Insolvency law’s elephants in the room

Professor Jason Harris and I will be presenting a session at INSOL Academics Colloquium in San Diego USA on 22 May.  Consistent with the theme of the INSOL conference, our session is titled ‘rethinking Australian insolvency law’ and comprises much of what we put to the Australian Parliamentary Joint Committee in its Corporate Insolvency inquiry by way of submissions and evidence as appears in the PJC’s July 2023 report.  We are also reprising our early thinking expressed in our text Keay’s Insolvency since the 7th edition in 2011 and presented at INSOL in the Hague in 2013.

While we are yet to finally settle upon our San Diego presentation, I have found it useful to list what I term ‘elephants in the room’, being structural problems which have been largely ignored over time, at least until the PJC inquiry, and call for a rethink, or even a think.

The elephant reference is useful because we can be in danger of insolvency’s limited tangible outcomes being compared with the well-functioning hospital with no patients in Yes Minister. 

Any comment welcome.

Elephant in the room number one – why does insolvency law stick to its rigid personal and corporate law categories?

As the Small Business Ombudsman said in his submission to the PJC,

“the current insolvency system assumes a neat distinction between a business and an individual, whose distressed financial circumstances do not intersect with one another. Small and family businesses are rarely so neatly arranged. A small business is less likely to be an incorporated entity and more likely to be a blended ‘structure’ of independent contractors, self-employed persons, or a partnership operating through a trust. Even for incorporated entities, Directors guarantees, personal collateral used to secure finance, and statutory sanctions that create a personal Director obligation or liability, add to the blending. The utility of the insolvency system would benefit from a better recognition of this blending of business and personal interests”.[1]

That is open for rethinking, difficult as it might be for Australian lawyers.

 Two – how viable is small business itself?

As the Ombudsman himself also reports, two out of five micro and small companies (43%) are non-profitable. This is the lowest proportion since 2012-13, when 48% of micro and small companies were non-profitable. This compares to 15% of medium and large companies which are non-profitable.[2]

Should we look at small business viability more closely with a view to more focused and streamlined processes generally?

Three – insolvency involves limited funds yet calls for specialist skills, leading to unresolved tensions

The system relies upon the remaining funds in insolvent estates to operate yet the figures show there is simply not enough money remaining to fully allow this.

Of the 10,000 corporate insolvencies in 2022-23, 83% had assets under $100,000, 82% had under 20 employees, 32% had liabilities under $250,000 and 68% under $1m; over 87% reported no dividend to creditors, and over 97% reported dividends of under 50c/$.

Of the anticipated 12,000 personal insolvencies (well below the long-term average of 23,100, and the peak of 37,000 in 2008), nearly 60% of bankruptcies have assets under $50,000, and average dividend returns are between 2-3%.  Part X’s average 10% and Part IXs 50c/$.

The deficiency is such that there is often not enough remaining funds for the IP’s remuneration, let alone any money for creditors.  A 2013 Australian study showed that liquidators conducted unfunded work to the value of over $48m annually.[3]  A 1979 inquiry found that 70% of court ordered liquidations were “unremunerative” or assetless.[4]  Other figures show that a high proportion of estates pay no remuneration to the liquidator at all.[5] 

Even in personal insolvency, where there is a government role, a 2020 report showed that over 30% of bankrupt estates handled by private trustees in a given year paid no remuneration.[6]

At the same time, there will continue to be significant matters that call for insolvency law remedies and creditors should be fully informed and engaged as necessary.  But there may need to be a refocus away from attending to creditors with no economic interest in the outcome.

Four – why are funds limited?

One reason for this lack of remaining funds may lie in the misconduct of directors trading their businesses into the ground, as has been suggested by Professor Mark Wellard[7] and hence that is the real problem that needs addressing.

But another reason may be a fundamental change in the nature of business assets over the last few decades.

Traditionally, the value of a business would reside primarily in its tangible assets, fixed assets such as real estate, machinery, and production lines, as well as raw materials, inventory and claims from its customers. … However, recent economic developments mean that, at least in developed economies, business value resides less in tangible assets and increasingly more in intangible assets.[8]

This is a fundamental issue needing further analysis.

Five – insolvency also involves public interest tasks, some inherent in insolvency, some clearly the preserve of the state.

