Not fit for purpose - PJC reports on Corporate Insolvency Regime in Australia
Key takeaways
- Insolvency regime may not be fit for purpose.
- Not properly resourced and overly complex, costly and difficult to access.
- Comprehensive review of corporate and personal insolvency regimes required.
- Immediate practical changes should occur while this review takes place.
This month the Parliamentary Joint Committee on Corporations and Financial Services (PJC) tabled its report following an inquiry into the effectiveness of corporate insolvency laws in Australia to protect and maximise value for the benefit of all interested parties and the economy.
The PJC’s report arrives 35 years after the 1988 Harmer Report, the previous most recent comprehensive review of insolvency in Australia.
According to the report, Australia’s insolvency regime may not be fit for purpose. The committee considers that the corporate insolvency system is not properly resourced and is ‘overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors.’
The committee concluded that an independent and comprehensive review is required to address the shortcomings of the corporate insolvency system and recommends that the review should consider both corporate and personal insolvency.
The PJC inquired into various matters including:
- trends in the use of corporate insolvency in Australia;
- the operation of the existing legislation, common law, and regulatory arrangements, including recent reforms;
- other areas for reform, such as, unfair preference claims, trusts with corporate trustees, safe harbours, and international developments;
- supporting business access to corporate turnaround capabilities;
- the role, remuneration, financial viability, and conduct of corporate insolvency practitioners; and
- the role of government agencies in the corporate insolvency system.
The report provides 28 recommendations divided into near-term actions and those better suited for implementation on comprehensive review.
For immediate action, the committee has recommended:
- ASIC collect high quality, granular data in relation to insolvency for the benefit of government agencies and regulators;
- the recommendations of the Safe Harbour Review be implemented;
- small business restructuring and simplified liquidation pathways reform;
- ASIC collect and analyse a sample of voluntary and compulsory deregistrations to provide greater visibility of the solvency status of deregistered companies;
- the potential benefits of a Public Interest Administration Fund be considered;
- reform of eligibility requirements for registered liquidators in order to address the gender imbalance within the profession;
- reforms to improve the regulation and active enforcement of pre-insolvency advisors;
- consideration of changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives;
- assessing potential benefits of a Public Interest Administration Fund;
- consideration of amendments to the thresholds for reporting requirements for insolvency practitioners, and ASIC’s responses to them. Are they best serving the corporate insolvency framework?;
- the ATO consult, act on and public model creditor guidelines, consistent with its model creditor obligations;
- improvements to the Fair Entitlements Guarantee as a scheme of last resort to prevent misuse and to ensure all individuals with valid entitlements are being captured;
- the government provide a formal response to the 2015 Whittaker Review; and
- improving the insolvency process for trusts.
For comprehensive review, the committee has included:
- consideration of the principles and objectives of insolvency law, in particular improving public interest objectives and the interaction between personal and corporate insolvency;
- looking at the pathways for voluntary administrations and member voluntary liquidations;
- independence requirements for insolvency practitioners and registration requirements for small business restructuring practitioners;
- funding the administrations of assetless companies and potential benefits of creating a public liquidator for corporate insolvency;
- considering unfair preferences and voidable transactions as a core aspect of any potential insolvency reform;
- examining the current insolvent trading regime and its impact on the corporate insolvency framework;
- amending the Corporations Act 2001 (Cth) to expressly clarify the treatment of trusts with corporate trustees during insolvency;
- review of the priority of employees, liquidators, and secured creditors, including the priority over circulating assets under section 561 of the Corporations Act 2001 (Cth);
- the overall economic, social benefits and costs of ATO relief to potentially insolvent companies in difficult economic times;
- franchising insolvency issues; and
- the ATO consulting, acting on and publishing model creditor guidelines.
Scrutiny of insolvency law in the post-covid era is timely, with industries such as the building sector continuing to be severely impacted by the economic downturn and inflationary pressures.
The PJC has recommended a mix of practical near-term fixes to discrete issues, and a longer term comprehensive review of the overall insolvency regime (corporate and personal) to address the concern that it is not ‘fit for purpose’.
We look forward to the government’s response to the PJC’s recommendations.
If any of the above is relevant to you or you want to know more, please feel free to get in touch.
The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such. It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only. You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.
