With the 3 year anniversary of Australia’s 2023 Parliamentary Joint Committee Report on Corporate Insolvency coming up,[1] and with the World Bank to make its assessment of Australia’s corporate insolvency regime this year, these views on the larger structural issues that are needed for law reform attention are offered.
It is a work in progress. Comments are welcome.
Given that 97% of Australian businesses are small to medium, these ideas are focused on MSMEs. Larger insolvencies raise some comparable but different issues.
This covers the structure of small businesses, their assets, conduct, including tax compliance, and their employees; and broader economic issues of competition, viability and restructuring, productivity and business churn or dynamism.
The debtors
The debtors upon which insolvency is focused are a narrow set of legal structures – individuals, and pty companies. Insolvency law addresses individuals well enough, but it has limitations in attending to modern business structures. These are invariably a blend of personal and corporate liabilities and assets, with personal guarantees and tax liabilities mixed in. There is need for insolvency law to be able to deal with the insolvency of a business.
AFSA has said the separation between personal and corporate[2] law is
“a key regulatory issue that contributes significantly to time-consuming, complex processes that constrain business dynamism and resilience”.
This is the focus of my research with Dr Amanda Bull recently presented to the World Bank in Washington. An outline of arguments supporting a combined personal and corporate insolvency regime for small business – Murrays Legal
As recommended by the PJC, we are applying systems-based analyses to what are the complex pathways in corporate insolvency, and in particular in the intersection of personal and corporate insolvency.
Systems analysis
Corporate and personal insolvency both lend themselves to systems analysis, particularly as to their points of intersection and friction.
Central to any systems analysis is a clear articulation of the purpose of any reform as recommended by the 2023 PJC Report. Here, and as Lo Pucki observes,
“for the most part, the systems are not designed; they simply grow up over time. Courts, legislatures, and administrative agencies occasionally attempt to make changes in them, but nearly always incrementally and often without success”: LM Lo Pucki, Systems Approach to Law, (1997) Cornell Law Review 479 at 521.
I will come back to purposes, shortly.
Corporate structures
Another law reform approach lies with corporate law, which has ignored the workings of small proprietary companies and the tax and other abuse in which many engage.
There could be devised better business structures to be created to encompass the reality of how SMEs operate, without going to concepts of “commerçant” and “imprenditore” in civil law jurisdictions.
Changing nature of assets
The administration of a liquidation or bankruptcy will depend on the difficulty in locating and realising remaining assets and their value. Remaining assets are more limited nowadays, either because of their nature, or they are the more legally protected, or because they are used up in continued insolvent trading. As a Judge in one case said in the context of personal insolvency,[3]
“creditors should be expected in these times to be aware of the possibility of constructive trusts or of equitable interests which may arise when the debtor is married or in a de facto relationship”, let alone all other protective structures often used.
The result is that unsecured creditors receive little or nothing. That being the case, the elaborate structures created by the ILRA should be limited in favour of providing more public access to information about the administration for those that wish to have it: see Rebuilding the Structure of the Australian Insolvency System, Murray & Harris, INSLB, 2022.
Investigations
Much focus has traditionally been given to investigations of conduct when a business goes into insolvency. Close inspection is given to the 14,000 or so companies entering insolvency each year but limited if any regulation is given to the 2.5 million small private companies operating as businesses.
Data show that this is infrequent, or of a low level; and may well be comparable with companies that do not enter insolvency. It is a matter of risk management. Its tasks should be reduced. AI will assist.
The tax system
The inadequacy of the tax payment systems serves to maintain much of the insolvency system in its present way of operating. Small businesses in particular can readily accrue tax liabilities which are then relegated down the payment list in favour of commercial creditors. Those accrued liabilities then become the subject of a long series of negotiations between the company and the ATO, involving practitioners, lawyers, the ATO and the Courts. The on-going liabilities will often mean that the business is trading while insolvent, to its unfair commercial advantage over others. Such zombie businesses are an impediment to productivity.
That issue needs attention, or at least we should be aware of the inefficiencies it involves.
The 2025 ATO Capability Review foreshadows a regime whereby “tax just happens”, that is,
“a future where tax obligations are paid automatically in a way that is integrated into the systems that people and businesses already use to transact and manage their affairs … It is easy to imagine a future where obligations such as GST and PAYG withholding are paid to the tax office at the point of transaction, rather than through a separate lodgement”.
This adopts the OECD’s Tax suggestions – Administration 3.0: From Vision to Strategy, 2025 – involving taxation processes
“increasingly taking place in the natural systems (or ecosystem) used by taxpayers for their own purposes, for example for running their business or undertaking transactions”.
Employees
Employees are typically favoured in insolvency and are often a key factor in a restructure. Yet the retention of the business, and its employees, can be an impediment to “productivity-enhancing creative destruction”.
While there are necessarily concerns about job losses, and a range of negative social outcomes from any resulting job displacement, a Reserve Bank study shows employees quite readily finding new jobs, and with better employers –
“.. more than 90% of individuals of an insolvent firm have been re-employed within a few months [and] been able to recover their pre insolvency earnings within a year”: Reserve Bank’s Financial Stability Review, April 2025.
In any event, it is better to manage the costs of worker displacement, such as well-designed active labour market policies,
“which are said to be particularly effective at returning workers displaced by firm exit to work (Andrews and Saia, 2016)”.
In the context of AI, worker displacement itself may be a much larger issue.
As well, the costs to workers from insolvency reforms should not be overplayed
“since reducing zombie congestion implies higher non-zombie employment growth (Adalet McGowan et al., 2017) and creates scope for some displaced workers to be reallocated to a job that better matches their skill (Adalet McGowan and Andrews, 2015)”.
