Our submission to the Australian Senate Inquiry into Corporate Insolvency in Australia

Set out below is the executive summary to Ben Sewell’s submission and if you would like to read our entire submission click here: submission link

Executive summary and recommendations

Australian corporate insolvency law is failing the small businesses that are at the heart of the Australian economy. The ‘General Insolvency Inquiry’ of 1988, and subsequent law change in 1993, introduced Voluntary Administration — a form of restructuring which has been completely ineffective in turning around insolvent small businesses. 

In 2021, a positive development came with the introduction of the Small Business Restructuring Practitioner (SBRP) framework. There needs to be further improvements to the SBRP framework, as well as other changes to the corporate insolvency framework that would better support small to medium-sized enterprises (SMEs). 

The problems with the current system begin with the purposes or objectives that underlie the corporate insolvency framework. The current focus is risk-based and punitive — directed at the small number of business directors that engage in misconduct, rather than the majority who would be better described as overwhelmed by financial distress. 

The corporate insolvency system must shift towards supporting businesses capable of turnaround, and quickly winding up businesses that are not economically viable. 

A major difficulty in assessing the existing corporate insolvency framework is the lack of detailed data released by official actors into the operation of the system. For example, creditors should be provided with a breakdown of how liquidators spend their time (and therefore spend company assets), and the Australian Securities & Investments Commission (ASIC) should release more detailed information on the root causes of insolvency. 

Currently, the corporate insolvency framework applies a ‘co-regulatory model’, where both ASIC and the Australian Restructuring, Insolvency and Turnaround Association (ARITA) play key roles. It is inappropriate for ARITA to play this role, as they lack the impartiality to make decisions in the public interest, rather than simply the interests of their membership (predominantly registered liquidators). 

Voluntary Administration is an expensive (around $50,000 per administration), and largely unsuccessful, restructuring mechanism (around 1 percent of insolvent companies use Voluntary Administrations to successfully restructure). While it has worked for some larger corporates, it is ill-suited to SMEs. Instead, the SBRP framework should have its scope extended to cover a larger proportion of Australian companies (a $5m limit on total liabilities up from the existing $1m cap). 

Any reform of the corporate insolvency framework needs to re-think the role of insolvency practitioners. The current monopoly held by registered liquidators (and in essence, professional accountants) needs to end. Successful business restructuring requires more than just accounting skills, and there ought to be extra emphasis on general business skills. There should also be a mechanism allowing directors to receive more robust insolvency advice, prior to an external administration commencing. 

Finally, the way in which insolvency practitioners charge for their services needs to change.  The dominance of the ‘hourly rate’ incentivises incompetence, and provides no motivation for insolvency practitioners to achieve a desirable outcome for an insolvent company. Instead, insolvency practitioners should be paid based on a ‘percentage of assets’. 

I recommend: 

1. A re-organisation of Australia’s corporate insolvency framework to reflect the fact that the wider economic interests in business turnaround and efficiency should guide each element of the legal and regulatory framework.
2. That the corporate insolvency framework recognise that the needs of financially distressed small-to-medium sized enterprises (SMEs) are distinct from large corporates. 
3. That ASIC be directed to provide more detailed information about both individual insolvent administrations and the performance of the system as a whole. 
4. That reform to liquidator reporting require that liquidators provide more detailed breakdowns of their fees and costs to creditors. 
5. Transfer of government oversight of SME corporate insolvency to the Australian Financial Security Authority (AFSA). 
6. That the Australia Restructuring, Insolvency and Turnaround Association (ARITA) be removed from involvement in registration and disciplinary actions against insolvency practitioners. 
7. A requirement for general business skills for those seeking registration as an insolvency practitioner.
8. The current SBRP upper limit be lifted from $1 million in debt to $5 million. 
9. For Voluntary Administration itself, that the process be streamlined. 
10. That there be increased transparency and reporting around the costs of Voluntary Administration. 
11. Recognition that insolvency practice does not meet the expected norms of a profession, and therefore insolvency practitioners should not be (largely) self-regulating.
12. Recognition that liquidators and Restructuring Practitioners should have different skill sets.
13. Opening the criteria for insolvency practice in general to enable and encourage non-accountants to enter the field, and especially to become Restructuring Practitioners. 
14. A clear separation of restructuring and liquidation roles. 
15. Empowering insolvency practitioners to advise on insolvency matters before appointment, but require that advice to be put into writing as a condition of appointment. 
16. Encouraging the development of a turnaround profession (as distinct from registered liquidators).
17. That pricing structures be regulated to move to a ‘percentage of assets’ model. 
18. Revamping the insolvency practitioner complaints process.
19. Introducing a proper funding model for assetless administration to avoid cross-subsidy.