On 12 July 2023, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) released a comprehensive report on corporate insolvency in Australia. This report made 28 recommendations focused on addressing various issues in the current Australian corporate insolvency space and raised some issues in the personal insolvency sector. The report was well needed given the fact that the last major review of the Australian insolvency regime was the 1988 Harmer Inquiry.
The scope of the inquiry covered a wide range of topics, such as the roles and funding of insolvency practitioners, government agency involvement such as the ATO and ASIC, employee rights, insolvency for small and medium-sized enterprises (SMEs), and the operation of the Personal Property Securities Act (PPSA). The review also examined potential reforms in corporate insolvency mechanisms including: voluntary administration, insolvent trading, safe harbour, priority of creditors, unfair preferences and voidable transaction.
In response to the submissions raised in the enquiry, the committee made 28 recommendations in the report. Some of the more interesting recommendations are summarised in this article.
Recommendation #3 – a unified personal and corporate insolvency system
A main concern raised in the submissions was the fact that Australia’s corporate insolvency system is overly complex, challenging to navigate, and costly for both debtors and creditors. The committee found that these issues have in part been caused by the separation of personal and corporate insolvency systems. The committee formed a preliminary view that the unification of insolvency law along with a single insolvency regulator would be beneficial.
In order to achieve the grand ambition of “unification”, the committee noted that the options available to the legislature ranged from “relatively modest” changes to the law to implementing a “single legislative scheme administered by one specialist insolvency regulator”. An example of a modest change to the law is to have a common and consistent set of definitions across the insolvency regimes. The committee acknowledged that a true unification process would be significantly beneficial but also appreciated that the process would be complex, lengthy and would be resources intensive. For example, the suggestion for a single insolvency regulator was previously raised in 2010[1] to which the government rejected the idea due to the expensive upfront costs of merging regulators such as corporate insolvency arm of ASIC and AFSA together. The government also noted the merging of regulators would “result in corporate insolvency [part of ASIC] losing its important connections with others parts of ASIC, for example in relation to major corporate administrations, regulation of insolvent trading and of director and corporate misconduct that may have been engaged in leading up to, or during, an insolvency event”.[2]
Recommendation #26 – a formal response to the Whittaker Review (2015).
The Whittaker Review is a detailed statutory review into the PPSA that analysed the effectiveness of the operation of the PPSA and it made recommendations.
In particular, the PJC Report recommended implementing and requested a response to recommendation 362 of the Whittaker Review. This recommendation was made up of two complementary recommendations: first, leave the vesting rules solely in the PPSA and second, repeal section 588FL of the Corporations Act 2001 (Cth). Section 588FL provides for the automatic vesting of security interests that are registered out of time, but only in respect of corporations. The Whittaker Review maintained that section 588FL is unnecessary as the priority rules in the PPSA are adequate to protect a creditor’s position of a perfected security interest. The review also noted that section 588FL “is not reflective of the unifying principle” of the PPSA as it only applies to companies instead of all grantors (unlike section 267 of the PPSA which applies to both corporate and individual grantors). It is also worth noting that the Australian PPSA was created in 2009 and was based upon existing similar laws in Canada and New Zealand. Australia’s PPSA laws is an outlier as both Canada and New Zealand do not have an equivalent version of section 588FL. The recommendation to amend the current vesting rules in Australia was consistent with many submissions which argued that section 588FL is a harsh provision that is of little benefit and complicates the PPSA regime.
On 22 September 2023, the Attorney-General announced the Australian Government’s response to the Whittaker Review and released the Personal Property Securities Amendment Bill 2023 for public consultation until 17 November 2023. In the explanatory memorandum to the Bill, the government stated that section 588FL is a deterrent provision which protects against fraudulent registration before a company’s insolvency. Accordingly, the government intends to retain section 588FL.
Recommendation #28 – amend the Corporations Act 2001 to expressly clarify the treatment of trusts with corporate trustees during insolvency.
Australia currently lacks clear statutory regulations regarding the treatment of trusts and trust property in insolvency settings. The Committee has acknowledged the need for reform in this area given the popular and common use of corporate trustees and government inquiries regarding this issue. For example:
- the 1988 Harmer Report proposed 10 recommendations for insolvent corporate trustees, which haven’t yet been put into action; and
- in 2021, there was a consultation about how trustees are treated in insolvency law, but the government is waiting for the Committee’s inquiry results before taking further steps.
An example of an issue raised to the committee was the common clause in trust deeds which remove a trustee when they become insolvent (known as ejection clauses). The committee refers to Mr Richard Fisher, a consultant with Ashurst Australia and a Commissioner for the Harmer Review, explained that the effect of an ejection clause is to “deny trustees in liquidation the ‘continuing authority and ability to manage the trust assets, sell them and so forth’, the proceeds from which could be used to satisfy claims of creditors.”[3] In these circumstances, a liquidator would have to make an application at the court to be appointed as receiver of trust assets in order to be able to deal with them which then creates unnecessary costs for liquidators and detrimentally impacts returns to creditors. Another major concern was the lack of transparency regarding trusts as investors may not realise that the entity that they are dealing with is a trust.
In response to these concerns, the committee recommended amending the Corporations Act to allow liquidators to manage trust assets for single trading trusts (a corporate trustee of one trust). The committee acknowledged further consultation is needed regarding corporate trustees of multiple trusts. The Committee also supports a public registry of trading trusts to improve transparency, especially for less experienced investors who may not understand that the corporate trustee only hold legal title to these assets, they do not own the trust assets in a beneficial way.
Overall, there was a broad consensus in support for legislative reform for corporate trustee insolvency. This would require seeking referral of state powers for reform as the power to legislate trusts vests in states, not the Commonwealth.
Conclusion
In conclusion, the PJC’s report offers a comprehensive examination of the current state of Australia’s insolvency regime and has provided many recommendations on how to improve it. The inquiry also highlights the need to align and modernise the regime with the current Australian economic demands and community expectations. Ultimately, it appears that the Australian insolvency legislations is due for major reform and we will have to wait for the Federal Government to implement change.
[1] Government response to the Senate Economics References Committee report, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework.
[2] Ibid.
[3] Para 14.36 – https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/CorporateInsolvency/Report/Chapter_14_-_Property_held_in_trust#_ftn21