Chapter 4A comprehensive review: structure, scope and process
4.1This chapter follows directly on from recommendation made in the previous chapter—that the government commission a comprehensive and independent review of the insolvency system in Australia—and considers the possible structure, process, and scope of such a review. In turn, this chapter considers:
who might be given the task of undertaking the review;
likely research and consultation processes; and
international examples of reform processes that might help inform the conduct of an Australian comprehensive review.
4.2This chapter also considers how long a review might take, and how the conduct of a comprehensive review might relate to the need to progress certain reforms in a timely manner and thus independent of—and possibly in advance of—a comprehensive review.
4.3Finally, this chapter considers the appropriate scope and coverage of a comprehensive review, and the extent to which this should be set out in a review’s terms of reference.
Review structure and process
Who should conduct a comprehensive review?
4.4Some inquiry participants offered recommendations as to how a comprehensive review might be conducted, including which body would be best tasked with undertaking such a review.
4.5Not surprisingly, the Harmer Report was offered as a potential review model, with the ALRC nominated by many as a good choice to conduct the review. ARITA noted the ALRC’s ongoing work in relation to the Corporations Act, while suggesting that economic expertise might be added to the ALRC for the purposes of an insolvency review:
Given the review is likely to touch on administrative, commercial and economic matters, it may be appropriate for the Attorney General to appoint suitable persons as part-time Commissioners pursuant to section 7(d) of the ALRC Act. If financial or economic staff resources were required, we are sure these could be seconded from the [Productivity Commission]...
4.6Some witnesses noted that a comprehensive review might build on the ALRC’s ongoing inquiry into the simplification of the legislative framework for corporations and financial services regulation. However, it was generally acknowledged that a holistic review of insolvency law would be broader, given the ALRC’s current inquiry is a review of legislative structure rather than of policy settings.
4.7Mr Murray and Professor Harris also suggested either the ALRC or the Productivity Commission could lead a review, subject to those bodies being able to draw on both legal and economic expertise:
The nature of these failings in the present system is such that a financial, organisational and systems review is required, in conjunction with a legal review. If the ALRC can tap into other disciplines, including economics, finance, complex systems, IT and AI, then it would be suitable. Alternatively, the Productivity Commission may also be suitable given that an important aspect of any insolvency system is its efficiency and effectiveness in economic terms; again though, as long as it can access other relevant disciplines.
4.8Other witnesses suggested a comprehensive review could be undertaken by a body with economic and/or legal expertise, which could be either the Productivity Commission or the ALRC, a combination of the two, or a body similar to the former Corporations and Markets Advisory Committee (CAMAC) which was abolished in 2018.
4.9Government agencies and departments, such as ASIC and Treasury, suggested that if the government were to decide to conduct a comprehensive review, the choice of agency or body tasked with undertaking a review would depend on what the government was seeking to achieve and the review terms of reference. At the same time, they acknowledged a review would likely be a multidisciplinary exercise, requiring both legal and economic expertise.
4.10Mr Tom Dickson, Treasury, suggested that the choice between the ALRC and the Productivity Commission might be a ‘false dichotomy’:
If you wanted to expand the opportunities that you have to nail what you might consider to be a once-in-a-lifetime review, you might want to think about not confining yourself to those two agencies. Starting with the capability, because each does have advantages, for instance the Productivity Commission does have excellent expertise in relation to thinking about things through an economic lens. We know the ALRC is excellent in its capabilities in relation to looking at law reform too. In an ideal world you would be able to take advantage of the various disciplines and not be confined.
Committee view
4.11The committee agrees that a comprehensive review would require expert understanding of the legislative frameworks, case law and regulatory arrangements that apply to both corporate and personal insolvency law, including appropriate expertise in relation to international frameworks. Equally, a comprehensive review should have access to expert knowledge and capability in respect to the economic and financial imperatives of corporate insolvency.
4.12Whether 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. Subject to the government having regard to these considerations, the committee considers the question of who should conduct a comprehensive review should be left to the government.
