Government’s law reform of schemes of arrangement a “complete waste of resources when the core problem brewing is in the SME market”

Some may agree or not with the “blunt” submission of an Australian liquidator and trustee on the government’s review of schemes of arrangement law as being a “complete waste of resources when the core problem brewing is in the SME market”. 

The government’s 2021 discussion paper on schemes shows it is working through the next of several topics that were recommended for law reform attention by a 2015 Productivity Commission Report: see Government’s response to the 2015 Productivity Commission Report – “Business … closure” | Murrays Legal 

The government’s 2021 paper refers to schemes in the context of its small company business insolvency reforms, of 2021, which the author of the submission, Mr Roland Robson, says are a “complete flop” with simplified liquidations being “another ill-thought-out legislative change … costing more than a creditors voluntary liquidation”.

The following is a rough paraphrase of the submission from Mr Robson.

Please excuse my bluntness but Treasury have completely missed the core issue with a Scheme of Arrangement, and why they are not widely considered. The Act requires an application to Court which frankly is a costly exercise that only a few companies have the resources for, along with a ridiculously high percentage of creditors to agree to the Scheme. This basically wipes out the usefulness for SME’s as the Court application costs and legal costs, let alone the lead time in the Court system.

As such looking at the type of Company it would ordinarily for would be considered a large organisation like a Myer, Virgin Airlines and the like.

In addition, the rights of PPSR creditors (assuming they even respond to day one correspondence) and the threat of FEG action for utilising any circulating assets to continue trade to the alleged detriment of priority creditors, has in essence wiped out Schemes and VA’s

Any variations in the legislation to accommodate the large companies is a complete waste of resources when the core problem brewing is in the SME market; this is where the focus should be.

The Legislators came up with SBR’s which are a complete flop (technical term)

my PI insurance does not cover me for SBR’s and accordingly I will not even consider one as the insurance costs would exceed the income derived.

a firm has to recreate new standards at a further cost, and also suffer at the hands of a complex web of legislation that has been cable tied together like a bad quilt.

Simplified Liquidations are another ill-thought-out legislative change, actually cost more to do than a simple Creditors Voluntary Liquidation. The appointment numbers speak for themselves.

So simply focusing on a piece of legislation for large companies that probably only impacts less than 1% of insolvency appointments is a frivolous consumption of resources.

Robson, W. Roland – Submission in response to: Improving schemes of arrangement to better support businesses (treasury.gov.au)

Comment

Mr Robson’s point is well made but as I have explained before, the interests of the professions have historically dictated the focus of law reform, sometimes usefully.  The government may do better in its pending law reform decisions following its long-drawn out inquiry (2018-2022) into SME and consumer insolvency reforms: The bankruptcy system and the impacts of coronavirus – Discussion paper | Attorney-General’s Department (ag.gov.au).

Calls for insolvency regimes to accommodate the particular issues in small business, including the reality of limited remaining assets, and intermingled corporate and personal debt, come up against the priority given to large businesses and to corporate law; despite the Ombudsman explaining that small business comprises over 95% of the market in Australia.  Again to quote an OECD paper,

“personal insolvency regimes are often more relevant for entrepreneurs and small businesses. Indeed, the corporate vs non-corporate distinction in assets and liabilities is often blurred for small firms, either because lenders require personal guarantees or security – eg, a second mortgage on the owner’s home – or because prior to incorporating and obtaining limited liability protection, entrepreneurs typically use personal finances”: OECD Economics Department Working Papers No. 1504, Design of insolvency regimes across countries, McGowan & Andrews, September 2018.

Next steps

We therefore await the government’s responses on schemes of arrangement and on MSE insolvency reforms, and to see whether Mr Robson’s views have had impact.

Meanwhile, the government is to review the Insolvency Law Reform Act 2016 changes, and the financial savings predicted; along with issues concerning the government’s then views on the regulation of the practitioners in the industry, and more besides. A review of insolvency law should also be established.

======================

Leave a Reply

Your email address will not be published.