Chapter 5Harmonisation of corporate and personal insolvency
5.1This chapter considers the effects of the division between personal and corporate insolvency law, and whether this division reflects the needs of modern Australian business. A central concern in this chapter is the complexity this division can create for small and medium businesses, where the boundaries between personal and corporate debt are often poorly defined.
5.2In turn, this chapter assesses calls for greater harmonisation of insolvency law, including the implementation of a unified insolvency law administered by a single insolvency regulator.
Overview of the division between corporate and personal insolvency
5.3The legislative, regulatory and judicial division of personal and corporate insolvency is summarised in Keay's Insolvency:
The insolvency of individuals is governed by the Bankruptcy Act 1966 (Cth), including Sch 2 of the Bankruptcy Act, and the rules, and the Bankruptcy Regulations 2021 (Cth). This regime is administered and regulated by the Australian Financial Security Authority (AFSA), which houses the government trustee, the Official Trustee in Bankruptcy, the Official Receiver and the Inspector-General in Bankruptcy, along with the Personal Property Securities Register. The relevant courts are the Federal Court of Australia and the Federal Circuit and Family Court of Australia, with the state and territory Supreme Courts having only incidental jurisdiction.
Corporate insolvency is governed by the Corporations Act 2001 (Cth), including Sch 2 of the Corporations Act, and the rules, and the Corporations Regulations 2001 (Cth), with the regime regulated by the Australian Securities and Investments Commission (ASIC), among its many other responsibilities. Significant corporate insolvency jurisdiction is conferred specifically on the “Courts” set out in s 57AA of the Corporations Act, being the Federal Court of Australia, the Supreme Courts of the States and Territories. The Federal Circuit and Family Court has no direct corporate insolvency jurisdiction. However, the Corporations Act also gives jurisdiction to “courts” more generally, being any courts, including lower district and county courts.
5.4Put simply, whether the insolvency process of a business is governed by the personal or corporate insolvency regime depends on the legal form of that business, rather than its economic form. An incorporated company has the benefit of limited liability, meaning ‘in the event of business failure, members are not personally liable for the debts of the business and only stand to lose their paid-up share capital’. Incorporated companies are subject to the corporate insolvency regime. Where a business is set up as a sole trader or a partnership, there is no legal separation between the business owners and the business, meaning the personal insolvency system may be relevant, even when debts are business-related.
5.5Australian Bureau of Statistics (ABS) figures show that Australian businesses, which in absolute terms are overwhelmingly small and medium enterprises (SMEs), are about evenly split between companies, on the one hand, and sole traders and partnerships on the other.
5.6If a company director has provided a personal guarantee for company debts, they are also personally liable for those debts, and subject to the Bankruptcy Act and the personal insolvency regime.
5.7The division between the personal and corporate insolvency systems appears to derive from historical circumstance, rather than being reflective of any specific policy rationale or intent. Mr Gavin McCosker, ASFA, explained:
Bankruptcy was previously a courts-based process and relies on a federal head of power under the Constitution, whereas corporate insolvency relies on referred powers from the states under the Corporations Act regime. That’s just one of the historical factors leading to the current situation.
5.8Mr Michael Murray and Professor Rosalind Mason similarly advised that the division in insolvency law was ‘not based upon policy but on a constitutional quirk at federation based on a limited view of the federal power in respect of corporations, since discounted’.
5.9The Department of the Treasury (Treasury) agreed that the division in insolvency law might be attributed to historical factors, rather than any deliberate policy rationale in the first instance. While not disagreeing, MsZoeIrwin, from Treasury, also referred to ‘more scope for complexity in the corporate space’ relative to personal insolvencies, providing some current logic for maintaining separate systems. On notice, Treasury confirmed that personal insolvencies typically involve much smaller amounts than corporate insolvencies (see Figure 4.1 below), which is likely relevant to complexity.
Figure 4.1: Comparison of estimated total liabilities in corporate and personal insolvency
Source: Treasury, answer to question on notice (Treasury013), received 22 March 2023, p. [2].
