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

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Australia | Publication | luglio 2023

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.

#	Summary	Recommendation
1	Further comprehensive and independent review	The Committee recommends that the government commission a comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency, as soon as practicable, and progress several other near-term actions as identified in the executive summary.
2	Further consideration of appropriate principles and objectives of insolvency law	The Committee recommends that the comprehensive review, as part of its early work, consider and report on the appropriate principles and objectives of insolvency law. The Committee further recommends that the government respond quickly to this first report of the comprehensive review to allow the comprehensive review to continue with further stages of work in a timely way.
3	Further review of options to enhance public interest objectives	The Committee recommends that the comprehensive review consider and make recommendations on options to enhance public interest objectives and the effectiveness of, and interaction between, the personal and corporate insolvency systems.
4	Improve quality and collection of data by ASIC	The Committee recommends that the Australian Securities and Investments Commission collect high quality, granular data in relation to insolvency and provide this data in a timely way to relevant government agencies and regulators.
5	Further review on improving access to and analysis of insolvency data	The Committee recommends that the proposed comprehensive review of insolvency consult data holders, researchers, industry participants, and public sector organisations to progress the access to and analysis of insolvency data.
6	Further review based on a holistic systems analysis perspective	The Committee recommends that the proposed comprehensive review consider and report on the current system of corporate insolvency pathways from a holistic systems analysis perspective.
7	Implement recommendations from the Safe Harbour Review	The Committee recommends that the government implement recommendations from the Safe Harbour Review, independent and likely in advance of the further review, and consider referring the remainder of safe harbour reform issues identified in this report to a comprehensive review.
8	Reforms to small business restructuring and simplified liquidation pathways	The Committee recommends that as soon as practicable the government consider and consult on potential reforms to the: small business restructuring pathway; and simplified liquidation pathway.
9	Further review of voluntary administration and members voluntary liquidation pathways	The Committee recommends that the comprehensive review consider the: voluntary administration pathway; and members voluntary liquidation pathway.
10	Improve sample size of ASIC data	The Committee recommends that the Australian Securities and Investments Commission collect and analyse data from an appropriately sized sample of voluntary and compulsory deregistrations, to provide greater visibility of the solvency status of deregistered companies.
11	Further review of registration requirements for small business restructuring practitioners	The Committee recommends that the comprehensive review consider the requirements for the registration of small business restructuring practitioners to understand the reasons for the limited number of registrations to date.
12	Address inequity and gender imbalance in the population of registered liquidators	The Committee recommends that the government reform the experience eligibility requirements for registered liquidators, to address the inequity of the requirements and the gender imbalance in the population of registered liquidators. Reforms could potentially include: increasing the period over which experience is demonstrated, or replacing part of the required hours with a competency-based exam.
13	Further review of the remuneration of insolvency practitioners	The Committee recommends that the comprehensive review include consideration of the remuneration of insolvency practitioners, including: the extent to which public interest work carried out by liquidators for no or limited pay is sustainable; and the impact of this on all stakeholders in external administrations.
14	Further review of the independence requirements for insolvency practitioners	The Committee recommends that the comprehensive review include consideration of the operation, efficacy, and efficiency of the current independence requirements for insolvency practitioners, including: whether the current requirements are achieving the policy settings that inform them and whether these policy settings are optimal; and the advantages and disadvantages of formally separating the roles of advice and restructuring from formal appointments to liquidations and administrations.
15	Further review on improving regulation and active enforcement of pre-insolvency advisers	The Committee recommends that the comprehensive review include consideration of the nature and extent of the harm posed by ‘untrustworthy pre-insolvency advisors’, and whether further regulation or enforcement measures are needed to address this issue. The Committee further recommends that in the interim, the government take prompt action to improve the regulation and active enforcement of pre-insolvency advisers.
16	Review of the Assetless Administration Fund	The Committee recommends that the government consider changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives.
17	Review of the Public Interest Administration Fund, proposed by the Productivity Commission in 2015, by Treasury	The Committee recommends that the Department of the Treasury consider assessing the potential benefit of the Public Interest Administration Fund proposed by the Productivity Commission in 2015, including the impacts of the required increase on the annual review fee for company renewals; and either consider implementing the proposal, or provide that analysis to a comprehensive review.
18	Further considering funding options for the administrations of assetless companies	The Committee recommends that the comprehensive review consider and make recommendations on options for funding the administrations of assetless companies, including reforms to the Assetless Administration Fund (noting the Committee’s recommendation 16) and the merits of creating a public liquidator for corporate insolvency.
19	Further review of the current statutory reporting obligations for insolvency practitioners	The Committee recommends that the comprehensive review consider whether the current statutory reporting obligations for insolvency practitioners are best serving the integrity, efficiency, and efficacy of the Australian corporate insolvency framework, including (but not limited to): the ability of the Australian Securities and Investments Commission (ASIC) to appropriately process, utilise and respond to initial statutory reports on current resources; and the appropriateness of existing reporting thresholds, having regard to their regulatory value as well as the burden imposed on insolvency practitioners. The Committee further recommends that in the interim, the government and ASIC consider whether any timely changes can be made to the regulations on reporting thresholds, and ASIC’s response to insolvency practitioner reports.
20	Further review of the operation of the insolvent trading regime	The Committee recommends that the comprehensive review examine the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework.
21	Further review of ATO relief to potentially insolvent companies during hard economic times	The Committee recommends that the comprehensive review analyse and make recommendations on the overall economic and social benefits and costs of Australian Taxation Office relief to potentially insolvent companies in hard economic times, in the context of the impacts on the purposes of the insolvency system.
22	ATO to publish model creditor guidelines	The Committee recommends that the Australian Taxation Office consult, act on and publish model creditor guidelines, consistent with its model litigant obligations.
23	Further consider the relative priority of employees, liquidators, and secured creditors	The Committee recommends that the comprehensive review consider the relative priority of employees, liquidators, and secured creditors, including the priority over circulating assets under section 561 of the Corporations Act 2001. The Committee further recommends that this be a high priority topic for the comprehensive review.
24	Address misuse of the Fair Entitlements Guarantee through phoenixing and other practices	The Committee recommends that the government develop reforms to improve the framework designed to ensure the policy objective of access to the Fair Entitlements Guarantee as a scheme of last resort, both to prevent misuse by novel schemes of arrangement, phoenixing, and other practices and to ensure capture of all individuals with valid entitlements.
25	Further consider franchising insolvency issues	The Committee recommends that the comprehensive review consider and report on franchising insolvency issues.
26	Response to the Whittaker Review (2015)	The Committee recommends that the government provide a formal response to the Whittaker Review which was completed in 2015.
27	Further review of unfair preferences and voidable transactions	The Committee recommends that the comprehensive review consider unfair preferences and voidable transactions as a core aspect of potential insolvency reform.
28	Reform to Corporations Act regarding treatment of trusts with corporate trustees during insolvency	The Committee recommends that the government amends the Corporations Act 2001 to expressly clarify the treatment of trusts with corporate trustees during insolvency.

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:

the development of an attractive business and institutional environment;
the modernisation of Singapore’s insolvency and restructuring laws; and
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.