Insolvency aspects of the Productivity Commission’s Business Dynamism Inquiry

In its inquiry into barriers to business dynamism, the Productivity Commission has now called for submissions on a range of issues, due by 3 July 2026. Call for submissions – Reducing barriers to business dynamism | Productivity Commission

The comments here are drawn from an earlier post, in anticipation of what the PC would want, Insolvency law reform – some views – Murrays Legal, and from recent presentations of myself and Dr Amanda Bull to the World Bank and others. These comments are my own.

Note: this article is over 3,700 words.

Issues that the PC considers any submissions might address

The call for submissions describes business dynamism as the processes of change among firms – including business set-up, expansion, contraction, change of ownership and closure. It’s a more politically acceptable term than the original “creative destruction”, but with the same focus.

Within that lies the insolvency system, its prime purpose being to deal with business contraction, or exit, and closure, or to remediate, sometimes by change of ownership.

The call for submissions refers to new ventures, but if they do not succeed,

“stakeholders are ideally appropriately protected, founders experience an orderly, efficient and inexpensive recovery, and workers and capital move swiftly to businesses where they can be used more productively”.

The PC looks at barriers to these processes that impede business dynamism, rather than pathways that might improve it.

Those barriers include business registration and industry-specific licensing, the design, operation and integrity of corporate and personal insolvency frameworks; the operation, so to speak, of illegal phoenixing laws; and the broader economic impacts of these processes and barriers, including the effects on productivity, innovation, investment and employment.

The PC is asked to provide advice on implementing reforms, as to feasibility, and whether more evidence is needed.

It is to have regard to previous and current work by governments – this will include the 2023 PJC Report on Corporate Insolvency – and will draw on work by others in order to identify and recommend priority areas for reform. It is assumed that this includes the considerable insights from international bodies of which Australia is a member – the IMF, OECD, World Bank and UNCITRAL. See for example IMF Staff Discussion Note, “Insolvency Prospects Among Small and Medium Enterprises in Advanced Economies: Assessment and Policy Options”, Díez et al, SDN/2021/002.

While the PC says it is “inclined to focus on” nominated issues, it welcomes others.

Insolvency

The PC has identified five priority issues for investigation – administrative and regulatory costs of starting a business; Australia’s innovation ecosystem, including support and incentives for innovation and entrepreneurs, rules and stigma regarding business failure and risk protection systems to support entrepreneurs; human capital and management capability; capital markets; and transfer of successful businesses.

In the context of reducing barriers, the PC will examine the design of Australia’s insolvency frameworks, including their principles and objectives, if known, and the extent to which they support suitable outcomes for people and businesses, and enable economic growth – although those qualities themselves pre-empt ascertaining the purposes of insolvency. The quality of insolvency laws is said to influence whether people are willing to start and grow businesses.

It also intends to examine the integrity of Australia’s insolvency frameworks and whether they sufficiently deter misconduct, including illegal phoenixing and insolvent trading, and the role of safe harbour, in appropriately balancing integrity and rehabilitation of viable businesses; again pre-empting any finding about the purposes of insolvency.

The PC should assume those assumed purposes might be questioned.

Harmonising Australia’s corporate and personal insolvency frameworks

The call for submissions also asks whether further harmonising Australia’s corporate and personal insolvency frameworks would create a net benefit, particularly for small business owners; assuming we know what the present net position is.

The PC wants to see how the various corporate and personal insolvency pathways can be improved and to know how different types of creditors are prioritised.

The PC wants to know of any other serious concerns about Australia’s insolvency frameworks.

An interim report for public comment will be released in November 2026.

Comments, in summary

The last such Productivity Commission inquiry was in 2015 – Business Set-up, Transfer and Closure, with a similar focus to this one. That PC recommended a series of policy initiatives fostering innovation and entrepreneurship and accommodation of risk-taking. Safe harbour reforms flowed from that. Recommended changes to personal insolvency addressing the undue stigma of bankruptcy included a one-year period of bankruptcy, which the then government accepted, in 2015, eleven years ago.