5.10Professor Mason made the point that the differences in treatment of individuals in bankruptcy and directors of insolvent companies had deep historical origins. This, she argued, underlined the need for a comprehensive review with proper regard to the structure of the modern Australian economy:
The bankruptcy law has been around since the 1200s, and it began with worrying about absconding individuals, whereas our corporate insolvency provisions were introduced through the Corporations Act, which came about in the 1800s, for different reasons. That just underpins for me the importance of Australia looking at insolvency as a whole—it having arisen out of historical circumstance—with a more policy-driven, data-driven and thought-through approach to looking at this aspect of the cycle of business—and for individuals, given that we are very much reliant on the credit economy.
Business-related debt in personal insolvency
5.11While personal insolvency relates to individuals, the committee heard that the debts involved are often business-related. ASFA explained that the personal insolvency system includes:
…individuals and business-related insolvencies such as sole traders and partnerships. This may include company directors and/or secretaries who have given personal guarantees. […]
In 2021-22 we had active regulatory oversight of $17.7 billion in liabilities, of which $11.3 billion was business-related debt, with $10 billion addressed through bankruptcy. Business-related personal insolvencies have accounted for close to 38% of all bankruptcies since 2007. This has ranged from around 6,000 – 9,000 bankruptcies over the decade or so prior to COVID.
5.12While approximately two-thirds of the total system debt in the personal insolvency space is business-related (that is, $11.4 billion of $17.7 billion), AFSA also advised that only 23.4percent of active personal insolvencies are business‑related. Average debt for a business-related personal insolvency is $830,502, approximately 5.8times larger than the average debt in a non–business–related insolvency ($141,733) (see Figure 4.2, below).
Figure 4.2: Distribution of debtor liabilities by business-related personal insolvencies
Source: AFSA, Supplementary submission 7.1, p. 13.
Does the division of insolvency systems reflect business practice?
5.13A range of inquiry participants argued the division of personal and corporate insolvency is inconsistent with the operating reality of many SMEs, where the lines between personal and business debt were often unclear.
5.14Mr Bruce Billson, of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), explained that for small businesses, the interconnections between business and personal interests had implications for how those businesses engaged with the insolvency system:
The law basically says we've got the oil of an enterprise and the water of an individual. In the space we operate in, virtually everything is salad dressing—it's a combination. There are 2.5 [million] actively trading enterprises and about 950,000 are incorporated. […] The vast majority aren't incorporated. There's a range of other structures and many of them inherently have that blend, that mash together, of business interest and personal interest. Even if you are incorporated, some of the broader policy settings force that anyway. Just under half of all small businesses accessing finance for their business have their home on the line, so there's a finance practice to create that interconnection.
5.15Where a business uses a partnership structure, further complexity can arise. DrSulette Lombard observed some of the confusion that occurs when companies that were operating in partnership with one another are liquidated, and whether the Corporations Act or the Bankruptcy Act applies:
The answer to that question has far-reaching consequences. If we say that it's the Corporations Act, we have the super priority for employee claims, for example. If we say, 'No, it's not the Corporations Act distribution principles that apply,' but we use the partnership legislation and Bankruptcy Act then none of that will apply—section 561 and the super priority, for example. We have court cases with differing opinions. In some instances, the court has said, 'Corporations Act,' and in the others it has said, 'No, it's not; it's the Bankruptcy Act.' So there's uncertainty.
In my mind, it seems odd that you have companies that are being liquidated, but they're not subject to the distribution rules under the Corporations Act. And we have this other bizarre thing in the Corporations Act called the part 5.7 body, which says that a part 5.7 body is defined as a partnership et cetera that will consist of more than five members. So, if you have a partnership with more than five members, potentially it will be subject to the Corporations Act. But if it's not more than five members—say, if it's three or four members—it's not subject to the Corporations Act. That doesn't seem right.
5.16The Society of Corporate Law Academics (SCoLA) noted that while the committee’s inquiry was into corporate insolvency, for many Australian businesses the Corporations Act was not relevant (or solely relevant) to their experience of insolvency:
The majority of micro, small and medium businesses (MSMEs) are conducted as sole traders or partnerships, not companies, and so these will come within the Bankruptcy Act 1966 (Cth) and not the Corporations Act 2001 (Cth). Any changes that are aimed at addressing MSME insolvency need to take this into account. Even if an MSME is conducted using a company form it is likely that the company's affairs may overlap with the individual owner/manager’s affairs. The use of personal guarantees by company directors and shareholders for the debts of the company is widespread throughout the economy. There is little point in seeking to save a company in financial distress if in so doing the business owner will be sent into bankruptcy. When a small business goes into insolvency, the current law requires that different people be appointed as corporate liquidators and personal bankruptcy trustees, which just increases the level of cost and complexity involved in what is likely a small asset pool of personal and corporate assets.
