We are pleased to see some further responses to our early ideas on reform of the structure of the insolvency system. These were presented at a roundtable group in August 2021, and since then to government and others. They are significant root and branch issues given that they have rarely been part of the insolvency law reform debates in the past, which have focused on the law but not the structure within which the law is to operate.
We had earlier responded to a large number of ‘chat room’ questions and comments from the roundtable. See Rethinking Insolvency Law | Australian Insolvency Law.
We would like to respond to further worthy comments made recently, by Rob Naudi and others, in general terms.
In that respect, there are some threshold issues raised in those comments that we don’t wish to fully address now because we ourselves have not yet fully assessed the options. Our first task has been to have the problems identified. We see these as mainly three:
- public interest tasks being performed by a private profession, or not at all;
- those tasks being in effect funded by creditors (either in the particular administration or in another administration through the ‘swings and roundabouts’ principle); and
- inaccessibility of many insolvents to the insolvency system.
These seem to be uncontroversial as matters of reality; or if they are to be contradicted, we would like to hear. We remain open to those problems being re-assessed, or others being added.
We see them as aspects of market failure, and market failure provides the justification for regulatory intervention by government. (This is of course apart from the state infrastructure that any insolvency system relies upon – laws that give authority to insolvency practitioners, and an independent judiciary and open public registers).
We say that the significant public interest functions performed by insolvency practitioners should be conducted by the state, either by a federal agency taking them over, or by a federal agency supporting the private profession to better undertake them (such as through some form of assetless administration fund).
As to funding, we have initially suggested an Official Receiver role, funded by the state but with funds drawn from whatever sources are appropriate, eg a levy on realised assets, or on company registrations etc. We have not yet given any detailed consideration to funding, with criteria such as fairness and allocation of responsibility being relevant. We don’t see creditors alone as being the source of that funding, as is the case to a significant extent in corporate insolvency in particular.
While we are not fixed on a government agency such as an official receiver, it is difficult to see public interest tasks being pursued unless performed or supported by the government. As a matter of history, that OR role has long been accepted in the UK and NZ; the reasons for Australia not having that role lie in its early corporate constitutional restrictions rather than any considerations of the proper role of government. The state has such a role in personal insolvency in Australia and we don’t think there are arguments raised against that. We note that NZ sees personal insolvency as solely a matter for the state.
However, given we have received significant resistance to the idea of having ‘another government agency’ created, we make these initial comments.
Public v private
We do not accept there is any greater efficiency or capability of the private sector over the public, at least without substantiation against relevant and comparable criteria. Even if we were to accept the view that the public sector does not perform as well as private practitioners, it may also be the case that the private sector does not perform as well in attending to matters of the public interest, as the counter-proposals seem to reveal.
Also, there are many options available to address the issues we raise. For example, it is possible that an OR role could coordinate public interest work but actually distribute some or most of that work to the private profession, as we understand occurs in the UK and occurs to a more limited extent in personal insolvency here. A suggestion was made that there be a joint-arrangement between IPs and the state, certainly where there are potentially significant personal liabilities involved.
Personal insolvency vs corporate insolvency
As to further comparisons between public and private, while this is not the best comparison that should be available, it could be said that the personal insolvency regime in Australia, where there is a government trustee and a greater government role, alongside and supporting a private profession, is generally shown to have better laws, regulation, culture and outcomes than corporate insolvency.
This was evident in the 2010 Senate Committee report, and in its recommendations and later adoption by corporate insolvency of many personal insolvency law processes in the ILRA 2016. The processes of selection of trustees was found to be more rigorous.
Personal insolvency has better data collection on the operation of the system, showing dividend outcomes, assets sold, secured assets, remuneration; and it has a better funding model, based on assets realised.
The profession itself seems to rate the regulation of the personal insolvency system more highly.
Personal insolvency allows greater access to its services, necessarily given the government OR role that can deal with the large number of assetless personal and business bankruptcies unwanted by the private profession.
