2 June 2011

Address to the Insolvency Practitioners' Association (IPA) National Conference Gala Dinner

Thank you for that warm welcome.

It is a pleasure to have the opportunity to speak at this conference tonight. I am very grateful to the IPA for being so accommodating and shifting the program to allow me to attend. And I also appreciate the tolerance you have shown with the uncertainty around my arrival time given the need for me to catch flights from Canberra after today's sitting of Parliament.

The IPA plays an important role in representing the insolvency profession. And you play an important role in working with the profession to ensure that the highest levels of standards and conduct are maintained.

It is for these reasons that I have chosen the IPA's National Conference to announce the release of the Government's Options Paper that sets out a pathway to reform that will modernise and harmonise Australia's insolvency framework.

The Attorney General, the Hon Robert McClelland MP, and I will put out a joint media release on the Options Paper this evening.

I thank the Attorney General for allowing me to do the honours and announce the release of the Paper at this conference.

The need for reform

The Options Paper sets out a pathway to significant regulatory reform.

The Government believes we can build a better, more efficient insolvency system. And we want a system that is more consistent across corporate and personal insolvency. We want an insolvency industry that is underpinned by professionalism, efficiency and good outcomes for creditors.

The insolvency framework has a significant impact on individuals who find themselves as creditors, including employees, and shareholders of insolvent businesses.

Last year, the Senate Economics References Committee examined the extent of insolvency practitioner misconduct and the adequacy of efforts to oversee and regulate the insolvency regime.

The Senate Committee inquiry dealt with many cases that have caused frustration, personal anguish and even financial ruin for many people.

The Committee raised significant questions about the adequacy of the registration, remuneration and regulation of the insolvency profession.

The Government acknowledges the findings of the Senate Committee.

We have used the Senate Committee's recommendations as a basis to look at wide-ranging reforms.

Economic importance of insolvency framework

The options paper has been a significant effort.

It is the product of work by both the Treasury and the Attorney-General's Department, with the Australian Securities and Investments Commission (ASIC) and the Insolvency and Trustee Service Australia (ITSA), and represents a significant commitment to harmonisation of the corporate and personal insolvency regimes.

It is a significant paper, because insolvency is a significant issue.

Not only is the insolvency framework important for creditors and employees; it is also important for our whole economy as insolvency laws play an important role in promoting economic growth.

This is through its impact on those individuals and businesses who find themselves in the position of needing an insolvency practitioner; and through its impact on those who unexpectedly find themselves in the position of a creditor or employee that faces the prospect of not being paid for goods, services or labour they have already provided.

Insolvency laws affect the risks that people are willing to undertake, which in turn affects their consumption and investment decisions.

Corporate insolvency laws should not punish genuine business effort. They should not result in otherwise profitable business opportunities passing Australia by because the costs of possible failure are too high.

But the laws should also not transfer risks from those that are taking the risks and making the decisions to other unsuspecting individuals and businesses in the economy. They should not have people in our economy wary of buying or selling goods and services because they cannot be sure that they will receive the goods or services or be paid.

And when it comes to the point where an individual or business requires an insolvency practitioner, we need a system that is strong and credible, and offers value for money.

This means that businesses that can be saved will be saved, that resources are not wasted in dealing with insolvency, and that individuals and businesses are able to deal with their financial difficulties and move forward.

Effective insolvency frameworks have the potential to reduce the costs of insolvency administrations, to improve recovery rates and to minimise the losses experienced by creditors.

Setting a pathway to reform

The regulation of insolvency practitioners, particularly corporate insolvency practitioners, has been the subject of a number of reviews in the past two decades.

These reviews have been undertaken by some eminent bodies, including the Australian Law Reform Commission, the then Trade Practices Commission, the Parliamentary Joint Committee on Corporations and Financial Services, and the Corporations and Markets Advisory Committee (otherwise known as CAMAC).

And most recently, of course, there has been the Senate Economics References Committee inquiry report released last year.

The Options Paper sets out a pathway to reforms that will improve the framework, including areas not considered by the Senate Committee. It is aimed at holistic and coordinated solutions to problems facing both corporate and personal insolvency regulation.

We want to consider changes within a broad framework, and we want to consider changes in light of the whole system – both personal and corporate insolvency.

The framework of regulation applying to insolvency professionals in Australia should reflect the policy goals that are at the core of the system. These policy goals are to promote:

  • a high level of professionalism and competence;
  • market competition on price and quality;
  • consistency for practitioners and other stakeholders operating in both the personal and corporate insolvency systems;
  • enhanced communications with stakeholders; and
  • increased efficiency in insolvency administration.

