Some years ago, I suggested to a Treasury officer that Ch 5 of the Corporations Act be redrafted and simplified. The curt response was, “you think Ch 5’s difficult – check out Ch 7”.
That was no doubt correct. Chapter 7 is the subject of the ALRC’s Confronting Complexity: Reforming Corporations and Financial Services Legislation – ALRC Report 141 of November 2023, which was tabled in parliament on 18 January 2024. It makes numerous and no doubt worthy recommendations about legislative attention to chapter 7. ALRC-FSL-Final-Report-141.pdf
Nevertheless, Chapter 5 remains irritatingly difficult. The 2023 PJC Report on Corporate Insolvency noted the complexity of the corporate provisions.
The ALRC Ch 7 Report cites [8.22-8.23] the PJC Report as concluding that
‘Australia’s corporate insolvency system is overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors’.
The ALRC then says that some submissions to the PJC suggested that the ALRC’s own approaches to reducing complexity in Ch 7 could be applied as part of any review of the corporate insolvency laws.
That may be, but looking at chapter 5 from an Australian corporate law and Office of Parliamentary Counsel drafting perspective might be unwise, at least without having regard, as I suggest, to bankruptcy law, and New Zealand law.
New Zealand law
Professor Lynne Taylor of New Zealand gave evidence before the PJC referring to the undue complexity of Australian insolvency law. As a prime example, she writes that in NZ [1]
“no matter how a liquidation commences or whether it is a solvent or insolvent liquidation, the statutory scheme … converges on one statutory process covering liquidators’ powers and duties, voidable transactions, creditors’ claims and distribution of assets”.
Giving the appointed liquidator full authority no matter the source of their appointment is hardly radical; it is the way the Australian Bankruptcy Act has been framed since 1924.
However, corporate insolvency became fixed some centuries ago on having separate powers and duties of liquidators depending on whether the liquidator was appointed by the court, or voluntarily. As Ford has noted, while 19th century law separated solvent and insolvent companies, insolvency law’s main separation was and remains between companies wound up by the court and those which wound up voluntarily. That led to unfortunate separation of bankruptcy from liquidation law, where the distinction in bankruptcy is necessarily between solvent and insolvent.
That was the 19th century, and the current corporate law cohort have raised no law reform issue about it since.
In illustrating her point, Professor Taylor describes in embarrassing detail the ins and outs of Australia’s liquidation pathways.
‘streamlined’ liquidation?
And as to our ‘streamlined’ liquidation process, she says that, overall, even NZ’s standard liquidation process
“is simpler and more streamlined than the Australian simplified liquidation process. The new Australian procedure provides no useful model for New Zealand”.
Professor Taylor also notes that, in contrast to New Zealand, there is more extensive insolvency regulation in Australia, increased after the ILRA 2016, in response to evidence of “feelings of creditor powerlessness”, to give them “greater control”, this despite well over 90% of unsecured creditors receiving nothing out of insolvency.
As to regulation, and in contrast with NZ and bankruptcy law, the Australian courts’ role in the administration of corporate insolvency matters is long-standing, an example of the latter being that Australian liquidators are constantly seeking court approval of their funding and settlement agreements, unnecessary in NZ, or in Australian bankruptcy.
There are many other innovative approaches to insolvency law in the Bankruptcy Act, and in NZ law, that could usefully be adopted.
Greater harmonisation of corporate and personal should be one aim of the comprehensive review of insolvency law as recommended by the PJC. But while ever the two are handled by different departments, that will be difficult. Alignment achieved by the ILRA 2016 has already been reduced by Treasury amending harmonised laws about insolvency committee meetings, meetings of creditors and service of documents. The different insolvency courts in Australia are another issue.
As to legislative structure, Taylor refers to the over 180 sections in Ch 5, supplemented by the Insolvency Practice Schedule (Corporations), the Insolvency Practice Rules (Corporations), and the Corporations Regulations. She could have mentioned the seven Courts’ Corporations Rules. The Bankruptcy Act has a similar structure. The Act-Schedule-Rules drafting approach of OPC for the ILRA 2016 has never been explained.
As I reported in Slow pace of litigation and incomprehensible laws – Murrays Legal, former Justice Steven Rares KC is critical of legislative drafting, including the Corporations Act and the Bankruptcy Act, as to the latter, that it “has a schedule it in that is hundreds of sections long that adds to what was in the rest of that Act. … Instead of having a standard like the 10 Commandments – though shalt not steal – you’ve got 40 pages of how you might be able to steal.”
As I commented, he might have added that Ch 5 of the Corporations Act also “has a schedule it in that is hundreds of sections long …”.
A redraft of Ch 5?
While the ALRC’s recommendations for reducing complexity in Ch 7 could be applied to insolvency, we would first want to have a detailed submission as to its intended approach.
Also, the PJC has recommended that the aims of insolvency law be reviewed. That process might reveal some legislative processes need changing, others that are redundant, and others again that need adding. Chapter 5 would not be just a re-drafting exercise.
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[1] A comparative analysis of the Australian and New Zealand liquidation schemes – Taylor – 2023 – International Insolvency Review – Wiley Online Library
