Australia's corporate insolvency laws are facing extensive reforms in the near future. On 12 July 2023, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) tabled its highly anticipated report into Corporate Insolvency in Australia (Report).

This article summarises some of the recommendations of the Report, focusing on corporate (rather than personal) insolvency.

Overview - current regime

In December 1988, the Australian Law Reform Commission (ALRC) published its General Insolvency Inquiry (ALRC Report 45) more commonly referred to as the Harmer Report, following a five-year review of Australia's corporate and personal insolvency laws. Following the Harmer Report, legislative reforms were enacted by (for example and without limitation) the Corporate Law Reform Act 1992 (Cth) which codified many of the ALRC's recommendations.

Since then, Australia's commercial and economic sectors have changed considerably but Australian corporate insolvency laws have remained largely stagnant (save for discrete, incremental changes to specific areas). Many insolvency lawyers and practitioners have long been calling for a "roots and branch" review of the complexity and effectiveness of Australia's insolvency laws to better align with current national and global economic and political issues.

Australia's current statutory corporate insolvency law is contained in:

  • the Corporations Act 2001 (Cth)
  • the Insolvency Practice Rules (Corporations) 2016 (Cth).

On 28 September 2022, the Committee announced an inquiry into the effectiveness of Australian corporate insolvency laws (the Inquiry). The Inquiry considered (without limitation) the current legislative framework, simplified restructuring and turnaround options and other mechanisms to make Australia's current corporate insolvency regime more accessible for distressed businesses. The Inquiry's preliminary areas of focus included:

  • trends in the use of corporate insolvency in Australia
  • the operation of the existing legislation, common law, and regulatory arrangements, including recent reforms
  • other areas for reform, such as, unfair preference claims, trusts with corporate trustees, safe harbours, and international developments
  • supporting business access to corporate turnaround capabilities
  • the role, remuneration, financial viability, and conduct of corporate insolvency practitioners
  • the role of government agencies in the corporate insolvency system.

Before discussing the proposed law reforms, we summarise the various types of corporate insolvencies below.

Types of corporate insolvency

Corporate Insolvency Processes

Type

Process & Outcomes

Voluntary Administration

Initiated by company directors where company is insolvent or likely to become insolvent. Provides regime for Administrator to control company's business, assets and affairs to ensure that:

(a) prospects for continued business operations are maximised; and

(b) if possible, a better return for stakeholders is achieved than through liquidation.

Another unique feature of administration is the use of Deeds of Company Arrangement (DOCAs) to provide flexibility and allow for creative solutions to ultimately avoid liquidation.

Members' Voluntary Liquidation

Initiated by company members and only available where company is solvent. Commonly used for companies with limited assets or that are no longer required (such as special purpose vehicles where the project has concluded).

Creditors' Voluntary Liquidation

Voluntarily initiated by company members and directors where company is insolvent/unable to pay debts. Voluntary liquidations save the expense of court liquidations. A liquidator is appointed to investigate company affairs, identify reasons for failure, realise assets, pay liabilities, pay dividends to creditors and deregister the company.

Court Liquidation

Court liquidations require an application to court and result in a court order for a liquidator's appointment. Such applications are often made following a debtor's failure to comply with a statutory demand or on just and equitable grounds (i.e. director deadlock or shareholder oppression). A liquidator is appointed to investigate company affairs, identify reasons for failure, realise assets, pay liabilities, pay dividends to creditors and deregister the company.

Receivership

Receiverships entitle creditors to appoint receivers to administer debtor's assets to realise debts. Appointments are usually limited and only protect one creditor as opposed to other insolvent administrations, in which administrators and liquidators must act in the interests of all creditors. Receiverships often arise from general security agreements and secured debts involving mortgages and guarantees.

Small Business Restructuring

Type of debtor-in-possession model enabling a company to remain in control whilst compromising debts and maximising possibility of future profitable trading. Stringent eligibility requirements apply. Benefits include less-stringent reporting requirements and quicker/cheaper than liquidation.

Further details about the various insolvency processes may be found in:

  • our "Demystifying Insolvency" e-book available here; and
  • our "Insolvency" e-book available here.

Submissions

The Committee accepted submissions from stakeholders to assist the Inquiry until 30 November 2022. The Committee received 78 submissions as well as supplementary submissions from notable industry stakeholders including (without limitation):

  • The Australian Financial Security Authority (AFSA)
  • The Australian Restructuring Insolvency & Turnaround Association (ARITA)
  • The Australian Institute of Credit Management (AICM)
  • Prominent accounting firms including KPMG Australia, KordaMentha and Deloitte
  • Chartered Accountants Australia and New Zealand
  • Top tier global law firms such as MinterEllison, Ashurst and King & Wood Mallesons.

