Get Ready To Ring In The Changes - An Update On The Parliamentary Inquiry Into Corporate Insolvency In Australia

On 28 September 2022, the Parliamentary Joint Committee on Corporations and Financial Services began an inquiry into corporate insolvency in Australia to assess the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the Australian economy.

This is arguably the broadest review of Australia’s insolvency laws since the Australian Law Reform Commission’s General Insolvency Inquiry which was commissioned by then Attorney General Gareth Evans in 1983, and which culminated in 1988 in the ‘Harmer Report’ (nicknamed after its main author) which then led to the Corporate Law Reform Act 1993 (Cth).

The Committee’s report is due to be tabled in Parliament by 30 May 2023, and this publication looks at some of the key issues that have been addressed and debated in the submissions lodged and public hearings held to date.

Background

On 30 March 2022 the then Assistant Treasurer announced that the Morrison government proposed to further simplify and streamline Australia’s insolvency laws¹.  Among the proposed reforms were changes to unfair preference claims (consistently with the simplified liquidation process introduced in 2021) and the creation of a legislative framework for the external administration of corporate trustees. 

The proposed reforms were not implemented before the change in government in May 2022.

However, on 28 September 2022, the Parliamentary Joint Committee on Corporations and Financial Services began an inquiry into corporate insolvency in Australia. 

The Committee’s remit is to investigate the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy.  The terms of reference identify a number of particular issues for consideration by the Committee, including but not limited to unfair preference claims, insolvent corporate trustees and the reforms introduced by the Morrison government in 2021². 

Nearly 80 submissions have been lodged with public hearings held over five days between 13 December 2022 and 1 March 2023.  

The Committee’s report is due to be tabled in Parliament by 30 May 2023. 

While we await the tabling of the report, below are some of the key substantive law issues and common themes which have emerged to date. 

Unfair preference claims

As well as being a specific area of interest for the inquiry, unfair preferences have been the subject of two recent High Court decisions, analysed in our previous publications here and here. 

There appears to be general consensus amongst industry participants that reform is needed although opinions about what changes should be made are mixed. 

Some examples of some themes which have emerged from the submissions and hearings as to proposed reform in this area include:

• Limiting potential defendants:  A number of submissions suggested that unfair preference claims be restricted to related parties only, and/or that unfair preference claims should not be available against non-related party creditors where the relevant debts were incurred in the ordinary of business.
• Minimum threshold amount:  Multiple submissions also supported the introduction of a minimum threshold amount before a liquidator may pursue a claim (the Morrison government reforms proposed a $30,000 threshold but many submissions considered that figure too high, with ARITA suggesting a threshold of $4,000).
• Time limitations:  Other submissions suggested a reduction of relevant timeframes to favour creditors, for example:
  • reducing the six-month relation back period to three months; or
  • reducing the time period in which a liquidator may make an unfair preference claim from within three years after the relation-back day to a mere 12 months after the relation-back day.

External administration of corporate trustees

Industry participants also generally supported clarification of the law in respect of insolvent trusts.

As the law presently stands, trust property is not considered to be property of an insolvent company, with the consequence that a liquidator does not have the power to deal with trust assets.  Instead, a liquidator appointed to the trustee of an insolvent business must also apply to the Court to be appointed receiver and manager of trust assets, increasing the cost and complexity involved with the administration of insolvent trusts.  

A number of submissions called for the adoption of recommendations made in the 1988 Harmer Report³ including, at a minimum, amendments to:

• prevent the automatic removal of a trustee from office by reason of its external administration; and
• make it clear that external administrators appointed over a company that has been acting as trustee (and has a right of indemnity against the trust assets) should be able to deal with those trust assets as property of the company using their statutory power of sale, rather than requiring separate/additional Court intervention.  

Other common themes or ideas that emerged in this area were that:

• there should be a separate regime for dealing with insolvent trading trusts that sits alongside current provisions for corporate insolvency, although this would potentially just add another layer of complexity to Australian insolvency law; and
• beneficiaries of trusts should be listed on a proposed public register of beneficial interests⁴, with the register still only in the design phase but with a key goal of the register being to allow third parties to identify the entities behind a trust, similar to how the ASIC register of companies includes details of a company’s directors and shareholders.

Small business restructuring (SBR) & simplified liquidation

One of the specific matters set down for consideration by the Committee by the terms of reference is the effectiveness of the SBR and simplified liquidation reforms introduced in 2021.  

Before a company may adopt either one of these processes, it must meet certain eligibility criteria, including having total liabilities of less than $1 million.

It appears from the submissions and the hearings that the market consensus is that the reforms have not been effective in providing low cost simplified alternatives to voluntary administration and liquidation.  There have been 176 SBRs, and 59 simplified liquidations between March 2021 and October 2022⁵, which represents a low take up when compared to voluntary administrations (1,459) and creditors voluntary liquidations (5,862) during that same period.   

Key themes emerging from the submissions were that:

• the eligibility criteria should be changed to increase the $1 million maximum debt threshold; and
• requirements around payment of employee entitlements and having taxation lodgements up to date should be relaxed and/or clarified, eg by paying outstanding superannuation be considered a priority under an SBR plan, rather than being a condition of access to the legislation⁶.

Previous reform recommendations not implemented

While it is not possible to summarise every matter the subject of the inquiry here, it is worth noting that many of the issues under consideration are not new and have, in fact, been the subject of earlier reviews and recommendations.  For example, a number of submissions support the implementation of recommendations made in the 2015 Review of the Personal Property Securities Act 2009 Final Report and the 2021 Review of Insolvent Trading Safe Harbour Report to rectify issues identified with the current law.

Does the inquiry go far enough?

Given the focus of the inquiry is on the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy, a number of submissions have also suggested that piecemeal fixes are not sufficient and have called for a complete review of both the corporate and the personal insolvency regimes in Australia, with a view to harmonising the laws under a single regulator.

Personal insolvency law reform is outside the scope of the current inquiry.  While the Commonwealth Attorney-General held a roundtable on 2 March 2023 to identify reforms needed to Australia’s bankruptcy laws, it does not appear that serious consideration is being given to a consolidation of personal and corporate insolvency law at this time.  

Lavan comment

The Parliamentary Joint Committee on Corporations and Financial Services inquiry into corporate insolvency in Australia represents an important opportunity for much needed changes and improvements to the corporate insolvency landscape.

It is very likely that the findings of the Committee will result in legislative changes that could profoundly impact the way that corporate insolvency works in Australia.

Watch this space for more updates once the Committee’s report is tabled before Parliament.

In the meantime, if you have any questions about how the potential changes to the insolvency law landscape could impact you, the experienced Lavan team is here to help.