Parliament signals a comprehensive review of corporate insolvency law in Australia

The Parliamentary Joint Committee on Corporations and Financial Services released its Report into Corporate Insolvency in Australia, the first major review of Australia's corporate insolvency regime since the Harmer Report in 1988.

The Report made 28 recommendations in total which can be divided into recommendations that support a comprehensive and independent review encompassing both corporate and personal insolvency law with recommendations also as to how Government agencies (particularly ASIC and the ATO) handle corporate insolvency matters, Many of the recommendations related to the establishment of an independent and comprehensive review to consider a plethora of reforms to Australia's insolvency framework. In addition, the Committee also set out several recommendations for immediate reform, aimed at the low hanging fruit of insolvency law.

An independent and comprehensive review

The key recommendation of the Committee was that the Government establish the Review to consider both corporate and personal insolvency laws in Australia (recommendation 1). The majority of recommendations related to the Review and put forward the following issues for consideration:

• re-examining the guiding principles and objectives of corporate insolvency for later statutory codification (recommendation 2);
• the interaction between the personal and corporate insolvency systems, with harmonisation of the two being a high-level guiding reform objective, this being a priority for the Review (recommendation 3);
• cross-sectional consultations on progressing the access to and analysis of insolvency data (recommendation 5);
• the current system of corporate insolvency pathways, particularly the voluntary administration pathway and the members voluntary liquidation pathways (recommendations 6 and 9);
• the following issues in relation to the Safe Harbour Defence:
  • relaxing the criteria to access;
  • small and medium enterprise access;
  • interaction with unfair preference claims;
  • costs relative to phoenixing; and
  • potential exploitation of creditors (recommendation 7);
• the requirements of Small Business Restructuring (SBR) practitioner registrations (recommendation 11);
• the remuneration of insolvency practitioners, including for public interest work undertaken and the impact of this on all stakeholders (recommendation 13);
• the operation, efficacy and efficiency of the current independence requirements for insolvency practitioners, including consideration of whether the roles of advice and restructuring should be formally separated from liquidations and administrations (recommendation 14);
• issues associated with "untrustworthy pre-insolvency advisors" (recommendation 15);
• options for funding the administration of assetless companies, including reforms to the Assetless Administration Fund (AA Fund) and the merits of creating a public liquidator for corporate insolvency (recommendation 18);
• whether the current statutory reporting obligations for insolvency practitioners are best serving the integrity, efficiency and efficacy of the corporate insolvency framework (recommendation 19);
• the operation of the insolvent trading regime, this being a priority for the Review (recommendation 20);
• the economic and social benefits and costs of ATO relief to potentially insolvent companies in hard economic times (recommendation 21);
• the relative priority of employees, liquidators and secured creditors, including priority over circulating assets under section 561 of the Corporations Act, this being a priority for the Review (recommendation 23);
• franchising insolvency issues (recommendation 25); and
• unfair preferences and voidable transactions, particularly any further reform to the running account principle in the wake of the High Court's decision in Bryant v Badenoch Integrated Logging Pty Ltd (recommendation 27).

Addressing the low hanging fruit

The Committee also identified a number of reforms the Government should pursue alongside and/or in advance of the Review.

Data collection

The Committee recommended that ASIC collect high quality, granular data in relation to insolvency and provide this data in a timely way to relevant agencies and regulators. The Committee noted that once ASIC had transitioned its registry function to the Australian Business Registry Services (ABRS), the ABRS would likely be the most suitable entity to publish insolvency data (recommendation 4).

Safe Harbour

The Committee recommended that the Government implement the recommendations from the Safe Harbour Review independently, and likely in advance of, the Review. Furthermore, the Committee recommended the Government refer the remainder of reform issues to the Review (recommendation 7).

SBR and simplified liquidation

The Committee noted that both systems likely required reform. Specifically, the SBR likely required reform around its complexity, eligibility, insurance and industry licensing impacts, banking access, investigative burdens on practitioners and issues with personal guarantees and practitioner liabilities. As such, the Committee recommended the Government, as soon as practicable, consider and consult on potential reforms to the SBR pathway and the simplified liquidation pathway (recommendation 8).

Deregistration

The Committee recommended that ASIC collect and analyse data from an appropriately sized sample of voluntary and compulsory deregistrations, to provide greater visibility of their solvency status (recommendation 10).

Inequality

The Committee acknowledged the lack of gender diversity among registered liquidators. To that end, the Committee recommended the Government reform the experience requirements, floating the following as potential reforms:

• increasing the period over which experience can be demonstrated; or
• replacing part of the hour requirement with a competency-based exam (recommendation 12).

Pre-insolvency advisors

Prior to establishing the Review, the Committee recommended that the Government take prompt action to improve the regulation and active enforcement of pre-insolvency advisors (recommendation 15).

Assetless companies

The Committee recommended the Government consider changes to the AA Fund to ensure that it is achieving its intended policy objectives. Under this, an immediate increase to the overall AA Fund was recommended (recommendation 16).

Additionally, the Committee recommended that Treasury consider assessing the potential benefits of the Public Interest Administration Fund first proposed by the Productivity Commission in 2015 (recommendation 17).

Reporting obligations

Prior to establishing the Review, the Committee recommended that both the Government and ASIC consider whether any timely changes to reporting thresholds can be made, as well as ASIC's responses to insolvency practitioner reports (recommendation 19).

ATO as a model creditor

The Committee recommended that the ATO consult, act on and publish model creditor guidelines for itself, consistent with its model litigant obligations (recommendation 22).

Fair Entitlements Guarantee

The Committee recommended 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 (recommendation 24).

Responding to the Whittaker Review of the PPSA

The Committee recommended the Government provide a formal response to the Whittaker Review, suggesting the Government 'consider adopting' the recommendations of it (recommendation 26).

Insolvent corporate trusts

The Committee recommended the Government amend the Corporations Act to expressly clarify the treatment of trusts with corporate trustees during insolvency. The Committee supported this in relation to single trading trusts, but highlighted further consultation was required before extending to trustees of multiple trusts. The Committee supported the establishment of a public register of trusts as part of these reforms (recommendation 28).