5.17Small businesses, AFSA wrote, ‘frequently lack the resources and expertise to effectively understand and navigate complex and, in particular for small creditors, costly insolvency systems’.
The failure of a small business, incorporated or not, has a financial impact on the owners or (if incorporated) the directors of that business, as well as the creditors. These consequences can lead to subsequent personal insolvency of a business’s owners, directors and/or its creditors.
5.18The Australian Banking Association (ABA) acknowledged some of the complexities that arise from having two separate insolvency regimes when debtors were subject to both regimes. It noted that the Banking Code of Practice (Banking Code) makes allowance for this, and provides that business assets should generally be realised before pursuing a guarantor for individual assets (typically, their residence):
There are certainly steps that have been taken over the last few years where the instances of guarantors losing their home have been reduced because secured creditors are far more focused on recovery against the business assets rather than the individual assets. Notwithstanding that, there are definitely cost complexities [from] having the two regimes separate—that is, having a voluntary administrator or receiver deal with the business assets, and, if a demand is made against the guarantor to settle their obligation and action is taken, that would follow the personal insolvency regime. There definitely is an opportunity to consider that in the future—whether that's the right way of dealing with that or whether actually there is an opportunity to combine those where, at the heart of it, there is only one individual party.
5.19The Australian Restructuring Insolvency and Turnaround Association (ARITA) argued that the division between personal and corporate insolvency was the primary cause of unnecessary complexity in system. This was, it contended, especially the case for SMEs, leading to excessive cost, reduced incentives and likelihood of business turnaround, and low returns to creditors.
5.20Mr Michael Brereton, ARITA, emphasised the challenges SME business owners face as a result of the division between corporate and personal insolvency:
At the moment you have this complicated scenario where many small‑business owners have to deal with both a registered liquidator that’s administered by ASIC and the bankruptcy trustee that’s administered by AFSA. It’s very, very complicated. It makes it extremely complicated for those individuals in the SME space and generally in small business for them to try and work out how to navigate their way through financial difficulty while having to deal with two different practitioners administered by two different bodies. It’s just extremely complicated.
5.21Elsewhere, ARITA argued:
By separating personal from corporate insolvency, and failing to address trusts and partnerships at all, the regime as a whole fails to recognise the underlying legal and economic relationships within most Australian businesses.
Prior calls for and steps toward harmonisation
5.22Previous reviews have considered the potential benefits of greater harmonisation of personal and corporate insolvency law, up to and including the unification of the two systems under a single law. Notably, the Harmer Report suggested that despite apparent advantages to a unified insolvency law, it was not a matter of ‘major significance’ or high priority:
The integration of individual and corporate insolvency into a single Act may be more efficient and result in cost savings through the use of common procedure. A single statutory scheme, controlled by one government, would also allow better control of policy and changes to the legislation could be made more expeditiously. On the other hand, there are many areas peculiar to individuals and corporations which may make complete fusion difficult, if not impossible. The issue of which courts would exercise jurisdiction would also need to be resolved. There does not appear to be any overriding need for unity. Substantive reforms in particular areas of insolvency law are more important. However, it is desirable to promote uniformity of the substance of the provisions relating to individual and corporate insolvency.
5.23This committee’s 2004 ‘stocktake’ of corporate insolvency, acknowledged that a merger of the two systems would be a ‘protracted and difficult exercise,’ and declined to make a ‘firm recommendation’ on the matter. It nonetheless concluded that a possible merger should remain an option for government consideration. It recommended that the government ‘ensure, particularly when contemplating changes to the law, that the two streams of Australia’s insolvency laws, personal bankruptcy and corporate insolvency, harmonise where possible’.