This current inquiry continues to focus on dynamism, but perhaps now with some deeper understanding of how the system works.

How the system works – my views

Broadly, in 2026:

The system serves to formalise the exit of failed businesses, and resolve undue personal debt, although many more businesses exit through informal default deregistration;
Unsecured creditors receive little to nothing from an insolvency;
Remaining funds in insolvencies are inadequate to fund the system to the level sought;
Much of the work is involved in investigating the circumstances of the insolvency, selling remaining assets, providing some accountability to creditors, and the community, and finality, and allaying further costs.
Restructuring serves to protect and restore viable businesses that have nevertheless suffered loss, although the threshold for protection may not meet the demands of economics and competition principles, and accountability is opaque.
Insolvency is confined to its 19^th century focus on personal and corporate debtors, despite small business operating on a basis of combined corporate and personal assets and liabilities. Efficiency of processes and pathways needs attention;
This is exacerbated by separate laws, professionals, regulators and courts. There are in effect two professions, when there might be one.
The aims of the system, in terms of what it can realistically achieve, are unclear and unverified.
Data is limited such that how the system works is unclear, worsened by the disconnect between personal and corporate insolvency.
See generally, Murray and Harris, (2022) 22(1&2) INSLB 14, Rebuilding the structure of the Australian insolvency system.
The context is important. Of 2.5 million corporate businesses, only about 14,000 enter formal insolvency each year; of an adult population of about $22 million, only 13,000 or so enter personal insolvency.

Economics

The PC’s call for submissions focuses more on economics than law.

From an economics perspective, a healthy market should comprise a constant churn of new businesses replacing old – creative destruction or business dynamism.

Creative destruction is an evolutionary process of selection: entrepreneurship innovates, creating new combinations or new ways of doing things either within an existing business or a new venture triggering the displacement and destruction of incumbents – a series of “perennial gales” and an essential factor in economic development. See Anne Matthew, The Conceptual Legitimacy of Support for Risk-Taking, Entrepreneurship and Innovation in Australian Corporate Law: A Theoretical Examination, PhD Thesis, QUT, 2019.

Certain barriers to entry and exit have the potential to hinder the efficient operation of markets. These barriers can be a function of market structure, government regulation, industry specific sunk costs or geography. Cultural appetite for risk is also important.

Business exits can be “a mechanism by which innovation and productivity growth occur” PC 2023; and “a well-functioning exit margin, which sorts successful market activities from unsuccessful ones, is vital to aggregate productivity growth’: OECD.

However the Productivity Commission’s 5 Pillars Report of 2025 – 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”.

An insolvency system therefore needs more input from economics, which, as is evident, can serve to be contrary to the legal purposes of insolvency or at least they provide a counter foil to what can be the overly legalistic approach of insolvency.

Purposes

As the PJC said in 2023, and others, we have to determine what the purposes of the insolvency regime are. Ideally we would have data to show whether the existing purposes, if determined, are met. For example:

if the stated purpose is to provide a reasonable return to unsecured creditors, the data shows the opposite;
if rights of recovery by liquidators and trustees are meant to support pari passu distribution then the figures show otherwise;
if investigation and prosecution of offences is an aim, the reality is minimal, and the work involved within the limited funds of insolvency contrasts with the limited if any attention given to the 2.5 million other companies that trade in the market.

In anticipation of such issues for consideration, my recent comments might assist. I won’t repeat them, but summarise as follows.

Comments in more detail

Debtors

The debtors upon which insolvency is focused are a narrow set of legal structures – individuals, and pty companies. However, modern business structures are invariably a blend of personal and corporate liabilities and assets, with personal guarantees and tax liabilities mixed in. Corporate law reform has ignored the broader workings of small proprietary companies and the tax and other abuse in which many engage. We need better business structures to encompass the reality of how SMEs operate.

