A timely review of the effectiveness of Australia’s restructuring and insolvency laws

The Parliamentary Joint Committee on Corporations and Financial Services (PJC), chaired by Senator Deborah O’Neill, has handed down its final report into the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy.

The Committee has made some far-reaching recommendations in the Final Report, heralding the long awaited “root and branch” review of Australia’s insolvency laws that ARITA (Australian Restructuring Insolvency & Turnaround Association) and other industry bodies have called for over the last decade.

It is important to note that 17 of the 28 recommendations in the Final Report are to be addressed by a further comprehensive independent review. These are identified in the coloured rows below. The other recommendations are to be addressed sooner.

This has been an extensive process, commencing on 28 September 2022, and receiving 78 submissions from individuals and organisations. The submissions included restructuring groups, law firms, liquidators, academics, government departments, industry groups and unions. The inquiry held five public hearings, two in Canberra and three in Sydney.

We are proud to have made a direct contribution to the work of the PJC. The call by ARITA (Australia’s leading restructuring and insolvency professional body) for a root and branch review of Australia’s insolvency laws has been a strategic priority for almost a decade. In 2019, that was accelerated upon our Partner and Global Co-Head of Restructuring, Scott Atkins, taking on the Presidency of ARITA, with the PJC convening and finalising its work while Scott served on the ARITA Board as Immediate Past President.

Partner Dr Nuncio D’Angelo’s written and oral submissions feature heavily in proposed reforms to trust insolvency law covered by Recommendation 28.

Australia as a restructuring hub and an issue on the horizon

The Committee has laid the groundwork for the Australian Government to focus its energy and resources on establishing Australia as a ‘restructuring hub’ to resolve cross-border insolvency disputes.

A globally-recognised model is the Singaporean Government’s active investment in this area. This has seen the country create a debt restructuring hub, and grow and develop the professional services sector and judiciary that is required to support this type of work. In submissions, the three main steps in Singapore’s strategy were recognised as:

1. the development of an attractive business and institutional environment;
2. the modernisation of Singapore’s insolvency and restructuring laws; and
3. the strengthening of the restructuring ecosystem while enhancing Singapore’s leadership in the international insolvency debate.

The arrival of the PJC report comes on the heels of the recent announcement by the UK Government that it will legislate to implement the UNCITRAL Model Law on Enterprise Group Insolvency “at the earliest opportunity”. The Group Model Law provides tools to manage and co-ordinate insolvencies within corporate groups, while respecting that each company within the group remains a separate legal entity. The UK will become the first jurisdiction to implement the Group Model Law into its national law, taking the lead as an early adopter. This is also an opportunity for Australia to take this step as part of broader efforts to enhance its restructuring and insolvency system. It is the space to watch.

Single, focused legislative framework

The unifying theme of submissions to the Committee were that Australia’s corporate insolvency regime is highly complex in that it currently spans across multiple Commonwealth laws as well as State and Territory equivalents. This regime requires practitioners to be across Australia’s corporate insolvency laws, personal insolvency laws and the full suite of state and territory tax laws, and also engage with multiple government agencies with different responsibilities.

Unification and simplification of this patchwork will bring benefits to small businesses that do not have the capacity and resources to understand the current labyrinthine regime. This reduces the effectiveness of the regime, as it is essential that the legislation is simple and comprehensible so that directors can understand their obligations without having to overly rely on an insolvency practitioner.

Having regularly advised on the scope and application of insolvency laws, we see the Committee’s Final Report as providing the impetus for Australia to:

• adopt international best practice, following the approach taken by Singapore and the United Kingdom;
• clarify the safe harbour and unfair preference regimes and take action on illegal phoenixing;
• develop a framework that will provide benefits to small and medium sized businesses; and
• address the treatment of trusts with corporate trustees during insolvency.

Norton Rose Fulbright has a leading restructuring practice in Australia and across the Globe. If you have any queries or require support in engaging with this important reform, please contact Scott Atkins or Alex Mufford, or any of the partners in our national team.