5.24The Senate Economics References Committee 2010 inquiry into liquidators and administrators also addressed the potential benefits of harmonisation of personal and corporate insolvency law. It recommended that the government commission the Australian Law Reform Commission (ALRC) to inquire into the opportunities to harmonise insolvency laws. The government noted the recommendation, while indicating that it did not consider an ALRC review necessary, given other ‘significant work’ being progressed by relevant government agencies to achieve greater harmonisation.
5.25In its 2015 review, the Productivity Commission again considered the merits of unifying corporate and personal insolvency within a single legislative and regulatory structure. The Productivity Commission concluded that the benefits of doing so would be marginal. Appearing before this inquiry, MrMichaelBrennan, Productivity Commissioner, questioned if enough had changed since 2015 to justify a different conclusion. He suggested changes in economic activity—for example, increases in platform work and the gig economy—were unlikely ‘big enough to warrant a change of view’. He noted the sizable commitment of time and resource likely required to achieve such a reform, underlining the need for caution:
I think there’s the question about whether or not the intermediate step of just trying to get greater consistency between the two regimes is a better solution than trying to bring it all together under one act and a single regulator.
Insolvency Law Reform Act 2016 (ILRA)
5.26Some steps toward greater harmonisation of the personal and corporate insolvency frameworks were taken with the ILRA. In addition to other reforms, the ILRA ‘introduced into corporate insolvency many of the processes of bankruptcy law—the registration and misconduct processes, voting mechanisms, the replacement of liquidators and more’.
5.27ARITA noted the then government’s effort toward greater alignment of the Corporations Act and Bankruptcy Act through the ILRA, but added:
…before the legislation had even commenced, we saw a drifting apart of the requirements as each regulator needed amendments to cater for their particular approaches.
5.28As Mr Murray and Professor Mason noted, as part of its development of the ILRA the then government contemplated, but ultimately decided against, aligning the requirements placed on non-compliant directors with those of non‑compliant personal insolvents.
International trends, comparisons and best-practice guidelines
5.29Internationally, there has been a growing focus on the need for insolvency law to recognise the intermingling of personal and corporate finances for SMEs. For example, the World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes refers to the need for a simplified insolvency regime for SMEs. Simplified regimes should allow ‘all personal and business debts of a natural person [to] be included in simplified insolvency proceedings’. A simplified insolvency system should also ‘address, including through procedural consolidation or coordination of linked proceedings, the treatment of personal guarantees provided for business needs of the MSE [micro to small enterprise] debtor’.
5.30The United Nations Commission on International Trade Law (UNICTRAL) has also recommended that:
States should ensure that all debts of an individual entrepreneur are addressed in a single simplified insolvency proceeding unless the State decides to subject some debts of individual entrepreneurs to other insolvency regimes, in which case procedural consolidation or coordination of linked insolvency proceedings should be ensured.
5.31Like witnesses to this inquiry, UNICTRAL noted that for MSEs:
…it may not always be possible to separate their debts into clear categories. Individual entrepreneurs, owners of limited liability MSEs and their family members may all be involved in the business and use consumer credit to finance the business either as start-up capital or for operations. Business insolvency may lead to personal or consumer insolvency once a business fails, even if the business is a separate legal entity. For that reason, separate proceedings with different access conditions and procedural steps applicable to various debts involved in MSE insolvency may not be an optimal solution.
5.32The committee also received evidence about other countries pursuing harmonisation of corporate and personal insolvency law. For example, Deloitte advised that in 2020 Singapore:
…implemented significant reforms which consolidated their personal and corporate insolvency and restructuring laws into a single piece of legislation which had the objective of simplifying and modernising their insolvency framework.
5.33A single insolvency law and insolvency regulator is standard in many other common law countries, including Canada, the United States, and now, as noted above, Singapore. Mr Tom Dickson, Treasury, noted that Australia appeared to be an ‘outlier in that we have separate corporate and personal insolvency systems’.
A single insolvency system?
5.34The committee received a range of evidence suggesting that the bifurcation in personal and corporate insolvency was problematic and should be addressed.
5.35ARITA noted that the Harmer Report had recommended against unification of insolvency laws. However, ARITA argued that changes to the economy since, including the growing complexity of small business and the rise of the gig economy, and changes in statute and case law, created a strong case for reform now. ARITA further suggested the Productivity Commission’s 2015 review had only briefly considered the possibility of unifying the two systems before recommending against it.
