium to large companies dealing with financial distress. It allows them the space to explore restructuring or turnaround strategies without the immediate threat of personal risk. Now, in December of 2024, as we said, ASIC updated its Regulatory Guide 217 – so that’s RG 217 – to reflect developments in case law and best practices and restructuring. This update follows the government’s response to a review of the safe harbour framework, which recommended clearer guidance on how directors can effectively use the protections. The new RG 217 provides practical advice on applying safe harbour protections and includes real world examples and criteria for directors to consider when they’re engaging professional advisors. One of the key takeaways from the updated guide is the emphasis on four fundamental principles that directors should follow when they’re dealing with financial distress. The first; they must actively monitor the company’s solvency, staying informed about its financial position through reliable financial records and expert advice. Secondly; if financial difficulties arise, they need to investigate the situation thoroughly to understand the extent of the problem. Thirdly; directors should seek advice from qualified professionals. This includes insolvency practitioners, accountants or lawyers to ensure that they’re making informed decisions. Lastly; they must act in a timely manner. Delays in responding to financial distress can make matters worse and reduce the likelihood of safe harbour protections applying. Now under the Corporations Act for safe harbour to apply, directors must develop and begin implementing a course of action that is reasonably likely to result in a better outcome for the company than liquidation or administration. This could involve debt restructuring. asset sales, operational changes or a few other turnaround strategies, however, it’s not about just having a plan. The plan has to be credible, rational and backed by evidence. ASIC’s guidance highlights that directors should document their decision-making processes, seek expert advice when necessary and continuously assess whether their chosen strategy remains viable as their circumstances change. Another key aspect of the safe harbour regime is the requirement for directors to meet certain legal and financial obligations. This includes ensuring employee entitlements are paid and tax lodgements are up to date and if these conditions aren’t met, safe harbour protections might not apply. ASIC also provides guidance on how to assess whether a course of action is actually considered reasonably likely to lead to a better outcome and stresses that this doesn’t require a guarantee of success but it should be based on solid evidence and informed judgment. |
| 00:42:16 | DT: | I think the level of protection’s been overstated outside of academic or professional circles but certainly within those academic and professional circles, you heard a lot, certainly back in 2017 when we started talking about safe harbour as a legislated tool, about this phenomenon of falling in and out of the safe harbour protection. You know, as you say, it’s not retrospective in its effect – you’re protected so long as your plan is reasonably likely to lead to a better outcome for the company but perhaps three months in, it’s no longer reasonable that plan is reasonably likely to lead to a better outcome for the company because the circumstances have changed and whatever your plan was, whether that was to obtain new debt financing or new equity financing or renegotiate customer contracts that’s no longer plausible or viable, now you’re back out of safe harbour and potentially exposed to insolvent trading liability. A month later you make a new plan and you’re back in and so you don’t have, as you say, that broad brush without exception protection from insolvent trading liability, that directors believe or would like to believe that it affords them. |
| 00:43:15 | SV: | Absolutely. I mean, forgetting legal analysis and conclusions, safe harbour for me is an opportunity to plan, fail, plan again and just keep doing that iteratively in a way that I guess gives you a feeling of comfort and ultimately, when you think about drivers of good decision-making, particularly for directors that are already heavily exposed, having the feeling of comfort to make good decisions is really important because people tend to make very bad decisions when they’re under pressure. |
| 00:43:47 | DT: | Yeah. I remember working in a safe harbour matter a while ago, that the business was well capitalised, it had more than 12 months of cashflow available to it but they’d seen very early on this concern about future insolvent trading liability if they weren’t to make changes that they could bring into effect over the next several years and it was kind of this situation that was like, well, this is such an exceptional scenario where the business is actually well capitalised now, they’ve started this process very early before they’ve already accrued some personal insolvent trading liability but that’s not the majority of circumstances but, I think, safe harbor was one of these tools introduced because the overwhelming feedback from both the community of insolvency practitioners and the lawyers advising them was that businesses simultaneously were going into voluntary administration too early by conservative directors afraid for their own liability and too late by directors who were not incentivised to get early advice and safe harbour was supposed to be a useful tool to remedy both ills and I suppose the messaging about its benefits necessarily has to be a little more forceful to achieve that policy outcome, which is for people to get early advice but not take value-destructive steps too early and it seems to be having that impact. |
