Corporate Insolvency Inquiry – what about bankruptcy?

With the government last month announcing that the Parliamentary Joint Committee on Corporations and Financial Services would begin an inquiry into corporate insolvency in Australia, iNO sought the views of stakeholders and interested experts on the Inquiry’s Terms of Reference.

“At a higher level of policy, I think the inquiry is an opportunity to revisit some fundamental questions about if, why and how we expect company directors to be accountable for excessive risk-taking/leverage and the prevalence of egregiously deficient balance sheets which mean that unsecured creditors usually receive no dividends from liquidations. In short, I think the corporate rescue narrative, important though it is, has crowded out a much-needed debate about what creditors, our economy and society legitimately expect from corporate failures and what, if anything, should be done about the prevalence of insolvent trading by directors of SMEs.” UTS Faculty of Law Senior Lecturer Mark Wellard.

Australian Restructuring Insolvency and Turnaround Association (ARITA)

For ARITA president John Winter the Inquiry’s broad Terms of Reference are reassuring because they cover so many of the areas the nation’s preeminent organisation representing insolvency and turnaround practitioners has been lobbying for. Of course, that also exacerbates the frustration generated by what’s omitted.

“Unfortunately, bankruptcy was not wrapped into it and that’s problematic because the intersection and duplication around SME insolvencies and bankruptcy needs to be looked at,” Winter said.

“Nonetheless, because that nexus exists, we think that the Inquiry will end up dealing with this when they are confronted with the challenges caused,” he said.

Winter said the profession’s main aim is to persuade that legislators that the regime is inordinately complex.

“Our view is that our members end up doing too much pointless work for which they rarely get paid.

“We’d like a streamlined regime that makes insolvencies more affordable, stops the leakage out of the system into deregistrations and lets our members concentrate on the highly skilled work that they do which is most valuable.”

He said that Small Business Restructurings and Simplified Liquidations needed to be simple and low cost and warned against calls to narrow the review’s focus.

“There doesn’t need to be any sacred cows,” Winter said. “There’s no doubt that aspects of our regime, like the laws around voluntary administration, are world-class restructuring tools.

“But even the VA regime can do with a tidy up. It was created 30 years ago for a very different economy and it’s had a pancake stack of changes made to it without proper pause and consideration.”

Murray Legal

Legal academic and co-author of the influential Keay’s Insolvency Michael Murray told iNO that based on the Terms of Reference, the Inquiry will fall short in terms of applying the big picture approach he believes is essential.

“The insolvency system itself is insolvent,” Murray said citing as reasons for his view the many hours of unpaid work performed by insolvency practitioners, the average return of two cents in the dollar to creditors of liquidations and the common practice of IPs suing creditors for preferences just to recoup some portion of their own fees.

While admitting it would be politically difficult to abolish ASIC and AFSA and replace them with a single insolvency regulator, Murray said that shifting portfolio responsibility for personal insolvency out of the Attorney General’s Department and into Treasury which is also responsible for the ATO and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) would at least provide the chance for “a mutual osmosis of ideas, which can be more effective that any change in the law.”

Nevertheless Murray said that the Inquiry’s Terms of Reference about the financial viability of liquidators and the role of state agencies do raise some of these threshold issues and would attract a submission that an official receiver role is needed in corporate insolvency.

In terms of what he felt should be prioritised, Murray listed the role, remuneration, financial viability, and conduct of corporate insolvency practitioners’, the role of government agencies, including ASIC and its effectiveness as a co-regulator, and the ATO’s role.

He also questioned why the law devoted so much attention to creditors when they generally received so little and why the law required insolvency practitioners to spend so much time investigating director misconduct when prosecutions for such misconduct were few.

In general though he felt that the Terms of Reference “generally assume too much as to the present system without addressing what he sees as threshold issues, such as the high cost of liquidation in the SME space.

Murray said there was a strong argument for reforming the law in respect of SME insolvency so the corporate and personal insolvency aspects could be resolved together.

“This inquiry is looking at the trees not so much the wood, though with some glimpses of big picture,” Murray concluded.

Turnaround Management Association (TMA)

Maria O’Brien, a partner at law firm Baker & McKenzie and president of the Turnaround Management Association (TMA) had no concerns about the scope of the review, particularly given the “any related corporate insolvency matters” catch all in the Review’s Terms of Reference.