5.36While acknowledging the work involved in the creation of a single insolvency law, ARITA submitted that ‘at a conceptual level the bringing together of the two frameworks may not be too difficult’. To demonstrate the point, it provided a diagram showing the structural similarities between the two regimes (as reproduced below at Figure4.3).
5.37ARITA also argued that ‘bringing the regimes together would facilitate a common, consistent set of definitions, a common approach to priorities for business insolvency, a single approach to professional regulation and a single regulator’. ARITA further suggested that the ALRC’s current review of the legislative framework of the corporations and financial services regulation meant ‘now is an ideal time to remove insolvency from the Corporations Act and develop a fit for purpose, unified insolvency law’.
Figure 4.3: Comparison of structures of corporate and personal insolvency systems
Source: ARITA, Submission 36, p. 37.
5.38As noted previously, SCoLA argued that the division of corporate and personal insolvency is not reflective of how smaller businesses in Australia are structured and financed, and submitted:
A modern insolvency law needs to acknowledge the special characteristics of MSMEs and provide streamlined and flexible options for addressing their financial problems. We recommend consideration be given to forming a single insolvency regulator under a uniform Insolvency Act, which is what exists in most common law countries.
5.39Mr Murray and Professor Mason addressed their submission primarily to the less harsh obligations and duties placed on non-compliant directors relative to those applying to non-compliant bankrupts. Mr Murray explained that the obligations on a director to assist a liquidator in providing books and records and a statement of assets and liabilities was a somewhat ‘reactive obligation which requires enforcement by the liquidator or by ASIC’. In contrast, in bankruptcy ‘there’s a severe and immediate consequence of a bankrupt not having prepared their statement of affairs or provided their books and records’. Mr Murray explained that where small business directors had personal liabilities in respect of their corporate business operations and the company itself had separate liabilities, the director could be exposed to two sets of obligations:
…if the director is bankrupt, there’s one set of obligations in respect of the liquidator and there’s another set of obligations, which are quite different, in respect of the trustee. As a matter of principle, we see that as requiring attention, as being an example, I think, of many other such inconsistencies between corporate and personal insolvency which we say should be remedied in any root-and-branch review.
5.40Mr Murray and Professor Mason acknowledged the challenges of unwinding ‘the settled approaches’ of personal and corporate insolvency. Nonetheless, they contended that addressing this ‘would be necessary for any "holistic" or "root and branch" insolvency law reform’.
5.41Discussing the potential purposes of a comprehensive review, MsJillLawrence, of Chartered Accountants Australia and New Zealand (CAANZ), explained the priority for CAANZ’s members would be:
…the ability to look through corporate insolvency to personal insolvency for the small businesses. That reflects their business operating model, in which, to even start, a lender will demand that you put up personal guarantees, such as by putting your house on the line. Yet, if the business fails, that registered liquidator is unable to look through to the personal assets. You have to go through the two insolvency systems.
5.42MinterEllison questioned the split in insolvency systems and submitted that improvements could be realised through ‘harmonisation and simplification [of the] various insolvency laws relating to companies, individuals, trusts and partnerships’. To this end, it recommended:
…the conduct of a further, more comprehensive and holistic review of Australia’s corporate and personal insolvency laws, with a view to making meaningful recommendations to harmonise and simplify those laws.
5.43MinterEllison added that the referral of power since the Harmer Report from the states to the Commonwealth to legislate with respect to corporations means it is no longer necessary to ‘maintain any legislative schism’ with respect to personal and corporate insolvency:
If Australian insolvency legislation is to be rewritten, consideration should be given to whether such legislation should be contained within a single enactment encompassing all of the current matters legislated for in the Corporations Act, [Cross-Border Insolvency Act 2008] and Bankruptcy Act in an appropriately structured and streamlined manner.
5.44A range of other inquiry participants also argued that the unification of corporate and personal insolvency law should be the focus of a comprehensive review.
A single insolvency regulator?
5.45A range of witnesses also recommended the establishment of a unified regulator for corporate and personal insolvency, for the most part as a corollary to broader recommendations for a unified insolvency law.
