Australia: Good Things Take Time: Parliamentary Joint Committee Delivers Report On Australia's Corporate Insolvency Framework

The Parliamentary Joint Committee on Corporations and Financial Services (the Committee) has delivered its report following 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

The Committee has recommended that, as soon as practicable, the Australian government should commission a comprehensive and independent review of Australia's insolvency law, encompassing both corporate and personal insolvency law.

The Committee considered Australia's corporate insolvency system to be "overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors".²

It made a number of recommendations to guide the structure, scope and process of a comprehensive review.

In addition, the Committee has also suggested a number of areas for reform ahead of the comprehensive review, to address "clear and broadly recognised failings in the current law."³

As discussed in our earlier note on the launch of the inquiry, previous restructuring and insolvency law reform efforts over the last decade have been restrained by a 'piecemeal' approach, with a focus on specific issues or 'cherry picked' features, rather than considering the system as a whole. The recognition by the Committee that fulsome review is needed aligns with broad consensus across the restructuring and insolvency market that Australia's insolvency framework requires in-depth and principled review.

A full list of twenty-eight recommendations made by the Committee can be found in the Appendix.

The government is yet to publicly respond to the recommendations of the Committee.

Remind me, what is this inquiry?

On 28 September 2022, the Committee commenced an inquiry into corporate insolvency in law which identified seven key areas of interests. The inquiry was welcomed with cautious optimism by the restructuring community at the time, given the breadth of issues covered by the inquiry. The Committee first intended to release the report by 30 May 2023 but this was subsequently delayed until 12 July 2023, which was to be expected given the comparatively short turn-around compared to earlier consultations and inquiries.

A holistic and comprehensive review

The Committee considered the shape and scope of a comprehensive and independent review of the insolvency system.

Strong emphasis was placed on the reviewing body having appropriate expertise, including in respect of the legislative frameworks, case law and regulatory arrangements relating to corporate and personal insolvency law, international frameworks and economic and financial matters:

"Whether the comprehensive review is conducted by the ALRC, the Productivity Commission, or a made-for-purpose body, is secondary in the committee's view to the overriding need for a review to be supported by experts reflecting the multidisciplinary nature of the undertaking. It may be appropriate for a review to be led by multiple commissioners to reflect this multidisciplinary character."⁴

Ultimately the Committee indicated that the identity of who should undertake the review was a matter for the government, having regard to these factors.

First things first

The Committee emphasised that the comprehensive review needed to start out by reporting on the appropriate principles and purpose of insolvency law:

"This would serve as a clear, transparent foundation for the remainder of the review's work, and provide for early and extensive engagement with interested stakeholders and members of the public."⁵

This might form the basis for an initial report, to which the government could "respond and affirm or vary the report's findings and recommendations."⁶

Big-picture issues

There were also a number of other 'big-picture' issues that the Committee considered to be early priorities for any comprehensive review. These included things such as:

• the extent to which corporate and personal insolvency law should be aligned (including at one extreme "the design and implementation of a single legislative scheme administered by one specialist insolvency regulator").⁷ The Committee came to a preliminary view that unification of insolvency law under a single regulator would "potentially deliver significant benefits".⁸ In Australia, the corporate and personal insolvency regimes are dealt with in separate legislation and by different regulators, so a unification would be a big step albeit not out of line with international jurisdictions such as the United States, the United Kingdom, Canada and Singapore.
• obtaining better data on insolvency from various sources. The Committee noted that an ability to support insolvency policy and legislative decisions has been constrained by an inadequate availability of quality data.
• consideration and reporting on the current insolvency regime and 'pathways' from a 'holistic systems analysis perspective'.⁹ The Committee suggested that before working on the individual pathways, there should be big-picture view of the system of pathways as whole. It expected more pathways were not likely to be needed but that existing pathways could be refined or improved.

These issues broadly encompassed the first six recommendations from the report.

Specific issues

The remaining recommendations address more specific substantive issues, most of which were matters to be addressed as part of the comprehensive review. This includes things such as:

• the specific insolvency pathways (i.e. voluntary administration, liquidation etc);
• the remuneration and independence of insolvency practitioners;
• 'untrustworthy pre-insolvency advisors' and 'illegal phoenix activity';¹⁰
• assetless insolvencies;
• the operation of the insolvent trading regime - "the committee is concerned that the current insolvent trading regime is not working to prevent companies from becoming deeply insolvent before they enter formal insolvency or restructuring pathways"; ¹¹
• the role of ASIC and the ATO;
• insolvency priorities, including the relative priority of insolvency practitioners and employees; and
• unfair preferences and voidable transactions.

Worth the wait?

