In the various calls for a holistic review of Australian insolvency law, there is little explanation of what exactly needs law reform attention – processes leading up to insolvency, investigations and examinations, antecedent transactions, discharge, rehabilitation? Issues that have been raised lack adequate evidence to substantiate where the law is not working. This is odd given that much of insolvency law is inherently based on quantitative data – value of realisations, voidable transaction recoveries, remuneration, dividends etc.
IMF
Australia’s lack of data on these issues is consistent with findings in an IMF Working Paper – The Use of Data in Assessing and Designing Insolvency Systems[1] – that insolvency legislation is typically designed or assessed without data showing the actual performance of the system, or the issues experienced in its application. While there are qualitative assessments based on standards and practice, there are virtually no assessments of insolvency systems based on empirical data.
The IMF paper provides a critique of current methodologies for analyzing the effectiveness and efficiency of insolvency proceedings and sets out a preliminary set of guiding principles with respect to the data collection systems that countries should establish to assess and design their insolvency systems, while recognizing the inherent limitations of all data systems and varying country circumstances.
The IMF paper goes to an important current issue in Australia – that of productivity – with its focus on the need for efficient and effective insolvency systems.
Australia
In Australia, the lack of insolvency statistics has been a source of complaint for some years. A recommendation in 2010 for a federal statistics unit for insolvency was never acted upon. Nevertheless, some data is offered by both ASIC (corporate) and more so AFSA (personal insolvency).
AFSA data shows for example total asset realisations by registered trustees annually, as well as receipts from voidable transactions and income contributions, amounts paid to secured creditors, remuneration of trustees, dividends paid, government charges paid and so on. While these are rather broad and in general practice categories – registered trustee bankruptcies, official trustee bankruptcies, Part IX and X agreements etc – they are at least some indicators of how the system works.
For example, we know that registered trustees administered nearly $275 million in receipts in 2020–21 with asset sales accounting for 55%; voidable transaction recoveries were relatively minor at 6%. Over $272 million was paid by trustees in that period, with secured creditor payments accounting for 26%, trustee fees accounting for 25% and dividends 18%.
These figures can then be compared with previous years, and other types of administration. In 2020-2021, only 24% of registered trustee estates paid any dividend, and overall the average dividend was 2.37c/$, although an increase from 1.51c/$ in 2011-2012. Part X agreements produced 9.7c/$ and Part IX debt agreements 54.90c/$.
Data extracted or adopted by Jason Harris and myself on the insolvency system in Australia shows, broadly, that there is much cross-subsidisation of fees particularly in corporate insolvency, as a result of or leading to the limited value of remaining assets in estates, minimal returns to creditors, continued creditor subsidy of work on behalf of the regulators, and an increasing proportion of companies being simply deregistered, as spent phoenix companies or otherwise.[2]
Further and better data is needed to confirm and as necessary assess whether the outcomes revealed support the tasks of an IP. For example, we have suggested that with creditors receiving such minimal dividends, the law might properly be changed to reduce or ameliorate the reporting obligations of IPs. Investigations and reporting could likewise be refined.
Data would also show the value of voidable transactions in actually producing dividends for creditors, or instead, recoupment of IP fees. Data on the costs of court involvement could lead to a reduction in the need for judicial intervention. An assessment of standard remuneration claims could allow a substantial increase in the statutory amount of $5,000. While the cost of IP regulation has been identified as an area needing attention, inconsistent data between ASIC and AFSA makes that difficult. Consistency would assist in assessing the claim that insolvency’s treatment of SME insolvency is a productivity issue. The new Australian Business Register and director identification number should assist in providing access to data, for example in tracking the increasing number of deregistered companies: Oversight of deregistered companies – Murrays Legal.
Value of data
The IMF paper concludes in saying that data is needed to allow legislative change to be properly targeted to address specific problems in an insolvency framework.
“Legislating “in the dark” is an anomaly in the age of big data”.
As to cost, there are often existing multiple data sources which partially cover insolvency data which may need rationalization and simplification.
“In addition, the cost of implementing advanced systems should be compared with the cost of not having them: ignoring how the insolvency system works in practice, and where its main challenges lie, can result in severe consequences for the economy, and it may render legal reforms ineffective”.
=============================================
[1] WP/19/27, prepared by José Garrido (dir.), Wolfgang Bergthaler, Chanda DeLong, Juliet Johnson, Amira Rasekh, Anjum Rosha, and Natalia Stetsenko, February 2019. The Use of Data in Assessing and Designing Insolvency Systems (imf.org)
[2] Rebuilding the structure of the Australian insolvency system (2022) 22 (1&2) INSLB 14, Murray and Harris
