Insolvency Law Update: Not Sure What You Heard, But The Reviews Aren’t All That Bad - Parliamentary Joint Committee (PJC) July 2023 Report on Corporate Insolvency in Australia

Insolvency: 13 July 2023

Author: Oren Polichtuk & Amanda Robinson - Our People

Insolvency law, a practice area very near and dear to our hearts (we are assuming that is why you are here) but like anything, there is always room for improvement.

Recently, the Parliamentary Joint Committee (PJC) on Corporations and Financial Services has expressed concerns that Australia’s corporate insolvency system is “overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors” and reported that few seem satisfied that the system reflects modern business practices and needs.

Accordingly, July 2023 has seen the PJC deliver a report on Corporate insolvency in Australia and following their thorough review have recommended … that as soon as practicable the government commission a comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency.

We have reviewed the review suggesting a further review, and while lengthy the various recommendations highlight (amongst other the things), the following key concerns with the current system:

• the relative priority of employees, liquidators, and secured creditors, including the priority over circulating assets under section 561 of the Corporations Act 2001.
• the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework.
• unfair preferences and voidable transactions; and
• the treatment of trusts with corporate trustees during insolvency.

Whilst the PJC’s focus was on corporate insolvency, it formed a view that the unification of insolvency (corporate and personal) regimes under a single insolvency regulator would potentially deliver significant benefits. Some benefits of note include considerations for many smaller businesses, whereby directors have been required to give personal guarantees such that when the corporate entity fails, they may find themselves having to navigate two systems and two regulators. The harmonisation of the two regimes has been considered before but given the recognition that the exercise will be protracted and difficult, to date it has not been a priority. We will have to wait for the finding(s) of the comprehensive review to see whether our insolvency regimes will move in that direction.

Notwithstanding the PJC recommendation for adopting a holistic approach, it nonetheless identified some reform actions which ought to be immediately progressed independent of a comprehensive review to address clear and broadly recognised failings in the current law including:

• implementation of the recommendations from the Safe Harbour Review;
• reforms to the experience eligibility requirements for registered liquidators, to address the inequity of the requirements and the gender imbalance in the population of registered liquidators; and
• prompt action to improve the regulation and active enforcement of pre-insolvency advisors including consideration of the nature and extent of the harm posed by ‘untrustworthy pre-insolvency advisors’ some of which promote illegal activities or methods to avoid paying outstanding obligations.

With more reviews to come, we shall keep you posted.