That part of the Productivity Commission’s report on insolvency – or “closure” – was not one of its better efforts, though it was constrained by being asked to deal with insolvency in what was a broad ranging inquiry, and without a wider perspective offered on the law and practice problems. A number of the Commission’s recommendations were queried at the time, and in its response, the government has now rejected a number of these, with only a few recommendations being accepted, or in the process of being implemented in any event.
The Commission’s controversial recommendation 14.1 was that within one month of a voluntary administration (VA), the administrator must certify that the company’s business is “viable”; otherwise the company should go into liquidation. This does support much opinion that a business fails because of its lack of viability, rather than its management or market conditions, a concept that deserves a closer focus. But as the government says in its response, this would fundamentally change the purpose of a VA to focus only on restructuring, “which disregards the current focus of also providing an alternative mechanism to liquidation”, this presumably referring to the proposed safe harbour reforms.
The government optimistically comments that VA “is likely to operate much more effectively” when the government’s ipso facto clauses and safe harbour reforms commence.
While the government supported the Commission’s safe harbour recommendation 14.2 in principle, it appears to reject the need for a safe harbour adviser to be one registered as an insolvency and turnaround practitioner, its own safe harbour adviser contemplating a broader range of expertise.
The euphemious ‘pre-positioned sales’ recommendation was also rejected, that where no related parties are involved, there should be a presumption in favour of a sale of the company’s assets prior to insolvency only if the administrator can show that it was not for market value. This would extend to small companies [14.4].
The Government says it does not support this because it says the liquidator or administrator will assess any sale, and any presumption in favour of a sale would fetter the liquidator’s ability to carry out this function.
The Government also notes concern that the UK’s non-legislative ‘pre-pack’ administration has
“attracted considerable criticism because of perceptions that it may facilitate fraudulent phoenix activity”.
While that may be the case, this does not appear to acknowledge the various processes implemented since the Commission’s report in 2015 to strengthen the integrity of the process.
Indeed, as the government itself says, in promoting its safe harbour reforms, that voluntary administrations are “value destructive”, and pre-packs are one means to avoid that loss of value when an insolvency administrator is appointed.
The government has proceeded to implement the limitation on the use of ipso facto clauses, although the Commission’s recommendation was one among many: [14.5].
The government supports recommendation 14.6 in principle, that there may need to be a moratorium on creditor enforcement when a company is in a scheme of arrangement, although such proposals have been rejected in comparable overseas jurisdictions. The government says it will consider this further.
As to a small liquidation process [15.1], the Commission listed a grab-bag of ideas, for companies with liabilities under $250,000 to present a “debtors petition” with ASIC, with a report as to affairs. The main role of the liquidator would be to “ascertain the funds available to a reasonable extent”, with, for example, the pursuit of unfair preference claims being limited to 3 months and only for material amounts. Creditors could opt out and move the process to a standard creditors’ voluntary liquidation. Liquidators would be drawn from a panel of providers selected by tender to ASIC.
The government says it supports in principle this recommendation and that it has already taken significant steps through the Insolvency Law Reform Act 2016 (ILRA). However, those steps are seen as generally increasing the costs of insolvencies, and there is very little in the ILRA reforms supporting a streamlined approach to small insolvencies.
In fact, the Commission’s worthy focus [15.2] on funding the costs of small insolvencies by way of a levy on registrations (recommended by the 1988 Harmer Report, and many times since) to allow increased access to the Assetless Administration Fund, was rejected by the government without reason, simply saying that the Fund is
“not designed to support small scale liquidation more generally”.
As to a Commission recommendation that the roles of receivers be reviewed, the government says it wants to further consider the report of the Parliamentary Joint Committee on Corporations and Financial Services into the impairment of customer loans, of 4 May 2016; and the report of the Australian Small Business and Family Enterprise Ombudsman, of December 2016. The government does support in principle a recommendation to allow more information to be provided to unsecured creditors in a receivership.
The Commission recommended [15.5] that the operation of the Fair Entitlements Guarantee should be reviewed in 2021 in order to monitor any moral hazard issues, potential abuse and continued effectiveness of its recovery arrangements. It also said that consideration should be given to amendments to allowing the Commonwealth to play a more active part as creditor. This reform has been introduced by the ILRA (see s 70-55, s 75-35 IPSC) although delayed until 1 September 2016.
While the government does not refer to the ILRA reform, it does refer to the enhancements to the scheme and the increased funding of the FEG Recovery Program, estimated in the MYEFO 2016-17 to achieve additional FEG recoveries of $165.7 million over four years.
The Government only notes a recommendation for a Director Identification Number (DIN), saying not that it is considering what are now around five recommendations from various government inquiries – the latest being last week – but that it will “give this proposal further consideration as part of its ongoing work on insolvency reforms”.
The government notes that the Commission’s recommendation 15.7, that ASIC produce a regulatory guide targeted at small businesses facing financial difficulty, is a matter for ASIC. While that may be a priority, ASIC, and ARITA, have unmet tasks following the introduction of the ILRA which might come first.
The government says that
Australia’s corporate insolvency framework is generally sound and reforms should focus on specific, not fundamental change.
This statement will be of interest to many.
While accepting an earlier Commission recommendation [10.2] that “positive language” be used to “describe start-up success and failure that is associated with ‘trying again’ and ‘learning by doing’”, the government reverts to old political form is saying that creditors and society need to be protected from “disreputable or unscrupulous business people”, while not unduly penalising genuine entirely honest and legitimate entrepreneurs, who must be few and far between.
The Commission’s recommendation 12.1 is for a one-year period of bankruptcy which the government supports and it to be announced imminently; with obligations continuing for income contributions to be made, perhaps counter-productive of a financial fresh-start.
There is not much on the government’s response about real or new reform, consistent with its view that reforms should be specific, not fundamental. That being the case, as I have reported, there are over 25 government reports recommending change awaiting attention, being added to by further reports, often covering the same issues.
That list, updated, can be supplied.
The government’s rejections of some of the Commission’s recommendations are more significant than the acceptances:
- rejecting pre-packs to counter “value destructive” insolvencies,
- rejecting streamlined small insolvency processes to counter the large number of disappearances of small companies,
- rejecting the funding of assetless company insolvencies, now to increase with the removal of the official liquidator obligations, and
- if not rejecting, then giving only a lukewarm comment on the need for a Director Identification Number, one significant counter to unlawful phoenix activity.
Also, in giving a 2017 response to a 2015 report, it is evident that the government has not assessed its responses in light of the significant policy thinking internationally since 2015, as displayed at recent INSOL and QUT conferences. In relation to micro to small to medium businesses, the government should have regard to the UNCITRAL Working Group V meeting in New York this week, at which a range of measures for addressing MSME insolvencies are being debated. While the government does not attend, my colleague Anne Matthew of QUT is attending, with the hundred or more delegates from other countries and interested bodies.