The hearing in relation to the law of set-off and insolvency in Metal Manufacturers Pty Limited Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liq) & Anor (B19/2022) [see footnote 5 below] was heard by the High Court on 12 October 2022. The transcript is here. A decision is reserved.
The High Court also heard a question as to the peak indebtedness rule and preferences in Badenoch Integrated Logging on 18 October 2022 – also see footnote 5. The transcript is here: Bryant & Ors as liquidators of Gunns Limited and Auspine Limited v Badenoch Integrated Logging Pty Ltd  HCATrans 177 (18 October 2022) (austlii.edu.au). A decision is likewise reserved.
Necessarily, the PJC’s consideration of any law in relation to these matters will need to await the High Court’s decisions.
26 October 2022
The Parliamentary Joint Committee on Corporations and Financial Services has commenced an inquiry into the effectiveness of Australia’s corporate insolvency laws in “protecting and maximising value for the benefit of all interested parties and the economy”. Corporate Insolvency in Australia – Parliament of Australia (aph.gov.au)
The terms of reference list a number of issues to examine, under 7 heads:
- recent and emerging trends in the use of corporate insolvency and related practices in Australia, including in regard to temporary COVID-19 pandemic insolvency measures, recent changes in economic conditions, etc and other contributory factors or events that have impacted insolvency patterns
- the operation of the existing law including the small corporate business restructuring and liquidation reforms, the 2019 unlawful phoenixing reforms and the operation of the PPS Act
- other potential areas for reform, such as preference claims, corporate trustees, insolvent trading and safe harbour, and international approaches and developments
- support for business access to corporate turnaround capabilities to manage financial distress
- the ‘role, remuneration, financial viability, and conduct of corporate insolvency practitioners’
- the role of government agencies, including ASIC and its effectiveness as a co-regulator, the ATO’s role, and other bodies including the Small Business Ombudsman
- any related corporate insolvency matters.
As I earlier explained, this inquiry does not seem to have a clear genesis, being neither the 5 year review of the Insolvency Law Reform Act 2016, nor the “holistic” review sought by many. Nor is it the preliminary systems review, recommended by Professor Harris and myself, though it has that potential. Treasury may not have been consulted, given that the terms of reference cut across its existing inquiries into trusts and safe harbour.
The PJC seeks to inquire into the “effectiveness” of the laws in “protecting and maximising value”. While this is an important aim of insolvency law, assessing the effectiveness of the laws in achieving those outcomes has not been given close attention, given the limited input from economics in insolvency generally. It depends on how effectiveness is defined. Much of insolvency law and practice proceeds on assumptions as to outcomes. Hence the terms of reference mostly refer to legal concepts rather than economic or accounting.
(One useful economic analysis would be as to the estimated millions in unnecessary costs spent over the decades through government inaction in reforming the law of the insolvency of corporate trustees (item 3). That inquiry would be better than again revisiting that law, about which Treasury already has submissions).
These fine points should not distract the PJC from examining the issues by reference to the law. But the law does not necessarily work the way it appears or is intended. For example, while a policy behind unfair preference law (item 3) is to ensure that all creditors share equally, the reality may often be that moneys recovered go only to the liquidator for her or his fees. As Justice Black said in Cardinal Group, this is legitimate because liquidators would less readily accept appointments, and litigation funders would less readily offer funding, if they could not recoup their fees or costs.
That in itself is instructive in that it has been suggested that the cost of bringing preference claims is often prohibitive. They are also politically unpopular, and in the recent small business reforms, preference claims under a threshold were excluded.
Transparency as to how the law works, like preference recoveries, is important but is often based only on information held by the industry. The Committee might find itself without sufficient data to know how preference claims are used let alone their effectiveness.