Likely consultation processes and the importance of robust data
4.13Some witnesses pointed to the processes a comprehensive review would likely need to undertake, including: research and data-driven analysis on the state of Australia’s insolvency laws; comparison to other jurisdictions; written submissions and hearings; engagement with interested members of the public and stakeholders, such as professional associations, industry bodies, academics and other experts; and the preparation of consultation papers and draft recommendations.
4.14Both Treasury and AGD underlined the importance of broad and in-depth consultation and consideration of the perspectives of various stakeholders connected to the insolvency system. AGD advised that any review:
…would need to take a fresh look at what the industry needs right now—… broad stakeholder consultation would be critical, particularly if you're considering a root-and-branch review with an intention of some form of harmonisation, given the two different roles that the systems play. You wouldn't want to exclude consideration of one system in light of the other, so it would need to be very carefully balanced to ensure that outcome.
4.15During the inquiry, it was observed that part of the challenge of assessing if the corporate insolvency system is meeting its objectives, and if not why not, was imperfect data on insolvency. For example, the Business Law Section of the Law Council of Australia (BLS LCA) submitted that an extensive review of the insolvency regime ‘would need to include material data gathering and analysis’. The paucity of data on some issues, as highlighted in much of the evidence to the committee, presented a real challenge.
4.16As noted in a 2017 IMF Working Paper, The Use of Data in Assessing and Designing Insolvency Systems, ‘measuring the effectiveness and efficiency of insolvency procedures begins with establishing the desired objectives, or outcomes of an insolvency system’. The IMF’s paper, while explaining the importance of a proper empirical foundation in assessing an insolvency system, argues that the value of such data is contingent on a clear understanding of the system’s objectives. The IMF’s reasoning would support a comprehensive review starting with a consideration of the principles and objectives of insolvency law (as per recommendation 2 of this report), before in turn identifying what data gaps might exist. This point is considered further in chapter 6.
International examples of insolvency law reform processes
4.17Other inquiry participants pointed to exercises in insolvency law reform in other countries, including comprehensive review and reform processes that Australian policymakers could potentially draw on or learn from.
4.18The BLS LCA noted that a number of Australian private practice lawyers had participated in some of these international processes:
In any root and branch review of Australian insolvency law, it is important that any inquiry utilise the resource of the extensive experience of Australian practitioners and academics in these international processes.
4.19Deloitte pointed to the Singaporean implementation of ‘significant reforms which consolidated their personal and corporate insolvency laws into a single piece of legislation which had the objective of simplifying and modernising their insolvency framework’.
4.20Mr Murray and Professor Harris wrote that it was always valuable to consider reform processes undertaken in comparable jurisdictions. They highlighted broad-ranging reviews in Singapore, India and the United States, along with ‘broad scale’ insolvency law reforms in recent years in the European Union and United Kingdom.
4.21The AIIP suggested that a ‘comprehensive and thorough examination of corporate insolvency in Australia’ should have regard to international examples, including the United States and Singapore:
In Singapore a major overhaul of its restructuring and insolvency legislation was the culmination of a process that was ongoing for approximately 10- years, including participation by a cross section of stakeholders with relevant specialist skill to review the existing law to determine its effectiveness relative to consideration of the 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 these goals.
Could a comprehensive review inadvertently slow necessary reforms?
4.22In its examination of calls for a comprehensive review, the committee sought to understand the potential investment of time and resources that might be required and weigh the value of a review against the risk such a comprehensive and complex exercise might delay or distract from more timely and potentially easier-to-achieve reforms.
4.23The Harmer Report followed a lengthy process, with the review taking the ALRC approximately five years to complete, from 1983 to 1988. It took a further five years for the most important resulting reforms to be legislated and implemented.
4.24Mr Dickson, Treasury, noted that Productivity Commission reviews typically took 12 to 18months, while ALRC processes were commonly multiyear exercises. How long an insolvency comprehensive review would take, he added, would very much depend on its terms of reference and what the government was seeking to achieve.