The recurring issues in stakeholder submissions to the Committee included:

  • consolidation and simplification of conduct obligations under the Corporations Act to make them easier to navigate
  • whether a legislated "debtor in possession" model would benefit all stakeholders by enabling directors to maintain conduct and control of a company whilst navigating its financial distress
  • whether the current restructuring and schemes of arrangement eligibility requirements ought to be expanded to be more accessible and affordable to more entities
  • whether provisions governing corporate, cross-border and personal insolvency currently codified across various legislative instruments ought to be harmonised into a single unified legislative instrument.

Findings and recommendations

Following investigations and submissions, the Report (comprising 358 pages) tabled on 12 July 2023 made several significant findings and provides twenty-eight individual recommendations.

Notably, the Committee's Report found that "Australia's corporate insolvency system is overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors." Additionally, the Report expressed concerns that "Australia's insolvency system may not reflect modern business practice and needs."

Some of the Report's recommendations include:

  • "The committee recommends that as soon as practicable the government commission a comprehensive and independent review of Australia's insolvency law, encompassing both corporate and personal insolvency. The committee is also recommending that the government progress several other near-term actions as identified in the executive summary" (Recommendation 1).
  • "The committee recommends that the proposed comprehensive review consider and report on the current system of corporate insolvency pathways from a holistic systems analysis perspective" (Recommendation 6).
  • "The committee recommends that the government implement recommendations from the Safe Harbour Review, independent and likely in advance of the further review, and consider referring the remainder of safe harbour reform issues identified in this report to a comprehensive review" (Recommendation 7)
  • "The committee recommends that as soon as practicable the government consider and consult on potential reforms to the:
    • small business restructuring pathway; and
    • simplified liquidation pathway."
      (Recommendation 8)
  • "The committee recommends that the government reform the experience eligibility requirements for registered liquidators, to address the inequity of the requirements and the gender imbalance in the population of registered liquidators" (Recommendation 12).
  • "The committee recommends that the comprehensive review include consideration of the remuneration of insolvency practitioners" (Recommendation 13).
  • "The committee recommends that the comprehensive review consider and make recommendations on options for funding the administrations of assetless companies, including reforms to the Assetless Administration Fund (noting the committee's recommendation 16) and the merits of creating a public liquidator for corporate insolvency" (Recommendation 18).
  • "The committee recommends that the comprehensive review examine the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework" (Recommendation 20).
  • "The committee recommends that the comprehensive review consider the relative priority of employees, liquidators, and secured creditors, including the priority over circulating assets under section 561 of the Corporations Act 2001. The committee further recommends that this be a high priority topic for the comprehensive review" (Recommendation 23).
  • "The committee recommends that the comprehensive review consider unfair preferences and voidable transactions as a core aspect of potential insolvency reform" (Recommendation 27).
  • "The committee recommends that the government amends the Corporations Act 2001 to expressly clarify the treatment of trusts with corporate trustees during insolvency" (Recommendation 28).

Conclusion

Whilst the Report's recommendations are yet to be ratified into law and their impacts on insolvency practitioners, creditors and debtors remain to be seen, we anticipate a shift towards time and cost-efficient administrations to empower company directors to trade out of insolvency. We expect a greater emphasis on education and resources for small businesses with insolvent liquidations reserved as a "last resort" for large and complex structures.

Additionally, simplified recovery actions (such as uncommercial transactions and insolvent trading claims) may be legislated to minimise litigation risk and expense in response to recommendations 20 and 27.

In turn, we predict the recommended changes to Australia's insolvency laws will require practitioners to upskill and offer more debtor-in-possession, restructuring and turnaround solutions for affordable prices. Conversely, adverse impacts may be felt by insolvency practitioners, depending on the review's findings on liquidator qualifications and remuneration, in response to recommendations 12 and 13. Securing ongoing adequate funding for administrations of assetless companies as referred to in Recommendation 18 will likely assist with access to professional support and improved outcomes in the corporate insolvency area.

The resounding industry sentiment seems to be that a "roots and branch" review resulting in simplification and harmonisation of Australia's corporate insolvency regime is necessary and overdue. This is reflected in the Report's findings and recommendations. We consider updates necessary to modernise Australian insolvency laws in line with radical changes to Australia's political and economic climates. For example, in our work at Bartier Perry we have seen the impact of rising interest rates, aimed at curtailing inflation, on increasing rates of both corporate and personal insolvency. If implemented well, the Report's recommendations will enable financially distressed companies to better access commercial resolutions that will provide fairer and more equitable outcomes for all stakeholders in corporate insolvency.

Additionally, we welcome the Report's considerations of gender equality and equal opportunity, which are reflective of the need for Australia's insolvency laws to better align with modern attitudes, values and perspectives.

Although we recognise there may be differing views on the Recommendations contained in the Report, the reality is that Australia's corporate insolvency laws are changing and need to change more. Bartier Perry provides expert legal services on current insolvency laws whilst remaining informed on the impending changes to assist clients with all insolvency advice requirements. We remain committed to keeping up to date with changes to Australia's corporate insolvency laws and will report further as developments occur.

Whether you are an insolvency practitioner, director, creditor or debtor - please contact Gavin Stuart or David de Mestre for advice on corporate or personal insolvency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.