In preparing for a presentation before eminent insolvency law academics I thought I would test my thinking by presenting to an equally eminent economics colleague, knowing that she might challenge some of my thinking. I’ve always found such a process to be useful in prompting responses that might not always come from one’s group, to the extent I have one.
My presentation concerns how or whether the law should allow an insolvent or struggling business to be ‘restructured’ by way of processes under the Corporations Act allowing the business to survive through compromise of its debts, and release of its contracts or leases, in order to put it on a better commercial footing. The company might have for example incurred $500,000 in unpaid taxes, which a restructure might reduce to $100,000.
The first comment from my economics colleague (EC) is to point out that the company is back in the market having been given a significant competitive advantage over other businesses that were the more efficient and innovative and tax compliant.
EC “Why not just let the company respond to competitive market forces. The employees will find jobs readily elsewhere and even at better salaries (see the Reserve Bank Report of 2025), the assets will be bought up by competitors, the customers likewise, and what has been a struggling non-tax compliant enterprise will be removed through market competition and replaced by ones more efficient and innovative and tax compliant”.
MM “Well, that would still be disruptive and employees would lose their jobs and customer and contract arrangements would be disrupted and the business would lose its value and there may well be a viable business there that needs support?”
EC “But disruption is the process by which an economy thrives – the process of “creative destruction” or as it is called nowadays “business dynamism”. Older companies tend to decline in efficiency, newer companies show more innovation and efficiency. Let the old company go and allow new ones to take its place”.
My colleague EC then asked “in any event what is the object of this restructuring law?”
MM “The expressed object of the law – s 435A – is to assist the company to “continue in existence””.
EC: “What!? what sort of low flying object is that? Would we go to a doctor and expect a diagnosis that “I fixed you up – you will be able to continue in existence”. “Gee thanks doc”.
MM: Or the law says “you’ll get more out of this deed of company arrangement than if the company were to go into liquidation”.
EC: “So, it seems getting more could be 6 cents in the dollar and you let this company get away with paying that, one reason being you are “saving” six jobs and you then allow it to go back into the market?!”
EC: “What market evidence do you obtain or regulatory input is required? To ensure that this company paying 6c/$ represents a worthwhile return to the economy?
MM: “Well, none”.
“Right” says my economist, “and who decides all this?”
MM “Well, the creditors who have lost out or as many of them as are interested to turn up to vote”.
EC: “But isn’t the reality with many of these creditors that they’ve extended credit unwisely without security and we’re relying on these less than astute business-people, who only want some cents in the dollar, to make an important determination about returning a business to the economy?!”.
MM: “Well, yes”.
EC: “OK so when the business is returned to the market, what responsibility has it got to account for its miraculous survival by way of reporting or justifying the case it put to the creditors?”
MM: “Well nothing”.
EC: “Good luck with your talk. You might get some tough questions from the economists in your network and it will be interesting to see how Assistant Minister Dr Andrew Leigh (PhD, former Professor of Economics (ANU), inter alia) responds to his new insolvency responsibilities”.
3 Responses
Your point is well made, MM. And in an entertaining way!
The historical policy justification for elevating certain unsecured debts to a preferential status (such as employee entitlements under s 556) and, more recently, the current FEG “safety net”, inspired by the demise of National Textiles, a company chaired by the former Prime Minister’s brother, are consequences of purely political choices about who should bear the cost of business failure. None of these choices derive from economic efficiency, and none of them were ever intended to enhance “business dynamism” in the sense your economist colleague uses the term.
Australia’s restructuring regimes have always reflected a compromise between economic theory and political reality. The legislature is comfortable with interventionist mechanisms that cushion particular constituencies — employees, small business creditors— but has never articulated a coherent economic objective for corporate rescue itself. Section 435A’s “continue in existence” formulation is a clear expression of this: it is not an economic objective but a social one.
