The Parliamentary Joint Committee on Corporations and Financial Services (‘PJC’) handed down its Report into Corporate Insolvency in Australia on 12 July. The Report contains 28 recommendations spread over 14 chapters and runs to over 350 pages. The PJC inquiry has been very thorough, with 78 written submissions (including a submission by ourselves), 5 days of public hearings and hundreds of questions on notice to those who appeared before the committee.
The inquiry has been sweeping in its scope of corporate insolvency law, covering the role and funding of insolvency practitioners, the scope of voidable transactions, the role of government agencies, the position of employees, restructuring and workouts, MSME insolvency and restructuring, the use of data and statistics in insolvency and the operation of the PPSA in insolvency. While personal insolvency was not included as one of the terms of reference, many submissions raised issues relating to the overlap between personal and corporate insolvency and suggested a new unified insolvency framework with a single regulator. The Report also draws upon various international approaches and guidance.
The most consistent submission made to the committee was to recommend a comprehensive review of insolvency law (both personal and corporate), noting that the last such review was undertaken by the Australian Law Reform Commission in the mid-1980s (the Harmer Report). We are pleased to see that issues raised in our submission and in our appearances before the committee are the subject of recommendations in the Report, including the need for the comprehensive review to draw on the expertise of different disciplines including law, accounting, finance and economics, to determine the extent of public funding for the regime and to settle the aims and purposes of the regime based upon a more transparent analysis of how the insolvency system works and what benefits and costs it produces.[1] A comprehensive review can address these.
The Report states at 1.2:
‘Australia’s corporate insolvency system is overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors. Tellingly, few parties seem satisfied with the system as it stands. Unsecured creditors are understandably frustrated by stubbornly low returns in insolvency processes. Debtors, particularly smaller businesses, regard opportunities for restructure as lacking, and system costs as excessive. Insolvency practitioners and other observers consider the system is not appropriately resourced to achieve its purposes.’
The PJC heard from insolvency and legal practitioners, government agencies, unions, creditors (both large and small), financiers, small business advocates and academics. The written material provided to the committee runs in the many hundreds of pages and offers a broad spectrum of perspectives, the result of which was the PJC stated that no-one seems to be satisfied with how insolvency law works. We have long argued that Australia has an apparent Rolls Royce insolvency system that expects the world but which the economic reality of most insolvent companies shows we simply cannot afford, nor is it needed. This has been recognised by the PJC Report.
The Report’s Recommendations
A comprehensive and independent review
The Report’s 28 recommendations can be divided into recommendations that support a comprehensive and independent review as well as near term recommendations for government amendments to the law and changes to practices and policies and recommendations for changes to how government agencies (particularly ASIC and the ATO) handle corporate insolvency matters. There is a useful graph on page xxiii in the Report that highlights these recommendations.
Apart from the ‘comprehensive and independent review’ to be conducted as soon as practicable (rec 1), key matters for its potential terms of reference are summarised in [1.8] (based on the overall recommendations). The Report does not specify which agency might undertake this review (whether that be the ALRC, Productivity Commission or a ‘made-for-purpose body’) but recommends the review draw on expertise from various disciplines in [4.12].
The Report provides detailed suggestions as to what the review might consider. It was recommended that the first task of the review should be to consult on and determine the appropriate principles and objectives of insolvency law (rec 2). This is an important recommendation because the goals identified by the Harmer Report and the earlier UK Cork Report might no longer be appropriate in the modern economy. Undoubtedly, the goal of providing breathing space to businesses to allow them to consider restructuring options is even more important in the modern economy where the value of most businesses is tied up in intangibles rather than the heavy plant and equipment of the 1980s when the Harmer Report was handed down. We have also raised whether insolvency’s goal of providing dividends for unsecured creditors should be tempered in light of minimal returns from insolvent businesses.
It is pleasing that the Report raises the need to assess the scope and funding of work currently required by insolvency practitioners. We have argued for years that the insolvency system is unsustainable in its current form because there is simply not enough money to pay for the work required. Insolvency practitioners should not be expected to work for free and this was recognised by the Committee as a matter for the comprehensive review to examine (rec 13).
Other topics suggested for the review include:
- Options to enhance public interest objects and the effectiveness of personal and corporate insolvency (including the interaction between both) (rec 3)
- Identify and facilitate access to insolvency data (rec 5)
- The types of insolvency appointments (‘insolvency pathways’) (rec 6)
- Specific consideration be given to small business restructuring, simplified liquidation, voluntary administration and members’ voluntary liquidation (recs 8 and 9)
- Registration requirements for restructuring practitioners under Pt 5.3B (rec 11)
- Consideration of the independence requirements for IPs, in particular the separation between advisory and restructuring roles from external administration (rec 14)
- The nature of, and harm caused by, untrustworthy pre-insolvency advisors (rec 15)
- The funding of assetless administrations (and potential reforms to AAF), including the merits of a public liquidator (rec 18)
- Consideration of the scope of current IP reporting obligations (rec 19) and the ability of ASIC to respond to Reports (rec 19)
- The operation of the insolvent trading regime and its impact on corporate insolvency law (rec 20)
- The economic and social benefits and costs of ATO relief to insolvent companies in hard economic times and the impact on the insolvency system (rec 21)
- Consideration of the priority position of employees, liquidators and secured creditors over circulating assets (high priority) (rec 23)
- Franchising insolvencies (rec 25)
- Voidable transactions and unfair preferences (rec 27)
Actions for Government
The following matters were raised for the Government to consider implementing prior to the conclusion of a comprehensive and independent review:
- Implement the Safe Harbour Review Report (rec 7).
