The recent launch of the new 10th edition of Keay’s Insolvency prompted some pointed comments about the current insolvency system and suggestions about law reform – including safe harbour and pre-packs, the need for a holistic approach rather than the present ‘tinkering’, and the limitations imposed on the effectiveness of insolvency laws by the existing law and business environment.
Richard Fisher AM
Richard Fisher, a Commissioner on the ALRC inquiry leading to the 1988 Harmer Report, wrote the foreword and also launched the book, its year of publication marking the 30th anniversary of that Report. The launch was attended by representatives of the legal and insolvency professions, academia, government policy and law reform bodies, and members of the judiciary.
Supporting the authors’ call for a grass roots re-evaluation of the role of insolvency law, Mr Fisher warned against the inability of the legislature to resist the temptation to “tinker” with Australia’s insolvency laws, saying that any such reform requires a holistic view of its operations. Pointing out that this is not a technical exercise, he instanced the approach developed by Michael Kirby the then chair of the Commission, in conducting public hearings around the country. One particular outcome of that process was the Part XI debt agreement regime under the Bankruptcy Act which the book notes now offers a significant alternative to bankruptcy for many debtors.
Keay’s guidance on workouts
Mr Fisher commended Keay’s increased focus on corporate restructuring, expressing support for the authors’ view that the new safe harbour regime will assist in that process. Chapter 21, he pointed out, now provides a valuable chart to assist those directors and advisers using the safe harbour process. It also offers a broader perspective on business distress, drawing on overseas approaches in the US, England and Europe, and with ideas for further reforms here.
The book’s comments on ‘pre-pack’ sales as a means of restructuring drew comment from Mr Fisher. Given that “the only way to establish market value is to test the market”, he noted that proposed new anti-phoenixing laws, offering a defence of market value, would in fact facilitate the need for an independent valuation of the company in any pre-pack process.
The authors, Michael Murray and Jason Harris
As the authors, Murray and Harris drew attention to the fact that Keay’s Insolvency now incorporates all the law introduced by the Insolvency Law Reform Act 2016, involving a careful citation of the different sections of the Acts, the Schedule and the Rules. While the harmonisation of personal and corporate insolvency laws is welcome, it has not permitted any reduction in the size of the book, as was predicted in the preface to an earlier edition. The increased verbiage and regulation introduced by the law reforms is one reason.
The authors said that the significant effort involved in the ILRA, over some years, might better have been directed to more important law reform issues.
Nevertheless, the harmonisation reforms have permitted insolvency law to be seen more holistically, and the text assists by cross-referring between personal and corporate insolvency, in particular on what are now the many common provisions. ‘Section 90-15’ is now a familiar provision by which the court can issue directions and make a range of other orders.
What should we expect of insolvency and its practitioners?
Referring to their joint work here and internationally, the authors refer to what is now chapter 1 of the text in asking ‘what should we expect of insolvency and its practitioners?’
“Insolvency law is not the panacea for all of society’s financial defaults … it must be seen as part of the network of other legal regimes – tax, employment and securities law – in which it takes its place and which themselves have their own protections for their respective constituents”.
And as the authors put it bluntly, “blood cannot be got from a stone; and if blood is to be found, it must come at a cost”. While those costs should be kept under scrutiny, who meets those costs must be better defined. Neither society nor creditors can expect their justice to be provided for free. As Mr Michael Kirby has said in this context,
‘The task of insolvency administration is inherently expensive. Principally this is so because of the intensive nature of the investigation of accounts… This is also true of legal costs. … It is unreasonable to demand that skilled professionals should perform their functions at low cost. Dispute resolution has a cost component’.
A government role is needed
The authors argue for more government responsibility for the many public interest responsibilities with which practitioners have to deal, often at their own direct cost. A government liquidator is needed, even if it then enlists the private profession in its tasks.
And insolvency does not exist in a vacuum. As the book explains, its effectiveness is presently constrained by the opaque commercial environment that exists in Australia, supporting, or at least doing little to impede, the unlawful phoenix, tax and other such operators which are the subject of much ex post facto law reform. An open business environment that serves to prevent or at least disrupt misconduct should exist, which would go to enhance the effectiveness of the necessary ex post regulatory powers.
Examples of what are needed are free public access to ASIC data; an identity number for directors; and disclosure of beneficial company ownership.
As a respected academic colleague says, sunlight is a great disinfectant, and prevention is better than cure.
Insolvency review needed
Overall, a new examination of the regime is needed, with a focus not only from law, but also from economics and IT. Economics is needed to more clearly address the effectiveness of the regime; IT to provide the cost-effectiveness the system needs; and the law to ensure that the important legal and social purposes of insolvency, explained anew in the book, are maintained.
The significant changes in commerce and finance, and access to credit, and in particular internet-based payment systems, financial tracking and assessment and tax recoveries, and more, are already with us, with the classic notions of insolvency likely to be fundamentally transformed as a result.
The authors questioned none of the significant value of the Harmer Report of 1988, the principles of which largely remain sound and they will do so for some time yet. But the world has changed significantly over the last three decades, and expectations have heightened, across many areas of society, and insolvency law needs to readjust.
Keay’s Insolvency – Personal and Corporate Law and Practice, Thomson Reuters, 10th ed, 2018, Michael Murray and Jason Harris. Editor, Lara Weeks. Product developer, Lucas Frederick.
Thanks to Baker McKenzie for hosting the launch, on 22 August 2018, and in particular to David Walter, Maria O’Brien and Laura Honey.