It is with these goals as a foundation that the Options Paper has been drafted. And it is these goals that I wish to discuss this evening.

High level of professionalism and competence

One of the key policy goals of any insolvency framework is to promote professionalism and competence.

A skilled, honest and accountable insolvency profession is vital for the efficient operation of the insolvency regime. A high level of professionalism and competence is important for getting the best possible outcomes for creditors, employees and businesses.

Quite clearly, the very public cases of misconduct of a small number of practitioners have had a very large impact, particularly on the level of trust in the industry among the wider community.

I think that we all recognise the need to make sure that there is confidence in the system, and that the framework is credible and works for creditors and businesses alike.

I acknowledge the IPA's work in this area, particularly through its Code of Professional Practice. The IPA Code is an important reference as to what standards of conduct are expected of insolvency practitioners. It plays an educative role, not merely for IPA members but also for those who deal with insolvency professionals.

We need to ensure that our insolvency practitioners have the appropriate skills and knowledge to do the job in order to promote a high level of professionalism and competence.

And it is important that we harmonise the professional standards across the personal and corporate insolvency systems where we can.

Competition on price and quality

A related policy goal to that of professionalism and competency is competition on price and quality.

We do not want a system that is so exclusive in terms of skills that it blocks out people that would be suitable to be insolvency practitioners. Ensuring that all suitably qualified people can enter the market means that there is more competition in the provision of quality services.

This is not just about standards for entry. It is also about transparency and the ability of creditors to assess quality and remove insolvency practitioners who are performing poorly or engaged in misconduct.

The Options Paper considers the issue of the limited power of creditors to remove insolvency practitioners and asks whether reform in this area is needed. It is important that our system facilitates the natural checks and balances that flow from competition.

The Options Paper also deals with the vexed issue of the rules governing remuneration. It seeks to identify the features of insolvency service delivery that pose particular challenges to the setting, monitoring and review of practitioner remuneration.

There is a perception that the level of remuneration claimed by registered liquidators in a number of instances has been disproportionate to the funds available for distribution to creditors. These perceptions damage the credibility of the profession and the system as a whole.

There is an inherent difficulty in efficiently setting the price of remuneration for an insolvency practitioner. There are a number of issues that can make it difficult for clients of insolvency practitioners to assess whether they have received value for money.

The Options Paper examines theses issues and seeks comment on what measures might be adopted to address remuneration related concerns — for example, what may and may not be charged as disbursements.

Consistency between personal and corporate insolvency

This brings me to the next policy goal of consistency between the personal and corporate insolvency frameworks.

The recent Senate Committee inquiry recommended that the corporate insolvency arm of the Australian Securities and Investments Commission be transferred to the Insolvency and Trustee Service Australia, to form a single insolvency regulator.

The Committee also recommended that the Australian Law Reform Commission examine opportunities to harmonise the corporate and personal insolvency systems.

The Government agrees that improvements can be made to the insolvency framework, but does not consider that a 'one-size-fits-all' approach to insolvency is appropriate. I can announce tonight that the Government will not be creating a single insolvency regulator.

We do not consider that the issues affecting the corporate insolvency framework can be resolved by picking up the current regulatory framework and placing it in a new entity.

We need to take a considered look at the entire framework to determine what changes need to be made to ensure the system works.

By making systemic changes to the framework, and the incentives that exist within the framework, we can create a system that operates more efficiently and delivers better outcomes for creditors. We can focus on changes that are aimed at preventing problems emerging rather than fixing them after they occur.

The removal of insolvency from the responsibility of ASIC would also remove substantial efficiencies and regulatory safeguards, as corporate insolvency would lose its important connections with other parts of ASIC. For example, it would lose connections with the regulation of any corporate misconduct that may have occurred in the lead up to an insolvency event.

However, we do agree that there are a number of benefits from removing unnecessary divergence between the two regimes. Given that the Australian Law Reform Commission is fully committed with existing references for the rest of the year, the Government has decided not to refer the issue of harmonisation to the ALRC, but will instead progress harmonisation through the Options Paper.

Enhancing alignment of Australia's personal and corporate insolvency laws would reduce legal complexity, risk and duplication for insolvency practitioners, creditors, shareholders and regulators.

For example, the current divergence in rules and requirements for funds handling and accounts reporting creates complexity and costs for creditors and for insolvency practitioners.