In comparison, in corporate insolvency where there is in effect no government role, beyond ASIC as a regulator, and a funder, there is a large number of low asset or assetless companies, comparable to those in bankruptcy, that either cannot or do not access the insolvency system. The extent of reported misconduct is significant but at the same time perhaps overstated. The funding model is, by all accounts, unsatisfactory and until the ILRA, the process of selection of liquidators less satisfactory. None of this is to say that corporate insolvency does not provide a significant resource to the community, but rather that there are gaps and unknowns in its coverage, with public data being more limited, and private data inaccessible. While the government should be expected to provide data on its operation, so might the private profession which operates it.
All this is apart from the main problem, being that the government legislates, regulates and administers each of personal and corporate insolvency separately; partly as a consequence of the acceptance by the private profession. The creation of a government agency in corporate should assist in resolving this.
Whether what we are looking at accords with current government policy, being an issue raised, is not relevant, even if it is for others, except that we accept the need to put forward a practical proposal, and one that meets Australia’s present legal framework.
For the record, insofar as government has any stated policies relevant to our thinking, it is that corporate insolvency should remain in the hands of a private profession, with the costs of assetless liquidations continued to be funded by creditors; or, if not, then by those costs being avoided through the company’s default deregistration.
In contrast, and perhaps inconsistently, the government sees no real role of the private profession in its own regulation, rather, that the state should regulate through ASIC and AFSA. Some further inconsistency is that while the government has rejected any up-front fee for voluntary bankruptcy, it in effect requires a ‘fee’ for voluntary liquidation.
Hence, we see the present role of the state in corporate insolvency as being primarily focused on regulating insolvency practitioners rather than seeking to deal with insolvent companies, including those that by-pass the system. To that extent we agree that the accountability of those who operate companies is a factor; as to which prevention is better than reactive cure.
But requiring a private and heavily regulated professional to remain the sole service provider for all external administrations clearly generates private costs that the market cannot or will not accept. External administration is too expensive for many insolvent companies, and we say this creates a public interest concern which should be addressed as a public responsibility.
No overarching approach
A difficulty is that there has not been an overarching examination of the current purposes of insolvency – legal, economic, and social, nor the role of the state, leading to any structured approach. Rather, as many have said, there has been a continued piecemeal approach to reform, and reform only of the law, not of the structure within which the law is to operate, and how it is to be funded. Funding is necessarily relevant to what we should expect the insolvency regime to do – costs v benefits are central to any assessment. We have said that we expect the insolvency regime to do too much, without regard to the costs and benefits of doing do.
Overall, we would say that this thinking is, in large part, because the government role and responsibility is so reduced, and the funding arrangements so opaque, and the available information and data so limited.
Some other issues
The focus of some of the suggestions made is on better enforcement of existing corporate law obligations and drawing funding from that source. We don’t disagree with that in principle but there are limits on how far the law should go consistent with its effectiveness, for example in imposing financial penalties or hurdles, and on how much it can be enforced, and at what cost. That may provide some answer for agencies like the ACCC or APRA, given the size of the entities they regulate, but it does not appear feasible for insolvency.
But even then that would not mean that the private sector would then expend those funds without some control over how the funding is allocated. We certainly don’t see the need for all insolvent estates to be liquidated under the present laws, at $15,000 each, as seems to be suggested, along with numerous bankruptcies. There should be an administrative path that can be taken to deal with some, perhaps many, instances of insolvent companies, just as there are administrative processes to deal with most personal insolvencies.
We do agree though that the present business environment is unhelpful, with a lack of director identification (now being remedied), a lack of a register of beneficial ownership, complex trust laws, and a lack of open access to corporate and bankruptcy data. There is also a lack of data as to how the system operates, certainly in corporate insolvency. Our system would ensure these were collected and used to further direct the law as needs change.
Dealing with professionals
Given that we are dealing with objectively-minded professionals, we know they appreciate that any impact on their role in a commercial sense is not relevant, assuming they do support a root and branch review, if the public interest requires otherwise.
However in the end, we don’t anticipate saying that the insolvency professionals should have no role – rather, we are looking at removing their public tasks and allowing them to focus on their skills in attending to the interests of the debtor and of the creditors, and having the state assume those public tasks.
Our focus is on rebalancing insolvency law to reflect the public and private values that insolvencies involve, and who should attend to them.
Michael Murray Jason Harris