There’s Good News And Bad News – Joint Committee Finds Major Problems With Corporate Insolvency Laws, Recommends Major Changes

On 12 July 2023, the Parliamentary Joint Committee on Corporations and Financial Services published its report on the state of corporate insolvency law in Australia (the Report). 

At the time of our 22 March 2023 article on the key issues and themes emerging from the inquiry (which you can find here), the Joint Committee was planning to issue its report by 30 May 2023.  However this was pushed back by a month and a half to allow the Report to be completed which in its final form is over 300 pages long.

The Report contains 28 recommendations for reform of corporate insolvency law in Australia, with recommendation 1 being that¹:

          … "as soon as practicable the government commission a comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency".

While the Joint Committee has proposed that many of its recommendations be addressed as part of the comprehensive review, it has also identified some urgent reforms that it considers should be implemented independently of that review.

Why is a comprehensive review needed?

After considering the 78 submissions lodged in respect of the inquiry, and after hearing from just under 100 witnesses from government and the private sector, the Joint Committee concluded that corporate insolvency law in Australia is “overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors²”.

It noted that³:

• the last comprehensive review of corporate insolvency law was the 1988 Harmer Report4;
• amendments to corporate insolvency law since that time have been undertaken on a ‘piecemeal’ basis; and
• while individual amendments may have sensibly addressed particular issues, they have not necessarily had regard to the corporate insolvency system as a whole, leading to complexity and, in some areas, inconsistencies within the law and consequently, unnecessary cost and confusion for stakeholders.

Some of the specific concerns identified by the Joint Committee in support of its recommendation for a comprehensive review are as follows:

• the lack of express purposes and objectives in the current corporate insolvency law (except in respect of voluntary administrations under Part 5.3A of the Corporations Act 2001 (Cth) (Corporations Act)⁵) makes it very difficult to assess the performance and effectiveness of the current system;
• there have been significant economic changes since the Harmer Report was handed down, which means that the policies that underpin the existing system should be reviewed and assessed as to whether they remain fit for current and future purposes⁶;
• the Joint Committee heard evidence that approximately 90% of unsecured creditors receive a nil return in liquidations, which suggests that there should be an investigation into whether this might have been due to failures with the current insolvency regime (for example, if the current system results in companies facing financial difficulties not seeking or obtaining assistance early enough⁷ - although it should also be noted that the Joint Committee also heard evidence that returns to creditors and the duration of liquidations in Australia were not inconsistent with other jurisdictions⁸);
• there needs to be a review of the interplay between corporate and personal insolvency, particularly for micro, small and medium enterprises where directors who provide personal guarantees secured by the family home for business loans stand to lose everything from a business failure, and where corporate insolvency advice may well be cost prohibitive⁹; and
• the lack of data about the high number of company deregistrations (the Joint Committee heard evidence that 13 out of 14 companies are deregistered without any formal insolvency process) means that there is potential for the deregistration process to be abused (with the Joint Committee specifically recommending that ASIC collect and analyse data from an appropriate size sample of voluntary and compulsory deregistrations as to their potential insolvency¹⁰ to assist in considering this issue).

Overall, the Committee considered that a comprehensive review is required because specific amendments are unlikely to resolve fundamental issues such as these¹¹.

What would a comprehensive review look like?

Chapter 4 of the Report sets out in detail the Joint Committee’s recommendations as to the structure, scope and process for a comprehensive review including that the review be undertaken in stages by a multidisciplinary team of commissioners with a view to tabling a final report within three years.

The Joint Committee noted the following high priority topics for the comprehensive review:

• unfair preferences, voidable transactions and the insolvent trading regime; and
• priority of payments as between liquidators, employees and secured creditors, including in respect of circulating assets.