Not only is much work unfunded, but there is much public interest work being done in insolvency by its practitioners which only goes to exacerbate the problem of limited funds.  

Liquidators refer over 5,000+ statutory breach reports to ASIC each year, in the public interest, and trustees in bankruptcy refer a similar proportion.[9]   The estimated cost of preparing these reports was put to the PJC as around $5,000, and higher depending on the circumstances of the liquidation. To what extent should IPs be “the frontline investigators of insolvent companies” as ASIC describes liquidators?

This is currently the subject of a consultation by ASIC: ASIC’s review of offence reporting – RG 16 – Murrays Legal

Six – given the public private composition of insolvency practice, why has there not been some policy effort to sort out who should do what?

For example, the Hon Paul Heath KC put this thesis over 20 years ago, 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 …”: Paul Heath, Insolvency Law Reform: The Role of the State (1999) NZLRev 569 [10]

And Professor Jason Harris and I have been making a similar point since our 7th edition in 2011, and INSOL the Hague in 2013, that while the IP is a private sector professional,[11] yet some seem to expect the IP

to act as a protector of the insolvent company or individual, as an asset recovery agent and asset protector, a commercial investigator and problem solver, a public inquisitor, and then, as needed, a distribution agent … [with the practitioner] expected to do this with limited or, in some cases, no funds, or where funds are available, in the knowledge that these expenses compete with funds which the creditors might see, unrealistically, as theirs:” Keay’s Insolvency, Murray & Harris, p 32See also Australian insolvency practitioners as unique professionals: An examination of the history of liquidators and trustees, Symes and Murray, (2023) 31 Insolv LJ 97.

Seven – shouldn’t insolvency be open to all?

Australia insists upon that access in personal bankruptcy, even to the extent of having no filing fee for debtors’ petitions.  But in corporate insolvency, the need to pay a liquidator to take the appointment (which can cost $10,000 or more) presents a barrier to entry for no or low asset insolvent companies. An estimate based on ASIC figures is that five times as many companies are deregistered by default under ss 601AA/AB as go through Corporations Act Ch 5: see Insolvency – it’s all about the money (2018) 46(2) Federal Law Review 287-312, H Anderson.

Eight – why are assetless administrations seemingly ignored or given low attention?

It goes against the integrity of the regime and business confidence generally to allow a business to unfairly deplete itself of assets to avoid its creditors; on the other hand, if there is a genuine loss, there should be an avenue available for the directors to wipe the slate clean and attend to creditors and employees by way of formal liquidation: UNCITRAL.[12]

Nine – what is preference recovery law about?

To support pari passu or to shore up the lack of funds in the system?

“even if the proceedings were pursued to seek to recover the liquidators’ costs or funding which had been devoted to the conduct of the proceedings, it seems to me that that is a proper purpose, where liquidators would less readily accept appointment, and litigation funders would less readily fund proper proceedings in liquidation, if liquidators could not recover their remuneration or litigation funders could not recover the funding which they provided”: In the matter of Cardinal Group Pty Limited (in liq) [2015] NSWSC 1761 at [34].

Ten – why don’t we have the data?

By standards of effectiveness (in achieving purposes, aims) and efficiency (in being cost/time effective),[13] we have difficulty in making a confident assessment of the quality of the Australian insolvency regime, despite numerous calls for better data over the years. These IMF comments are apposite:

“For a long time, insolvency legislation, as most legal reforms, has been designed without a proper empirical foundation. Isolated from developments in other areas, insolvency law, and creditor-debtor law in general, is still designed in most countries without the support of detailed data on the actual performance of the system, or the issues experienced in its application. 2 Likewise, in the assessment of insolvency systems3 : there are qualitative assessments, based on compliance with international standards or customized indicators, but there are virtually no assessments of insolvency systems based on empirical data. Although qualitative methods have their use, they should not substitute for reliable quantitative data. The assessments and design of insolvency regimes should be based on relevant statistics, thereby providing the infrastructure for sound policy decisions.

… the cost of implementing advanced systems should be compared with the cost of not having them”.

Eleven – what is the relevance of all this to law reform?

Insolvency law deals with some fine financial margins, in relation to the majority of insolvencies.  We should therefore ensure that the laws and their processes are as refined and directed as possible, with measurable KPIs.

