Parliamentary Secretary to the Treasurer
26 October 2004 - 3 December 2007
"Future Directions for Insolvency Reform"
Insolvency Practitioners Association
Crystal Palace, Luna park
22 August 2007
The importance of sound insolvency law: Australia has well-functioning markets and wholesale change to our insolvency laws has been unnecessary. However, the Australian Government is delivering improvements, to ensure the law remains relevant to market changes. These include the recently passed Insolvency and Simpler Regulatory System Acts 2007. The Australian Government has also addressed the important issue of standards setting in the industry.
Corporations Amendment (Insolvency) Act 2007: Overview of contributions from stakeholders and on how the Act will improve insolvency laws.
Emerging issues: Sons of Gwalia, long-tail liabilities, cross-border insolvency and other issues raised during consultations on the Insolvency Act 2007.
Areas of potential reform: Issues raised during the consultation period which are currently being considered by CAMAC. Adopting the UNCITRAL model law on cross-border insolvency.
Thank you, Mark [Robinson, State President, Partner, PPB] for your very kind introduction. I’m delighted to be here this afternoon.
The active role played by the Insolvency Practitioners Association (IPA) has been instrumental in shaping the development of the legal and regulatory framework of corporate and personal insolvency.
Today, I have been asked to speak about the future directions for insolvency reform.
The Government is constantly engaged in the important priority of improving the efficiency of the economy. Through our careful and precise economic management, we are committed to the continual improvement of the living standards and economic wellbeing of all Australians.
To that end, the Government has pursued a number of initiatives. We have handed down surpluses in nine of the past ten Budgets… we have established the Future Fund… and eliminated net debt. Net interest payments have fallen by around $8.5 billion since 1996‑97.
We have delivered tax cuts to low income workers and to those on higher wages… and reformed superannuation through the Better Super initiatives.
As well, the Howard Government has created a modern and flexible industrial relations environment for both industry and employees.
Achievements like these are not produced by a complacent approach. They require strength of commitment and a determination to deliver what is right for the country.
Sometimes, these decisions are not easy, but the Australian Government is committed to doing the things that need to be done in the interests of all Australians.
I am proud to be a member of a Government that has maintained its drive and enthusiasm for economic excellence.
A key priority for this Government today and into the future is to continue to expand the productive capacity of the economy. One way to achieve this is to reduce red tape and enhance the quality of market regulation.
The Importance of Sound Insolvency Laws
Quality market regulation involves establishing and maintaining fair and efficient markets. In this respect, I cannot overstate the importance of insolvency law, as it provides a fair and orderly process for dealing with the financial affairs of insolvent companies and the individuals who have interacted with them pre-insolvency.
Insolvency law plays a fundamental support role in the commercial and economic processes of our community, by underpinning our system of financial and contractual relationships. Modern, credit‑based economies require predictable, transparent and affordable means for enforcing unsecured and secured credit claims.
The relatively low cost of credit in Australia undoubtedly has helped businesses to obtain finance more easily. I believe that this should continue to be reflected in a well‑designed insolvency system.
The Government has worked hard to develop and maintain competitive markets. And it is an unfortunate reality of competitive markets that some businesses will fail, often without any suggestion of misconduct by management.
When businesses do fail, sound insolvency laws play a significant role in promoting the efficient reallocation of assets. This creates certainty in the market and promotes economic stability and growth.
Of course, markets evolve over time. This is why it is important that we ensure that our laws evolve to match their increasing sophistication.
Hence, the current round of insolvency reform, which is now embodied in the Corporations Amendment (Insolvency) Act 2007. Its passage on 1 August 2007 marks the first legislative reforms to our insolvency laws in 15 years.
These reforms provide a very positive reminder of the critical contribution insolvency practitioners make in this area of the economy.
Standards for Insolvency Practitioners
You are all aware that insolvency processes can have a significant impact on a diverse range of stakeholders.
These stakeholders include suppliers of goods and services… employees… shareholders… directors… managers… and debtor companies.
It is precisely because a corporate failure can have such wide-ranging implications for society that the role of insolvency practitioners, who look after those companies much as a doctor looks after a patient, is a highly valued and critical one.