4.25For its part, SCoLA suggested a three-year timeframe for a comprehensive review would be appropriate. This would allow sufficient time for a ‘series of discussion papers, public and private consultations and broad engagement with stakeholders (not just lawyers and insolvency practitioners)’.
4.26The BLS LCA suggested that while a comprehensive review would be a multiyear process, it did not have to take as long as the Harmer Report. The process might be expedited, it argued, if a properly resourced review was instructed to:
…not only to settle on particular proposed policy positions but to engage in the legislative drafting process so as to cut short any delay associated with a further consultation process.
4.27ARITA suggested that given clear guidance by the government as to the objectives of a comprehensive review, it could be completed within 12 months:
We would expect that there would be consultation with the relevant professional bodies and other stakeholders, with a draft published after eight or nine months to which stakeholders would be given six to eight weeks to respond.
4.28Asked if he supported a comprehensive review, insolvency lawyer MrBenSewell identified the tension between the value of a broad-ranging review and the need for ongoing responses to address current issues with the law:
Yes and no. Yes, because of problems with the purposes and the objectives of insolvency in Australia. I think it'd be good to clear that up. But then, on the other hand, I don't want to unnecessarily delay the reform process, because I think it's more a continual process.
4.29A number of witnesses argued the case for a comprehensive review, while at the same time suggesting other aspects of insolvency law which might be addressed more immediately. Mr Winter, ARITA, while very firmly calling for a comprehensive review, noted that such a review and implementation of any resulting reforms could take many years:
That's why we say throughout our submission that there are some low-hanging fruit, if you like, that parliament can address straightaway—things like implementing the recommendations of the safe harbour report, fixing trusts, fixing small business restructuring et cetera. We can do that quickly, but the bigger review piece is a multiyear task for the ALRC and then for government to draft.
4.30Various inquiry participants pointed to specific examples of aspects of insolvency law that might be addressed in the short term, even while a larger comprehensive review proceeded. Professor Hargovan, for example, suggested that a ban on the auto ejection of trustees upon insolvency (a topic considered in chapter 10) might be one such change that could be addressed separate to a comprehensive review. As another example, he pointed to certain procedural efficiencies that might be relatively easily achieved in relation to the operation of voluntary administration.
4.31Associate Professor Wellard similarly pointed ‘to some quick fixes’, including to ‘long-standing errors, technical errors in the legislative drafting of the Insolvency Law Reform Act suite of reforms’ that could be addressed outside a comprehensive review. Professor Mason also agreed with the general proposition that in addition to a comprehensive review, there was a category of reforms that could be introduced in the shorter term to improve the current system.
4.32Other examples, too numerous to mention here, were provided by inquiry participants of reforms that might be pursued relatively quickly and outside of a presumably lengthy review and reform process. These other examples are raised at points throughout the rest of this report.
4.33Asked if there were some reforms that should be progressed now, even were a comprehensive review to proceed, SCoLA reiterated its concerns (set out in the previous chapter) about the risks of piecemeal reforms:
We recommend against short term quick fixes and suggest that reforms be considered holistically as part of a root and branch review. The history of insolvency law (and indeed, much of the history of corporate law) in Australia is replete with small changes designed to address particular concerns of specific stakeholders and unfortunately often without adequate public consultation. This has resulted in a bloated insolvency law that is filled with errors and inconsistencies and a system that fundamentally does not meet its stated goals. We have an insolvency system that we cannot afford and that produces no returns to general creditors in almost every case in circumstances where even the insolvency practitioners are not getting paid for their work in perhaps as much as 30-40% of their appointments. This is a system that no stakeholders are happy with and needs a fundamental rethink to provide a modern insolvency law that is fit for purpose, efficient and effective.
4.34However, Professor Brand, the Society of Corporate Law Academics (SCoLA), responding to the question of how to balance the need for action on pressing matters against the value of a comprehensive review, allowed that both processes might proceed at once:
They're not mutually exclusive. That's the beauty of it. You will have already heard lots of evidence about lots of detail that can be tweaked relatively easily and uncontroversially, which will improve things, fix things and allow unintended consequences to be removed.
