The Inquiry
Between September 2022 and March 2023 the Parliamentary Joint Committee on Corporations and Financial Services (Committee) conducted an inquiry into corporate insolvency in Australia (Inquiry).
The Inquiry focused primarily on addressing the effectiveness of Australia's corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy. The key themes included trusts and insolvency, micro, small and medium enterprises (MSMEs), company director liability and the insolvent trading safe harbour, the role of government bodies in insolvency (including ASIC, ATO and the Fair Entitlements Guarantee scheme), the rights of secured creditors and PPSA issues, liquidation and voidable transactions, the voluntary administration regime, and issues impacting the building and construction industry.
During this period, the Committee received 78 written submissions which came from a broad spectrum of the community, including professional associations, industry associations, law firms, insolvency firms, government agencies and academics. MinterEllison made a submission to the Inquiry. The key themes of our submission were:
- Australia's insolvency laws are largely robust and fit for purpose, but can be significantly improved by undertaking a comprehensive and holistic review of Australia's corporate and personal insolvency laws, whereby a particular focus is placed on making meaningful recommendations to harmonise and simplify those laws.
- There is a layer of complexity in Australia's insolvency laws driven by unnecessary differences existing between the insolvency laws and regimes applicable to corporations, individuals, trading trusts and partnerships.
The Inquiry held five public hearings and received over 120 answers to questions on notice in relation to the corporate insolvency regime in Australia.
Key recommendations in the Report
The Inquiry presented its final report to the Parliament on 12 July 2023 (Report), which set out the Committee's 28 key recommendations.
MinterEllison had submitted to the Inquiry that improvements could be realised through the harmonisation and simplification of various insolvency laws, a theme repeated in many submissions to the Inquiry, all of which were regarded favourably. The Report recommended that the harmonisation and simplification of insolvency law was a "worthy, high-level guiding reform objective", and should be a priority issue for examination in a comprehensive review.
The key recommendations in this Report include:
- as soon as practicable the government commission a comprehensive and independent review of Australia’s corporate and personal insolvency laws, to consider issues including:
- the appropriate principles and objectives of insolvency law;
- options to enhance public interest objectives and the effectiveness of, and interaction between, the personal and corporate insolvency systems;
- the voluntary administration and members voluntary liquidation regimes;
- the operation of the insolvent trading and safe harbour regime and its impact on the broader corporate insolvency framework;
- the unfair preferences and other voidable transactions provisions;
- the relative priority of employees, liquidators, and secured creditors, including the priority over circulating assets;
- the overall economic and social benefits and costs of ATO relief to potentially insolvent companies in hard economic times;
- the eligibility, regulation, renumeration and statutory reporting requirements applying to insolvency practitioners;
- the impact of pre-insolvency advisors and their regulation;
- the government implement the recommendations in the 2021 report of the insolvent trading safe harbour review, independent of and possibly in advance of a comprehensive review;
- the government as soon as practicable consider and consult on potential reforms to:
- small business restructuring; and
- simplified liquidation;
- ASIC collect high quality, granular data in relation to insolvency and provide this data in a timely way to relevant government agencies and regulators;
- the ATO consult, act on and publish model creditor guidelines, consistent with its model litigant obligations;
- the government consider changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives;
- the government develop reforms to the Fair Entitlements Guarantee scheme, to prevent misuse by novel schemes of arrangement, phoenixing, and other practices and to ensure capture of all individuals with valid entitlements;
- the government respond to the 2015 report of the PPSA review, and as recommended in that report, repeal the automatic vesting rule in relation to security interests which secure post-appointment finance given to externally-administered companies;
- the government amend the corporations legislation to expressly clarify the treatment of trusts with corporate trustees during insolvency.
Next steps
The Report noted that whilst a comprehensive review and any resulting reform process would likely require a considerable investment of time and other resources, it will ultimately be worth it given the importance of a robust, fit-for-purpose Australian insolvency framework. The Report also recommended that government should determine who should conduct the review. We anticipate that a comprehensive review would be conducted by an independent body comprised of multiple commissioners with deep expertise in corporate and personal insolvency, and in stages which will allow recommendations and shortcomings to be addressed in a fulsome manner.
The Report recommended that the government should set a clear timetable for a comprehensive review, and that a final report within three years of the review's commencement would likely be achievable and appropriate.
The Report also identified several areas in need of reform that should be progressed independently of (and sooner than) the comprehensive review. For example, on the question of insolvent trusts, we expect that the government will be keen to be seen as acting responsively to this area, which the previous government had already identified as a subject of reform and had received detailed submissions. We might therefore see legislation in the near future prohibiting the operation of clauses in trust deeds that automatically remove insolvent corporate trustees from control of the trust assets ('ipso facto' clauses), reinforced by giving liquidators an express power to realise trust assets.
We will provide further updates following the government's response to the recommendations in the Report.
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