Just as a doctor would seek to care for their patient, it falls to you – the insolvency practitioners - to tend to the distressed corporation.
You may have different options to explore to ensure that the corporation recovers – should the condition be mild.
On the other hand, the company may determine that it should voluntarily liquidate and cease functioning. But whatever route you may adopt, you must observe a set of duties. These include the duty to minimise the consequences of a corporate’s failure by efficiently reallocating its resources; and trying to improve the chances of business rescue; and investigate misconduct by debtors and/or directors.
Along with these responsibilities comes, unsurprisingly, close public scrutiny of the conduct of insolvency professionals.
Of course, the very essence of your role demands a level of public scrutiny. You are trying to allocate usually finite and insufficient funds to a range of people, who understandably might not see why they are to receive less than 100 cents in the dollar.
Accordingly, creditors and others who may be affected by an insolvency will look to you to ensure that in each insolvent administration you undertake, you have maintained an appropriate set of standards.
Not doing so can damage the reputation not simply of one practitioner, but of your entire profession. It can also mean economic ramifications may be with us for years.
It is in this context that the insolvency reforms acknowledge but also seek to lift the general standards of the insolvency practitioner profession.
But we have very deliberately also left space for the IPA to provide specific guidance on the detail of these standards. That is because we recognise that it is those who are in practice who are best able to provide this type of guidance.
And we recognise that guidance about “good practice” needs to be flexible so that it can move with the market.
So, I am therefore very pleased to hear that the IPA has stepped up to this challenge, and that it has begun working in earnest on the revision of your code of conduct.
I welcome the IPA’s undertaking to issue one consolidated code, addressing each of the various ethical, remuneration and practice issues for the profession.
I note that the guidance will also cover all forms of corporate and personal insolvency administration
I hope that this code will feature prominently in your profession, and I would encourage you to use it as an opportunity to promote your skills and dedication to the Australian community at large.
In this respect, I think the future direction of insolvency lies very much in the hands of the insolvency profession itself. Adopting and practising what is in a code of practice is a sensible way to ensure you remain a well-respected and valued profession, which passes the public scrutiny test.
I would now like to take some time to briefly discuss the key elements of the current reform package with you.
Current reforms – Corporations Amendment (Insolvency) Act 2007
The Insolvency Act 2007 embodies the results of the first review of insolvency laws since the Harmer Report, back in 1988.
Given the significant market developments that have occurred since 1998, the Australian Government decided to sponsor a series of reviews into this area of the law.
The recommendations of the Corporations and Markets Advisory Committee, or CAMAC, and the Parliamentary Joint Committee on Corporations and Financial Services were of particular assistance in fine-tuning our regulatory framework.
The recommendations of these committees reflected the consensus view of the business and practitioner community that some reform – but not wholesale change - was needed.
The IPA itself made a valuable contribution to the process of discussion and provided strong leadership on the issue.
In my view, the insolvency package continues to enshrine the principles that the Government adopted with its response to the report of the Banks’ Taskforce (on red tape) and implemented with legislation such as the Simpler Regulatory System Act 2007.
As with the Act, the Government has sought to achieve a balance. A balance that ensures the new rules are implemented in a flexible way that reflects best practice.
There are many examples of how this balance is being improved through the reforms.
Practitioner independence is one of them. Indeed, it was a key issue raised during the consultation process.
Particularly in the area of voluntary administration, there was a concern that a small minority of professionals were taking appointments in situations where they were obviously not independent.
In response, the Government has now introduced a requirement that practitioners declare any “relevant relationship”.
Administrators will now need to provide creditors with a statement disclosing any “relevant relationships”, early in the proceedings. The objective is that creditors are then able to assess this information and decide if they wish to terminate the appointment of an administrator they feel will not act in their interests.
I should note that the concept of a “relevant relationship” reflects the input of this Association, the IPA. Your suggestion that a two‑year limit on relationships be introduced, and that future relationships need not be disclosed, is now reflected in the Insolvency Act.
This reform provides a good example of the Government working with the insolvency profession to improve standards of conduct, without introducing an unnecessary regulatory burden.
The new disclosure requirements highlight the importance of practitioner independence, and should help strengthen the reputation of the profession even further.
