The quality of a recent UK review of its 2020 insolvency law reforms is compared with the approach taken in Australia.
In my comment of June 2020 on what was to become the Corporate Governance and Insolvency Act (CIGA) in the UK, I explained its proposed introduction of a moratorium on creditor claims, a prohibition of ipso facto termination rights and its proposed new restructuring plan as a means of salvaging a struggling corporate business: Behind the UK government insolvency reforms – Murrays Legal. I also commented, favourably, on a proposed review of the new law, making use of guidance on evaluation processes in what is termed the Magenta Book.
The 2023 outcome – a detailed Post Implementation Review (PIR) – is most impressive in the range and depth of issues examined, assisted by good statistics, quality academic and public policy input. The government’s Regulatory Policy Committee accepted several refinements to the CIGA recommended in the PIR, with comments and guidance for future evaluations: ukpgaod_20200012_en.pdf (legislation.gov.uk) .
The UK in fact commenced preparation for the review at the time of the law’s commencement, in 2020, including developing research questions, identifying what data would be needed and considering what would be proportionate. This led to gathering evidence as to monitoring and evaluation of the new measures, the experiences of stakeholders, “quantification, monetisation and re-estimation of the actual costs and benefits of the measure” and commissioned work.
As to the last, the government commissioned the University of Wolverhampton to provide an evidence base of how the measures were being used and received by various stakeholders, by gathering qualitative and quantitative evidence, including interviews with stakeholders, a survey of IPs, monitoring and data collection and international comparisons. The Insolvency Service worked with the University to ensure the research aligned with government best practice guidelines. A final evaluation report was issued in November 2022.
While I do not cover the findings in any detail, the conclusion of the PIR is that the CIGA measures have been “generally welcomed”.
“The Restructuring Plan is seen as a success and appears to satisfy its policy objectives. Though early, the early signs are positive that the Suspension of Termination Clauses provisions are meeting their objectives. The evidence for the Company Moratorium is more ambiguous. While moratoriums have been used successfully, there are some areas of concern which have been identified. For the measures’ impacts on employees, all three measures have, on the whole, given companies time to negotiate with their creditors and thus protect jobs. The measures have strengthened the insolvency and restructuring regimes by providing additional tools enabling companies to be rescued without first being required to enter insolvency proceedings”.
The PIR meets the need for law reform to proceed on evidence-based foundations, and the concern that “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”.
The PIR is of a series of legislated measures with the purpose of assisting a particular group of eligible companies in business, with the court ordered restructuring plan aimed at more complex restructurings. Broadly, a company must be encountering financial difficulties affecting its ability to carry on business as a going concern, which any compromise or arrangement would reduce or prevent. Directors are to declare the company’s insolvency and the monitor is to state that it is likely that a moratorium would result in the rescue of the company as a going concern. It is a series of “additional tools enabling companies to be rescued without first being required to enter insolvency proceedings”.
It is not a review of all businesses in financial difficulty followed by an assessment of the value of the measures in the Act for those businesses. The focus was on those businesses using the new law. Take-up numbers of the new law were low. At 30 September 2022 there had been 40 moratoriums and 12 restructuring plans since the start of the law on 26 June 2020, “considerably lower than expected” but explained in terms of on-going government assistance and lack of familiarity with the new law.
The nature of small business
In that respect England may be different but in Australia business structures comprise roughly half corporate and half sole-trader/partnerships, and with corporate there is often intermingling of corporate and personal assets and liabilities, including through guarantees. Australia also has significant corporate tax liabilities that can be imposed personally on directors of insolvent companies.
There is no small business insolvency law as such in Australia or England to deal with those economic structures – personal and corporate insolvency law must each operate separately and their law reform is usually considered separately. More recently, co-ordination/consolidation of personal and corporate liabilities of an insolvent business has been recommended for consideration internationally, by UNCITRAL and the World Bank, including disallowing the enforcement of personal guarantees. The PIR does talk of opening up the CIGA measures to be “more user friendly to SMEs” and to “strengthen the insolvency regime’s alignment with latest best practice principles”. This is in recognition of the “increasing recognition that addressing the needs of SMEs in insolvency is vital for economic growth [and that] SMEs often struggle to navigate an ordinary insolvency process, and typically lack the resources to cover the costs and fees of the proceedings.”
It may be that England is also different in other respects, but data in Australia broadly shows that in the SME sector, where the bulk of insolvencies arise, there is very little money – cash, assets etc – left in insolvent companies, not enough for the IP’s remuneration let alone the unsecured creditors. It follows that many companies are in fact unable to afford the services of an IP and drift off into default deregulation/dissolution because the debtor directors have no funds to put their company through a winding up process; and, with dividend returns being non-existent in over 90% of corporate insolvencies, it is not worthwhile for the creditors to themselves to do so. Nevertheless UNCITRAL’s Legislative Guide on Insolvency Law gives sound reasons for the need for insolvency law attention to be given to no or low asset companies.
Despite the useful application of CIGA to English companies in financial difficulty with sufficient remaining, or access to, funds, there may be that stratum of failed businesses in common with Australia. These are matters beyond the PIR but they do give some context as to the extent of the coverage of the UK CIGA measures.
Australia’s review processes
Australia’s insolvency and other law reform typically proceeds by way of submissions being sought on a particular change in the law, with much time and effort being put into the process. But once the law is enacted, there is little if any post-implementation review of the subsequent operation of the law, including as to the savings or other benefits it was to have generated, and not to the level of assessment or promptness shown in this UK review.
As one example, a review of the major changes under the Insolvency Law Reform Act 2016, including harmonising of personal and corporate insolvency law processes, has not eventuated. There has been no review of Australia’s 2017 removal of ipso facto termination rights. The original “safe harbour” changes under s 588GA (protection for directors from insolvent trading liability) were reviewed but the review, due after September 2019, was not completed until November 2021. One exception is that ASIC has reviewed the operation of the 2021 Part 5.3B small corporate restructuring. Also, the rigour applied in the UK Review, according to settled principles, has no real parallel in Australia; nor is there the quality of statistics apparently available in the UK; and nor is there any useful joint government-academia approach to any such review.
As one potential exception, an Australian Parliamentary Joint Committee is about to issue its report on corporate insolvency reform, following several months of review of the operation of the law based upon submissions from interested parties (78 in total) and open hearings. It is much more broad ranging in scope than the UK review. The PJC report should provide an assessment of how well the Australian system works, with recommendations for any change, of comparable quality and significance to that of the PIR in the UK.
 See Online Forum: Review of UK Insolvency Reforms (arita.com.au), 19 July 2023.
 The Use of Data in Assessing and Designing Insolvency Systems (imf.org). WP/19/27, prepared by José Garrido (dir.), Wolfgang Bergthaler, Chanda DeLong, Juliet Johnson, Amira Rasekh, Anjum Rosha, and Natalia Stetsenko, February 2019.
 See also the International Insolvency Institute – Asian Business Law Institute, Guide on the Treatment of Insolvent Micro and Small Enterprises in Asia, at p 17: “…as sole proprietors and shareholders/managers often act as guarantors for the debts of MSEs, there should be greater coordination between the systems of corporate and personal insolvency. …”.
 See Rebuilding the structure of the Australian insolvency system (2022) 22 (1&2) INSLB 14, Murray M and Harris J.
 At -.
 Review of the Insolvent Trading Safe Harbour (treasury.gov.au). See also Australia’s review of its insolvency safe harbour – more than a few issues to consider, but in the end, about not much – Murrays Legal
 Australia has other qualities.