The Parliamentary Joint Committee on Corporations and Financial Services (the Committee) has commenced an inquiry into the "effectiveness of Australia's corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy".1
On its terms, the inquiry appears broad ranging, and is arguably the broadest review of Australia's insolvency laws since the Harmer Report in 1988. It comes after a decade of almost continuous reviews, consultations and legislative adjustments to the existing legislative framework, and increased desire from the restructuring industry to see more fundamental and considered law reform, as we discuss further below.
The inquiry also comes as the numbers of formal insolvency appointments in Australia are rising. Australian Securities and Investments Commission (ASIC) data suggests that 717 companies entered external administration in July 2022,2 a 2.5-year high following the end of the pandemic-era protections.3
As turbulent economic conditions continue to place pressure on Australian businesses, the need to ensure Australia's insolvency regime is "fit for purpose" and able to "effectively serve the Australian economy and all participants in it" is topical.4
To that end, the Committee "has resolved to undertake this inquiry in order to understand and describe the reality of what is happening in the corporate insolvency space right now and consider potential areas of reform."5
The inquiry was not publicly foreshadowed, and it remains unclear how this Parliamentary process will interact with the various other law reform work that has been undertaken in this area by the Treasury and other limbs of Government.
Whilst we welcome a broad ranging and holistic review, particularly given the emphasis in recent years on a more piecemeal approach, we are cautious as to how much can be expected from this inquiry. Corporate insolvency and restructuring law is complex with significant policy trade-offs, impacts on other areas of law and regulations and economic impacts. We therefore encourage Government to dedicate the time and resources to work through these issues properly, rather than rushing to quick solutions.
In this note, we discuss:
- the terms of reference for the inquiry;
- the process for making submissions to the Committee in this inquiry;
- the role and previous work of the Committee;
- the recent history of insolvency related law reform in Australia;
- some thoughts on the approach to law reform; and
- some topics for consideration as part of a general review of Australian corporate insolvency law.
The terms of reference for the inquiry
The terms of reference, which provide further details on what the inquiry will cover, identified seven key areas of interest:
- recent and emerging trends in the use of corporate insolvency and related practices in Australia, including those relating to temporary COVID-19 measures, increases in material and input costs, inflationary pressures, and supply shortages;
- the operation of the existing law, including the recent reforms to small business restructuring (2021), simplified liquidation (2021) and unlawful phoenixing (2019), as well as the operation of the Personal Property Securities Act 2009 (Cth) in the context of corporate insolvency;
- other potential areas for reform, including unfair preference claims, trusts with corporate trustees, insolvent trading safe harbours, and international approaches and developments;
- supporting businesses to access corporate turnaround capabilities to manage financial distress;
- insolvency practitioners and their role, remuneration, financial viability, and conduct;
- the role of government agencies in the corporate insolvency system, including that of ASIC, the ATO and other relevant bodies such as ithe Assetless Administration Fund and the Small Business Ombudsman; and
- any related corporate insolvency matters.
Submissions to the Committee
The Committee is accepting written submissions from interested persons and stakeholders. The deadline for submissions is 30 November 2022. Further details to assist in making submissions are here.
The Committee intends to table a report in both Houses of Parliament by 30 May 2023.
The Parliamentary Joint Committee on Corporations and Financial Services
The Committee is provided for under the Australian Securities and Investments Commission Act 2001 (Cth),6 and is comprised of 10 members coming from the Senate and the House.7 The powers and proceedings of the Committee are determined by Parliament from time to time. It was most recently re-established by the newly elected Parliament by way of a resolution passed by both the House of Representatives and the Senate in July 2022.8
The Committee (in its previous incarnations) has conducted inquiries into various aspects of corporate law over the years. However, the last time the Committee undertook a general inquiry in respect of insolvency law was in November 2002, when the Committee agreed to consider and report on the operation of Australia's insolvency and voluntary administration laws. This resulted in the tabling in June 2004 of the Committee's report Corporate Insolvency Laws: a Stocktake.9
A quick recap – the previous decade of law reform efforts
In the past decade, there has been no shortage of consultations, reports and legislation in respect of restructuring and insolvency law reform (and closely related matters such as personal property securities).