Insolvency practitioner fees
Insolvency practitioner fees are another issue that creditors have raised with me in consultations on the legislation, and with Treasury officers.
I think that there is a lack of understanding in the general community about the complex nature of the work performed by insolvency professionals and its true cost. That is understandable – often, insolvencies are very emotional and distressing.
Perhaps this lack of understanding has lead to a perception that your profession can charge too much.
I therefore wanted to address this concern in the insolvency reform package by requiring practitioners to provide additional information about the basis of their fees when seeking agreement from creditors. I am confident that this measure will remove the fog from quite a misty area for creditors.
The approving creditors will be able to make an informed judgment about whether the proposed fees are reasonable.
This, coupled with the work the IPA has started on its own standards in this area, should help professionals to fully meet their legal obligations…and to go one step further – leading best practice.
At the same time, other related reforms are designed to remove unnecessary procedural impediments to insolvency professionals being appropriately compensated for their work.
They will allow a fixed amount of fees to be drawn down where a creditors’ meeting lacks a quorum… allow for the approval of fees of an administrator by a committee of creditors or committee of inspection... and allow administrators to apply to seek approval from a court for fees if creditors have not met.
Education criteria for registration as a liquidator
The Australian Government has taken several approaches in the insolvency package to improving the regime for registration of insolvency practitioners. One important element is the education criteria required for registration as a liquidator.
The criteria will now take into consideration a person’s experience in all types of external administrations under Chapter 5 of the Corporations Act. Until recently, not all of these qualified for consideration.
The issue of professional indemnity and fidelity insurance requirements has also been clarified. Practitioners will now be required to maintain both types of insurance in order to practise. Registered liquidators will be required to lodge a detailed annual (rather than triennial) statement with ASIC.
This statement is to include details of any professional development courses undertaken by a practitioner and will also include a summary of insolvency work undertaken throughout the year, together with the details of mandatory professional indemnity and fidelity insurance.
These reforms will modernise the registration regime, and importantly, will add another valuable layer of protection to the reputation of the profession.
Future reforms – Corporations Amendment (Insolvency) Act 2007
There is much more in the Act that I could talk about. However, at this point I would like to stop there, and turn to look briefly at some of the policy issues on the horizon.
Sons of Gwalia
The first issue — and one which I am sure many of you are interested in — is the Sons of Gwalia decision.
As you are all most likely aware, the High Court has determined that shareholders may claim against that company for losses they incurred as a result of misleading or deceptive conduct engaged in by the company in the lead-up to its insolvency.
There are two aspects of this issue that I would like to comment on.
First, I would like to say that I am always impressed by the practical and innovative approach that the insolvency profession takes to new problems. The approach that the deed administrator has taken to shareholder claims in the Sons of Gwalia administration is a case in point.
Some commentators said that sorting out shareholder claims in this context would be an insurmountable task.
While the task will inevitably take some time and result in some additional administrative costs, as the deed administrator’s report says, the procedure that is being considered would appear to be an “effective and cost efficient system” for adjudicating claims.
In brief, the total value of shareholder claims is accounted for mainly by a few large claims. These large claims would receive more careful attention than what the deed administrator has called “junior” claims.
Junior claims would be subject to a simplified assessment… would receive a one-off compromise payment if their claim meets specified criteria… and would have no further rights to dividends or to participate in the deed of company arrangement after such a payment is made.
To my mind, that is an eminently sensible solution to the problem of assessing shareholder claims in an administration.
So perhaps the answer you have found to this ‘on the ground’ issue, is a telling indication of what lies ahead for you in the future – scope to respond innovatively to complex issues!
Having said that your profession is quite capable of handling a new challenge like shareholder claims against insolvent companies, this does not of course, answer the question of whether such claims should be allowed to be made in the first place.
In that regard, I have asked CAMAC to look into the practical consequences of this decision, and whether law reform is required to change or clarify the law in this area. I understand CAMAC will issue a discussion paper in a few weeks, with a final report due later this financial year.
A key issue for the review is how any reform will affect insolvency proceedings on the ground.