Data
As the IMF has said, insolvency law reform in the absence of substantiating data, or “legislating in the dark”, involves the risk of ill-directed laws. The IMF also acknowledges that data will always be limited, or at least until AI takes hold.
Government agencies and private firms hold much of the data. Collating and extracting and publishing it is required. More sophisticated databases like BLADE will assist.
Data is often extracted to support reform; but it is also needed to substantiate or review and reframe the reform.
Back in time, the ATO sought a tougher Director Penalty Notice regime, which was granted. It does not seem the ATO has ever reviewed the effectiveness of that reform. The ATO’s inattention to data collection and reporting is referred to in the Capability Review
The use of data in directing law reform is valued across many policy areas, less so in insolvency. England’s Magenta Book and other such sophisticated guidance are worthy examples.
The opportunity for having combined personal and corporate insolvency data as recommended in 2010 has long passed. That would have involved breaking into the regulators’ silos … Instead, the ILRA reforms at least requires AFSA and ASIC to co-operate with each other.
What limited government data there is, plus views offered to the PJC and plus academic analyses will have to do. But any reforms should embed mechanisms for recording relevant data as to the ongoing operation of the law; and desirably, impose a 5 year review. Processes for any such review should be settled.
Competition, productivity etc
The insolvency of a business operating in a competitive market also brings in some tension between competition policy’s support for the most viable,[4] efficient, innovative and legally compliant businesses, and insolvent restructuring’s attention to the less competitive businesses. There is a certain unfair competitive advantage given to a struggling business with say 70% of its tax debt written off over its more efficient and tax-compliant competitors.
Also, the economics of a healthy market are that there should be a constant churn of new businesses replacing old – creative destruction or business dynamism – a process that should not be impeded by too ready a permission to restructure. Movement of employees is also economically beneficial.
In the PJC Report, evidence given by the Productivity Commission was that, while there is “an element of pain” associated with financial distress, business exits can be
“an important way to get economic growth through innovation and different business models, and in some industries in particular that is a mechanism by which innovation and productivity growth occur”.
Quoting from an OECD report, the PJC report said that
“a well-functioning exit margin, which sorts successful market activities from unsuccessful ones, is vital to aggregate productivity growth’.
That balance might be said at the moment to need re- calibration, that is, has insolvent restructuring gone too far in preserving under-performing companies. In any event the question is worth asking and assessing including by way of the application of economic criteria. The concept of viability needs to be assessed. This applies as much to voluntary administration as to small business restructurings.[5] The need for settled exit margins in referred to in much of the international literature.
As to the reality, the Productivity Commission’s 5 Pillars Report – Creating a more dynamic and resilient economy – refers to Australia’s reduced business dynamism –
“with fewer firms entering and exiting, the economy is not getting a productivity bounce from new firms bringing new products and innovative approaches”.
Economics
An insolvency system plays an important part not only in determining the legal rights of parties but in also playing a role in the economy. There has been too little input from economics into insolvency reform, Economic principles can seem contrary to the legal purposes of insolvency or at least they provide a counter foil to what can be and overly legalistic approach of insolvency.
It is not for me to delve too much further into the economics but I have listed many useful papers from overseas mainly. Australian economists need to take part, or be enlisted, in any such reforms.
References
- OECD Economics Department Working Papers No. 1399 Insolvency regimes, zombie firms and capital reallocation McGowan, Andrews and Millot
- Insolvency regimes and productivity Growth: No. 1309 By Müge Adalet McGowan and Dan Andrews
- World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes, revised 2021
- UNCITRAL Legislative Recommendations on Insolvency of Micro- and Small Enterprises (2021).
- M Wellard, World Bank report on MSME insolvency: Implications for Australian law reform, (2018) 30(4) ARITA Journal 18;
- R Mokal et al, Micro, Small and Medium Enterprise Insolvency: A Modular Approach (Oxford University Press, 2018).
- P Heath, “Insolvency Law Reform: The Role of the State” [1999] NZ Law Review 569.
- See J Harris and M Murray, What Do We Expect of Insolvency and of Insolvency Practitioners? (paper presented at the INSOL Academics’ Colloquium, The Hague 18–19 May 2013).
- M Murray and J Harris, The Roles of the State and the Private Profession in the Insolvency System: Do We Have the Right Balance? (Insolvency system roundtable, Australian Academy of Law, 4 August 2021).
- A Gurrea-Martinez, “Implementing an Insolvency Framework for Micro and Small Firms” (2021) 30 International Insolvency Review 46–66.
- Insolvency law in 2025: its present operation, its reform and its future, Bull & Murray, INSLB
[1] 12 July 2023
[2] Creating a more dynamic and resilient economy inquiry Questionnaire response 27 AFSA 6/06/2025.
[3] Clout v Markwell [2001] QSC 91; (2001) 1 ABC (NS) 177 at 185.
[4] Viability in corporate debt restructuring law, Lydia Tsioli, 2024, Edward Elgar.
[5] Small business rescue: identifying the objectives of Australia’s Pt 5.3B Small Business Restructuring Regime, Dr A Bull, INSLB, 2026
[1] LM Lo Pucki, Systems Approach to Law, (1997) Cornell Law Review 479 at 521, referring to CE Lindblom, The Science of “Muddling Through, (1959) 19 Pub Admin Rev 79 at 81.
One Response
There has been an ever increasing cohort of workers generally held out to be independent contractors, who have due to movement in statutory and general law to be employees. In an insolvency inevitably they miss out on GEERS because it is convenient to government funders and also regulators.
Far more empirical data should be available, particularly from ASIC.
I agree the system is to complex, costly and not presently fit for purpose.
The research by Amanda and yourself is essential, as is more discussion upon the Senate Committee report.