The Joint Committee also recommended that a number of other key issues be addressed in the comprehensive review including¹²:

• re-considering the principles, purposes and objectives of the insolvency regime;
• harmonisation of the corporate and personal insolvency regimes, including consideration of a uniform law and single insolvency regulator;
• the current system of insolvency pathways and potential reforms to specific pathways;
• registration requirements for small business restructuring (SBR) practitioners given limited registrations to date (as at January 2023, only one practitioner has been registered, with six applications rejected)¹³;
• insolvency practitioner remuneration, including the sustainability of the current system whereby public interest work is being performed by liquidators for no or limited pay;
• insolvency practitioner independence requirements, including consideration of whether there should be a formal separation of advice and restructuring from formal external administration appointments;
• pre-insolvency advisors, including consideration of the potential harm of ‘untrustworthy’ advisors and whether further regulation or enforcement measures are required¹⁴;
• implementation of a Public Interest Administration Fund instead of the current Assetless Administration Fund and the creation of a public liquidator for corporate insolvency; and
• reviewing statutory reporting requirements to ensure that they are fit for purpose.

Finally, while the operation of the 2019 unlawful phoenixing reforms formed part of the inquiry’s express terms of reference, the Joint Committee considered that more time may be necessary to determine the effectiveness of these reforms and whether any further changes in this area are required¹⁵.

Areas for more urgent action

Given the potential time required for the completion of the comprehensive review, the Joint Committee also identified a number of reforms that could be implemented in the short term to improve the current regime.  These include the following recommendations:

• the government should implement the recommendations from the 2021 Review of Insolvent Trading Safe Harbour Report¹⁶ (with further potential reforms to be addressed in the proposed comprehensive review);
• the SBR and simplified liquidations pathways should be reviewed and amended to improve useability.  As noted in our previous article, the consensus is that the reforms have been ineffective in providing low cost simplified alternatives to voluntary administration and liquidation.  Although the Joint Committee noted that there has recently been an increase in the use of SBR¹⁷, the Joint Committee recommended that the government consider and consult on potential reforms to both pathways as soon as possible¹⁸;
• improved insolvency data should be collected for a variety of reasons including:
  • to assist in the comprehensive review and better informing policy¹⁹; and
  • to better understand whether the deregistration process is being abused²⁰;
• the registration requirements for liquidators should be amended in circumstances where there is a significant gender imbalance (having improved in the last decade so that female representation is now at one in ten)²¹;
• changes should be made to the Assetless Administration Fund to ensure that it is adequate for its purpose in circumstances where enforcement outcomes are presently “underwhelming”²² (pending consideration by the comprehensive review of its replacement by a Public Interest Administration Fund and the creation of a public liquidator);
• changes should be made to the current statutory reporting requirements (and to ASIC’s responses to reporting) pending the comprehensive review²³;
• the ATO should adopt model creditor guidelines similar to its model litigant obligations²⁴;
• the framework of the Fair Entitlements Guarantee should be improved to ensure that it is accessible as a scheme of last resort and to prevent its abuse²⁵;
• the government should provide its response to the 2015 Whittaker Final Report on the Review of the Personal Property Securities Act 2009 in circumstances where:
  • incorrect registrations leave secured parties exposed to the risk of their security interests being void in an external administration; and
  • recent analysis of registrations by the Behavioural Economics Team determined that 22.3% of transactions using the original form are incorrect and 12.8% are inaccurate even after interventions to improve accuracy²⁶; and

• amendments should be made to the Corporations Act to clarify the treatment of trusts.  As noted in our previous article, there was general support for clarification of the law in respect of insolvent trusts.  The Joint Committee recommended that the Corporations Act be amended to expressly clarify the treatment of trusts with corporate trustees during insolvency²⁷, noting²⁸:
  • the “near universal support” for the proposal that the Corporations Act be amended so that liquidators of corporate trustees may deal with trust assets (without requiring separate/additional Court intervention); and
  • its support for the proposed public register of beneficial interests to increase transparency of the identity of entities behind a trust.

Lavan comment

While the delivery of the Report is an important step, it is now for the government to provide its response as to which if any of the Joint Committee’s recommendations will be implemented and when.

The Report highlights a number of areas in the current corporate insolvency regime that clearly need change, but care will need to be taken that any subsequent reforms actually deliver real improvements in terms of access, operation and outcomes rather that just replacing the current problems with new ones.

We will be delivering more updates as this process continues to unfold.

In the meantime, if you have any questions about the Report or any of the Joint Committee’s proposed changes to the corporate insolvency system, the experienced Lavan team is here to help.