NEWS & INSIGHTS

Spotlight on Reform

Mirror, mirror on the wall – do we like what we see?

The Parliamentary Joint Committee on Corporations and Financial Services released its report into Corporate Insolvency in July 2023, more than year ago, signaling a comprehensive review of the Corporate Insolvency Regime was needed. What has happened since? Is it ‘an impenetrable quagmire’ as suggested in the Safe Harbour Panel Review?

It is more than twelve months since the PJC Report on Corporate Insolvency Corporate insolvency in Australia – Parliament of Australia was submitted to the Government, on 12 July 2023.

Government Response

There has still been no Government response to the Report, notwithstanding Government’s requirement to respond to Committee Reports within three (3) months of tabling. (Editor: There are of course many such Reports awaiting a response as set out here - Government responses outstanding to committee reports – Parliament of Australia )

Committee Views

The Report is long (314 pages). The clear view of the Committee is in Section 3.97 onwards and are summarised below:

Australia’s corporate insolvency system is overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors

Few parties seem satisfied with the system ... Unsecured creditors are .. frustrated by stubbornly low returns in insolvency processes. Debtors .. regard opportunities for restructure as lacking and system costs as excessive

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

A very large number of stakeholders and experts, meanwhile, appear to agree with the Safe Harbour Review’s assessment of the system as an ‘impenetrable quagmire’

Australia’s insolvency system may no longer reflect modern business practice or sufficiently meet business needs

Insolvency law reform in recent years has been, at times, ‘piecemeal’ in nature, with reforms attending to parts of the insolvency system without always having regard to the whole.

Even where relatively modest changes to the law might be worthwhile ..

specific amendments to the law are unlikely to resolve the fundamental issues.

Summary of Recommendations

The Committee Recommendations are summarised below. In essence they fall into a number of distinct categories, involving (a) responding to and implementing the recommendations of the Review and (b) various actions required of Government, ASIC and the ATO:

Number	Recommendation
1	A comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency.
2, 3, 5 6 9,11, 13, 14, 15, 19, 20, 21, 23, 25, 27	The elements that the Review should consider including: the objectives and principles of insolvency law, the public interest objectives, access to insolvency data, review of individual pathways to insolvency administrations, the SBR process, remuneration, independence of practitioners, untrustworthy advisors, funding assetless administrations, statutory reporting obligations, insolvent trading, benefits and costs of ATO relief, priority of parties in liquidations, franchising insolvency issues, unfair preferences and voidable transactions.
4,10	ASIC to review the collection and analysis of data for government agencies.
7, 8, 12, 16, 17, 24, 26, 28	Government to implement the recommendations from the Safe Harbour Review, consider reforms to SBR and simplified liquidations, consider the eligibility requirements for liquidators, consider changes to Assetless Administration Fund, reforms to improve access to FEG and prevent misuse, clarify the treatment of trusts with corporate trustees, and provide formal response to the Whittaker Review
22	ATO to publish model creditor guidelines consistent with model litigant obligations

So what is actually happening?

Putting aside the formal response to the Committee recommendations, there has been some positive action on the more immediate issues that are the direct responsibility of ASIC, Government departments and the ATO:

Party	Requirement	Status
ASIC	Collect high quality granular data in relation to insolvency and provide to agencies and regulators	ASIC have released a revised Regulatory Guide in response to the Review Recommendations: Regulatory Guide RG 16 External administrators and controllers: Reporting of possible offences and misconduct
Government	Implement the recommendations of the Safe Harbour Review, and refer the balance of reform matters to the Review	Several of the Panel Review Recommendations have been implemented and there are more to come: See our article: SAFE HARBOUR – IS IT FIT FOR PURPOSE? \| News & Insights
Government	Consider and consult on reforms to the SBR Pathway and simplified liquidation pathway	ARITA have made submissions in relation to SBR Reforms: Submission: SBR, SL & Trust law reform
Government	Consider reform to the experience requirements for liquidators to promote gender balance, improve the regulation of so called “untrustworthy” pre-appointment advisors	ASIC introduced updated guidelines streamlining the registration process and clarifying ongoing requirements for registered liquidators. ASIC publishes updated regulatory guidance for registered liquidators \| ASIC A revised RG258 was issued in October 2024 Regulatory Guide RG 258 Registered liquidators: Registration, ongoing obligations, disciplinary actions and insurance requirements
Government	Consider reform to improve policy access to FEG as a scheme of last resort, to prevent misuse and capture individuals with valid entitlements	No reforms made public as yet
Government	Provide a formal response to the Whittaker Review on the Personal Properties Security Act 2009 (Report delivered in 2014)	The Government have run a Public Consultation process in relation to the Whittaker Review which closed in November 2023: Public Consultation on the Government's response to the statutory review of the Personal Property Securities Act 2009 - Attorney-General's Department - Citizen Space
Government	Amend the Corporations Act to clarify the treatment of trusts with corporate trustees during insolvency	ARITA have made submissions in relation to Trust Reforms: Submission: SBR, SL & Trust law reform
ATO	Consult, act upon and publish model creditor guidelines consistent with model litigant obligations	The ATO obligations were updated in June 2024: Our obligations as a model litigant \| Australian Taxation Office