The tax system

The exclusion of tax from the PC inquiry is unfortunate but understandable although broad tax issues should remain. I have suggested that the current recovery mechanisms in tax in effect serve to maintain much of the insolvency system and its volumes in its present way of operating, with small businesses readily accruing tax liabilities which are then relegated down the payment list in favour of commercial creditors. The on-going liabilities, then pursued by the ATO, will often mean that the business is trading while insolvent, to its unfair commercial advantage over others. Such businesses are an impediment to productivity.

The answer seems to be a complete revamp of the tax system, that is, “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”, adopting the OECD’s Administration 3.0: From Vision to Strategy, 2025.

Also, the 2023 PJC Report recommended that consideration be given to the role of the ATO in the insolvency system. Some might have seen this as being limited to the ATO assisting in achieving a quorum in a system where absent creditors receive nothing.

The ATO’s role could be much broader. However, if it were to be as broad as it exercises in relation to small business restructuring under Part 5.3B, whereby it dictates the success or failure of an application, then certain more definite criteria would be required.

Business insolvency

Accepting that there is need for insolvency law to be able to deal with the present structures and taxation regimes, the insolvency of a business is inefficiently handled by the insolvency system. See An outline of arguments supporting a combined personal and corporate insolvency regime for small business – Murrays Legal

This is an area of reform currently being examined by Dr Amanda Bull and myself, and on which we recently responded to a World Bank invitation to Washington to present our ideas. Personal guarantees of company debts are identified as a limitation of the Part 5.3B process: see Amanda Bull, ‘Small to Medium Sized Enterprises: Destined to Fail or Supported to Thrive? A Critical Analysis of the Australian Restructuring Framework as It Relates to Small to Medium Sized Enterprises’ (PhD Thesis, QUT, 2025). The intersection of bankruptcy and corporate insolvency is also a particular reform issue that has been given focus by Assistant Treasurer Dr Andrew Leigh.

See Murray, The alignment of the laws of personal and corporate insolvency (2009) INSLB.

Systems analysis

Corporate and personal insolvency both lend themselves to systems analysis, as recommended by the 2023 PJC Report, particularly as to their points of intersection and friction.

A US scholar’s comment applies to Australia, that mostly, “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”.

See LM Lo Pucki, Systems Approach to Law, (1997) Cornell Law Review 479; Niklas Luhmann, Systems Theory.

A recent speech by Dr Andrew Leigh to “get the plumbing right” is on point. Opinion piece: Productivity gains come from getting the plumbing right | Treasury Ministers

A comparison with New Zealand

As an example, it was said during the 2023 PJC inquiry for example that Australia’s Chapter 5 – External Administration – involves too much complex plumbing. In that respect, the PJC was informed that New Zealand liquidation law is far simpler, such that

“no matter how liquidation commences, the statutory scheme then converges on one process covering liquidators’ powers and duties, voidable transactions, creditors’ claims, and distribution of assets … with a small number of supporting regulations”.

In contrast, the Australian scheme provides for four liquidation processes. structured into parts which contain rules applying to insolvent or court-ordered winding ups, voluntary winding ups, and winding ups generally. There are then separate grants of powers to liquidators appointed in compulsory or voluntary winding ups.

“The Australian rules are more complex and are likely to be inaccessible for many SME stakeholders without professional assistance … the time and expense required to navigate the Australian framework results in more work (and greater fees) for Australian liquidators and their advisors”.

New Zealand law provides Australia with a

“useful example of what an accessible and easily navigable legislative framework might look like”.

Culture and research

The bankruptcy system produces little by way of return to creditors. Anecdotally, many bankruptcies are finalised within months, although the person remains “a bankrupt” for 3 years or more, compounding the stigma.

The last government response as to the long three year period of bankruptcy was that it would be considered some time in the future.

The hesitation or even opposition to that is an indicator of the culture that needs to be addressed in any insolvency law reform.