We set out in the appendix below (see the bottom of this article) a table setting out the main reform processes we are aware of over that period.
However, unlike the Committee's new inquiry, most of these previous law reform projects have been driven by the Treasury (PPS reform under the Attorney General's department and the Productivity Commission report being significant exceptions). It is currently unclear how the Committee's inquiry relates to these previous (and in many cases ongoing) projects.
Many of these previous restructuring and insolvency reform efforts have focused on addressing specific issues or 'cherry picking' features from foreign jurisdictions, rather than considering the system as a whole. As such, the results have been mixed, and the law has grown increasingly complex.
Calls have thus grown in the restructuring and insolvency community for a more in-depth and principled review of how the system operates as a whole, rather than further 'tinkering'.
Is this the long awaited 'root & branch' review?
Whilst this latest inquiry to be undertaken by the Committee has come as something of a surprise to the restructuring and insolvency profession, it has been cautiously welcomed.
It will however be interesting to see how the Committee will go about undertaking such a broad-ranging review, and how much can actually be achieved through this mechanism. Realistically, this inquiry may only be a first step on the road to comprehensive reform. Given the breadth of coverage and relatively short timeframe (both for submissions and the report itself), the inquiry is likely to identify a number of issues and potential areas for reform or further investigation. However, we expect it will likely require further additional reviews to develop comprehensive proposals to properly address those issues and reform areas.
What is needed?
It should be emphasised that the Australian corporate insolvency system is not (by global standards at least) fundamentally broken – it works relatively consistently in accordance with reasonably well understood principles. While not perfect (and there remain a number of areas that have long awaited attention), it can in most circumstances (where parties have appropriate guidance from advisers) adequately function to achieve the needed restructurings, turnarounds and liquidations of Australian corporates.
The law is therefore not a 'burning platform' that requires an emergency fix. Rather, what is needed is:
- some targeted attention to a number of areas where relatively straight forward amendments would have clear benefits in reducing cost and complexity or otherwise addressing known lacunas or problems. Many of these things have been identified (and clear solutions developed in greater or lesser detail) through the course of previous reviews and consultations, but have not yet been actioned by Government. These 'shovel ready' amendments could potentially be done relatively quickly so as to deliver real benefits in the near term – something particularly important as Australia and the world looks to head into a period of increased corporate financial distress; and
- deeper thought, over a longer time frame, as to the system as a whole, and how it should be repositioned in a manner that is fit for purpose for the next 10-20 years (perhaps something akin to a Harmer Report 2.0). Rushing out amendments to show progress is not the way to go where significant changes or new concepts are being introduced, nor is picking particular 'silver bullets' to focus on to the exclusion of the broader system (something we have seen previously).
Good things take time
With regard to this latter exercise, it will be critical that the necessary time and resources be devoted. Modern restructuring and insolvency law is highly complex, with fundamental policy issues at play, significant economic consequences and interactions with many other areas of the law.
By way of example, the Commission to Study the Reform of Chapter 11 formed by the American Bankruptcy Institute undertook an in-depth 3 year study before releasing its detailed final report and recommendations in 2014. The Commission was comprised of a body of highly experienced and respected commissioners practicing in the field of bankruptcy, who were supported by a number of specific advisory committees and research staff (and who took much evidence through public hearings, submissions and academic symposiums).
In a similar vein, as we have discussed previously, Singapore's major overhaul of its restructuring and insolvency legislation (by way of the Companies (Amendment) Act 2017 (Sing) and the Insolvency, Restructuring and Dissolution Act 2018 (Sing) which came into force in 2020) was the culmination of a long (nearly 10 year) process. It started with the appointment of the Insolvency Law Review Committee in November 2010 (formed of insolvency practitioners, academics and stakeholders) to review the existing law and issue a report making recommendations on an "Omnibus Insolvency Bill". The Final Report of the Insolvency Law Review Committee was published in October 2014. This was followed by the formation in May 2015 by the Ministry of Law of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (which included representatives from legal and accounting firms, insolvency practitioners, financial institutions and government agencies), which issued its Final Report in April 2016.
