Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Australia’s insolvency law reforms – useful information from government officers

On 26 October 2020 the Economics Legislation Committee inquired of various Treasury officers about personal and corporate insolvency law reform, in particular about the proposed corporate SME related insolvency reforms. 

Statistics were offered on the day which don’t seem to relate to other information available, perhaps because the figures were only those of ASIC; but these are being checked. Questions were also asked about the fact that the insolvency reforms do not assist unincorporated businesses, about which Treasury was to come back with the numbers involved.  The Attorney-General handles those, but has made no announcement; although the Attorney also handles the FEG scheme, which does help incorporated businesses, and the PPS scheme, likewise.  The relevant corporate insolvency Minister also appeared to be uncertain, although Mr Frydenberg himself may have quoted some of the statistics referred to in his newspaper article. Further questioning related to how creditors were to be assisted by the reforms, as to which the answers are interesting, and what modelling, evaluation or analysis was done. We now know there were 51 submissions made to Treasury in the week allowed, although they have not been released publicly.

We’ll report what Treasury comes back with, or the Attorney.

This is an extract of the transcript, edited:

The proposed insolvency reforms

Senator McALLISTER: …. Can I ask about the insolvency reforms. Which industries and small business stakeholders were consulted before the announcement?

Ms Christine Barron: I’m not aware of any associations that were consulted on the reforms before they were announced. The team in the division who are dealing with the reforms were in regular contact with a number of organisations that operate in the insolvency space as part of getting feedback on the effectiveness of the temporary insolvency measures that were introduced back in March.

Senator McALLISTER: Which organisations active in the insolvency space were consulted before these reforms were announced on 24 September?

Ms Barron: As I said, they weren’t consulted on those reforms; they were having discussions about how they were finding the temporary measures and the impact on the insolvency industry and businesses as they saw it. That would’ve been ARITA, the Australian Restructuring Insolvency and Turnaround Association. I certainly spoke with the BCA and the Law Council of Australia.

Ms Meghan Quinn: We also had the Coronavirus Business Liaison Unit that was set up in Treasury to consult with business on all aspects of what was happening in the economy. They had regular meetings with all the peak industry bodies and sought feedback on a whole range of things, which included how people were finding their financial situation and the implications for different regulatory environments. That continuous process of discussion with business and industry fed into a whole range of policy matters that were in the budget.

Senator McALLISTER: What was the process for receiving feedback once the reforms were announced?

Ms Barron: A number of people rang us after the reforms were announced, but then an exposure draft of the legislation was released, and it was open for consultation.

Senator McALLISTER: On what date was the exposure draft released?

Ms Barron: From memory, 5 October, but I can confirm that.

Senator McALLISTER: How many days was it open for consultation?

Ms Barron: It was open for one week.

Senator McALLISTER: Does one week seem a normal amount of time for stakeholders to provide feedback on complex legislative reform?

Ms Quinn: It is shorter than other consultation processes we’ve undertaken, and the reason for the shorter consultation process was the desire to have this legislation in place for commencement on 1 January, to ensure that there’s a smooth transition from the temporary measures to a more permanent regime and to provide certainty to the large number of businesses who currently have a temporary pause, and for creditors of those said businesses as well. There has been a shorter turnaround consultation process than in other times, but that’s a reflection of the economic environment in which we’re operating and the need to put in place a regulatory regime that will support businesses in the resolution of issues, as we expect various temporary measures and also bank deferrals and other support mechanisms to unwind.

Ms Barron: I would just add that we got 51 submissions in response to that period of consultation.

Senator McALLISTER: Was there any modelling, evaluation or analysis done on the effect of the reforms on sole traders or partnerships that might be creditors?

Ms Barron: Yes. In putting together the reforms, balancing the rights of creditors against the needs of the small businesses was of paramount concern. So the rights of creditors are maintained through these reforms.

Senator McALLISTER: I see. So the government’s position is that creditors’ rights are not diminished in any way by the reforms?

Ms Barron: For example, if we talk about the small-business debt restructuring reform, then a restructuring plan is put to creditors and it is creditors who vote on whether the plan is to go ahead or not. So the creditors have the final say.

Senator McALLISTER: So the government’s position is the creditors’ rights are not diminished in any way by these reforms?

Ms Quinn: That’s not the intention of the reform. The intention is to make the process quicker and easier and cheaper.

Senator McALLISTER: I understand that. I’m asking about what the effect is. I understand there is one intention for one group of stakeholders. I’m just trying to understand whether—

Ms Quinn: The intention is for this to work for creditors to more quickly resolve the situation, so they understand where their position is in relation to companies that are restructuring or, in the event that they move into insolvency, that that’s resolved quicker at lower cost so that they can potentially have more returns at the end of it. So the intention isn’t about unwinding rights; it’s about speeding up the process.

Ms Barron: Creditor priority is unchanged, and creditors’ rights to vote the scheme up or down are unchanged.

Senator McALLISTER: Can I ask about the media release which says that the reforms will cover about 76 per cent of businesses subject to insolvencies today, 98 per cent of whom have less than 20 employees. What is the basis of that claim?

Ms Barron: It’s based on data from ASIC.

Ms Quinn: It’s based on the historical evidence, given the information they’ve got on companies that have gone through the insolvency process.

Ms Barron: The historical insolvency data.

Senator McALLISTER: But some of the measures are only for incorporated small businesses—isn’t that correct?

Ms Barron: Yes, that’s correct. This is only about incorporated businesses, and that data is also only about incorporated businesses.

Senator McALLISTER: What proportion of small businesses are incorporated?

Ms Barron: I’d have to take that on notice.

Senator McALLISTER: Does anyone at the table know?

Ms Quinn: I don’t have that information, but we’re very happy to take it on notice.

Senator McALLISTER: I asked because I think that there’s a very large number of small businesses which are not incorporated. Sole traders and partnerships will not be able to access this scheme—is that correct?

Ms Barron: That’s correct, but the personal bankruptcy processes apply to them rather than the corporate insolvency process.

Senator McALLISTER: Finally, did Treasury consult the Australian Financial Security Agency prior to announcing these changes?

Ms Barron: I’m pretty sure not, but let me take it on notice and confirm.

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