“The TMA will – as we always do – have a subcommittee that will prepare a response and that subcommittee will identify reform priorities we will make submissions on and share those with the broader TMA community,” O’Brien said.

“Of course, our focus is on turnaround and restructuring, so I would certainly expect the safe harbour to be an area we will make submissions (noting the excellent report by Genevieve Sexton, Leanne Chesser and Steve Parbery on safe harbour of November 2021, which was the result of extensive consultation with relevant stakeholders).”

Association of Independent Insolvency Practitioners (AIIP)

AIIP president Stephen Hathway said the the association’s members welcomed the Inquiry, as all laws must be regularly tested to ensure they meet the requirements of contemporary markets.

He warned however against reviews that sought to dumb down the work of insolvency practitioners on the mistaken assumption that this was required to make it more productive.

“Reducing an industry to filing forms will never be advocated by the AIIP,” Hathway said.

He said the AIIP’s membership would also seek to dispel any excessive focus on costs, and would argue that maintaining and strengthening the powers of insolvency practitioners to investigate reasons for failure was essential to fostering trust in our free market system.

Faculty of Law, UTS

Like others iNO contacted, Senior Lecturer Mark Wellard lamented the omission of personal insolvency from the Inquiry’s Terms of Reference while acknowledging that the inquiry is being conducted by a joint parliamentary committee that “monitors and reviews activities of ASIC and the operation of the corporations legislation”.

“I am strongly of the view that our personal insolvency legislation is long overdue for a broad, technical review and amendment,” Wellard said.

“Not unlike the position in respect of corporate trading trusts, the remediation of obvious defects in the Bankruptcy Act is a task that has been ignored by successive Parliaments for more than 30 years.

“In a 2005 High Court judgment, Justice Kirby stated that these defects ‘were specifically drawn to attention in the Australian Law Reform Commission’s Report in 1988 (the Harmer Report), General Insolvency Inquiry. 

“The failure to implement, or even to present to the parliament for consideration, the reforms proposed by the commission, at least in this respect, is unexplained.

“The result of that failure is that Australian bankruptcy law … lingers behind the Australian law on corporate insolvency and far behind the bankruptcy laws of the United Kingdom, Canada and New Zealand.

“The consequent uncertainty for creditors, trustees and indeed bankrupts themselves, involves a significant economic cost,” Wellard said.

While generally happy with the Terms of Reference Wellard was critical of the inclusion of a review of insolvency practitioner remuneration.

“I admit to a degree of exasperation to see the terms of reference include yet another inquiry into insolvency practitioner remuneration and conduct,” he said.

“Of all the problems afflicting our corporate insolvency laws, my view is that insolvency practitioner regulation and conduct is not a ‘first-order’ issue.

“Of more concern, in my view, is company director conduct and the unnecessarily complex legislative and regulatory environment in which registered liquidators are expected to operate and deliver outcomes for unsecured creditors.”

He said his priorities for reform included remediating long-standing legislative drafting errors introduced by the ILRA (2016) which mean that certain streamlined procedures such as creditor approvals without a meeting cannot be used because of technical deficiencies in the legislation.

He also said it was essential that liquidators have the power they should already have to wind up the affairs of single-capacity corporate trustees in the same way as any other company, without the cost of a court application.

To this end he said the Inquiry should also look whether appointees can be empowered so they can extend convening periods in a voluntary administration or getting approval to enter into a funding agreement without application to the court, “ in the same way they commonly exercise judgment on a range of other matters”.

“At a higher level of policy, I think the inquiry is an opportunity to revisit some fundamental questions about if, why and how we expect company directors to be accountable for excessive risk-taking/leverage and the prevalence of egregiously deficient balance sheets which mean that unsecured creditors usually receive no dividends from liquidations,” Wellard said.

“In short, I think the corporate rescue narrative, important though it is, has crowded out a much-needed debate about what creditors, our economy and society legitimately expect from corporate failures and what, if anything, should be done about the prevalence of insolvent trading by directors of SMEs.”

No doubt the Committee will be inundated with recommendations. Resisting the temptation to make all stakeholders happy should be the Committee’s priority. Submissions close on November 30, 2022.