5.46Like the idea of a unified insolvency law, the possibility of a single insolvency regulator has been raised previously. In 2010, the final report of the Senate Economics References Committee inquiry into liquidators and administrators recommended the ‘the corporate insolvency arm of ASIC be transferred to the ITSA [as AFSA was then known] to form the Australian Insolvency Practitioners Authority’. That inquiry was focused on the conduct and regulation of insolvency practitioners, and less so on the regulation of the insolvency regime in its totality. Nonetheless, the committee did point to the ‘opportunity to treat insolvency matters more holistically’, and noted the committee’s view:
…that corporate insolvency in Australia needs more priority and prominence in the regulatory framework. This will not be achieved through more funding and responsibilities for the same overburdened agency [ASIC].
5.47The government rejected the recommendation, pointing to the upfront costs of merging the regulators. The government also observed that the regulation of personal and corporate insolvency involved broader policy considerations than those addressed in the committee’s report. The government responded that the:
…removal of the responsibility for regulation of corporate insolvency from the corporate regulator would be expected to result in corporate insolvency losing its important connections with others parts of ASIC, for example in relation to major corporate administrations, regulation of insolvent trading and of director and corporate misconduct that may have been engaged in leading up to, or during, an insolvency event.
5.48Some witnesses to this inquiry not only questioned the need for separate regulators for corporate and personal insolvency, but also argued that a specialist regulator would be better suited to the regulatory task than ASIC. The Institute of Public Accountants submitted that in its view:
…ASIC’s remit is too broad, and ASIC simply does not have the resources or the inhouse expertise to adequately regulate the corporate insolvency sector. Also, there is no compelling reason why corporate insolvency and personal bankruptcy should not be jointly dealt with. […]
Our recommendation is that the insolvency function (both corporate and personal bankruptcy) should be moved to a specialist regulator which has the powers, resources, and expertise to regulate the entire sector. This should include the power to arbitrate between parties and to make determinations on the day to day actions currently carried out by the Courts. In this way it could vastly reduce legal costs and be more timely in its processes. This would present a significant benefit for many small businesses and make the practice of insolvency more attractive for professionals.
5.49ARITA, alongside its call for a unification of insolvency law, called for a new specialist insolvency regulator with responsibility for both corporate and personal insolvency matters. It noted that the United Kingdom took this approach with its Insolvency Service. ARITA was critical of how ASIC has performed its regulatory task in relation to insolvency, and suggested AFSA had proven more effective, particularly in terms of its regulatory engagement performance. For this reason, ARITA recommended the proposed new regulator be modelled on AFSA.
5.50ARITA acknowledged a new agency would involve some cost to the Commonwealth, but added:
…we do not think these will be any greater than those encountered with other administrative re-organisations regularly undertaken by the Commonwealth, such as those that occurred after the last election. Further, there is a real opportunity to create an organisation focused on insolvency and turnaround matters.
Whilst ARITA is firmly of the view that a single insolvency law is the best option available to the Australian economy, even if that law reform option was not chosen, there remains merit in a single agency being responsible for both personal and corporate insolvency law. The merit of this is self-evident: greater efficiency, better engagement, removal of duplication of agencies and lower costs to the community.
5.51Even setting aside the question of different regulatory regimes for personal and corporate insolvency, the BLS LCA suggested the spread of regulators across the corporate insolvency landscape added cost and complexity to the system:
…it is broadly difficult to understand why the corporate insolvency regime is administered by so many different regulators in so many different respects. The PPSR [Personal Property Securities Register], for example, is overseen by AFSA, the personal insolvency regulator, rather than ASIC. Necessarily enough, practitioners need to deal with other arms of government, such as the ATO, but is unclear why many them need to be in different departments. The administration of the FEG [Fair Entitlements Guarantee] regime has been moved between the Department of Jobs and Small Business, the Attorney-General’s Department and then back to the Department of Employment and Workplace Relations in its short life. Those disparate regulators contribute to the time and cost inefficiencies associated with the regime.
5.52While calling for a broader harmonisation of corporate and personal insolvency law, the BLS LCA submitted that whether or not this occurred it would be:
… sensible to consider that all insolvency matters, including corporate and personal insolvency, personal property security matters, the FEG regime and other relevant matters are dealt with by a single competent regulator under a single department.
5.53The committee also received evidence from a range of other witnesses in support of a single insolvency regulator, in varying degrees with a view to a broader harmonisation of insolvency law.
