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 thought leadership 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 should be considered in light of the Inquiry’s first and overarching recommendation to reform the insolvency system following a comprehensive review of Australia’s insolvency law, encompassing 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 Authority (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 analyse 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 assets 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 assetless 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 practitioners 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 thresholds, having regard to their regulatory value as well as the burden imposed on insolvency practitioners.
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 thresholds, and ASIC’s response to insolvency practitioner reports.
- Recommendation 21: that the comprehensive review analyse and make recommendations on the overall economic and social benefits and costs of Australian Taxation Office relief to potentially 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 Entitlements Guarantee as a scheme of last resort, both to prevent misuse by novel schemes of arrangement, phoenixing, and other practices and to ensure capture of all individuals with valid entitlements.
How will some of these recommendations impact the insolvency landscape
One of the Inquiry recommendations involves the comprehensive review including an analysis of the economic and social benefits and costs of ATO relief to potentially insolvent companies during economic downturns. This recommendation follows the significant increase in ATO collectable debt during the COVID-19 pandemic, reaching $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 practitioners 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 practitioners 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 practitioners 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 phoenix activity, where directors move company assets to new entities out of the reach of creditors and to avoid scrutiny. The Inquiry Report details that the ATO estimates that the economic impact of illegal phoenix 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 phoenix 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 stakeholders 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.
