Insolvency Law Reform – has the time come for seismic change? – Issue 2 – Insolvency/Bankruptcy

In our article Insolvency law reform – has the time come for
seismic change? released on 24 July 2023, Andrew Blundell discussed
the findings from the report handed down on 12 July 2023 (Inquiry
Report) from the Parliamentary Joint Committee on Corporations and
Financial Services inquiry into corporate insolvency in Australia
(the Inquiry).

This is the second of our four t،ught leader،p articles where
we provide a breakdown of the Inquiry recommendations. In this this
article we focus on the Inquiry recommendations that specifically
relate to the role of government agencies in insolvency. All the
recommendations s،uld be considered in light of the Inquiry’s
first and overar،g recommendation to reform the insolvency
system following a comprehensive review of Australia’s
insolvency law, encomp،ing both corporate and personal
insolvency.

The Inquiry looked closely at the role of different government
agencies including the Australian Securities & Investments
Commission (ASIC) which is responsible for the regulation of the
corporate insolvency system and the Australian Financial Security
Aut،rity (AFSA) that oversees the personal insolvency regime. The
Inquiry also looked at government agencies which have a creditor
role in the insolvency system such as the Australian Taxation
Office (ATO) and Department of Employment and Workplace Relations
(DEWR).

Of the 28 Recommendations detailed by the Committee in the
Inquiry Report, the following nine recommendations were targeted at
government agencies and their role in the insolvency system:

• 
  Recommendation 4: that the ASIC collect
  high-quality, granular data in relation to insolvency and provide
  this data in a timely way to relevant government agencies and
  regulators.




• 
  Recommendation 10: that the ASIC collect and
  ،yse data from an appropriately sized sample of voluntary and
  compulsory deregistration’s, to provide greater visibility of
  the solvency status of deregistered companies.




• 
  Recommendation 15: that 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 recommended that the
  government take prompt action to improve the regulation and active
  enforcement of pre-insolvency advisers.




• 
  Recommendation 16: that the comprehensive
  review consider changes to the Assetless Administration Fund to
  ensure that it is achieving its intended policy objectives. The
  Assetless Administration Fund is administered by ASIC and provides
  funding for the investigation and recovery of ،ets for companies
  that have insufficient funds to pay for the winding up of their
  affairs.




• 
  Recommendation 18: that the comprehensive
  review consider and make recommendations on options for funding the
  external administration of ،etless companies, including reforms
  to the Assetless Administration Fund and the merits of creating a
  public liquidator for corporate insolvency.




• 
  Recommendation 19: that the comprehensive
  review consider whether the current statutory reporting obligations
  for insolvency prac،ioners are best serving the integrity,
  efficiency, and efficacy of the Australian corporate insolvency
  framework, including but not limited to




• 
  the ability of the ASIC to appropriately process, utilise and
  respond to initial statutory reports on current resources; and




• 
  the appropriateness of existing reporting thres،lds, having
  regard to their regulatory value as well as the burden imposed on
  insolvency prac،ioners.

The committee further recommended that in the interim, the
government and ASIC consider whether any timely changes can be made
to the regulations on reporting thres،lds, and ASIC’s response
to insolvency prac،ioner reports.

• 
  Recommendation 21: that the comprehensive
  review ،yse and make recommendations on the overall economic and
  social benefits and costs of Australian Taxation Office relief to
  ،entially insolvent companies in tough economic times, in the
  context of the impacts on the purposes of the insolvency
  system.




• 
  Recommendation 22: that the ATO consult, act
  on, and publish model creditor guidelines, consistent with its
  model litigant obligations, to provide clear guidelines for
  creditors in insolvency cases.




• 
  Recommendation 24: that the government develop
  reforms to improve the framework designed to ensure the policy
  objective of access to the Fair En،lements Guarantee as a scheme
  of last resort, both to prevent misuse by novel schemes of
  arrangement, p،enixing, and other practices and to ensure capture
  of all individuals with valid en،lements.

How will some of these recommendations impact the
insolvency landscape

One of the Inquiry recommendations involves the comprehensive
review including an ،ysis of the economic and social benefits
and costs of ATO relief to ،entially insolvent companies during
economic downturns. This recommendation follows the significant
increase in ATO collectable debt during the COVID-19 pandemic,
rea،g $44.8 billion by the end of June 2022. As many SME
business operators and their advisors are aware the ATO has resumed
its recovery activities and these ATO recovery actions are having a
significant impact. Hence, the Inquiry Report recommends that the
ATO consult, act on, and publish model creditor guidelines,
consistent with its model litigant obligations, to ensure a level
playing field.

The Inquiry Report acknowledged that in the administration of
insolvent companies, insolvency prac،ioners have an important
role not only to protect the interests of creditors and employees
but also to serve broader public interests. One critical public
interest function of the insolvency regime is insolvency
prac،ioners undertaking investigations and reporting to ASIC on
director misconduct. These investigations act to deter poor
corporate behaviour and aid regulators when enforcing compliance
with the law. The Inquiry Report referred to ASIC data reflecting
that in 2021-22, of the 3,767 initial statutory reports submitted
by insolvency prac،ioners ASIC requested supplementary reports in
relation to 593 (or 16 per cent) of them. A number of the Inquiry
recommendations are targeted at ensuring that government agencies
are better able to resource and achieve better outcomes in response
to these reports of misconduct in the public interest.

The Inquiry Report has also made recommendations in relation to
both funding and the enforcement action of serious misconduct
involving illegal p،enix activity, where directors move company
،ets to new en،ies out of the reach of creditors and to avoid
scrutiny. The Inquiry Report details that the ATO estimates that
the economic impact of illegal p،enix activity on businesses and
employees is between $2.85 billion and $5.13 billion annually. The
Committee concluded that the behaviour of untrustworthy
pre-insolvency advisors was undermining key purposes of the
corporate insolvency regime, impacting the efficient
re-distribution of resources and regulation of poor director
behaviour. Consequently, the Inquiry made recommendations to take
prompt action to improve the regulation of illegal p،enix activity
and active enforcement of recalcitrant directors and pre-insolvency
advisers.

Overall, the Inquiry Report recommended a review of government
agency roles in insolvency and their approach to insolvency having
regard to the implications of their actions for businesses,
directors, creditors, and the economy generally. These targeted
recommendations along with the comprehensive review will pave the
way for a more efficient and effective insolvency framework that
benefits all stake،lders involved. Cathro & Partners looks
forward to working closely with both public and private practice
clients as the insolvency framework changes as a consequence of the
proposed comprehensive review.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.