In order to stir comments on a forthcoming talk that I was giving on the law and economics of insolvency (wait for my one on discharge from bankruptcy) I set out a fictional dialogue between an insolvency lawyer and an economist – A lawyer and an economist walk into a bar…. – Murrays Legal – highlighting the (unfortunate) different and disconnected perspectives of the two disciplines.
In response, Dr Garry Hamilton, an eminent insolvency lawyer and academic, explained in insightful terms the tension here between law and economics, and political reality, for which I am very grateful.
I set Dr Hamilton’s words out in full [with minor edits].
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“Your point is well made, Michael. And in an entertaining way!
The historical policy justification for elevating certain unsecured debts to a preferential status (such as employee entitlements under s 556 Corporations Act) and, more recently, the current FEG “safety net”, inspired by the demise of National Textiles, a company chaired by the former Prime Minister’s brother, are consequences of purely political choices about who should bear the cost of business failure.
None of these choices derive from economic efficiency, and none of them were ever intended to enhance “business dynamism” in the sense your economist colleague uses the term.
Australia’s restructuring regimes have always reflected a compromise between economic theory and political reality.
The legislature is comfortable with interventionist mechanisms that cushion particular constituencies — employees, small business creditors— but has never articulated a coherent economic objective for corporate rescue itself.
Section 435A’s “continue in existence” formulation is a clear expression of this: it is not an economic objective but a social one.
That is why, somewhat paradoxically, your economist’s critique resonates.
If the only articulated goals are
(i) company survival, and
(ii) a marginally better return than liquidation,
then it is unsurprising that the process takes no account of competitive neutrality, allocative efficiency, or the economy-wide effects of allowing underperforming firms to survive on sharply discounted liabilities.
As you have pointed out elsewhere, and compellingly, we simply do not ask the question whether the rescued entity is the best user of the assets or whether market forces would reallocate those assets more productively.
And your economist colleague is right again: the creditors who vote on a deed of company arrangement (or DOCA) are often the least well-placed to make that determination. They are motivated — understandably — by maximising their own short-term recovery, not by weighing the long-term efficiency consequences for the market.
The law asks them to decide matters that, in any other policy domain, would belong to a regulator armed with data and a statutory mandate.
So yes: from an economic perspective, our restructuring laws indulge in a kind of policy exceptionalism. We permit value to be reallocated in ways that may significantly distort competition, with no requirement that the restructured entity justify its ongoing participation in the market, and no mechanism to ensure that the company’s return to trading produces a net benefit to the economy as a whole.
Whether that is tolerable is a matter for debate. But your economist’s critique — that we simply do not test these interventions against economic criteria — is a fair one.
And perhaps, as Assistant Minister Dr Andrew Leigh takes up his new insolvency responsibilities, this is the moment to ask whether a modern rescue regime ought to reflect at least some alignment with the principles of economic efficiency that underpin the rest of public policy”.
4 December 2025