That is why, somewhat paradoxically, your economist’s critique resonates. If the only articulated goals are (i) company survival, and (ii) a marginally better return than liquidation, then it is unsurprising that the process takes no account of competitive neutrality, allocative efficiency, or the economy-wide effects of allowing underperforming firms to survive on sharply discounted liabilities. As you have pointed out elsewhere, and compellingly, we simply do not ask the question whether the rescued entity is the best user of the assets or whether market forces would reallocate those assets more productively.
And your economist colleague is right again: the creditors who vote on a DOCA are often the least well-placed to make that determination. They are motivated — understandably — by maximising their own short-term recovery, not by weighing the long-term efficiency consequences for the market. The law asks them to decide matters that, in any other policy domain, would belong to a regulator armed with data and a statutory mandate.
So yes: from an economic perspective, our restructuring laws indulge in a kind of policy exceptionalism. We permit value to be reallocated in ways that may significantly distort competition, with no requirement that the restructured entity justify its ongoing participation in the market, and no mechanism to ensure that the company’s return to trading produces a net benefit to the economy as a whole.
Whether that is tolerable is a matter for debate. But your economist’s critique — that we simply do not test these interventions against economic criteria — is a fair one. And perhaps, as Dr Andrew Leigh takes up his new insolvency responsibilities, this is the moment to ask whether a modern rescue regime ought to reflect at least some alignment with the principles of economic efficiency that underpin the rest of public policy.
Your point is well made, MM. And in an entertaining way!
The historical policy justification for elevating certain unsecured debts to a preferential status (such as employee entitlements under s 556) and, more recently, the current FEG “safety net”, inspired by the demise of National Textiles, a company chaired by the former Prime Minister’s brother, are consequences of purely political choices about who should bear the cost of business failure. None of these choices derive from economic efficiency, and none of them were ever intended to enhance “business dynamism” in the sense your economist colleague uses the term.
Australia’s restructuring regimes have always reflected a compromise between economic theory and political reality. The legislature is comfortable with interventionist mechanisms that cushion particular constituencies — employees, small business creditors— but has never articulated a coherent economic objective for corporate rescue itself. Section 435A’s “continue in existence” formulation is a clear expression of this: it is not an economic objective but a social one.
That is why, somewhat paradoxically, your economist’s critique resonates. If the only articulated goals are (i) company survival, and (ii) a marginally better return than liquidation, then it is unsurprising that the process takes no account of competitive neutrality, allocative efficiency, or the economy-wide effects of allowing underperforming firms to survive on sharply discounted liabilities. As you have pointed out elsewhere, and compellingly, we simply do not ask the question whether the rescued entity is the best user of the assets or whether market forces would reallocate those assets more productively.
And your economist colleague is right again: the creditors who vote on a DOCA are often the least well-placed to make that determination. They are motivated — understandably — by maximising their own short-term recovery, not by weighing the long-term efficiency consequences for the market. The law asks them to decide matters that, in any other policy domain, would belong to a regulator armed with data and a statutory mandate.
So yes: from an economic perspective, our restructuring laws indulge in a kind of policy exceptionalism. We permit value to be reallocated in ways that may significantly distort competition, with no requirement that the restructured entity justify its ongoing participation in the market, and no mechanism to ensure that the company’s return to trading produces a net benefit to the economy as a whole.
And the economist is right again: the creditors who vote on a DOCA are often the least well-placed to make that determination. They are motivated — understandably — by maximising their own short-term recovery, not by weighing the long-term efficiency consequences for the market. The law asks them to decide matters that, in any other policy domain, would belong to a regulator armed with data and a statutory mandate.
So yes: from an economic perspective, our restructuring laws indulge in a kind of policy exceptionalism. We permit value to be reallocated in ways that may significantly distort competition, with no requirement that the restructured entity justify its ongoing participation in the market, and no mechanism to ensure that the company’s return to trading produces a net benefit to the economy as a whole.