The Committee has acknowledged that a comprehensive review will likely require a significant investment of time and resources that might delay potentially 'easier-to achieve' reforms.¹² However, the Committee came to a firm view that "this investment will be worth it, given the importance of a robust, fit-for purpose insolvency framework".¹³

This is an important recognition by the Committee that the approach to insolvency law reform in Australia needs to change - band aid solutions and quick fixes have run their course - reform now needs to be undertaken in a more systematic and thoughtful manner. Whilst this would delay some reforms, the Committee saw the value of reform being done in a holistic process, rather than in a piecemeal way. This necessarily takes time, a return to first principles and a willingness to grapple with the competing priorities and interests at play.

The Committee envisaged that the final report should be delivered within 3 years of the review's commencement (although stating it was up to government to set the timetable). It also noted that the work could progress in stages, allowing reform to be implemented along the way:

"This would allow the review to recommend reforms and, where the government and parliament agree those recommendations, for reforms to be implemented while the review continues." ¹⁴

The 'low hanging fruit'

Even though a comprehensive review came to the forefront of the Committee's recommendations, there were still areas where the Committee noted reform was long overdue, and that relatively simple and cheap reforms exist to provide 'quick fix' answers to recognised fallings in the current law. The Committee came to the view that:

"These more immediate potential reforms would address clear and broadly recognised failings in the current law. The committee is satisfied that these recommended reform actions - the 'low hanging fruit' of corporate insolvency law reform - will help realise a balance between the need for a considered, holistic review and reform process, and timely responses to shortcomings in the law." ¹⁵

This concept has widespread support. In some cases where there was specific 'quick wins' that could be fixed on a shorter timetable, the Committee made recommendations for near term action, including:

• implementing recommendations from the Safe Harbour Review, independent and likely in advance of the further view. The Committee noted other safe harbour issues raised in submissions, which require further consideration, but came to the view that these issues should not prevent near-term implementation of the Safe Harbour Review recommendations.
• collection of 'high quality granular data' by ASIC in relation to insolvency for provision to government agencies and regulators (and analyse data on voluntary and compulsory deregistrations).
• consult on reforms to the small business restructuring and simplified liquidation pathways to simplify and reduce the costs associated with these pathways.
• consider changes to the Assetless Administration Fund including consideration of an expanded design and purpose to support the administration of assetless companies more generally.
• reforming eligibility requirements for registered liquidators, to address the inequity of the requirements and address the gender imbalance in the profession.
• consider changes to insolvency practitioner reporting thresholds to ASIC to ensure the reporting obligations are best serving the integrity, efficiency, and efficacy of the Australian corporate insolvency framework.
• developing reforms to avoid misuse of the FEG scheme
• responding to the Whittaker Review, and implementing its recommendations where the benefits outweigh the costs without waiting for comprehensive review. In particular, the Committee supported the implementation of recommendation 362 of the Whittaker Review to repeal section 588FL of the Corporations Act 2001 (Cth) which provides for the vesting of security interests registered out of time.
• implementing certain reforms to clarify the treatment of trusts with corporate trustees during insolvency. This would appear to include matters such as restricting the operation of corporate trustee 'ejection clauses' upon the trustee's insolvency, and allowing liquidators (and potentially other insolvency practitioners) appointed to an insolvent corporate trustee of a trading trust to deal with the trust assets.

Comments

The Committee clearly had a high concern over the complexity, accessibility and effectiveness of Australia's insolvency system and has reached the conclusion that a holistic review should be undertaken by experts. The holistic review recommendation aligns with many submissions made to the Committee, including those of the Turnaround Management Association (TMA) (discussed here) that a panel of qualified and diverse experts, with the benefit of appropriate time, should undertake a thorough review of Australia's restructuring and insolvency framework.

The report shows that substantive reform is needed and long overdue. It is important to recognise Australia's insolvency framework is not fundamentally broken, but the report and the outcome of this inquiry are indicative of significant room for improvement and a need to re-evaluate, simplify and refine the existing state of laws.

Several areas which disappointingly did not receive significant attention in the report were:

• the role of informal or 'out of court' restructuring processes and the importance of business turnaround more generally;
• reforms to schemes of arrangement (and the lack of a government response to the consultation of schemes of arrangement in 2021 discussed in our previous note here);
• funding of businesses undertaking restructuring and insolvency processes (including whether to introduce a priority funding regime);
• cross border restructuring and insolvency (including whether to allow non-Australian companies to access Australian processes in appropriate circumstances, and whether to adopt additional UNCITRAL cross-border insolvency model laws).

We hope that these matters will be specifically included in any terms of reference for the comprehensive review to ensure they receive appropriate coverage.

Nevertheless, we think the Committee has taken an important first step towards substantive reform and are hopeful the report can provide the necessary momentum for further action.

As Professor Vivienne Brand noted in submissions to the Committee, and cited in the final report, a comprehensive review is worth the investment of time and resources:

"The thing is: insolvency is so big and so significant that you can give it as much time as it needs, and it will pay off. It will give you a dividend. But maybe not in your term [of Parliament]."¹⁶

We look forward to the government's response to the Committee's report.

Footnotes

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>. The Committee is chaired by Senator Deborah O'Neill (Australian Labour Party), and is comprised of 10 members across various parties.