But we were leaders in insolvency regulation in the early nineties when I was in insolvency practice, as a practitioner. The advice that we're getting from our expert committee is that we are well off the pace now. There are a number of common law jurisdictions around the world which have done clever things which are working well. We've got the capacity to get back up to a much more ideal model—a much more front-end-of-the-curve model, which could pay significant dividends for the economy as a whole.
4.35When it was put to Professor Brand that a comprehensive review would take significant time, she indicated that the investment of time and resources would be worth it over time:
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].
4.36Like Professor Brand, ARITA acknowledged the challenges of a comprehensive reform process, but argued the benefits would justify this effort:
We understand that the development of such a framework will take significant effort on behalf of policymakers and stakeholders alike. But law reform is the ordinary business of governments—ordinary business, in this case, that has been neglected for decades. The benefits of undertaking this reform will include more businesses surviving periods of financial difficulty; more efficient allocation of labour and capital; less dislocation of employment; reduced compliance and transaction costs; greater creditor recovery; more effective identification of unlawful activity and, therefore, a reduction of the social cost of such activity; reduced administrative costs to governments; and reduced risk of interruption of nationally significant goods and services markets and less distress for individual members of the community.
4.37Asked how government might conduct a comprehensive review while at once pursuing more pressing reforms, Treasury cautioned that the capacity of stakeholders to provide input to reform processes was finite. Even in pursuing reforms that might be considered relatively minor, careful consideration should be given to how pressing those reforms were:
One thing that [Treasury is] acutely conscious of is the impost on stakeholders' time when it comes to reform processes. If we were doing a change that you could consider to be relatively minor, if you're changing the law, then you're necessarily needing to consult with people to make sure that that law is going to work as it's intended to. It means engaging with a range of stakeholders who then need to, in some cases, consult with their membership, write briefings, prepare reports, prepare advice and lodge submissions. Even for what you might consider to be relatively minor reforms, there could be quite a material impact on stakeholders. If you're doing a root-and-branch review, my suspicion is that, from a stakeholder point of view, they actually might prefer to spend that time, those precious hours or days that they have, focusing on that once-in-a-lifetime opportunity.
Committee view
4.38The committee is mindful that a comprehensive review and any resulting reform process would likely require a considerable investment of time and other resources, both by the government and key stakeholders. The committee is firmly of the view that this investment will be worth it, given the importance of a robust, fit-for-purpose insolvency framework.
4.39While a comprehensive review may delay some reform actions, the committee notes the value in generally progressing reforms as part of a holistic process. The committee again observes the problems that can arise when reforms are progressed in a reactive and piecemeal fashion (as discussed in the previous chapter). Nonetheless, at points through this report this committee has identified some reform actions that should be progressed independent of a comprehensive review. 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.
4.40The committee also notes that the work of a comprehensive review could be progressed in stages. 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. This approach would be consistent with that taken in the ALRC’s ongoing Review of the Legislative Framework for Corporations and Financial Services Regulation, which complements ongoing work by Treasury to simplify relevant legislation.
4.41The committee considers that the government should set a clear timetable for a comprehensive review. While it should be left to government to determine this timetable, the committee suggests a final report within three years of the review’s commencement would likely be achievable and appropriate.
Review scope and content
4.42This part of the chapter considers the appropriate scope and content of a comprehensive review.
Articulating the objective of a comprehensive review
4.43Ms Linacre, AGD, observed that it was important to define the problems a comprehensive review was intended to address, and not do ‘a root and branch [review] for the purpose of doing a root and branch [review]’. She suggested that, should this committee make a recommendation for a comprehensive review, it should provide guidance as to its purposes:
I would just say again that the terms of reference would be really critical. We talk about a root-and-branch review in general terms, but what that review is seeking to achieve and what you're trying to get out of it is quite critical in determining who would be undertaking it. Are you trying to look at the economic impact of the system and determine on that basis whether law reform is appropriate? That may lead you down one path. But if you've determined law reform will be an appropriate mechanism to manage harmonisation for the experience of stakeholders, that may be different. I think these are things that the committee will need to consider in terms of why you are recommending a review and what its purpose [is].