5.54ASIC detailed a range of considerations that would likely be relevant in the instance the integration of personal and corporate insolvency regulators and regulation was considered, including:
whether the integration would be coupled with changes to the personal and corporate insolvency regimes;
would efficiencies in overall workload be achieved, and what would be the impact on resource demands;
would Registered Liquidators and Registered Trustees remain as two separate regulated populations;
would the single regulator include an official liquidator function in relation to corporate insolvency, funded by government, and what would this mean for the insolvency profession;
would there still be a need to provide funding through the Assetless Administration Fund;
would the regulator be responsible for investigating all misconduct related to corporate insolvency, ‘and, in the event the regulator is not ASIC, how would this relate to ASIC’s jurisdiction’; and
other administrative and funding considerations.
5.55Noting the complexities involved, ASIC submitted that any new model would need to deliver clear benefits compared to the status quo.
5.56ASIC cautioned that while some international jurisdictions have a single insolvency regulator for corporate and personal insolvency, direct comparisons were difficult given that in comparable jurisdictions with a single regulator:
the regulator is not required to supervise the conduct of insolvency professionals in their jurisdiction, as that is managed by a professional body which acts as a registration and disciplinary body;
the regulator is instead responsible for overseeing the professional body, rather than the regulated population; and
the government insolvency services provided by an ‘official trustee’ (or equivalent) are generally performed as a last resort.
5.57AFSA did not address recommendations for a single insolvency regulator. However, it explained that it already ‘maintains system surveillance’ of the intersections between, on the one hand, personal insolvency and personal property securities (which it also regulates), and, on the other, corporate insolvency. This surveillance includes engagement with ASIC, along with relevant policy agencies and peak bodies.
A single policy department?
5.58While making the case for a broader reform process to address the division of corporate and personal insolvency law, Mr Murray and ProfessorMason acknowledged ‘the legal difficulties of unwinding a hundredyears of not having a joint system’. They suggested a ‘soft law’ pragmatic alternative, which could be pursued independent of any comprehensive review. This:
… would be to move personal insolvency policy and AFSA to Treasury, which would assist in comparing and aligning personal and corporate insolvency law in regulating debtor and director conduct …
5.59Asked about the possibility of consolidating responsibility for insolvency policy within a single department, the Attorney-General’s Department advised that nothing in the current arrangements precluded effective policy engagement between departments. It added:
Notwithstanding the interaction of personal and corporate insolvency, each system performs a particular function and has a different focus. The benefits of any consolidation of the two policy systems must be carefully considered. This would include an analysis of policy, regulatory and legislative impacts of any consolidation.
5.60It might be noted that prior to 1996 corporate insolvency was dealt with by the Attorney-General’s Department, along with bankruptcy.
Views from a personal insolvency perspective
5.61Evidence received by the committee would suggest that reforms, including steps toward greater harmonisation of corporate and personal insolvency, might also find support from stakeholders working in personal insolvency.
5.62AFSA noted that its stakeholders would appear to support a reform process:
Our stakeholder engagement and system surveillance activities suggest a program of significant legislative reform will be supported. There is an appetite to:
streamline requirements for people struggling with small amounts of debt to allow practitioner and regulatory activity to focus on significant risks to the credit system and allow debtors and creditors to swiftly return their focus to more productive economic activities
enhance access to quality pre-insolvency advice to increase a person’s chances of managing their financial obligations and making informed decisions best suited to their needs and raise awareness of fee-free advisors such as Financial Counsellors
expand the range of tools available to monitor and dissuade system misuse to reduce the harm it causes to individuals and the economy.
We are alert to calls to rebalance the interests of debtors and creditors, and harmonise personal and corporate insolvency laws, regulations and administrative frameworks.
5.63Associate Professor Mark Wellard, while acknowledging the committee’s focus on corporate insolvency, also suggested that Australia’s ‘personal insolvency legislation is long overdue for a broad, technical review and amendment’.
Ministerial roundtable on personal insolvency, March 2023
5.64On 2 March 2023, the Attorney-General convened a roundtable with a number of key stakeholders in the personal insolvency sector to consider, among other things, any critical reforms needed in relation to the BankruptcyAct. In advance of the roundtable, the department noted that it expected issues arising out of the roundtable may be considered alongside this committee’s report.
