Parliament Joint Committee on Corporations and Financial Services commences inquiry into effectiveness of Australia’s Insolvency Laws

On 28 September 2022, the Federal Government’s Parliament Joint Committee on Corporations and Financial Services (PJC) commenced an inquiry into Australia’s corporate insolvency laws, with submissions due on 30 November 2022.

It is the first major review of Australia’s insolvency laws since the Harmer Report in 1988 and appears to be in response to the COVID-19 pandemic, associated difficult economic conditions which arose and are now coming to bear on business, and various support measures from the government through the pandemic.  

It also follows the reforms launched during the pandemic with the introduction of the ‘small business restructuring’ pathway and simplified liquidation process, which have seen limited adoption and use.

The terms of reference are accessible here.  The major areas of inquiry in the terms of reference of the inquiry include:

1. Recent trends in the use of corporate insolvency in Australia, in light of COVID-19 Pandemic and changes of economic conditions;
2. The operation of the existing legislation, common law and regulatory arrangements including:

1. the small business restructuring reforms (2021);
2. the simplified liquidation reforms (2021);
3. the unlawful phoenixing reforms (2019); and
4. the operation of the Personal Property Securities Act 2009 in the context of corporate insolvency

1. Other potential areas for reform such as unfair preference claims, trusts with corporate trustees, insolvent trading safe harbours and international approaches and developments;
2. Supporting business access to corporate turnaround capabilities;
3. The role, remuneration, financial viability and conduct of corporate insolvency practitioners; and
4. The role of government agencies in the corporate insolvency system.

The PJC is inviting interested parties and stakeholders to submit written submissions on this topic by 30 November 2022 and expects to submit a report to the Parliament by 30 May 2023.

As noted above, there has not been a major overhaul in Australia’s insolvency laws since the Australia Law Reform Commission published the General Insolvency Inquiry in 1998 (more commonly referred to as the ‘Harmer Report’). 

The Harmer Report led to the enactment of the Corporate Law Reform Act 1992 (Cth), Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Cth) and Bankruptcy Amendment Act 1997 (Cth), which included:

• The introduction of ‘voluntary administration’ – where an external administrator is appointed to consider whether the company have its debt restructured through a deed of voluntary arrangement, or whether it should continue trading as it was or enter liquidation;
• Abolished the statutory priority of the Commissioner of Taxation over other creditors in bankruptcy and insolvency in relation to unremitted tax; and
• Abolished the right of individual creditors to sue for the recovery of insolvent trading debts.

Since the above legislative changes, there have been only minor and incremental changes to Australian insolvency laws. 

More recently, the Insolvency Law Reform Act 2016, which was enacted following a Senate Economics Committee inquiry, amended the Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth) by modernising and strengthening the regulatory and disciplinary frameworks of liquidators and harmonising some of the procedures relating to personal bankruptcies and corporate liquidations.

However, issues remain. 

There are calls to further harmonise the personal and corporate insolvency regimes, and perhaps even to merge them into a single piece of legislation. Considerable differences still remain between the two, creating complexity and the need for specialisation in practice.

Further, the effectiveness of recent reforms has been questionable and these should be reviewed.

The Australian Restructuring Insolvency and Turnaround Association has welcomed the review, citing the need for a ‘root and branch review’ and the problem of the regime’s complexity for ordinary people and directors.

The inquiry provides an opportunity for insolvency practitioners, related professionals, industry stakeholders and the public to contribute and debate, and has the potential to be the first step in more considered and extensive review and reform.

Submissions can be made here.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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