Comprehensive review of Australia’s insolvency regime

In response to a swift return to pre-pandemic levels of insolvency activity in recent months, the Albanese Government has formed a Parliamentary Joint Committee to conduct a comprehensive review of Australia’s insolvency and bankruptcy laws. The review represents the first formal review of the Australian insolvency regime since the Harmer Inquiry of the 1980s that produced the Voluntary Administration process that we use today to revive an insolvency company.

In 2016 there were a number of reforms enacted to streamline the way the corporate and personal insolvency legislation operate along with the introduction of a several provisions to increase the rights of creditors in both corporate and personal insolvency administrations.  And then in 2020, the Small Business Restructuring (SBR) and Simplified Liquidation (SL) processes were rushed through as legislation in readiness for the then feared ‘tsunami’ of insolvencies, which hindsight has determined was barely a ripple.

The key elements of the review include and inquiry into existing legislation, such as:

• The SBR & SL legislation
• Unlawful phoenixing activity reforms
• The operation of the Personal Property Securities Act 2009 in the context of corporate insolvency

The terms of reference also intend to investigate potential areas of reform into matters such as:

• Unfair preferences
• Trusts with corporate trustees
• Safe Harbour

You can read the details of the full terms of reference here.

John Winter, the CEO of the Australian Restructuring Insolvency & Turnaround Association recently said in a media release, “ARITA has been seeking a root and branch review of our personal and corporate insolvency regimes for more than half a decade. There has not been a proper consideration of Australia’s insolvency laws since the Harmer Inquiry of the 1980’s despite an economy that has fundamentally changed. Australia’s insolvency and restructuring regime has some world leading features – like our Voluntary Administration and Safe Harbour regimes which are far more effective than, say, Chapter 11 in the US. As the Productivity Commission found in 2015, by not being court-driven, our regime is also cheaper than in many other jurisdictions. Our laws are ridiculously complex. They are so difficult for directors to understand that five times as many businesses are wound up by ASIC than are properly closed down. They make the process unnecessarily expensive, with registered liquidators forced to do work which is not needed and they often have to do this work without getting paid. No one wins from this – not investors, not creditors, not workers and not the community”.

Whilst the process is likely to take several months to complete, we look forward to learning of the proposed reforms, which hopefully reduce the complexity and compliance aspects of the Australian insolvency regime.

I will provide further updates on this matter as they come to hand.