5.65A public summary of the roundtable confirmed that discussion included potential harmonisation across the corporate and personal insolvency systems, and the difficulties for small businesses engaged in both corporate and personal insolvency proceedings.
Arguments against the unification of insolvency law
5.66Some inquiry participants contended that the costs of pursuing a unification of corporate and personal insolvency law were not justified, or otherwise raised issues that would need to be carefully considered before a decision was made to merge the two systems.
5.67For its part, the Association of Independent Insolvency Practitioners (AIIP) suggested the conclusion of the Harmer Report—that unification was not a ‘major issue’ needing attention—remained relevant today. Ashurst similarly suggested the conclusions reached in both the Harmer Report and the Productivity Commission’s 2015 report were still apposite.
5.68Ashurst suggested that if unification were to be considered, then it might be noted that Chapter 5 of the Corporations Act was not only concerned with the circumstances of insolvent companies:
So, the provisions dealing with schemes of arrangement, receivership and members’ voluntary liquidation are relevant for the administration of the affairs of solvent companies.
5.69In response to ARITA’s argument that the financial affairs of small businesses and their owners or shareholders are often intertwined, Ashurst wrote:
That is undoubtedly the case. However, with respect, the Submission ignores a fundamental consideration which, in the ordinary course, informs the decision to incorporate a company to conduct the "family business"; limited liability. If the family business fails and the primary objective of insolvency law is to provide for a rehabilitation and restructuring, an insolvency professional who is acting on or advising about the possibility of the insolvency administration of both the family company and its shareholders is in a position of conflict when addressing the issue; to what extent, if at all, should the shareholders’ assets be made available to satisfy the claims of the company’s creditors?
5.70The Productivity Commission noted that any consideration of unifying corporate and personal insolvency would need to weigh the fact that the majority of bankruptcies were not related to business factors. Should a decision be made to merge the personal and corporate insolvency frameworks, there ‘would need to be substantially different arrangements for those situations’ not related to business activity.
Committee view
5.71The committee acknowledges that the circumstances and needs of the insolvent business and the insolvent individual with non-business related debts are likely to be quite different. At the same time, the committee agrees that the division in insolvency law does not correspond with the operating reality for many Australian businesses, and can greatly increase the costs and complexity they encounter in insolvency. This is especially the case for many smaller businesses, where directors who have given personal guarantees may find themselves having to navigate two systems and two regulators.
5.72These difficulties underline the need for a review that, like the HarmerReport, address both personal and corporate insolvency in the same process. The committee reiterates it view, as set out in chapter 3, that a meaningful comprehensive review should have regard to both aspects of insolvency law, even allowing that this committee’s focus was on corporate insolvency.
5.73The committee considers harmonisation and simplification of insolvency law to be worthy, high-level guiding reform objectives.
5.74‘Harmonisation’ can, however, mean many different things. The options suggested in this inquiry ranged from the relatively modest (for example, co‑locating policy responsibility for corporate and personal insolvency in a single Commonwealth department) to fundamental changes to the law. The most far‑reaching proposed change, of course, was the design and implementation of a single legislative scheme administered by one specialist insolvency regulator.
5.75The committee has formed a preliminary view that the unification of insolvency law under a single insolvency regulator would potentially deliver significant benefits. At the same time, the committee notes that the development and implementation of such a law would be a lengthy, resource-intensive and complex undertaking. The committee has given this issue careful consideration over the course of this inquiry and taken evidence from a wide range of eminent scholars, leading practitioners and lawyers, peak bodies, commercial entities, regulators and other thought leaders on the topic. Still, the committee acknowledges that it may yet have only ‘scratched the surface’, and the implications of such reforms requires further consideration. The committee is particularly mindful that, in this inquiry, it did not consider the issue in any great depth through the lens of personal insolvency.
5.76As such, the committee considers the harmonisation of insolvency law, including the design and implementation of a single insolvency law and regulatory scheme, should be a priority issue for examination in a comprehensive review. It would likely be appropriate for a review to not only undertake extensive research and consultation on this issue, but to publish detailed issue and options papers. This would provide ample opportunities for all interested experts and stakeholders to provide input to the process.
5.77The committee recommends that 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.