It is no good introducing the latest voidable transaction provision if it is prohibitively costly to pursue, or if its main use will be to recoup moneys spent on core insolvency tasks that do not serve much purpose. The Yes Minister hospital with no patients looms.

It is for that reason that we say that the structure of the regime needs initial attention, before the core detail of insolvency law is reformed.  A threshold issue to be addressed is the need for an overarching assessment of the financial and legal system within which corporate insolvency operates, both corporate insolvency and personal insolvency.

The insolvency laws create a system, a complex system, with interconnected and moving parts. Changing bits and pieces of the law here and there is not the way a system should be reviewed and reformed; in fact it can be counterproductive.  Hence recommendation 6 of the PJC that we need to assess the “current system of corporate insolvency pathways from a holistic systems analysis perspective”.

Twelve – should we test and review the aims of insolvency law?

The PJC said that the aims of insolvency law need to be re-assessed. Those aims must be settled according to data that informs what can realistically be achieved.  At present, there is an undue expectation gap as to what insolvency law and its practitioners can achieve for creditors.  A restatement and realignment of the purposes of insolvency are required, because in the vast majority of cases creditors receive little or nothing from insolvencies.  This may be because of a fundamental shift in the nature and value of business assets.

The role of the IP in terms of its mix of public and private tasks needs also to be reviewed, given it is central to the operation of the insolvency regime, along with the courts and the regulators. We need an insolvency system that has realistic and achievable goals that deliver real value for users and stakeholders and the broader community. A government role to assist in that process is therefore a major aspect of our recommendations.


Any major rethink of insolvency law might start off with a focus on these sorts of issues, among others, to:

  • recognise and rebalance public and private work in insolvency
  • refocus away from creditors with no economic interest in the outcome
  • streamline processes for low/no asset estates
  • change the focus of IPs from gatekeepers/enforcers to value maximisers where there are prospects of recovery or rehabilitation.

Feedback from our colleagues in San Diego will be welcome, given that many of the issues we raise are of universal concern.

NB Detailed footnotes have been removed from this article.  References are available on request.

Michael Murray


[1] Submission 31, 2 December 2022

[2] Small Business Matters June 2023 Australian Small Business and Family Enterprise Ombudsman

[3] An analysis of official liquidations in Australia, A Phillips, February 2013; referred to in the Explanatory Memorandum to the Insolvency Law Reform Bill 2015 [Ex Memo ILRB] at [9.135].

[4] Brian Cassidy Electrical Industries Pty Limited (in prov liq) v Attalex Pty Limited (No 2) (1984) 2 ACLC 752, referring to the 1979 ‘Helsham Report’.

[5] Corporate Insolvency by the Numbers, J Harris, 27 February 2018 –; See Jason Harris in The Competing Goals Theory and Insolvency Law, Ch 9, p 133, in Re-examining insolvency law and theory – perspectives for the 21st century, eds Ghio, Wood and Gant, Edward Elgar Publishing, 2023.

[6] Remuneration in the personal insolvency system, 4 March 2020

[7] Insolvent Trading: Director accountability for minimal returns to creditors in liquidations (2023) 31 Insolv LJ 85.

[8] Re-examining Insolvency Law and Theory, Perspectives for the 21st Century, eds Ghio, Wood and Gant, Edward Elgar Publishing, 2023, Ch 7 A Rawlsian approach to preventive restructuring, Stathis Potamatis and Xenophon Paparrigopoulos.

[9] ASIC Annual Report 2020-2021, table 6.2.4. AFSA Enforcement statistics July 2021 to March 2022.

[10] P Heath, Insolvency Law Reform: The Role of the State (1999) NZLRev 569

[11] At [1.170].

[12] Those two important policy issues involving assetless insolvent companies are identified and explained by UNCITRAL at [73] …. [74].

[13] As to the distinction between effectiveness and efficiency in the insolvency context, see IMF Report The Use of Data in Assessing and Designing Insolvency Systems (, WP/19/27, prepared by José Garrido (dir.), Wolfgang Bergthaler, Chanda DeLong, Juliet Johnson, Amira Rasekh, Anjum Rosha, and Natalia Stetsenko, February 2019.

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published.