While submissions to the parliamentary joint committee on corporate insolvency are not due until 30 November 2022, some indication of the views of those involved can be anticipated from their ongoing law reform commentary and some more recent views expressed in Insolvency News Online about what the inquiry should recommend.[1]
One stakeholder focuses on a fundamental issue as to the conduct of directors needing more scrutiny – conduct in continuing to trade their business with no reasonable prospect of paying creditors, to the extent that as the stakeholder says “the corporate rescue narrative has crowded out a much needed debate about what creditors, our economy and society really expect from corporate failures” and who should bear responsibility.
Simplicity, efficiency and effectiveness are the focus of many those interviewed, grand aims, although bearing in mind that the very nature of insolvency, in taking on the legal and financial issues of the insolvent, often makes achieving them difficult.
In the context of efficiency, the relevance of much of the work done by practitioners is queried – “too much pointless work for which practitioners rarely get paid” – probably referring to the numerous reports to ASIC on misconduct that are not actioned, and continual reports to creditors. The need for insolvencies to be more “affordable” was raised, perhaps also with a view to the type of reform suggested by the Productivity Commission in 2015 of a set fee for small liquidations. The government, if not this one, has said we should not expect liquidators to work for free.
Liquidators should be allowed to focus on the skilled work for which they are trained is another theme. Voluntary administration allows those skills to be applied, but even though it is a “world class regime”, it could itself do with a “tidy up”. In that respect, a useful suggestion is to allow administrators to decide on convening period extensions, without the need to go to court for approval, though with the danger of self-bias. Other such powers could usefully be handed down to practitioners; approval of funding agreements is another example.
While turnaround management’s focus is less on the insolvency laws themselves, it refers to the words “any related corporate insolvency matters” in the terms of reference as being a useful catch-all. Safe harbour is a listed criterion that would attract comment but it has already had a recent review, as has insolvent trading trusts, also on the PJC’s list.
In the SME sector of the market, the vast bulk of insolvencies, there was resistance expressed to any “dumbing down of the work of insolvency practitioners”, reducing the industry to “filing forms”, with boxes no doubt ticked in the process. The more complex and productive work of liquidators was important to retain, including through the powers of investigation, and the costs of insolvency need to be accepted because the work is “essential to fostering trust in our free market system”’.
Others commented that bankruptcy is not covered by the inquiry, said to be a deficiency given the intermix of personal and corporate insolvency in many SME collapses. This exclusion of personal insolvency was probably necessary given the bifurcated approach Australia takes to insolvency, as if each of personal and corporate insolvency were separate and distinct in law and in practice. A comment was also made that bankruptcy law lags behind corporate insolvency law and far behind the laws of other comparable jurisdictions including Canada, the United Kingdom and New Zealand. Some might disagree but Australia’s retention of a long 3 year period of bankruptcy might be said to be extreme, perhaps representing a psychological retention of some sense of virtual imprisonment for debt despite actual imprisonment of debtors having been done away with in the late 19th century; but Australia (Victoria actually) being one of the last jurisdictions in the world to do so. Whether some stakeholders maintain their insistence on the 3 years being retained – imagine a debtor who innocently loses money through a scam – will be interesting.
There is protest about the inclusion of remuneration of a liquidator as a topic. But it is listed along with “financial viability” and the limits and difficulties associated with remuneration, and the extent of unpaid remuneration, is a valid and potential issue in this inquiry.
A final comment is as to the need to attend to remediating legislative drafting errors introduced with the “harmonising” Insolvency Law Reform Act 2016, whereby, for example, “certain streamlined procedures such as creditor approvals without a meeting cannot be used because of technical deficiencies in the legislation”. That Act is due for review in 2022 in any event, but whether this inquiry wants to take that on is problematic.
Comment
Without doubting the quality and thought that will no doubt appear in the submissions, these stakeholders, selected in limited number by the author of the article, do not necessarily represent the full range of those from whom the inquiry should usefully hear. The “usual suspects” are there, and although they have knowledge of the system, there is an inherent bias in all of us; or, as one stakeholder said, “when you have a hammer, every problem looks like a nail”. The [too?] detailed terms of reference suggest the presence of hammers in compiling the list of matters selected. The inquiry needs the economists, business advisers, credit managers, financial counsellors, and unions and more to assist.
Those from other disciplines might alternatively have framed terms of reference that asked – “how are those unable to pay their debts being managed, what triage or other process is applied to ensure those in need of resuscitation seek help quickly and others quickly meet their demise? To what extent to we expect accountability? Is there an efficient and fair process for sorting the dodgy from the unlucky? How well are assets redistributed and value retained? Who should be performing these tasks? How to resolve the insolvency problems of small business would be a useful inquiry, bearing in mind that SMEs do not generally abide by the law’s categories of personal or corporate. In the end, what’s the insolvency regime all about? As a threshold question, is there some abiding set of principles that the committee could recommend that would guide not only present law reform but reform in the future”.
The limited consideration of the principles of insolvency in Australia has been the subject of critical comment. Overseas and international guidance might usefully be examined. The alternative is to consider and recommend law reform without a clear purpose, and insolvency has many rabbit holes that can distract.
And then there will be the requests by the PJC for statistics and more in relation to a body of practice and law that lends itself to numerical data and whose efficiency and outcomes are of great importance to society. The PJC may find that there is little in the way of raw statistics that show how the regime works – to what extent do creditors receive dividend payments and in what amount? how long do administrations take to finalise? what value of assets are realised? what is the cost of their recovery? what is the average remuneration of the practitioner and their expenses? what government levies are charged? and so on. In relation to a particular file the practitioner could or should be able to readily extract each of those items of information; on a collective basis it all seems too hard.
The author of the interview article – Peter Gosnell – says the committee should resist the temptation to try to satisfy everyone as a priority. It may have a higher one. Those making submissions are all familiar with the principles of independence in relation to the impact that relationships and personal demands can have on one’s mind, however honest one’s approach. Here, independence of thought is needed, unconstrained by one’s personal interests or biases, no sacred cows as one said. Assuming that will be the case, there is much expertise and knowledge about the insolvency system in Australia from which the committee will no doubt benefit.
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[1] See Insolvency News (insolvencynewsonline.com.au) Corporate Insolvency Inquiry – what about bankruptcy? 12 October 2022. My own comments are recorded in the interview but are best left for others to review, if at all.