It will likely take a similar volume work to properly reposition the Australian system so it works consistently, efficiently and in tune with the needs of the modern Australian community and economy. It may also require a significant readjustment of the relative roles of the state and private sector in administering and funding the costs of the system, as Michael Murray and Jason Harris suggest,10 or other fundamental changes.
One possible starting point for a reform exercise, previously recommended by Derrington J, would be to process and analyse the current state of the law.11 This would involve "using a number of methods, [such as] primary legal analysis; engaging legal scholars; and, comparing the law to the law in other jurisdictions to highlight similarities and differences."12 Such would help reveal the "hotspots of complexity" within the current regime,13 and further inform how we think about more fundamental policy questions on what the key goals of our insolvency law should be, and what sorts of processes are needed in order to achieve those goals.
As Michael Murray has noted, an assessment of the effectiveness of the law in achieving its policy goals, including analysis from an economic perspective would also add significantly to the exercise. However, this is to a significant extent dependent on the existence of sufficient data on the current operation of Australia's insolvency system which is generally lacking at present.
The US and Singapore approaches also demonstrate the benefit of establishing specialist committees or commissions of practitioners, academics and other business and government stakeholders to consider and undertake careful study of both the operation of the current regime and potential reforms (including by way of collecting submissions and other input), and developing a coherent set of recommendations based on such work.
Areas for study and potential reform
Given the breadth of an inquiry encompassing all of corporate restructuring and insolvency law in Australia, there is much that could and should be considered. We set out below a list of topics that we think are worthy of inclusion in the discussion:
- policy and priorities – what are the most important objectives that our insolvency laws should seek to achieve?;
- voluntary administration generally (including time periods and extensions, court approvals, funding and additional/alternative exit routes);14
- deeds of company arrangement (including the ability to bind secured creditors, lessors and guarantee claims, voting and classes, minimum requirements, creditor protections, court oversight and standalone DOCAs);
- creditor schemes of arrangement (our thinking on these matters in respect of schemes including scheme moratoriums, cross-class cramdowns, priority funding, the headcount test, practice letters, cross border jurisdiction, disclosure and a number of other matters was reflected in the TMA submissions in response to the 2021 consultation on creditor schemes of arrangements that we discussed in our blog post here);
- governance, transparency and oversight (including in particular during the informal restructuring period and interaction with safe harbour, continuous disclosure and financial reporting requirements);
- the role of advisors and interim management;
- voidable transactions;
- the operation of the ipso facto regime;
- reporting in insolvency and restructuring processes and data collection;
- the interaction of insolvency and restructuring laws with Australia's debt and equity capital markets (and with finance and security law);
- the role and powers of secured creditors;
- interim funding for business undergoing restructuring and turnaround (including priority funding and priming of secured creditors);
- pre-packaged sales or restructurings;
- the treatment of corporate groups in restructuring and insolvency processes;
- the need for specialist regimes or carveouts (for example in respect of financial market transactions, banks, other financial institutions and critical infrastructure);
- cross border insolvency (including the application of Australian laws to non-Australian debtors and creditors; the UNCITRAL Model Laws on Enterprise Group Insolvency, the UNCITRAL Model Law on the Recognition and Enforcement of Insolvency-Related Judgments and the role of the Gibbs rule);
- the role of the state in insolvency resolution and policing corporate malfeasance (including in respect of assetless estates);
- the role of the courts, and the degree of specialisation and/or centralisation of insolvency matters before them;
- simplicity, consistency and accessibility of the legislation (a point on which the Australian Law Reform Commission (ALRC) is undertaking an review in respect of corporations and financial services legislation);
- encouragement of efficient markets and allocation of capital, and the interaction of the insolvency framework with macro-economic cycles and policy;
- small business restructuring and insolvency and the interaction with personal insolvency (including consideration of the UNCITRAL Legislative Recommendations on Insolvency of Micro and Small Enterprises); and
- lessons from around the world (including recent studies and reforms in the United States, the United Kingdom, Singapore and the EU, and work undertaken by international organisations such as UNCITRAL, the World Bank and INSOL).
