Submission update: PJC inquiry into Corporate Insolvency in Australia - Report findings

14/07/2023

On 12 July 2023, the Parliamentary Joint Committee on Corporations and Financial Services presented the final report of its inquiry into corporate insolvency in Australia.

This report is a significant step forward for the profession and all stakeholders as we look to modernise and future-proof Australia’s corporate and personal insolvency regimes. It is a comprehensive yet practical report recognising the overarching need for simplified and effective solutions for those in and dealing with financial distress.

Pleasingly, the vast majority of the 28 recommendations from the report are consistent with recommendations made by ARITA, or address issues raised in our submissions. Most notably, the Committee’s finding that there is a need for an independent and comprehensive review of the insolvency system, including both corporate and personal insolvency, echoes ARITA long-standing call for a ‘root and branch’ review.

With the report now clearly highlighting the areas of insolvency law that need working on, it is proper that that work now goes to an expert law reform group, like the Australian Law Reform Commission, to work with subject matter experts like ARITA on ensuring we rewrite the law to be global best practice.

A full list of the Committee’s recommendations is included at the end of this alert.

Helpfully, the Committee has made findings that can be addressed by near-term actions, as well as matters for consideration as part of a comprehensive review, and recognises that any overlap between some of these should not delay them being considered by ASIC or the Government.

We have prepared the below summary of the Committee’s recommendations, noting the ones that are consistent with ARITA’s recommendations, submissions and/or evidence.

ARITA is pleased with the extensive inclusion of its recommendations, submissions and evidence to the inquiry in the report, but we specifically note the following references to ARITA’s positions made by Committee:

• that Australia’s insolvency law should have a clear statement of objectives
• ARITA’s ‘very strong belief’ that a comprehensive review was required to address the cost and complexity that had come to characterise the system
• the need for a ‘single unified insolvency law’ that encourages ‘a turnaround and restructuring culture that is focused first on saving viable but distressed businesses’; and ‘enhance creditor outcomes by reducing unnecessary processes and other regulatory burdens’
• that the complexity of the SBR pathway was counterproductive to its purpose of being more accessible to SMEs and outlined ARITA’s reform suggestions
• the need for further reductions in complexity and cost of the simplified liquidation process and noted ARITA’s proposed reforms to bring the simplified liquidation pathway closer to its policy intent
• that more needs to be done to ‘ensure that the profession is more reflective of the community that it serves’ and noted ARITA’s efforts to improve diversity and inclusion through its Balance Taskforce, which is initially focusing on gender and age diversity
• the significant amount of unfunded work done by registered liquidators, estimated to be around $100 million per year, and the need for the government to fund the public functions done by liquidators
• the extent of work required by liquidators to undertake statutory reporting to ASIC, and provided examples of such reports receiving an instantaneous response from ASIC indicating that no further action is required
• the rising concern amongst some insolvency practitioners about the influence of pre-insolvency advisors expressed in ARITA’s 2019 member survey and the need for the introduction of a licensing scheme
• ARITA’s support of the Productivity Commission’s 2015 recommendation that the AA Fund be changed and renamed the ‘Public Interest Administration Fund’, to better reflect a public rather than creditor interest in most small liquidations
• the need for a review of the current reporting requirements in order to ‘identify and recommend the reduction and/or elimination of unnecessary regulatory burdens’, including the replacement of the prescriptive reporting requirements under the Corporations Act with a simpler format such as those under section 19 of the Bankruptcy Act.

ARITA looks forward to seeing the Government’s response to the report and the next steps towards a comprehensive review. We will also continue to engage with the Government in relation to progressing the near-term recommendations.

We will continue to advocate for a number of practical recommendations made by ARITA that were not addressed in the report, including the need for greater investment in educating company directors in proactively managing financial distress and in advising creditors of their rights and obligations in an insolvency.

ARITA thanks all members for their contributions, support and feedback throughout the inquiry process.

Committee Recommendations

The Committee recommends that:

1. 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.

2. The comprehensive review, as part of its early work, consider and report on the appropriate principles and objectives of insolvency law. The committee further recommends that the government respond quickly to this first report of the comprehensive review to allow the comprehensive review to continue with further stages of work in a timely way.
   
   
3. The comprehensive review consider and make recommendations on options to enhance public interest objectives and the effectiveness of, and interaction between, the personal and corporate insolvency systems.
   
