What does our insolvency system produce?

Many of us who call for a major review of our insolvency laws must know that the data on the performance of those laws is quite limited, certainly in the area of the majority of insolvencies, the small to medium enterprises (SMEs). The government won’t act. Why would not the industry itself gather and publish its own data?

Academics’ 2019 submission to government in response to its new data collection laws listed numerous inquiries over the years, calling for better data. Submissions | ONDC (datacommissioner.gov.au)

One 2004 report cited said that

“ … there is little data on the operation of insolvency laws in Australia. We have only the bare minimum of information on the operation of our various corporate administrations. There is for example virtually no data on the operation of the voluntary administration procedure beyond the number of commencements. This is not a new observation”.[1]

A concrete recommendation from a Senate committee in 2010 for a data collection agency was not accepted.

As much as we do have has been the result of academic research.

The point is, we don’t want another insolvency inquiry to be established only to then find that information which it needs is limited.

The typical and probably proper response all along is that the collection and dissemination of data is a government role. The time has come for us to accept that the government won’t act.

Professional input

Professions establish themselves by assuming certain public interest tasks on behalf of the community, in return for certain privileges and with the tasks also benefiting their members.  A task of the insolvency industry could or should be to gather and publish data about the operation of the insolvency regime and show what benefits the system provides.

The liquidators and trustees hold the raw data in their files, and while the extraction of it in a coherent and valid manner is another thing, that data holds much of the information about how the system works.  It must be to the benefit of the industry to report on the benefits of their work to the economy and the community.

Such a report is regularly issued in the UK by R3, its latest for 2021 being The Value of the Profession: How insolvency and restructuring supports the UK economy.

While useful, more particular data could be extracted.  I have suggested before that the financial outcomes of preference recoveries, insolvent trading and other such actions be gathered and reported. They may well show that the legal hurdles, and hence the costs, are too high, and the law should be simplified.

The courts themselves might assume a role, consistent with their aim to ensure the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute.  To what extent recoveries go only to the litigation and other costs of the administration is a question that could be asked by courts and has been asked.  I reported a Judge’s recent order that the trustees in bankruptcy file “evidence that identifies the benefits the creditors of the bankrupt estate are likely to receive if the Trustees succeed” in the voidable transaction claims being brought: What do creditors get from ‘successful’ recovery actions by insolvency practitioners? | Murrays Legal

Some might disagree with my assessment that insolvency returns to creditors are a fiction Insolvency returns to creditors and other fictions – reissued March 2022 | Murrays Legal  If so, statistical evidence to the contrary would be welcome.

However there seems never to have been any move from the industry to collect its own data or even scope what could be done.

Industry responses

On my raising the idea some years ago with a Senior Partner of a Large Insolvency Firm, I was told “that’s a job for government”.  This despite the collective resources of the large firms and others having it well within their operational and financial capacity to fund a university or other such body to do this.

Since then, I have been given other reasons why not:

  • “why would we share commercial information with our competitors in the industry?”;
  • “why would we disclose the reality of limited or nil dividends and our costs?”
  • “why do we need data? the system ‘works well’, just ask us”
  • “why bother?”

each of which is probably standard, from an industry perspective.

That “it’s a job for government” view has continued into the recent safe harbour report, the panel recommending to the government that it collect and report data on safe harbour, despite the fact that the data is mainly held by the industry.

The one positive response to that report from government was its reference to “reforms to enhance the ability of regulators and the Registrar to collect business-related data to support law and policy as part of the Modernising Business Registers program”, including the removal of search fees, next year.  However, from the government’s perspective, it should be careful – better data might show the system not working well, suggesting that some uncomfortable decisions might need to be made.

Examples of the potential use of data

There are many potential reform issues in insolvency that would be much clarified and progressed if that business-related data is of good quality and made available.  What data we have – the under-funded work in both personal and corporate, the 95% of estates that pay no dividend, the average 2c/$ dividends, and the high number of businesses that can’t access the system at all[2] – is rather bleak unless any body were to come up with alternate more positive [statistically valid] data in the meantime.

In the ‘holistic’ insolvency law review that some seek, deeper data might confirm for example what is said to be an increasing blurring of the law’s corporate vs non-corporate distinction in assets and liabilities in small businesses, what with personal guarantees, use of personal finances and tax and related personal liabilities – such that law reform should have a new focus on ‘business’ insolvency reform, with corporate and personal debts being dealt with concurrently.[3] Further extraction of data would reveal the nature of the significant number of businesses that can’t or don’t access the insolvency system – surmised by researchers to be a possible black hole of phoenix and director misconduct – such that government intervention or support may be required.

The benefit of a holistic approach is to bring into law reform a wide range of such perspectives. But data is needed in support, and objectively extracted and reported.

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[1] Letter to Office of the National Data Commissioner, citing the 2004 ‘Stocktake’ report.

[2] Any of An analysis of official liquidations in Australia, A Phillips, February 2013; Explanatory Memorandum to the Insolvency Law Reform Bill 2015 at [9.135]. Sunlight as the Disinfectant for Phoenix Activity (2016) 34 Company and Securities Law Journal 257, Helen Anderson; Illegal Phoenix Activity: Practical Ways to Improve the Recovery of Tax [2018] Syd Law Rw 10; (2018) 40(2) Sydney Law Review 255, Helen Anderson. Corporate Insolvency by the Numbers, Jason Harris, 27 February 2018 and more.

[3] OECD Research Paper 2018; UNCITRAL MSE Legislative Guidance, 2021

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