4.44Likewise, Ms Lawrence, CAANZ, told the committee that while a comprehensive review would be warranted:
…the caveat is that it has to have a purpose. Just reviewing legislation won't achieve structural change. Is the review to bring the two insolvency regimes together? Is it to align insolvency better with the natural business life cycle? Is it with a view to bringing in the nuances that you yourself have referred to and understanding that what a small business needs, what a microbusiness needs and what a larger business needs are quite different? So we do support a review, but we'd like to understand the purpose of that review before it commences.
4.45The committee considered the extent to which terms of reference for a comprehensive review should refer to specific areas of reform. The BLS LCS observed that the Harmer Report terms of reference were ‘short and very broad’. The terms of reference simply referred to:
…the law and practice relating to the insolvency of both individuals and bodies corporate, in particular—
(i)the provisions of the Bankruptcy Act 1966, in its application to both business and non-business debtors;
(ii)Parts VIII, X, XII of the Companies Act 1981 so far as they are related to or are concerned with the insolvency of companies;
(iii)any related matter.
4.46The BLS LCA noted that while there might be a need to be more specific than the Harmer Report terms of reference, care should nonetheless be taken ‘not to box in any subsequent inquiry unnecessarily’.
Key issues for consideration by the comprehensive review
4.47As set out in the remainder of this report, there are a range of issues that the committee has determined should be considered as part of a comprehensive review, including:
re-examining the principles, purposes, and objectives of the insolvency system (recommendation 2);
the harmonisation of the personal and corporate insolvency systems – as discussed in chapter 5 (see recommendation 3);
the need for improved insolvency data – as discussed in chapter 6 (see recommendation 4);
the current system of insolvency pathways, and reforms to specific pathways – as discussed in chapter 7 (see recommendations 5, 6 and 8);
the requirements for the registration of small business restructuring practitioners – as discussed in chapter 8 (see recommendation 10);
issues relating to the remuneration of insolvency practitioners – as discussed in chapter 8 (see recommendation 12);
the independence requirements for insolvency practitioners – as discussed in chapter 8 (see recommendation 13);
issues associated with of ‘untrustworthy pre-insolvency advisors’ – as discussed in chapter 8 (see recommendation 14);
options for funding the administrations of assetless companies, including reforms to the Assetless Administration Fund and the creation of a public liquidator for corporate insolvency – as discussed in chapter 9 (see recommendation 17);
statutory reporting obligations that apply to insolvency practitioners – as discussed in chapter 10 (see recommendation 18);
the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework – as discussed in chapter 10 (see recommendation 19);
overall economic and social benefits and costs of ATO relief to potentially insolvent companies in hard economic times, in the context of the impacts on the purposes of the insolvency system – as discussed in chapter 10 (see recommendation 20);
the relative priority of employees, liquidators and secured creditors, including in relation to circulating assets under Section 561 of the Corporations Act – as discussed in chapter 11 (see recommendation 21);
unfair preferences and voidable transactions – as discussed in chapter 13 (see recommendation 25); and
improving the insolvency process for trusts – as discussed in chapter 14 (see recommendation 26).
Committee view
4.48The committee notes that the Harmer Report was provided with very broad terms of reference, and evidence suggests this ensured the ALRC was not ‘boxed in’ or prevented from following the evidence.
4.49Nonetheless, the committee considers that it will assist both a review and those who wish to engage with it if the government sets out in the terms of reference key matters to be addressed. This could be done without necessarily limiting the review to those matters. Those key matters, as the committee views them, are set out over the course of the remaining chapters.
Consideration of the purposes of insolvency law in a comprehensive review
4.50Mr Neil Hannan submitted that it was ‘essential’ that any comprehensive review of Australia’s insolvency law consider what legal predisposition the system should take. A review, he explained, should examine:
…the purpose of and the framework surrounding our insolvency system and the natural tensions that exist within the same between the interests of the debtor and the interests of the creditors. Such a review would then have to look at whether as a matter of public policy our system should have a predisposition toward restructuring with a view of saving business or liquidation and receivership which allows creditors to achieve a maximum return.
