Australia has implemented its first major insolvency reforms in many years but rather than being seen as an achievement they are regarded by many as being populist and over-regulatory. They have in fact been described by a senior insolvency academic as the worst insolvency reforms in his thirty year experience.
The new law
The Insolvency Law Reform Act 2016 largely addresses two issues, the regulation of insolvency practitioners and the harmonisation of Australia’s personal and corporate insolvency regimes. Australia’s personal insolvency law is contained in the federal Bankruptcy Act 1966, regulated by the Australian Financial Security Authority, AFSA. Its corporate insolvency laws are part of the federal Corporations Act, regulated by the Australian Securities and Investments Commission, ASIC, the general corporate regulator. The profession comprises around 700 liquidators, and 200 bankruptcy trustees, many with co-registration. Tax law, imposing liabilities on directors, has a significant influence on insolvency law.
What is seen by many to be excessive and prescriptive regulation was prompted by a rogue liquidator ten years ago, whose administrations led to media and political concern, in particular about the slow regulatory response of ASIC. A government inquiry followed, which found that bankruptcy law offered a better regulatory regime, and a single insolvency regulator under the AFSA model was recommended. That recommendation was rejected, with corporate insolvency seen as needing to remain connected to corporate law and regulation. A long period of consultation followed, which has led to the current law.
A consequence is that, in the interests of harmonization, the well performing bankruptcy regime has been lumbered with the heavy corporate insolvency regulation.
And while the two regulators would necessarily be expected to co-operate with each other, a specific provision in the law now mandates that they do so, although early indications are not promising.
… all insolvency practitioners have the potential to be rogues …
Throughout the law, there is an assumption that all insolvency practitioners have the potential to be rogues, only prevented by ‘tough regulation’. Regulators have extended powers to cancel registration, creditors have authority to remove practitioners, processes are in place for the appointment of reviewers to check on the conduct of liquidators’ files, and reporting and accountability requirements are heightened. The law requires the chair of a meeting to greet the creditors attending.
… ad hoc committee processes for registration and discipline …
Other aspects, not necessarily unwelcome, are harmonized registration and discipline processes, with natural justice requirements. A person applying for registration as a liquidator must now be interviewed by a selection committee; a similar committee hears and determines regulator actions against practitioners. A new co-regulation regime now exists, with sharing of information between the regulators and the professional bodies. One interesting reform of substance is the right of a practitioner to sell a voidable transaction claim, similar to provisions introduced in the UK in 2015. All these changes commenced on 1 March 2017.
… process changes …
The other changes will commence on 1 September, the profession saying it needed more lead time to implement them. These include harmonised processes between bankruptcy and corporate insolvency on meetings and voting, including ‘virtual meetings’, time limits, and reporting, though still to each separate regulator, and general streamlining. Certain creditors’ meeting have been removed, with the option given to creditors to be able to more readily call for a meeting.
Community perceptions of insolvency practitioners in Australia seems to remain low, partly because of the negative regulatory, media and government views. The reality is that trustees in bankruptcy realise around A$500m annually in the 20% of personal insolvencies they administer. Australian liquidators handle all corporate insolvencies, given there is no government liquidator. Many of these are unfunded. The system is economically dysfunctional, with perverse expectations of investigations and other work being done irrespective of funding.
… unhealthy distraction of regulatory focus …
The focus on regulation has resulted in virtually no other reform proceeding over the last ten years or more despite numerous reports recommending worthwhile changes, often supported by the profession. Reports exists on director regulation, phoenix and pre-insolvency activity, the construction industry, managed investment schemes, and long tail liabilities, all with no outcome. As to corporate restructuring itself, Australia is said to have a harsh insolvent trading regime which impedes corporate rehabilitation. While the government has promised ameliorative reforms, none have yet been forthcoming. The potential for increased technology in corporate insolvency administrations is evident but is not on the reform table; bankruptcy leads in this area with potential for more. While we have adopted the Model Law, the Australia government takes little or no part in international developments in insolvency, including on UNCITRAL’s work on corporate groups and foreign judgments.
Australia is hosting INSOL International in Sydney this month. While many of its comparable jurisdictions and neighbours are looking at worthwhile reforms, Australia is lagging. Its last major review was in the 1980s, when the world was very different. Worthwhile reforms came from that, including Australia’s voluntary administration regime. But another review is needed, in my view, from a joint legal, economic and technological perspective. Its initial task is to address the poor state of statistical information in corporate insolvency.
But she’ll be right mate, no worries
For all that, the regime works well enough with a capable and experienced insolvency and legal profession, and quality courts and regulators. They manage, but there is a cost in the rigid processes and the many uncertainties in the law. And for struggling businesses, better outcomes should be achievable. The government shows no real signs of noticing.
Any questions about Australian insolvency law? Please feel free to contact me.
Photo: Sydney Harbour Bridge, c 1944