The Options Paper asks a range of questions about the alignment of the rules between corporate and personal insolvency professionals and how any such alignment should occur.

The Options Paper also re-examines some of the measures contained in the 2010 corporate insolvency reform package in light of the goal of harmonisation, including measures to facilitate electronic communication with creditors and measures to require the lodgement of certain documents with ASIC. I am interested to hear views on whether any of these proposals should be further tailored to eliminate unnecessary divergence with the personal insolvency law.

The Government continues to progress other aspects of the 2010 reform package, with an exposure draft of the legislation to be released in due course.

Enhanced communications with stakeholders

The fourth policy goal highlighted in the Options Paper is that of enhanced communication with stakeholders.

This is a critical issue. The involvement of stakeholders, and particularly creditors, in the insolvency process is important to the efficient operation of insolvency regulation and the credibility of the system.

Creditors suffer from a number of disadvantages from their position in an insolvency. They do not have access to the same information as the insolvency practitioner and they currently face difficulties removing non-performing liquidators.

Ensuring that creditors have positive rights to access information and the powers to act to protect their interests; ensures that the system is built on a credible and trusted foundation.

The Options Paper asks what information creditors should be entitled to receive regarding an administration – both by default and upon request, and what form that information should be in.

One important means of creditor involvement is the ability of creditors to call a meeting. The Senate Committee inquiry found that, while creditors in a corporate insolvency may have a right to call a meeting where 10 per cent in value agree, the cost of doing so is an effective deterrent.

The Options Paper examines whether the 10 per cent threshold achieves the appropriate balance, and proposes an option that the cost of the meeting be borne by the company where 25 per cent of creditors by value call a meeting.

By removing the requirement for creditors to bear the cost in calling a creditors meeting, this option would likely result in more meetings being called and consequently greater communication between creditors and liquidators.

Committees of Inspection (a COI) are another way in which creditor involvement in insolvencies is promoted. However, at present, liquidators are only required to consider, rather than follow, a direction made by the COI, and the question has been raised whether creditors have a realistic recourse if a liquidator acts against the wishes of the COI to the detriment of the creditors as a whole.

The Options Paper asks questions about whether the COI should be given greater prominence and indeed whether creditors should be able to make a binding resolution on a liquidator.

By allowing creditors to make a binding resolution, they would be able to directly influence the direction of a winding up, without recourse to the Court.

These are big questions, but promoting enhanced communication with stakeholders is central to the credibility of the insolvency regulatory framework.

Increased efficiency in insolvency administration 

This leads me to the fifth and final policy goal at the core of the insolvency regulation framework, and that is promoting increased efficiency in insolvency administration.

Most of the issues that I have already discussed are fundamentally about the efficiency of the system.

But the Options Paper does address one area where the need for efficiency in the system is felt particularly acutely – this is in the chapter on the application of the insolvency framework to small businesses.

The majority of the companies that enter into external administration are small to medium sized enterprises.

Many owners of small businesses use personal assets, often their homes, as security for loans for their business. When their business fails, small business owners may be placed into bankruptcy as a result of the guarantees made for the loans of their businesses. And as a result, directors and creditors can find themselves dealing with both the corporate and personal insolvency regimes simultaneously.

Facilitating the operation of an efficient corporate and personal insolvency framework will assist all stakeholders who straddle the divide between the two systems and make the insolvency process easier to deal with, for practitioners, creditors, employees and businesses alike.

We need to ensure that our review of the insolvency system has regard to particular issues that are faced by small businesses.

The Options Paper puts forward proposals to increase the efficiency of the administration of small businesses by clarifying the regulatory grey area that exists between related corporate and personal insolvencies. This will make it easier for small business and creditors to deal with insolvency issues and will lead to greater confidence in the system and more efficient outcomes.


And that is what this Options Paper is all about – greater confidence in the insolvency framework and more efficient outcomes.

The Options Paper is an opportunity for us to set out a pathway to reform. And it is an opportunity for us to work together – creditors, businesses, practitioners and Government – to ensure that we have a better system that is more efficient and delivers value for creditors.

And I mean this in its broadest sense – a strong system; a system that promotes and entrenches high levels of professionalism; a system that does not see resources wasted; a system that ensures that businesses that can be saved will be saved; a system that results in the highest possible returns to creditors; and a system that is credible and trusted.

The Government looks forward to receiving your comments on this important Options Paper, and working closely with the profession, as we translate these options into durable reforms.

Thank you very much.