| 00:45:04 | SV: | Yeah, absolutely. I mean, it’s a really, I guess, satisfactory tool in the arsenal. |
| 00:45:10 | DT: | Such glowing praise, a really satisfactory tool! One thing that I’ve always enjoyed about insolvency practice but it’s a challenge as well, is that it’s constantly changing – there’s always new legislation, new tools on the horizon. That’s a product of everything we’ve been talking about – the central role that insolvency law plays in the regulation of so much commercial activity. What do you see on the horizon in terms of changes in restructuring law and practice? |
| 00:45:35 | SV: | Well, changes to restructuring law and practice, I think it’s a hard question to answer because I think the practice of restructuring law is already changing so much and I think the need to be a genuine expert in a number of commercial areas is becoming significantly more important and so not just with respect to the subject matter of the corporate or personal insolvency legislative frameworks, the case law etc, but actually understanding businesses in particular sectors well enough to be genuinely valuable and I mean that very separately to the work as part of the practice of that law that is quasi-regulatory in nature. So acting for liquidators in their investigations and prosecutions or quasi-credit management in nature, acting in the defence or enforcement of debts and winding ups but in the actual practice of restructuring, helping preserve business value, the need to have genuine and deep commercial acumen in one or two areas are becoming an imperative as far as practice, because the regulatory landscape for all businesses in all sectors is becoming more complicated. So, there was a time when I used to do a lot of work, probably across eight or nine of the top sort of 15 categories of insolvency risk areas – construction, transport, retail, hospitality. The list goes on. What I tend to find now is outside of acting through more formal legal processes that tend to rely on process a lot more, I’ve had to narrow that down over the last 10 years and I think that practitioners that don’t pick a focus will be left behind as far as their expertise and their ability to add value and with respect to legislative changes, it’s such a poorly supported area. I was involved in the Law Council on its lobbying and law reform works for a couple of the, not so much recent rounds but rounds before that of changes to the Corporations Act, the insolvency framework, even over COVID and outside of what happened with the Small Business Commissioner at a federal level and some changes that have come through there, it’s an afterthought as a sector. It’s not a sexy part of the economy. I think the last leader of the country we had, which really talked about it was Malcolm Turnbull and I’m dismissive of the comments made by politicians during COVID because they’re just part of COVID law reform packages and doing what they could but we haven’t had a cohesive vision for the insolvency frameworks of the country for a long time and I don’t necessarily see that changing. So when you ask me what changes are on the horizon, the answer could be anything. I still have bets with colleagues about when they’re going to introduce one year bankruptcies. |
| 00:48:26 | DT: | Oh, well, I remember talking about doing insolvency episode of this show four years ago and talking about, “well, one year bankruptcies any day now,” right? |
| 00:48:34 | SV: | Yeah, that’s right. Yeah. You know, if I had to take a bet, what are some changes that are going to happen, I think, there’s probably going to have to be changes to the simplified liquidation and small business restructuring regimes. I think the caps are too small. I think that the drafting of the sections were incredibly rushed. We’ve already seen a number of practical and technical issues hit the courts. We sought to bring, what would’ve at the time been, the first sort of purely statutory interpretation compliance based issue for small business restructuring some time ago now. When it hit the Federal Court, the direction from the bench was to try to avoid writing a judgment about it because the sections are so poorly written that the act of statutory interpretation on parts of the small business restructuring plan regime could just create more practical issues for industry and for punters. So, I think those two things need a shakeup. We’re also do another set of recommendations, I believe, on the PPSR review, which they do every X amount of years. So that’s an interesting one. They’ll probably make some tweaks there and regulations will change but I don’t know. |
| 00:49:47 | DT: | And I suppose we’re all waiting for that root and branch review of the Corporations Act that we’ve been calling for for probably 10 years now. |
| 00:49:53 | SV: | Yeah, I mean, I doubt it. |
| 00:49:55 | DT: | Yeah, no, it seems unlikely. I mean, what I usually hear about that is it’s been 20 years since the Corporations Act was passed, we had the Corporate Code 20 years before that, it’s due but it seems like we’ve got many other legislative priorities on both sides of parliament before that one gets a look in. Last question for you before I let you go. I like to finish with a question for recent members of our profession or maybe those who are still studying law and I have a specific question for you today. You mentioned how important it is to really understand the commercial aspects of the businesses that you’re advising or the commercial aspects of the businesses that your clients are working on – that you are narrowing down from those nine areas of economic activity to fewer of those. My question for you is this – for graduates or law students who are looking to get into insolvency and restructuring practice and want to develop that commercial acumen, want to understand the businesses that they’re working on a little better, how do they go about doing that? |