   
4. The Australian Securities and Investments Commission collect high quality, granular data in relation to insolvency and provide this data in a timely way to relevant government agencies and regulators.
   
   
5. The proposed comprehensive review of insolvency consult data holders, researchers, industry participants, and public sector organisations to progress the access to and analysis of insolvency data.
   
   
6. The proposed comprehensive review consider and report on the current system of corporate insolvency pathways from a holistic systems analysis perspective.
   
   
7. 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.
   
   
8. As soon as practicable the government consider and consult on potential reforms to the:
   
   • small business restructuring pathway, and
   • simplified liquidation pathway.
     
     
9. The comprehensive review consider the:
   
   • voluntary administration pathway, and
   • members voluntary liquidation pathway.
     
     
10. The Australian Securities and Investments Commission collect and analyse data from an appropriately sized sample of voluntary and compulsory deregistrations, to provide greater visibility of the solvency status of deregistered companies.
    
    
11. The comprehensive review consider the requirements for the registration of small business restructuring practitioners to understand the reasons for the limited number of registrations to date.
    
    
12. 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. Reforms could potentially include:
    
    • increasing the period over which experience is demonstrated, or
    • replacing part of the required hours with a competency-based exam.
      
      
13. the comprehensive review include consideration of the remuneration of insolvency practitioners, including:
    
    • the extent to which public interest work carried out by liquidators for no or limited pay is sustainable, and
    • the impact of this on all stakeholders in external administrations.
      
      
14. The comprehensive review include consideration of the operation, efficacy and efficiency of the current independence requirements for insolvency practitioners, including:
    
    • whether the current requirements are achieving the policy settings that inform them and whether these policy settings are optimal, and
    • the advantages and disadvantages of formally separating the roles of advice and restructuring from formal appointments to liquidations and administrations.
      
      
15. The comprehensive review include consideration of the nature and extent of the harm posed by ‘untrustworthy pre-insolvency advisors’, and whether further regulation or enforcement measures are needed to address this issue. The committee further recommends that in the interim, the government take prompt action to improve the regulation and active enforcement of pre-insolvency advisors.
    
    
16. The government consider changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives.
    
    
17. The Department of the Treasury consider assessing the potential benefit of the Public Interest Administration Fund proposed by the Productivity Commission in 2015, including the impacts of the required increase on the annual review fee for company renewals; and either consider implementing the proposal, or provide that analysis to a comprehensive review.
    
    
18. 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.
    
    
19. The comprehensive review consider whether the current statutory reporting obligations for insolvency practitioners are best serving the integrity, efficiency, and efficacy of the Australian corporate insolvency framework, including (but not limited to):
    
    • the ability of the Australian Securities and Investments Commission (ASIC) to appropriately process, utilise and respond to initial statutory reports on current resources, and
    • the appropriateness of existing reporting thresholds, having regard to their regulatory value as well as the burden imposed on insolvency practitioners.
      
      
20. The comprehensive review examine the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework.
    
    
21. The comprehensive review analyse and make recommendations on the overall economic and social benefits and costs of Australian Taxation Office relief to potentially insolvent companies in hard economic times, in the context of the impacts on the purposes of the insolvency system.
    
    
22. The Australian Taxation Office consult, act on and publish model creditor guidelines, consistent with its model litigant obligations.
    
    
23. The comprehensive review consider the relative priority of employees, liquidators and secured creditors, including the priority over circulating assets under s 561 of the Corporations Act 2001. The committee further recommends that this be a high priority topic for the comprehensive review.
    
    
24. The government develop reforms to improve the framework designed to ensure the policy objective of access to the Fair Entitlements Guarantee as a scheme of last resort, both to prevent misuse by novel schemes of arrangement, phoenixing and other practices, and to ensure capture of all individuals with valid entitlements.
    
    
25. The comprehensive review consider and report on franchising insolvency issues.
    
    
26. The government provide a formal response to the Whittaker Review which was completed in 2015.
    
    
27. The comprehensive review consider unfair preferences and voidable transactions as a core aspect of potential insolvency reform.
    
    
28. The government amends the Corporations Act 2001 to expressly clarify the treatment of trusts with corporate trustees during insolvency.
    

Read the full report here.