As to item 4, supporting business access to advisers, that will no doubt be the subject of some competing comments from the respective interests in that area. In any industry reform based on a particular expertise, there is often tension between the existing professional interests and those seeking to also assume a role offering new approaches, and new competition. This is not new, nor confined to insolvency; doctors and pharmacists are examples. That can lead to various (purportedly well meant) warnings given by existing interests, one being to demonize the intruder, subtly or otherwise. The common use of the term “untrustworthy” with “pre-insolvency advisers” is an example, describing those who would seek to have an insolvent avoid or thwart the formal insolvency processes upon which work liquidators and trustees depend. See generally The new law’s limitations in controlling phoenix misconduct – Murrays Legal
Item 5 is interesting in its reference to remuneration and financial viability of liquidators, an issue that Jason Harris and I have focused on in terms of the viability of the regime itself. As Professor Harris has written, there’s just not enough more to go around what with a continuing large number of minimal asset estates, an increasing number of companies being deregistered by default, all leading to cross-subsidisation and litigation to recover fees. It is in that context that we would say that an official receiver would have one of its roles in attending to the assetless matters in the same way that the official trustee in bankruptcy attends to assetless bankruptcies.
The role of the insolvency practitioner is important given that it involves the exercise by a private individual of significant authority on behalf of the state and in the interests of the state as well as in the private interests of creditors. It is said that ‘[i]n the field of insolvency there are two actors whose integrity and expertise are central to the functioning of the insolvency system: judges and administrators’. Hence some review of the viability of the practitioners themselves is warranted.
Role of government – ATO, ASIC, FEG, AFSA
As to item 6, the role of government and its agencies, again our theme is that the role of government needs to be increased both in respect of gaps in the system and work done by practitioners on behalf of the government which in effect is charged to creditors.
The reference includes the role and effectiveness of ASIC as the regulator. This was the subject of a recent paper given by Professors Moffatt and Mason and myself where we noted the difficult legal and constitutional issues associated with legislating for a single regulator given the length of time that the dual regulatory system has persisted. We therefore recommended at least that personal solvency be transferred from AGD to its proper location within Treasury – along with ASIC, the ATO, and the Ombudsman, with the aim of bringing an economic rather than a law enforcement focus to it.
The role and effectiveness of ASIC as an insolvency regulator is important given that insolvency is only a bit part of ASIC’s overall responsibilities; but it should properly be looked at in the comparative context of personal insolvency, as the outcome of the 2010 Senate inquiry showed.
In that respect while this PJC inquiry is focused only on corporate insolvency, there may be benefit in that as with the 2010 inquiry, corporate insolvency could only be properly examined by reference to personal insolvency. Bankruptcy law and practice provided a series of useful precedents and approaches that were subsequently adopted by corporate in the Insolvency Law Reform Act 2016. And the High Court may well need to refer to and rely upon bankruptcy law in its forthcoming hearings in relation to corporate insolvency preferences and the peak indebtedness rule, and in relation to the law of set-off.
As to the ATO, it is a significant player in insolvency law; my article of several years ago referred to the ATO as the true insolvency regulator rather than ASIC. The extent of liquidators’ reliance upon the ATO for work is evident in social media comments, almost to the extent of compromising the appearance of independence of some practitioners.
As to other bodies, FEG should be listed. The arcane processes and analysis imposed by the law in order to support a priority for employees, and hence FEG, need a full review.
The terms of reference refer to the Australian Small Business and Family Enterprise Ombudsman. That body is significant in its focus, SMEs constituting by far the majority of businesses in Australia, and hence of insolvencies. It now sits within Treasury, its proper place, in offering an SME perspective that can be somewhat at odds with the structure of insolvency law. For example, the ASBFEO made a submission to the Productivity Commission that insolvency of small business be dealt with holistically – personal and corporate – and not separately as the law and the industry would have it.
That is in fact an internationally suggested approach which brings me to the mention by the PJC of international developments in the terms of reference (item 3), almost in passing. Apart from comparative assessments through INSOL, III and such, Australia benefits from its continued and recent involvement with UNCITRAL and the World Bank, and the IAIR, which each have given focus to COVID impacts during the crisis period (item 1).
