A single insolvency regime with a single insolvency regulator?

A deeper dive into the review of Australia’s restructuring and insolvency laws

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Australia | Publication | août 2023

This article was co-authored with Queenie Mok.

In our earlier Legal Update, we outlined the findings of the Parliamentary Joint Committee on Corporations and Financial Services’ Final Report on Corporate Insolvency in Australia. Recommendation 3 of the Report was a comprehensive review to consider and make recommendations on the options to enhance public interest objectives and the effectiveness of, and interaction between, the personal and corporate insolvency systems.

Unlike other common law countries such as the United States and Canada, Australia's corporate and personal insolvency regimes are distinct. Corporate insolvency is governed by the Corporations Act 2001 (Cth) and its associated regulations, while the Bankruptcy Act 1966 (Cth) and its regulations govern personal insolvency.

The reason for this distinction is historic rather than driven by any specific policy rationale. Bankruptcy relies on a specific Commonwealth (federal) constitutional head of power, while corporate insolvency relies on referred powers from the states under the Commonwealth Corporations Act regime.

Globally, there are calls to simplify insolvency/bankruptcy law and to recognise the intermingling of personal and corporate finances in micro and small enterprises (MSEs). The World Bank has recommended that countries enact simplified insolvency regimes that apply to both corporations and natural persons, and all personal and business debts of a natural person should be included in simplified insolvency proceedings.¹ Simplified insolvency law should also address the treatment of personal guarantees provided for business needs of MSE debtors.²

UNCITRAL has noted "[b]usiness insolvency may lead to personal or consumer insolvency once a business fails, even if the business is a separate legal entity".³ Therefore, "separate proceedings with different access conditions and procedural steps applicable to various debts involved in MSE insolvency may not be an optimal solution".⁴ UNCITRAL has recommended that "[s]tates should ensure that all debts of an individual entrepreneur are addressed in a single simplified proceeding".⁵

A Single Insolvency Regime

There have been previous calls to harmonise the personal and corporate insolvency regimes in Australia. However, prior reviews that have considered a unified insolvency regime have stated:

“[t]here does not appear to be any overriding need for unity” (the Harmer Report in 1988);⁶
a merger would be “a protracted and difficult exercise” (a Parliamentary Joint Committee Report in 2004);⁷ and
the benefits of unifying corporate and personal insolvency within a single legislative and regulatory structure would be “marginal” (the Productivity Commission in 2015).⁸

ARITA (Australian Restructuring Insolvency & Turnaround Association) submitted to the Parliamentary Joint Committee that the changes to the economy since 1988, including the increasing complexity of small businesses and the rise of the gig economy create a strong case for reform now. ARITA also suggested that the Productivity Commission’s 2015 review only briefly considered the possibility of unifying the two systems before recommending against it.

Other inquiry participants argued that the unification of corporate and personal insolvency law should be the focus of a comprehensive review. Mr Murray, a co-author of Keay’s Insolvency: Personal and Corporate Law and Practice, and Professor Mason emphasised the need to address the many inconsistencies between corporate and personal insolvency, such as the different obligations owed by a bankrupt director to the company’s liquidator and to the trustee in bankruptcy. Chartered Accountants Australia and New Zealand (CAANZ) also submitted that it is their members’ priority to look through corporate insolvency to personal insolvency for small businesses.

A Single Insolvency Regulator

Currently, the regulation of corporate insolvency practitioners is under the remit of the Australian Securities and Investments Commission (ASIC), while the Australian Financial Security Authority (AFSA) has the power to regulate bankruptcy trustees.

The Senate Economics References Committee has previously recommended that there should be a single insolvency regulator.⁹ The government rejected this recommendation because of the associated upfront costs.¹⁰

Inquiry participants called for the creation of a single insolvency regulator overseeing both corporate and personal insolvency. ARITA noted that the United Kingdom took this approach with its Insolvency Service. It submitted that creating a new regulator that is responsible for both personal and corporate insolvencies will lead to “greater efficiency, better engagement, removal of duplication of agencies and lower costs to the community”.

Future Reform

The Committee agreed that “the division in insolvency law does not correspond with the operating reality for many Australian businesses, and can greatly increase the costs and complexity they encounter in insolvency”. The Committee recommended that the harmonisation of insolvency law, including the design and implementation of a single insolvency regime and regulator, be a priority issue for examination in a comprehensive review.

Given the joint voices from various professional bodies and academics calling for a unified insolvency regime and a single insolvency regulator, there may be more incentive for legislative change, however, such change will only result pending the outcome of the Committee’s recommended wholesale insolvency review. The Committee expects that the comprehensive review will be a further opportunity for interested experts and stakeholders to provide input on the design and implementation of a single insolvency law and regulatory scheme.

Footnotes

¹ World Bank, Principles for Effective Insolvency Creditor/Debtor Regimes (2021) 30.

² Ibid 31.

³ United Nations Commission on International Trade Law, UNCITRAL Legislative Guide on Insolvency Law for Micro- and Small Enterprises (2022) 49 [33].

⁴ Ibid.

⁵ Ibid 4.

⁶ Law Reform Commission, General Insolvency Inquiry (Report No 45, 1988) 2.

⁷ Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake (Report, June 2004) 227 [12.81].

⁸ Productivity Commission, Business Set-up, Transfer and Closure (Inquiry Report No 75, 30 September 2015) 334.

⁹ Senate Economics References Committee, The Regulation, Registration and Remuneration of Insolvency Practitioners in Australia: The Case for a New Framework (Report, September 2010) 147–8.

¹⁰

"Government Response to the Senate Economics References Committee Report, The Regulation, Registration and Remuneration of Insolvency Practitioners in Australia: The Case for a New Framework” (Download copy here: www.aph.gov.au/~/media/wopapub/senate/committee/economics_ctte/completed_inquiries/2008_10/liquidators_09/govt_response/govt_response_liquidators_pdf.ashx).