Insolvency law reform – conference paper

This is the paper given by Professor Jason Harris and myself at the Society of Corporate Law Academics (SCOLA) conference on 4 July 2022, at the University of the Sunshine Coast.

It concerns our views that the insolvency system in Australia needs re-thinking, before any attention is given to reform of the insolvency laws operating within that system.  We are writing a book on the topic, through Edward Elgar Publishing, due in 2023. 

Comments on the paper, and the issue generally, are invited.

At the presentation, I raised three particular issues that are missing or unclear parts of the jigsaw that make up the present system.

Why no official receiver already?

Of the bills prepared early after federation, referred to in newspaper reports in 1907 – a bankruptcy/insolvency bill and a companies bill – only one proceeded, becoming the Bankruptcy Act 1924, which introduced an official receiver in bankruptcy as well as a regulatory structure involving the Inspector General in Bankruptcy.

The companies bill did not proceed for the apparent reason of the decision of the High Court in Huddart, Parker v Moorehead [1909] HCA 36, which raised significant impediments to the Commonwealth legislating a federal companies law.  

I am looking for drafts of the Companies Bill, including to see whether an official receiver was proposed, following English and NZ law at the time.   

The rest is history. In the following decades state companies acts applied relying upon the ‘official liquidator’ process for court appointments, taken on by a limited number of senior liquidators on a swings and roundabouts basis. That continued under the Corporations Act 2001 until the official liquidator role was abolished in 2017, the government saying that liquidators should not be expected to do work for no fee. But rather than propose a government role, as was one idea, the government said that it was for creditors, or the debtor, to fund liquidations, and if not, insolvent companies could just fall off the register via s 601AB.

A result of that may be that many thousands of companies disappear off the register without scrutiny. We say that needs attention.

The (ir)relevance of corporate insolvency to MSMEs

The second issue I raised is the declining relevance of corporate insolvency in the MSME sector. As the Ombudsman and other statistics show, that sector mainly comprises sole trader/partnerships. International focus in recent times is given to the impact of COVID-19 on small to medium enterprises and the need for insolvency regimes to be adjusted in order to address their particular needs.  In particular, small corporate businesses invariably have intertwined personal and corporate assets and liabilities through personal guarantees and other personal liabilities assumed by the owners.  Corporate insolvency laws do not address that reality and in fact seem to travel forward without recognition that personal liabilities remain after the company’s position is resolved. 

The suggestion from UNCITRAL and the World Bank is that insolvency law should find a way to deal holistically with an insolvent business and that corporate and personal insolvency laws should be reformed together. 

An egregious example of the opposite approach in Australia is the rushed Part 5.3B reforms of 2021 and in contrast the stalemate on bankruptcy reforms.  Government and others seem to see ‘small business’ solely through corporate eyes. That is not helped by the fact that each of personal and corporate insolvency is administered by separate agencies.  Hence, our proposed OR role would cover personal and corporate without distinction, and one of its tasks would be to harmonise the two. 

Voluntary and compulsory corporate insolvency?

The third and last issue is that I have always been puzzled by the unnecessary distinction that corporate insolvency law makes between court appointed liquidations and voluntary liquidations, to the extent of having separate rules and provisions, all based in 19th century corporate law history. Jurisdictions where there is a corporate official receiver – for example England and NZ – follow that quaint corporate distinction and limit the official receiver role to court appointed liquidations.  We would not accept that separation.

Any comment welcome.

Michael Murray

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