2015 PC Report – Australian entrepreneurship and research rates poorly

In that respect, the 2015 PC report had said that in relation to entrepreneurship, Australia rates poorly compared with countries such as the United Kingdom, the United States and Canada on entrepreneurial framework conditions, perceptions and motivations for entrepreneurial activity, and fear of failure. Government has few levers to remedy this but the Commission recommended reforms to personal and corporate insolvency aimed at reducing the penalties for, and stigma associated with, business failure, as a means of improving entrepreneurial culture.

Also, that 2015 PC Report said that Australian research had generally failed to translate into successful business opportunities. Australia then ranked 9th in the OECD in publications of research undertaken, but 81st out of 143 countries for the efficiency with which it converts innovation inputs into outputs, 16th out of 17 OECD countries in terms of creating new-to the-world innovation, and last out of 33 OECD countries on the proportion of businesses that collaborate with research institutions on innovation.

“There is a lack of clarity and process around industry access to university and public-body held intellectual property. Further, the current university focus on peer-reviewed research combined with a general paucity of practical industry experience amongst academics provides little incentive for academics to translate research into commercial business opportunities”.

Data

As to research, like numerous earlier inquiries there will be a call for evidence in support by the PC. The state of gathering relevant data is rather limited even putting aside the adverse siloed collection between different Commonwealth agencies. The 2010 recommendation for a combined personal and corporate approach to insolvency statistics was rejected.

But 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. 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. England’s Magenta Book and other such sophisticated guidance are worthy examples.

Data is also needed to substantiate or review and reframe the reform. Any reforms should embed mechanisms for recording relevant data as to the ongoing operation of the law; and desirably, impose a 5 year review.

Changing nature of assets

Remaining assets are more limited nowadays, either because of their temporal nature, or they are the more legally protected, or because they are used up in continued insolvent trading. Trusts in particular can negate bankruptcy recoveries. The result is that unsecured creditors receive little or nothing – 1c in bankruptcies. That being the case, the elaborate structures in favour of creditors might more efficiently be dismantled in favour of providing more public access to information about the administration for those creditors that wish to have it. Promotion of PPSA security in business might usefully be more engaged.

Falling returns in personal insolvency agreements – Murrays Legal

But tertiary assets can have and do retain value more in an ongoing business, broadly leading to increased attention being required to allowing a beneficial restructure.

Investigations

As to insolvency practitioner investigations, the law requires IPs to give close and expensive inspection 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.

It is a matter of risk management. AI will assist.

Employees

Employees are typically favoured in insolvency and are often a key factor in favour of a restructure. Yet the retention of the business, and its employees, can be an impediment business dynamism. A Reserve Bank study shows employees quite readily finding new jobs, and with better employers: Financial Stability Review, April 2025.

In any event, it is otherwise 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)”.

Competition, productivity etc

Competition from new firms, or even the threat of potential entry, forces existing firms to be more efficient.

The exit of inefficient firms can provide for greater allocative efficiency as their former resources can be put to higher value use.

That brings in the debate, if less so in Australia then elsewhere, as to the clash between the aims of competition policy to promote the “survival of the fittest” businesses – those that are innovative efficient and legally compliant – over those less so to which insolvency in its restructuring guise seeks to give substantial economic benefits.

That balance might be said at the moment to need re-calibration, that is, “has insolvent restructuring gone too far?”

It is said that insolvent restructuring can be unfair on those businesses that compete well.

Neither argument is absolute but it does call for a re-examination of how far we go to assist struggling enterprises rather than allow their operations and assets and employees be released to better economic effect.

The ATO has expressed similar competition concerns in relation to non-complaint business taxpayers.

See Lydia Tsioli, Viability in corporate debt restructuring law, 2024, Edward Elgar; CG Paulus, Competition law versus insolvency law: when legal doctrines clash, (2013) 18 Unif. L. Rev. 65–77; Matthijs Van Schadewijk, Pushing the Boundaries between Competition and Insolvency Law, (2017) 5 NIBLeJ 2; Boratyńska, K., Corporate Bankruptcy and Survival on the Market: Lessons from Evolutionary Economics, (2016) 7(1) Oeconomia Copernicana 107-129; Yane Svetiev, Corones’ Competition Law in Australia, 8^th ed, Thomson Reuters.