There is plenty of room for improvement. Thinking on the role and function of restructuring and insolvency has developed greatly over the time period since the Harmer Report, and there is much that Australia can learn from this and developments abroad when re-evaluating our system. We hope this inquiry is the first step in achieving that goal.
Appendix – a decade of law reform efforts
1 Parliamentary Joint Committee on Corporations and Financial Services, 'Inquiry into Corporate Insolvency in Australia' (Media Release, 28 September 2022), https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/CorporateInsolvency/Media_Releases.
2 ASIC, Australian insolvency statistics (September 2022) https://download.asic.gov.au/media/ttxd0tf0/asic-insolvency-statistics-series-1a-published-8-september-2022.pdf
3 Michael Read, ''Zombie' firms collapse as pandemic aid removed', The Australian Financial Review (online, 14 September 2022) afr.com/policy/economy/zombie-firms-collapse-as-inflation-and-rates-bite-20220913-p5bhme.
4 Inquiry into Corporate Insolvency in Australia (n 1).
6 The Committee's duties include a duty to inquire into, and report to both Houses on the operation of the corporations legislation (and the operation of any other law of the Commonwealth, or any law of a State or Territory, that appears to the Committee to affect significantly the operation of the corporations legislation): Australian Securities and Investments Commission Act 2001 (Cth), section 243.
7 The Committee is currently comprised of Senator Deborah O'Neill (Chair, Australian Labor Party), Hon Alex Hawke MP (Deputy Chair, Liberal Party of Australia), Senator Andrew Bragg (Liberal Party of Australia), Mr Steve Georganas MP (Australian Labor Party), Ms Zaneta Mascarenhas MP (Australian Labor Party), Senator Nick McKim (Australian Greens), Dr Daniel Mulino MP (Australian Labor Party), Hon Keith Pitt MP (Liberal National Party of Queensland), Senator Louise Pratt (Australian Labor Party) and Senator Paul Scarr (Liberal Party of Australia).
8 Amongst other things, this resolution granted the Committee the power to: (i) call for witnesses to attend and for documents to be produced; (ii) conduct proceedings at any place it sees fit; (iii) sit in public or in private; (iv) report from time to time; and (v) adjourn from time to time and sit during any adjournment of the Senate and the House of Representatives.
9 The Committee also conducted an inquiry in respect of the exposure draft of the Corporations Amendment (Insolvency) Bill 2007 (Cth). This resulted in the publication of a report of the Committee in March 2007.
10 Michael Murray and Jason Harris, 'The Roles of the State and the Private Profession in the Insolvency System: Do we Have the Right Balance?' (Discussion Paper for the Insolvency Roundtable, Australian Academy of Law and the Ross Parsons Centre, University of Sydney, 4 August 2021) https://academyoflaw.org.au/resources/AAL%20-%20Discussion%20paper%20for%20insol%20r'table%20-%20Murray-Harris%20-%2022.7.21.pdf
11 Justice S C Derrington, 'The Changing Face of Law Reform in Australia: Commentary on the ALRC's Inquiry into Insolvency, its Contribution to the Current Legal Framework and the Need for a New Review Given the Passage of Over 30 Years' (Speech, ARITA Expert Series: Insolvency – Season 1, 11 November 2021) https://www.fedcourt.gov.au/digital-law-library/judges-speeches/justice-s-derrington/s-derrington-j-20211111
14 Previous examinations of the voluntary administration regime have included the Legal Committee of the Corporations and Markets Advisory Committee (CAMAC), Corporate Voluntary Administration Report (June 1998), CAMAC, Rehabilitating Large and Complex Enterprises in Financial Difficulties (October 2004); Commonwealth Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Law: A Stocktake (June 2004); Productivity Commission, Business Set-up, Transfer and Closure: Inquiry Report (September 2015). Jason Harris undertook a detailed review in his thesis Promoting an Optimal Corporate Rescue Culture in Australia: The Role and Efficiency of the Voluntary Administration Regime (August 2021). These previous reviews have raised a lot of issues for consideration, and this discussion should be continued and expanded upon.
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