- As soon as practicable consider and consult on reforms to Pt 5.3B (SBR) and simplified liquidation (rec 8)
- Consideration of the current experience requirements for registration as a liquidator (having regard to the diversity of potential applicants and the significant gender imbalance in the registered liquidator profession (rec 12)
- Take prompt action to improve the regulation and enforcement of pre-insolvency advisors (rec 15)
- Change the Assetless Administration Fund to ensure it achieves its objectives (rec 16)
- Consider the potential benefit of a Public Interest Administration Fund as proposed by the PC in 2015 (rec 17)
- Review the reporting thresholds for IPs (rec 19)
- Develop reforms to ensure that access to the FEG is given to all individuals with valid entitlements and to prevent misuse of the scheme (rec 24)
- Provide a response to the Whittaker Review of the PPSA (rec 26)
- Amend the Corporations Act 2001 (Cth) to clarify trusts and insolvency (rec 28)
As to these recommendations, there was broad consensus that the funding of insolvency work, particularly for MSMEs and assetless companies was inadequate and so recommendations about improving the Assetless Administration Fund are welcome.
There was also broad support in submissions to implement the Safe Harbour Review Report, although several unions argued against having a safe harbour at all. Responding to the Whittaker Review of the PPSA is long overdue, although we wonder whether the hundreds of recommendations in that Report will be too much for the government, particularly without an obvious senior member of the government making the case for significant reform of the PPSA.
The recommendations to review ‘insolvency pathways’ for SMEs in the Pt 5.3B (SBR) restructuring and simplified liquidation as part of a comprehensive review are welcome, but also a little disappointing because there was broad consensus on the immediate need to increase the SBR threshold of $1 million and to relax the eligibility requirements in advance of any comprehensive review. Simplified liquidation is the embodiment of an ironic reform that does the opposite of what its name suggests. It is disappointing that more concrete immediate reforms were not put forward, particularly with insolvency rates increasing and the economy seemingly headed for a downturn. It is nevertheless open to the government to act on these issues promptly.
The recommendation that the Government amend the Corporations Act to clarify that liquidators can deal with assets held in trust by a corporate trustee (or a company that was formerly a trustee but has been removed by an ejection clause in the trust deed) is welcome and should be actioned promptly. Providing beneficiaries in investment trusts with the same protections as company shareholders is a more complex issue, although it is one that has generated extensive reform suggestions (see for example the detailed submissions from Dr Nuncio D’Angelo). The Report recognises that a satisfactory resolution to the insolvency and trust quandary may require a referral of power from the states to the Commonwealth, which will be difficult to achieve because while insolvency and trusts is primarily a problem for trading trusts, changing trusts law won’t affect only commercial trading trusts and will raise difficult legal and political questions about a plethora of trust arrangements.
The Report’s discussion of the FEG program is particularly disappointing because the role that FEG plays in insolvency and the stultifying effect it can have on restructuring efforts during voluntary administration was widely criticised during submissions and public hearings.
Actions for Government agencies
ASIC and the ATO were given broad criticism during submissions and in public hearings. The criticisms of ASIC focussed on its lack of enforcement activity arising from insolvency practitioner reports of potential misconduct, their approach to regulating liquidators, their lack of active oversight of deregistered companies and their overall poor performance with providing comprehensive insolvency data. The ATO were criticised for their role as a creditor in insolvency matters and their lack of providing high quality data. The Report made the following recommendations for ASIC and the ATO.
- ASIC collect high quality and granular data and provide this in a timely way to government agencies and regulators (rec 5)
- ASIC conduct research on deregistered companies to provide transparency on their financial position (rec 10)
- Review the reporting thresholds for IPs and ASIC’s response to IP reports (rec 19)
- ATO consult and publish model creditor guidelines that are consistent with the model litigant obligations (rec 22).
Conclusion
The PJC has produced a detailed Report that does a good job in getting across the details of insolvency law and practice. The Report canvasses a broad range of submissions and while providing a cogent critique of the current state of the insolvency framework it does not approach this from any clear ideological perspective. This was not a witch hunt against insolvency practitioners or a thoughtless incantation of ‘creditors don’t get paid enough in insolvency’. The Report is a thoughtful examination that paints a picture of an insolvency system in need of a comprehensive review to ensure that its goals, processes and outcomes are appropriate for a modern economy and meets reasonable community expectations.
It is important that this Report is not added to the library of unactioned official Reports that grows larger each year. The submissions to the PJC make it clear that there is widespread concern that insolvency law is not operating as well as it should. Stakeholders in insolvency must continue pushing for better laws and keep up the momentum to deliver a comprehensive and independent review into personal and corporate insolvency.
We ourselves will continue to develop our own thinking on the Australian insolvency system, very well assisted by this quality PJC Report.
Michael Murray and Professor Jason Harris
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[1] See ‘Rebuilding the structure of the Australian insolvency system’, Insolvency Law Bulletin (July 2022), referred to at p 179 of the Report. See also various law reform comments on our websites.
