Is there a need to revamp the corporate insolvency system?

Yes is the answer! On 12 July 2023, the Parliamentary Joint Committee on Corporations and Financial Services published its report regarding corporate insolvency in Australia.

Objective of the inquiry

The committee’s inquiry assessed how effective the current corporate insolvency regime is at providing benefits to, and protecting, stakeholders as well as the Australian economy. It looked at a number of aspects including:

• the trending use of corporate insolvency;
• the operation of the existing law;
• recent reforms; and
• the roles of insolvency practitioners and government agencies.

According to the report, the committee’s overall view is that Australia’s insolvency system may not reflect the needs of modern businesses in Australia.

The committee characterises corporate insolvency in Australia as ‘too complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors’.

Recommendations

The committee considers that it is important to have a ‘robust, fit-for-purpose insolvency system’ within Australia and has provided 28 recommendations for short- and long-term reform with the central theme being that the government needs to do a comprehensive and independent review of Australia’s insolvency law, both corporate and personal.

Recognising that such a comprehensive review may well be a lengthy process, the committee has suggested that there are some more immediate reforms or actions. These include:

• ASIC taking steps to provide high quality, granular data about insolvency, as well as collecting and analysing data with the view to providing greater visibility of the solvency status of deregistered companies;
• implementing the recommendations of the Safe Harbour Review;
• considering the potential benefits of a Public Interest Administration Fund;
• development of pathways for small business restructuring and simplified liquidations;
• reforms regarding the experience requirements for registered liquidators in order to address inequalities and the gender imbalance within the profession;
• reporting obligations for insolvency practitioners and whether those obligations are best serving the corporate insolvency framework;
• improving the framework to ensure access to the Fair Entitlements Guarantee as a scheme of last resort and to ensure all individuals with valid entitlements are being captured;
• providing a formal response to the 2015 Whittaker Review;
• reforms to improve the regulation and active enforcement of pre-insolvency advisors; and
• reforms to the Assetless Administration Fund.

In addition, some of the key areas the committee has recommended be included in a comprehensive review are:

• the principles and objectives of insolvency law, in particular improving public interest objectives as well as the interaction between personal and corporate insolvency;
• looking at the pathways for voluntary administrations and member voluntary liquidations;
• the registration requirements for small business restructuring practitioners, and the remuneration and current independence requirements for insolvency practitioners;
• options for funding the administrations of assetless companies and merits of creating a public liquidator for corporate insolvency;
• considering unfair preferences and voidable transactions as central to any potential insolvency reform and examining the current insolvent trading regime and its impact on the corporate insolvency framework;
• amending the Corporations Act 2001 (Cth) to clarify the treatment of trusts with corporate trustees during insolvency;
• 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 hard economic times;
• franchising insolvency issues; and
• the ATO consulting, acting on and publishing model creditor guidelines.

We now wait for the government’s response to this inquiry, and Gadens will continue to monitor and report on any future developments in this area.

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Authored by:

Rob Hinton, Partner
Louise Schmid, Special Counsel
Norisha Young, Lawyer