Any change toward a restructuring predisposition would require an assessment of what rights secured creditors should have in a restructuring or liquidation and the extent to which their current rights should be restricted…
4.51SCoLA wrote that a comprehensive review should:
…consider why we have insolvency law, what goals it can and should aim for and how best to achieve those goals. This should include whether Australia should have a unified insolvency statute (as many other countries have), whether there should be a single insolvency regulator and what the balance between public and private work within insolvency should be (eg should there be a government liquidator?).
4.52SCoLA added that:
…one of the first tasks of a root and branch review should be to determine what the goals of an effective modern insolvency law should be. These goals need to be realistic and achievable. There is little point in designing and insolvency regime around unsecured creditor rights and powers if unsecured creditors rarely receive any financial return in insolvencies and hence are rationally apathetic.
4.53Mr Murray and Professor Harris envisaged a comprehensive review as a staged process:
…based upon consultations held and decisions made about the principles, purposes and aims of the insolvency system. The review should ascertain what the appropriate goals and scope of a modern insolvency law for Australia should be.
4.54TMA submitted that a comprehensive review should address the adequacy of the current objectives of the system, and proceed accordingly:
In our view, this is a key consideration of any review, that is to ensure that the aims and intention of the legislation are clear up front. Further, in our view, this would include consideration of how businesses can be more effectively turned around, with jobs saved, suppliers keeping business and the consequential positive effects on the economy of saving businesses from liquidation.
4.55Some inquiry participants argued that the government should clearly articulate what it considered the purposes of insolvency law in the terms of reference given to a comprehensive review. Mr Michael Brennan (Offermans) indicated that while he was not opposed to a root-and-branch review, the government would need to first be clear on what it expects from the insolvency system:
I’m not averse to a root-and-branch review. Given the last one was 30-odd years ago, I think it's well time for us to do it again. The key is understanding what the government wants of the insolvency system. When we talk about the bandaid solution of different bits and pieces that have happened to our legislation over time, it's because the goalposts shift marginally or because of an event like COVID where we try to be all things to all people. That's really why we need to have government direction on what it wants out of the insolvency process.
4.56Treasury was asked whether a comprehensive review should itself consider the purposes of the insolvency system, or whether this should be a separate pre-review process that would then inform the review terms of reference. MrDickson, Treasury, indicated that there would be pros and cons for each approach:
If you were to establish the objectives of the system and those objectives were agreed by government first then the review team that comes after that has an easier time of thinking about how those objectives would be achieved. I'm really thinking from the perspective of the review team itself. I imagine the review team that then, in contrast to that, was given both the task of setting an objective and then figuring out how to achieve that objective—if it didn't get the first part of that exercise correct itself then it would potentially find itself off course.
Committee view
4.57The committee recognises that the outcomes of a comprehensive review, and resulting recommendations for reform, will be very much shaped by how the principles and purposes of insolvency law are defined.
4.58The committee considers that an early task of a comprehensive review should be to consider and report on the appropriate principles and objectives 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.
4.59The committee would expect that a comprehensive review would, in the ordinary conduct of its work, consult with government and seek to understand its views on the objects of insolvency law. It may also be appropriate for the review, after presenting a report on the purposes of insolvency law, to provide the government with an opportunity to respond and affirm or vary the report’s findings and recommendations. Moreover, while it is not suggested that the government should seek to pre-define and lock in those purposes in the review terms of reference, the government might still convey a view of those purposes in initiating a review. The committee notes that the ALRC Review of the Legislative Framework for Corporations and Financial Services Regulation provides an example of a review that has proceeded in multiple stages, with the government responding to an early report, while further work continues on the review.
4.60The committee would also expect that a comprehensive review would have regard to the evidence put in this inquiry, and summarised in this report, as to the purposes of insolvency law.
4.61The committee recommends that 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.