Personal insolvency law and policy under the new Labor government in Australia

With the Attorney-General Mr Mark Dreyfus QC in the process of picking up police and other responsibilities from the disbanded Home Affairs and deciding upon priorities in his department among anti-corruption, the rule of law, merit-based tribunal appointments and constitutional change, he might also like to reconsider his responsibility for personal insolvency law.

Mr Dreyfus might in fact query why society’s handling of the adverse financial impacts of a credit driven economy on individuals and on small businesses does not sit with the economic and business focus of Treasury, which houses related agencies such as ASIC, the Small Business and Family Enterprise Ombudsman and the ATO.

Small business in Australia

We know from the Small Business and family Enterprise Ombudsman that SMEs comprise the bulk of Australia’s businesses, a mix of small corporates and sole traders and partnerships. Yet we have the Attorney handling one set of insolvency laws and Treasury handling the other, with little co-ordination.  Corporate insolvency laws for Covid impacted small company businesses were rushed through in January 2021; related small business personal insolvency laws announced in January 2021 remain unactioned.  The respective priorities, or interest, of different ministers on the one issue of small business did not align.

The reality is that even though the statistics show a mix of individual and corporate businesses, that division is often a fiction in the case of companies because of directors’ personal guarantees, mortgages over the family home, and their own and other family member support.  It has been said that it is personal insolvency law is often the more relevant for entrepreneurs and small businesses given that intermingling of directors’ corporate and personal assets. That intermingling has been shown to extend to a correlation between the director’s own troubles – health, marital, financial – and the company’s failure.    

Recognition of these realities has led to international recommendations, in which Australia has been involved, that insolvency law move away from its separate treatment of personal and corporate debt to a more holistic approach to SME failure, by way of consolidation or at least co-ordination, and with a focus on early discharge. 

Australia’s two parallel insolvency regimes

Apart from that, as the Attorney will know, Australia’s inefficient separation of personal and corporate insolvency is legally unnecessary, being based on past difficulties of the High Court’s 1909 decision in Huddart Parker. Further, Australia’s two main insolvency law reform reports have recommended an alignment of personal and corporate insolvency.  The government’s Insolvency Law Reform Act of 2016 went some way towards that, and its 2022 review is an opportunity to consider alignment further.

Nevertheless, any law changes to combine personal and corporate insolvency administration would be difficult to justify in the current climate. 

A soft law option

A practical ‘soft law’ option would be for the Attorney to transfer his present responsibility for personal insolvency to Treasury, thereby at least ensuring a consistent and co-ordinated policy approach.  That might also then assist in having a decision made on the reduction of the period of bankruptcy from 3 years to one. That was announced in 2015, but under the law enforcement focus of AGD, it has remained unactioned.

INSOL London

At least this option for Australia is what is being presented to an international audience later this month in the context of a comparative UK-Australia assessment of regulatory approaches to insolvency law and its practitioners.  A paper offering that comparative regulatory assessment by Professor Paula Moffatt, Professor Rosalind Mason and Mr Michael Murray[1] is being presented at the INSOL Academics Colloquium in London on 25 June 2022.   

UNCCA Sydney

Issues concerning the reform of insolvency laws for MSMEs were the subject of a presentation by Michael Murray at the seminar of UNCCA on 27 May 2022 marking the 25th anniversary of the Model Law on Cross-Border Insolvency and other work of UNCITRAL. 

[1] Paula Moffatt, Nottingham Trent University, UK; Rosalind Mason, Queensland University of Technology, Australia; Michael Murray, Murrays Legal, Australia “Report of findings on the regulation of insolvency practitioners in the UK and Australia”.

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