Executive summary

1.1This is the final report of the Parliamentary Joint Committee on Corporations and Financial Services’ (the committee) inquiry into the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy. The committee inquired into matters including:

(1)trends in the use of corporate insolvency in Australia;

(2)the operation of the existing legislation, common law, and regulatory arrangements, including recent reforms;

(3)other areas for reform, such as, unfair preference claims, trusts with corporate trustees, safe harbours, and international developments;

(4)supporting business access to corporate turnaround capabilities;

(5)the role, remuneration, financial viability, and conduct of corporate insolvency practitioners; and

(6)the role of government agencies in the corporate insolvency system.

1.2In the committee’s assessment, Australia’s corporate insolvency system is overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors. Tellingly, few parties seem satisfied with the system as it stands. Unsecured creditors are understandably frustrated by stubbornly low returns in insolvency processes. Debtors, particularly smaller businesses, regard opportunities for restructure as lacking, and system costs as excessive. Insolvency practitioners and other observers consider the system is not appropriately resourced to achieve its purposes.

1.3While reforms introduced following the 1988 ALRC Report 45 (Harmer Report) were cutting-edge at the time, the committee is concerned that Australia’s insolvency system may not reflect modern business practice and needs. This is particularly the case for smaller and medium-sized businesses. It also appears that the insolvency system has not kept pace with changes in the Australian and global economy since the Harmer Report, including but not limited to the shift from fixed assets to intangibles and increasing levels of secured debt. The committee also notes evidence suggesting Australia may have also fallen off the international pace in terms of insolvency reform.

1.4Since the post-Harmer Report reforms of the early 1990s, a great number of changes have been made to corporate insolvency law. Many of these reforms have made valuable contributions to the corporate insolvency system; indeed, assessed individually, they overwhelmingly appear worthwhile and sensible. However, the committee agrees that the approach to corporate insolvency law reform in recent years has been, at times, ‘piecemeal’ in nature, with reforms attending to parts of the insolvency system without always having regard to the whole. This has added to the complexity and, in places, inconsistency in the system, making it harder and more costly for all to navigate. The committee also notes how failings in one area—for example, the apparent extent of insolvent trading and lack of enforcement in response—creates pressures throughout other parts of the system.

1.5The committee has concluded that, to address the shortcomings of the corporate insolvency system, there is a need for an independent and comprehensive review that addresses the system as a whole.The committee suggests that a comprehensive review should consider both corporate and personal insolvency.

1.6The 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 relation to the economic and financial imperatives of insolvency.

1.7The 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 system.

1.8The committee considers that it will assist both a comprehensive 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:

re-examining the principles, purposes, and objectives of the insolvency system (recommendation 2);

the interaction between the personal and corporate insolvency systems (recommendation 3);

the need for improved insolvency data (recommendation 5);

the current system of insolvency pathways, and reforms to specific pathways (recommendations 6, 7 and 9);

the requirements for the registration of small business restructuring practitioners (recommendation 11);

remuneration of insolvency practitioners (recommendation 13);

the independence requirements for insolvency practitioners (recommendation 14);

issues associated with of ‘untrustworthy pre-insolvency advisors’ (recommendation 15);

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 (recommendation 18);

statutory reporting obligations that apply to insolvency practitioners (recommendation 19);

the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework (recommendation 20);

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 (recommendation 21);

the relative priority of employees, liquidators and secured creditors (recommendation 23);

franchising insolvency issues (recommendation 25); and

unfair preferences and voidable transactions (recommendation 27).

1.9While a comprehensive review may delay some reform actions, the committee notes the value in generally progressing reforms as part of a holistic process. Nonetheless, the 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. The committee's recommendations on near term reforms and actions include:

the collection of high quality, granular data by ASIC (recommendation 4);

implementing the recommendations of the Safe Harbour Review (recommendation 7);

reforms to simplify the small business restructuring pathway and the simplified liquidation pathway (recommendation 8);

ASIC collecting and analysing data from an appropriately sized sample of voluntary and compulsory deregistrations, to provide greater visibility of the solvency status of deregistered companies (recommendation 10);

reforms to the experience eligibility requirements for registered liquidators, to address the inequity of the requirements and the gender imbalance in the population of registered liquidators (recommendation 12).

prompt action to improve the regulation and active enforcement of pre-insolvency advisors (recommendation 15)

consideration of changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives (recommendation 16);

assessing potential benefits of a Public Interest Administration Fund (recommendation 17);

consideration of amendments to the thresholds for reporting requirements for insolvency practitioners, and ASIC’s responses to them (recommendation19);

the ATO to consult, act on and public model creditor guidelines, consistent with its model creditor obligations (recommendation 22);

reforms to improve the framework designed to ensure access to the Fair Entitlements Guarantee, both to prevent misuse, and to ensure capture of all individuals with valid entitlements (recommendation 24);

the government responding to the Whittaker Review of the Personal Properties Securities Act 2009 (recommendation 26); and

improving the insolvency process for trusts (recommendation 28).