This might assist

This commentary may assist the process with which the PC is engaged.

Readings

The following articles and other readings may also assist. Take care though, I read each one myself and noted its citation rather than taking these from an AI generated process.

Gurrea-Martinez, “Implementing an Insolvency Framework for Micro and Small Firms” (2021) 30 International Insolvency Review46–66.
Bull & Murray, Insolvency law in 2025: its present operation, its reform and its future,[2025] INSLB
Lydia Tsioli, Viability in corporate debt restructuring law, 2024, Edward Elgar.
Amanda Bull, Small business rescue: identifying the objectives of Australia’s Pt 5.3B Small Business Restructuring Regime, [2026] INSLB.
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.
Anne Matthew, The Conceptual Legitimacy of Support for Risk-Taking, Entrepreneurship and Innovation in Australian Corporate Law: A Theoretical Examination, Doctor of Philosophy Thesis, QUT, 2019.
CG Paulus, Competition law versus insolvency law: when legal doctrines clash, (2013) 18 Unif. L. Rev. 65–77;
Riz Mokal and Alfonso Nocilla, Rehabilitating the UK Pre-Pack: A Critical Analysis and Proposals for Reform, (2024) 40(2) Banking and Finance Law Review 207;
Aurelio Gurrea-Martinez, The Rise of Pre-Packs as a Restructuring Tool: Theory, Evidence and Policy, Singapore Management University School of Law Research Paper 15/2021;
Matthijs Van Schadewijk, Pushing the Boundaries between Competition and Insolvency Law, (2017) 5 NIBLeJ 2;
Harris, J., Symes, C. The chimera of restructuring reform: An opportunity missed for MSMEs in Pt 5.3B(2021) 36 AJCL 182;
J Faull, A Nikpay (eds), The EU Law of Competition, 3^rded;
Carruthers & Halliday, Rescuing Business (OUP, 1998);
Max Huffman, Worlds Colliding: Competition Policy and Bankruptcy Asset Sales, (2015) 60(5) Villanova Law Review 839;
Boratyńska, K., Corporate Bankruptcy and Survival on the Market: Lessons from Evolutionary Economics, (2016) 7(1) Oeconomia Copernicana 107-129;
J Derenne, Insolvency, restructuring and competition law, September 2023, Anthemis Publications;
P Werner & V Verouden (eds), EU State Aid Control: Law and Economics;
Yane Svetiev, Corones’ Competition Law in Australia, 8^th ed, Thomson Reuters;
Miller’s Australian Competition Law and Policy, 3^rd ed, LBC;
Biresaw and Rahim, Theories and goals of insolvency in common law – a critical review, (2025) J.B.L. 24-48.
Vittorio Minervini, Insolvency, Competition, Economic Growth (and Recovery), federalismi.it ISSN 1826-3534;
F Ilzkovitz & A Dierx (eds), Ex Post Economic Evaluation of EU Competition Policy, Ch 10;
Heribert Hirte, The EU regulation between company and insolvency law, (2024) (4) ECCL 361;
Christoph G. Paulus, In search of what constitutes insolvency law, (2024)(4) ECCL 369;
Schumpeter, J: Capitalism, Socialism and Democracy, New York: Harper, 1975, orig. pub. 1942;
Australian Productivity Commission’s Business Set-up, Transfer and Closure, Final Report, 2015;
Andrea Pezzoli, “With a little help from my friends – quale politica della concorrenza per l’economia digitale?”, (2019) 1 Economia Italiana 131;
Financial Stability Review, Reserve Bank of Australia, April 2025;
Silvia Muzi, Domenico Viganola, Filip Jolevski and Kohei Ueda, Productivity and firm exit during the COVID‑19 crisis: cross‑country evidence, (2023) 60 Small Bus Econ 1719–1760.
Murray and Harris, (2022) 22(1&2) INSLB 14, Rebuilding the structure of the Australian insolvency system.