Key observations from the Government's review of Australia's corporate insolvency regime

Overly complex, difficult to access and creating unnecessary cost and confusion for debtors and creditors 4 min read

On 12 July 2023, the Federal Government's Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its report into corporate insolvency in Australia (Report). The Report concluded that Australia's corporate insolvency system is too complex, hard to access and unnecessarily costly.

Key takeaways

• The Report is the first major review of the corporate insolvency regime since the Harmer Report in 1988.
• In total, 28 recommendations were made, including the commission of an independent review of corporate and personal insolvency law.
• The Committee concluded that Australia’s corporate insolvency system is overly complex, difficult to access and creates unnecessary cost and confusion for both debtors and creditors.

The Report

In our previous Insights (available here), we noted that until this Report was published there had been no major reviews of Australia's corporate insolvency laws since the Harmer Report more than 30 years ago. Since publication of the Harmer Report, however, Australia's corporate insolvency regime has not kept pace with the changes in the Australian and global economy. This includes the shift from fixed assets to intangibles and increasing levels of secured debt.

The Committee commented that Australia's approach to corporate insolvency law reform in recent years has been piecemeal in nature, with reforms attending to parts of the insolvency system without always having regard to the whole. In the view of the Committee, this approach has left Australia lagging behind the international standard of insolvency reform.

The Report found that few were satisfied with Australia's current corporate insolvency regime, noting:

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.

Establishing an independent and comprehensive review

The Report concluded that to address the shortcomings of Australia's corporate insolvency system there is a need for an independent and comprehensive review that addresses the system as a whole (Review). The Review would consider both corporate and personal insolvency.

The key matters which in the Committee's view should be the subject of the Review include:

• 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 ‘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 Australian Taxation Office (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)
• unfair preferences and voidable transactions (recommendation 27).

Immediate action—the 'low hanging fruit'

In the interim, the Committee identified certain reforms that should be implemented while the Review is established. In the Committee's view, these more immediate reforms would address clear and broadly recognised failings in the current law. The Report calls these the ‘low hanging fruit’ of corporate insolvency law reform, and includes:

• the collection of high quality, granular data by the Australian Securities and Investments Commission (ASIC) (recommendation 4)
• implementing the recommendations of the Safe Harbour Review, tabled in Federal Parliament on 24 March 2022 (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 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 (recommendation 19)
• the ATO to consult, act on and publish 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 ensure capture of all individuals with valid entitlements (recommendation 24)
• the Government responding to the Whittaker Review of the Personal Properties Securities Act 2009 (Cth) (recommendation 26)
• improving the insolvency process for trusts (recommendation 28).

Next steps

Given that a review of Australia's corporate insolvency regime has not occurred in decades, the Report is a welcome addition which hopefully heralds much-needed, industry-wide reform.

Should you wish to discuss this further, please do not hesitate to contact one of our experts.