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Australia needs a simplified system with a single regulator for both company and personnel bankruptcy, says restructuring association.
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Unfit-for-purpose insolvency law needs complete overhaul: ARITA
24 January 2023
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Insolvency law needs a complete overhaul and a new regulator because the current system is unfit for purpose, the Australian Restructuring, Insolvency and Turnaround Association (ARITA) says in its submission to the government investigation on the matter.
ARITA chief John Winter said the law was simply “too damn hard” and deterring struggling businesses from doing the right thing.
“Something like 50,000 businesses a year are simply deregistered and exit,” he said — five times the number that go through the insolvency process.
“That’s problematic because it means there’s wholesale avoidance of the insolvency regime and that comes with lots of risks, including phoenixing and people not paying their tax obligations.
“Part of the reason is that the regime is just too damn hard.
“Most people in business, particularly those in SMEs, simply think that all they need to do is close the doors and hand back the keys. Accountants in public practice would see this all the time.
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“We need to get back to a system that allows businesses to exit gracefully and efficiently.”
He said Australia was unique in having a dual system for personnel and corporate insolvency with two different regulators, ASIC and the Australian Financial Security Authority.
“ARITA believes the time has come for a fundamental simplification of the design and drafting of the law – bringing together corporate and personal insolvency law into one, unified and fit-for-purpose piece of legislation.”
“When small businesses become distressed the personal financial affairs of the directors and shareholders are very often similarly impacted.
“Currently, two professionals — or potentially more if secured creditors are involved — are required to run different processes which require coordination.
“Through a single insolvency framework these unfortunate circumstances could be dealt with more quickly and cheaply, and by reducing costs creditors could generally expect a superior return.”
To oversee a unified regime, ARITA’s submission also seeks the creation of a new regulator solely focused on insolvency.
“ASIC is a large organisation with a wide range of responsibilities and insolvency is a very small part of those,” Mr Winter said.
“A new, for-purpose agency could encourage a turnaround culture, increase the understanding of business operators about their opportunities and obligations when their businesses are in trouble, and enforce the law in a rigorous way.”
A single, unified insolvency law could encourage a turnaround and restructuring culture with a focus on saving viable but distressed businesses and deliver better outcomes for creditors.
“The benefits from this are many, but in particular accountants stand to benefit from maintaining relationships with clients whose businesses are restructured and saved by highly trained insolvency professionals which might otherwise have been forced to close,” Mr Winter said.
A recent report from the Australian Securities Investments Commission (ASIC) on the Small Business Restructuring Scheme, which was designed to simplify debt recovery, showed only 72 companies successfully applied over its first 18 months to June 2022.
The parliamentary joint committee on corporations and financial services inquiry is the first major investigation into Australia’s insolvency system since the Harmer inquiry of the late 1980s.
ARITA said other benefits from its proposed changes included:
- Addressing the lack of action on phoenixing by ASIC.
“The market needs stronger signals that poor director behaviour won’t be tolerated,” Mr Winter said.
- A national register of trusts.
“For the purposes of insolvency law, trusts should be treated as economic entities (but not legal entities) separate from their trustee,” Mr Winter said.
- Clearing up misunderstanding on insolvency practitioners’ remuneration.
“Media headlines have often focused on the amount charged by insolvency practitioners in high-profile cases,” Mr Winter said. “Criticisms of insolvency practitioner fees usually overlook the significant personal liability insolvency practitioners face.”
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