Inquiry calls for major reform of Australia's insolvency regime

On 12 July 2023, the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) released its final report following an inquiry into the framework of Australia's corporate insolvency laws (Inquiry). The Inquiry commenced in September 2022.

The Inquiry has determined that Australia's insolvency regime is not fit-for-purpose and requires major reform, with the Committee finding that the current regime is complex, difficult to access, and creates unnecessary cost and confusion for debtors and creditors. Despite progressive reforms introduced following the Harmer Report in the early 1990s, the Committee identified that more recent piecemeal reforms had added further complexity and inconsistency and, as a result, the current insolvency regime no longer reflects modern business practices.

Out of 28 recommendations made by the Committee, its key proposal is for a comprehensive, holistic and independent review into Australia's corporate and personal insolvency laws. While recognising that such a review is likely to significantly delay law reform in this area, the Committee determined that a universal examination was necessary to ensure the system is fit for purpose.

Background

The terms of reference guiding the Inquiry were necessarily broad, but divided into seven key focus areas:

• recent and emerging trends in corporate insolvency
• effectiveness of existing laws
• potential reforms including unfair preference claims, trusts and safe harbour provisions
• support provided to business access turnaround capabilities to manage financial distress
• the role of insolvency practitioners including remuneration, conduct and financial viability
• the role of government agencies such as the Australian Taxation Office (ATO) and Australian Securities & Investments Commission (ASIC)
• any related corporate insolvency matters.

The Inquiry received more than 70 submissions from interested stakeholders, the majority of which expressed some degree of dissatisfaction with the existing insolvency framework.

Final report

The Committee's final report includes 28 recommendations, the majority of which pertain to the substance of the proposed comprehensive independent review (as outlined above). Further, the Committee recommends that the independent review identifies and reports on the appropriate principles and objectives of Australia's insolvency laws, including the interaction between corporate and personal insolvency systems.

The proposed review would examine potential reforms in respect of corporate insolvency mechanisms including:

• small business restructuring
• voluntary administration
• insolvent trading and safe harbour
• unfair preferences and voidable transactions
• priority of creditors
• the simplified liquidation pathway.

The Inquiry found that despite the intention to make the restructuring mechanism more accessible to small businesses, the adoption of this procedure has been lower than expected.

Insolvency practitioners

The Committee suggested a number of potential areas of reform in relation to insolvency practitioners, including required experience, independence and remuneration. In doing so, it recognised that registered liquidators play an important public interest role, and should be sufficiently independent and appropriately remunerated (particularly in circumstances of assetless administrations). The Committee recognised that the independence requirements at law are currently not as exhaustive as the professional code of conduct, and hence an area of potential reform. The Committee also identified the need to promote gender equality in the profession.

Insolvency of trusts

The relationship between trusts and insolvency has been an area of uncertainty for some time, with many stakeholders, including insolvency practitioners, calling for clarity through further law reform. The Committee has recommended amendments to the Corporations Act 2001 (Cth) to expressly clarify the treatment of trusts with corporate trustees during insolvency, to address uncertainty and reflect the widespread use of trusts in commercial life in Australia.

Quick wins

Whilst the majority of the Committee's recommendations relate to the comprehensive independent review, a number of recommendations are intended to be "quick wins". For example, the Committee recommends:

• implementing the findings of the Safe Harbour Review released in March 2021
• reforms to the small business restructuring pathway
• consideration of changes to the Assetless Administration Fund, and
• improving the insolvency process for trusts.

Next steps

At this stage, the extent to which the government intends to act on the Committee's recommendations remains to be seen. Given the nature of the recommendations and the Committee's belief that the current insolvency regime is not fulfilling the needs of the Australian public, this will likely be the first step in modernising the regime and effecting widespread and long-awaited law reform.

Authors: Jonathon Turner, Partner; and Sophie Timms, Lawyer.

For more information about Australia's corporate insolvency laws, please contact a member of Lander & Rogers' Insolvency & Restructuring team.