With over 70 submissions from a wide variety of stakeholders and numerous answers to questions on notice, the parliamentary joint committee[1] inquiry into corporate insolvency has generated a high level of thought leadership and ongoing debate.
We are ourselves pleased to see that a number of issues we have been raising have for the first time become issues for discussion and in some cases disagreement. We welcome the fact that these issues are now the subject of open debate. If what we see as the three threshold concerns about the system that we have raised can be addressed, well and good. If they are not seen as concerns that need attention, or that other changes can address them, we at least will have brought new transparency to the way the insolvency regime operates. Over the years, up until now, it has all been rather opaque.
Our three threshold concerns
Our three threshold concerns are based on the need to settle the respective responsibilities of the state and the private sector in an area of law and commerce that is inherently limited in funds but which requires specialist expertise.
We say there are generally not enough remaining funds in insolvencies to fund liquidators for their work let alone pay dividends to creditors in what is a private market. This is the case in particular in the MSME sector, where the majority of insolvencies occur.[2]
That leads to our concerns:
- one, that the corporate insolvency regime is not financially accessible to all in that it operates only within that private market;
- two, that the cost of unfunded work is spread as an impost on dividend returns of all creditors through business models that have to charge higher fee rates to compensate for the volume of unfunded or underfunded work; and
- three, that private sector practitioners are conducting work on behalf of the state to the ultimate expense of private creditors.
In clarifying the respective responsibilities in insolvency, we are guided by this statement of principle, that
“private functions should be performed by the private sector and paid out of funds otherwise available for distribution among creditors, while public functions should be performed by public officials and paid for out of public funds …”.[3]
Our proposal
Our proposal is that there be a government role in the nature of an official receiver in corporate insolvency that would serve to address these concerns, and others besides. It would:
- provide access to insolvency services in the same way the Official Trustee provides access to all debtors;
- remove much unfunded work from the private market either by performing it itself or by funding the work to the done by the private profession; and
- properly reallocate public interest tasks to public responsibility and oversight.
We propose that this role would harness the expertise of the private market in both estate administration and in investigations of conduct and other matters as appropriate.
If not, then these current issues need to be accepted and resolved
As to the first concern, a number of submissions to the PJC inquiry focus on the figures that show, as we have described, a large number of companies exit the system by way of deregistration, whether because the company and its directors cannot afford the cost of liquidation, or because there is some abuse of the deregistration process. Different approaches in the submissions made to address this issue broadly call for a more robust deregistration process. A law reform option might be to require liquidators to take all insolvency appointments regardless of funds being available with provision made for their costs through government funding. Another option offered is to reduce the complexity of the laws; but while this no doubt compounds the problem in that directors or creditors must fund liquidators larger sums to cover the work they must do, it is hardly an answer.
As to our second concern, the private insolvency market continues to spread the risk and cost of conducting unfunded work as an impost on dividend returns of all creditors. How effective that impost is in a competitive fee market requires closer examination. A concern is that unfunded work impacts the financial viability of insolvency firms, a focus of the PJC inquiry, and while cross-subsidisation may not be seen as proper or fair by some, it appears to be entrenched. A past government response that practitioners should not take unfunded work is not feasible. A law reform option might be to acknowledge this ‘portfolio’ basis of remuneration and at the same time change the law to limit the work required on unfunded estates. A percentage of assets approach is another approach, but which seems merely to be de facto cross-subsidisation, and from a narrow base. However, this is the basis of the Official Trustee’s remuneration in personal bankruptcy.
As to our third concern, that private sector practitioners are conducting work on behalf of the state, we have for some time drawn attention to this and are pleased to see it now being acknowledged in submissions. A law reform option might be to acknowledge the public nature of the investigative function of liquidators and allow that cost also to be fed into the hourly rates and hence be imposed on all creditors. Limiting the reporting required, leaving it to the decision of the practitioner, is a supporting option.
Public v private
Each of these alternative approaches to ours largely accepts that the status quo of corporate insolvency operating in a private market is satisfactory – that is, rephrasing our opening statement of principle, that both private and public functions of insolvency should be performed by the private sector and paid out of funds otherwise available for creditors, or, that the private sector should itself be funded to perform the public tasks required.
Whether that should also apply to personal insolvency has not been raised.
We point out again that our proposal for a government role for liquidations and investigations is based upon much work being referred to the private sector.
Substantive issues
We ourselves do not have a concluded view on how our proposals might be implemented, including as to the range of duties and powers of a government role – our main tasks being to have these issues identified and discussed. The inquiry is very helpful for that purpose.
There are also many other issues in insolvency law and practice beyond these threshold items that are being drawn out by the inquiry. We don’t ignore the substantive insolvency law issues being raised and we have made submissions and given responses on many. This comment is confined to our three threshold issues.
At this stage the PJC inquiry is to report to parliament by 30 May 2023.
Michael Murray Jason Harris
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[1] Parliamentary Joint Committee on Corporations and Financial Services Corporate Insolvency in Australia – Parliament of Australia (aph.gov.au)
[2] See Rebuilding the structure of the Australian insolvency system, (2022) 22(1&2) INSLB 14, Murray and Harris. See also Centring debt justice in insolvency reform (2023) 22(5) INSLB 64, Salman Shah.
[3] P Heath, Insolvency Law Reform: The Role of the State (1999) NZLRev 569.
One Response
#2 “the cost of unfunded work is spread as an impost on dividend returns of all creditors through business models that have to charge higher fee rates to compensate for the volume of unfunded or underfunded work”
Getting the knack of this was the fastest way to climb the corporate ladder at many IP firms.