I would emphasise the importance of having the experience and expertise of the insolvency profession reflected in this report. So I would encourage all of you to examine CAMAC’s discussion paper and seek to contribute your own submission to this issue.
The second policy issue on the horizon in this area is the protection of personal injury claimants.
The creditors of a company typically receive very robust protection in the insolvency process.
Creditors with claims against the company that have not yet crystallised — known as the long-tail liabilities of a company — on the other hand, are often not recognised at all in the insolvency process.
Long-tail liabilities typically arise where the conduct of a company results in individuals suffering a personal injury that will only become manifest at some future time due to its latency period. The concept of long-tail liabilities is not new, being well established in the insurance industry.
Recognising such claims in an external administration raises a number of difficult questions.
The main difficulty relates to uncertainty. By their nature, unascertained future claims against the company are likely to be unknown at the point at which a company is being wound up. This is likely to create difficulties in terms of estimating and allowing for such claims.
Requiring that every external administration include provision for long‑tail liabilities might unduly complicate insolvency proceedings.
That is why the Government is considering a threshold test that would need to be satisfied before such claims are taken into account. Under the test being proposed, there would need to be a strong likelihood of numerous future claims before provision needs to be made to meet those claims.
Handling the external administration of a company that is experiencing financial distress is often challenging and involves significant complexity.
Wherever possible, it is my goal to avoid introducing additional complexity unless the benefits can be shown to exceed the costs.
In this regard, I place a very high value on input from groups such as the IPA. You are uniquely qualified to advise the Government as to what will and won’t work when it comes to handling challenges such as long‑tail liabilities.
I would therefore encourage all of you to consider the CAMAC discussion paper and input to the CAMAC process.
I would also like briefly to touch on the proposal to adopt the UNCITRAL model law on cross-border insolvency.
The model law has now been adopted by a number of our major trading partners including the United States, the United Kingdom, Japan and New Zealand.
The CLERP 8 discussion paper canvassed the adoption of the model law by Australia. That paper was published in 2002 and adoption of the model law by Australia received widespread support.
The Government is now proceeding to legislate for the adoption of the model law in Australia. A key objective of the model law is to achieve uniformity across the globe in the way that cross-border insolvencies are treated.
Legislating the model law will help maintain Australia’s reputation as a place to do business, and we can also benefit from international jurisprudence in this area.
Australia’s enactment of the model law, in line with other jurisdictions that have already adopted the model law, will follow closely the text as adopted by UNCITRAL.
I hope to introduce this Bill before the end of the current Parliamentary term. So perhaps that will see us with another future direction for insolvency – one that is going global.
Consultation on law reforms
Previously, I mentioned the importance of engaging in the reform process and ensuring that the views of stakeholders – in your case, the insolvency profession - are put to Government early, and in a coherent manner.
The IPA submission on the insolvency reform package is a good example of what can be achieved when serious consideration is given to the options available.
Organisations like the IPA have expertise in a very technical field, and they therefore bring a very unique and integral perspective to the policy table.
It helps that the IPA also has a great deal of peer respect and credibility. I can assure you that these qualities do not go unnoticed by Government.
Meaningful consultation with influential stakeholders can have a significant impact on the final shape of any piece of legislation.
Without wishing to take up much time on it, I will assure you that issues that could not be included in the Insolvency Act (but which were raised in consultations about it) will not be forgotten, or left to wither on the vine.
Rather, I believe some of these issues are significant enough in themselves that they require close examination. To start the process rolling, I have referred numerous issues that could not be included in the Insolvency Act in time, to CAMAC.
One of these includes whether to allow insolvency notices to be published to a website. So, another future direction for insolvency, I think, lies in maximising modern technology for the benefit of creditors.
Insolvency should never be described as a simple topic or an easy field to practise in. It is a complex space in which you operate, and the demands on you are very significant!
The Insolvency Act 2007 delivers an insolvency framework that is more certain…faster… cheaper… and which has an even higher degree of integrity than the current framework.
The reforms protect and enhance the integrity of the insolvency profession, which will continue to play a central role in this area of the law.
For our part, the Government will continue to monitor insolvency law and practice, and we will continue with our commitment to improve the performance of the economy for the wellbeing of all Australians.Thank you.