| 00:50:53 | SV: | It’s a good question. I mean, I’ll probably start with, go get a job, not in the law. |
| 00:50:59 | DT: | Yeah, that’s a good start. Yeah. |
| 00:51:00 | SV: | And a job where you actually get some meaningful, practical engagement in the subject matter of a business. Go work for a small business. Go be a barista at a cafe. Go and work in an industrial setting and understand how shift work works and actually read all the signs on the wall that tell you about Work Health and Safety and start to appreciate the complexities of running a business. That’s a big one. I also think that learning to deal with asymmetric workflows is really important. So there are a lot of areas of practice of law in my experience. You know, all law is hard and client expectations are big and it’s a tough job and the mental health crisis we have in the sector is a really big deal but restructuring does not have generous deadlines. It does not always have instructions which come in the way that you are used to. It also does not have nice and tidy court timetables most of the time, obviously, the litigation does and so learning to appreciate a feast or famine approach to your work-life balance is, I think, a really vital role and I know that might be an unpopular opinion. Ultimately, if somebody is going to run out of money in their bank account in three days, they don’t care whether you want to get out of work on time and if you do, you probably won’t care enough about them to help them as much as you could and obviously I’m not saying make decisions which are adverse to your health or anything like that but it is an area of law that suffers from that and so for those that don’t have good tools to thrive in that environment and make a sustainable life out of that, it’s a challenging area. |
| 00:52:48 | DT: | Yeah, I think you’re right, it’s not a popular thing to say necessarily – not to say that it’s unpopular to say that people are unhappy to hear it – but it’s not often said, I think. We like to think that work life balance is always easy – that if you have the willpower, then you can always get out at a time that suits you and you can go and pursue your hobbies and spend time with the family and that can happen every day of the year but you’re right, insolvency and many other areas of practice do have that feast and famine is a good way to put it, that ebb and flow of work and yeah, sometimes our professional and ethical responsibilities to our clients will dictate that we have to do some pretty hard work late into the night and if you want to work in this area, you should be forewarned of that, I suppose. |
| 00:53:29 | SV: | Yeah and look, probably if I can maybe end with this – read. I think that a lot of us and I like a lot of people in my demographic bracket didn’t do articles. You know, I did A GDLP and I did work experience in a law firm and worked as a graduate and did all that sort of stuff but people forget that traditionally the practice of law is a craft and so actually investing outside of work in understanding the legal parts of your job so that you can extract as much commercial acumen and knowledge in the time you do spend with your clients is really important. As a young lawyer, if you are relying on on the job learning and experience to become an expert in the subject matter of the law, then that’s a lot of intellectual capacity and space that you are filling up that you could use for opportunities to learn about how your client’s business runs, how their sector runs and to improve your commercial acumen. |
| 00:54:31 | DT: | Yeah, absolutely. There’s not a lot of time during the workday between billable work to be reading up on developments in your area, to be thinking about the legal frameworks and issues in the abstract, is there? Stipe, thank you so much for joining me today on Hearsay. |
| 00:54:47 | SV: | Thanks David. Thanks for having me |
| 00:54:58 | TH: | As always, you’ve been listening to Hearsay the Legal Podcast. We’d like to thank our guest today, Stipe Vuleta, for coming on the show. Now, if you’re an insolvency practitioner and you want to hear more substantive content, you should check out our episode with Nik Angelakis. Stipe just alluded to it at the end there when talking about the quasi-regulatory role of liquidators but Nik’s episode is all about the supposed quasi-judicial role of the liquidator for companies in administration. If you’d like to check it out, that one is episode 128 and it’s called ‘Balancing the Books: Exploring the Role of a Liquidator in Adjudicating Proofs of Debt’. If you’re an Australian legal practitioner, you can claim one continuing professional development point for listening to this episode. Now, as you know, whether an activity entitles you to claim a CPD unit is self-assessed but we suggest that this episode entitles you to claim one substantive law point. For more information on claiming and tracking your points, head on over to the Hearsay website. Hearsay the Legal Podcast is brought to you by Lext Australia, a legal innovation company that makes the law easier to access and easier to practice and that includes your CPD. Now, before you go, we’d like to ask you a favour, listeners. If you’re enjoying Hearsay the Legal Podcast, please consider leaving us a Google review. It helps other listeners to find us and ultimately it keeps us in business. Thanks for listening and we’ll see you on the next episode of Hearsay. |
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