Making positive progress on all of these issues will be an important step in creating the right environment for the larger Insolvency Reform agenda.

Look in the mirror

Until we see the Government response, we will not know the scope and tone of the Review. From the number of recommendations and the Committee views, one can assume it will be a comprehensive look in the mirror for the insolvency community. The recommendations are here summarised:

No.	Chapter	Committee Recommendation
1	Comprehensive Review of Insolvency Law Chapter 3.104	As soon as practicable the government commission a comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency. The committee is also recommending that the government progress several other near-term actions as identified in the executive summary.
2	Principles and Objectives of Insolvency Chapter 4.61	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	Principles and Objectives of Insolvency Chapter 4.61	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.
4	Public Interest Objectives Chapter 5.77	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.
5	ASIC Data and Benchmarks Chapter 6.76	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	Pathways for Insolvency and Restructuring Chapter 7.98	The proposed comprehensive review consider and report on the current system of corporate insolvency pathways from a holistic systems analysis perspective.
7	Pathways for Insolvency and Restructuring Chapter 7.101	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	Pathways for Insolvency and Restructuring Chapter 7.107	As soon as practicable the government consider and consult on potential reforms to the: small business restructuring pathway; and simplified liquidation pathway.
9	Pathways for Insolvency and Restructuring Chapter 7.108	The comprehensive review consider the: voluntary administration pathway; and members voluntary liquidation pathway.
10	Pathways for Insolvency and Restructuring Chapter 7.110	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	Administration of Liquidators and Insolvency Chapter 8.25	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	Administration of Liquidators and Insolvency Chapter 8.30	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	Administration of Liquidators and Insolvency Chapter 8.67	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	Administration of Liquidators and Insolvency Chapter 8.87	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	Administration of Liquidators and Insolvency Chapter 8.108	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	Assetless administrations and the role of the State Chapter 9.46	The government consider changes to the Assetless Administration Fund to ensure that it is achieving its intended policy objectives.
17	Assetless administrations and the role of the State Chapter 9.51	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	Assetless administrations and the role of the State Chapter 9.73	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	The role of Government Agencies in Insolvency Chapter 10.35	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	20 The role of Government Agencies in Insolvency Chapter 10.54	The comprehensive review examine the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework.
21	The role of Government Agencies in Insolvency Chapter 10.54	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	22 The role of Government Agencies in Insolvency Chapter 10.106	The Australian Taxation Office consult, act on and publish model creditor guidelines, consistent with its model litigant obligations.
23	Assets of the Company and Creditors Priority Chapter 11.37	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	Assets of the Company and Creditors Priority Chapter 11.79	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	Assets of the Company and Creditors Priority Chapter 11.87	That the comprehensive review consider and report on franchising insolvency issues.
26	Secured assets and Creditors and the PPA Act	The government provide a formal response to the Whittaker Review which was completed in 2015.
27	Voidable Transactions and unfair preferences Chapter 13.61	The comprehensive review consider unfair preferences and voidable transactions as a core aspect of potential insolvency reform.
28	Property held in Trust Chapter 14.55	The government amends the Corporations Act 2001 to expressly clarify the treatment of trusts with corporate trustees during insolvency.

Conclusion

The Report and the many submissions made demonstrate reform is warranted and overdue. There has been good progress in relation to specific issues addressed by Government, ASIC and the ATO, but in relation to holistic reform it is very hard to see anything happening quickly given the looming election in 2025. Hopefully the other reforms that can be pursued in the interim create a degree of impetus in a refreshed government with a reform agenda.