As to SMEs, UNCITRAL’s guidance says that consideration should be given to the law providing procedural coordination or consolidation of business and personal debt, and of personal guarantees. An OECD paper points out that with personal guarantees so prevalent in business, personal insolvency law needs as much attention for SMEs as corporate. UNCITRAL also warns against ignoring assetless administrations and recommends a government role as one option.
As to the rights of creditors, international comparisons have been drawn between the low threshold for bringing proceedings against debtors in Australia and the more limited rights in other comparable jurisdictions where some benefit from the compulsory insolvency must first be shown.
As to the IAIR, with the UK in the midst of reviewing its regulatory process, NZ having adopted a version of the UK co-regulatory model in its 2019 reforms, and Australia having taken a strict regulatory approach, subject to review, AFSA and ASIC might have some new views on the merits of Australia’s regimes, and their respective costs.
The IMF’s guidance on data needed for insolvency reform is useful in showing what Australia does not have. The 2010 Senate report in the context of a combining of the regulation role of ASIC with that of into one agency – the Australian Insolvency Practitioners Authority (AIPA) – the establishment of an agency to gather and report insolvency statistics. No action was taken.
I recently commented that Australia’s lack of data is consistent with findings in an IMF Working Paper – The Use of Data in Assessing and Designing Insolvency Systems – that insolvency legislation is typically designed or assessed without data showing the actual performance of the system, or the issues experienced in its application: see footnote 2 of this article.
The PJC may find that it needs to adopt the words of the 2004 PJC report which noted the lack of basic data on the operation of insolvency laws 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 [under Part 5.3A] beyond the number of commencements”. In 2022, even though small business restructuring under Part 5.3B is only new, and operates only in small numbers, the Committee may end up saying that there is “virtually no data on the operation of the small business restructuring procedure under Part 5.3B beyond the number of commencements”.
That 2004 PJC report then made suggestions for data collection including phoenix and assetless companies, strategic insolvencies involving corporate groups, cases involving a shortfall in the payment of employee entitlements and superannuation, and fraud. The government response was simply that this was a matter of ASIC.
As for this inquiry, simple data such as the returns to creditors from voidable transaction judgments would be a start. AFSA provides some useful figures in that level of detail.
The 2022 PJC calls for submissions by 30 November 2022 with a final report due by 30 May 2023.
 My resources don’t allow full citations and references. These are available on request.
 Questions of efficiency etc are explaining in the IMF paper I discuss at A productive insolvency regime – who knows? – Murrays Legal
 In the matter of Cardinal Group Pty Limited (in liq)  NSWSC 1761
 A Global View of Business Insolvency Systems, Westbrook, Booth, Paulus and Rajak, The World Bank and Brill, 2010, at 203.
 Set down for 11 October 2022 – see Metal Manufacturers Pty Limited Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liq) & Anor (B19/2022) Full Court of the Federal Court of Australia  FCAFC 228. Also Bryant & Ors as liquidators of Gunns Limited and Auspine Limited Badenoch Integrated Logging Pty Ltd (A10/2022) Full Court of the Federal Court of Australia  FCAFC 111, set down for 18 October 2022.
 (2007) 19(3) Australian Insolvency Journal 24-27.
 World Bank Principles for Effective Insolvency and Creditor Debtor Regimes, 2021; “C19.8 Personal guarantees. A simplified insolvency system should address, including through procedural consolidation or coordination of linked proceedings, the treatment of personal guarantees provided for business needs of the MSE debtor”, noting that “Procedural consolidation or coordination is aimed at facilitating the administration of insolvency proceedings exclusively. It does not involve substantive consolidation of assets and liabilities”.
 UNCITRAL Legislative Guide on Insolvency Law, [73-74]: “Where an insolvency law does not provide for exploratory investigations of insolvent companies with few or no assets, it does little to ensure the observance of fair commercial conduct or to further standards of good governance of commercial entities. Assets can be moved out of companies or into related companies prior to liquidation …” etc