PJC inquiry calls for ‘comprehensive review’ of insolvency law

The government has been advised to commission a comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency, following an inquiry into corporate insolvency.

The Parliamentary Joint Committee on Corporations and Financial Services inquiry into corporate insolvency handed down its report yesterday, making 28 recommendations in total.

The Committee found that Australia’s insolvency system has failed to keep pace with changes in the Australian and global economy and that few parties are satisfied with the system.

“Unsecured creditors are understandably frustrated by stubbornly low returns in insolvency processes. Debtors, particularly smaller businesses, regard opportunities for restructure as lacking, and system costs as excessive,” the report stated.

“Insolvency practitioners and other observers consider the system is not appropriately resourced to achieve its purposes.”

The Committee said a comprehensive review is necessary for addressing the shortcomings in the system.

The review would re-examine the principles, purposes and objectives of the insolvency system and look to harmonise the personal and corporate insolvency systems.

ARITA welcomes ‘root and branch’ review of insolvency law

The Australian Restructuring, Insolvency & Turnaround Association (ARITA) has applauded the recommendations which it believes will have a profoundly positive impact on the economy, businesses and outcomes for creditors.

ARITA chief executive John Winter said the comprehensive review will create a more simple, efficient and effective regime to foster better outcomes for companies in financial distress.

“The root and branch review into insolvency law is something that we’ve been pushing for since before Covid,” Mr Winter told Accounting Times.

“We would like to see that done by the Australian Law Reform Commission or someone similar. Someone who has the capacity to bring a level of expertise into getting the law right so that it is usable by directors and so that accountants in public practice can actually give advice and support to clients in distress and refer them to the people that can help save their business.”

ARITA has also welcomed recommendations from the committee calling for greater harmonisation of corporate and personal insolvency.

“The committee has seen the wisdom of bringing our personal and corporate insolvency regimes and oversight together which will significantly reduce costs and complexity and make a lot more sense for those in small and micro-businesses in particular,” said Mr Winter.

“The report also identifies the need to understand the process that people go through in an insolvency situation and better build our laws to fit that. This has been something ARITA has been urging for many years and it should make dealing with financial distress much less difficult.”

The comprehensive review will also consider the remuneration of insolvency 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.

“[The Committee has] recognised the unjustness of liquidators being required by law to do extensive work that often don’t get paid for and isn’t delivering any public good outcomes and certainly not being used by regulators,” said Mr Winter.

Potential quick wins for the government

ARITA said it was also pleased to see the report call for urgent action to address the costly impact of trusts in insolvency.

This has been a recommendation sitting on the books from the Australian Law Reform Commission for over 30 years and is a vital reform,” said Mr Winter.

Mr Winter said that under the current system, if a business collapses and it has a trust, the liquidator is required to go to court and undertake an expensive process to get those assets back.

This was first identified as an area for improvement by the Harmer Report in the 1988.

The inquiry found that reform in this area has been limited and that no dedicated statutory regime has been enacted to regulate trusts.

“Everyone is pleased to see that recommendation in there because it will ensure that there’s more money going back to creditors who should be getting paid.”

The committee has also recommended that the government consider and consult on potential reforms to the small business restructuring pathway and simplified liquidation pathway as soon as practicable.

“That’s a really important quick fix that could help save a lot of small businesses,” said Mr Winter.

The simplification of these laws will make them more useful and allow directors of small business to remain in charge of their business while still getting the advice of a liquidator, he said.