The Financial System Inquiry was formed on 20 November 2013 by our Federal Treasurer to examine how our financial system could be positioned to best meet Australia’s evolving needs and support economic growth. The Inquiry received over 280 first round submissions and released it’s Interim Report earlier this week. [1] 

A CALL FOR REFORM OF EXTERNAL ADMINISTRATION IN AUSTRALIA

One of the observations considered in the Interim Report is the call for a reform of external administration in Australia. The Interim Report identifies four problems identified in submissions by stakeholders:

  1. the current regime is biased towards liquidation, as directors are more cautious in circumstances where they could be personally liable for trading while insolvent;
  2. voluntary administration is expensive and significantly devalues companies, resulting in the failure of businesses that could survive with some restructuring;
  3. current external administration arrangements are too complex and costly for SMEs; and
  4. the cost and effectiveness of liquidation for SMEs is affected by liquidator misconduct and competence.

IMPROVING EXTERNAL ADMINISTRATION IN AUSTRALIA

Ultimately, the Inquiry is sceptical of the notion that Australia’s voluntary administration process is causing otherwise viable businesses to fail. It found little empirical evidence of this, but calls for any evidence to the contrary.

The Inquiry also calls for views on the costs, benefits and trade-offs of two policy options:

  1. no change to current arrangements for external administration; or
  2. the implementation of the Commonwealth’s 2012 proposals to reduce the complexity and cost of external administration for SMEs.

The Commonwealth’s 2012 proposals were contained in the Insolvency Law Reform Bill 2013. They are principally concerned with reforming the external administration structure so that it more closely aligns with the bankruptcy regime. Specifically, the Bill includes reforms to:

  1. the registration and discipline requirements of insolvency practitioners, including by creating new committees for the regulation of the profession and strengthening the disciplinary powers of these regulators;
  2. the rules relating to external administration, particularly in relation to:
  1. reporting obligations of insolvency practitioners to regulators and creditors;
  2. greater competition and increased oversight over the remuneration of practitioners; and
  3. the review and replacement of practitioners from specific administrations by the Court, ASIC or creditors, and
  4. provide increased regulator powers and greater transparency of ASIC.[2]

The Insolvency Law Reform Bill 2013 was introduced by the former Labour government and abandoned when the new government assumed office. The Inquiry’s renewed consideration of its proposals could potentially lead to a fundamental shift in the regulatory landscape for insolvency practitioners.

IS THE UNITED STATE’S CHAPTER 11 APPROACH THE ANSWER?

The Inquiry considered the submission by some stakeholders that Australia adopt the US Chapter 11 regime, or certain aspects of it to prevent otherwise viable businesses entering into and suffering the costs of voluntary administration. 

The Inquiry’s Report rejects the proposed adoption of aspects of the US Chapter 11 bankruptcy regime and is sceptical of the notion that voluntary administration in Australia is causing otherwise viable businesses to fail. The Inquiry takes the view that adopting this regime would be expensive and restrict or defer the capital from being channelled to more viable and productive enterprises. It would also be imprudent according to the Inquiry, because control would be left to those who are often the cause of a company’s financial distress.

In contrast, the proposal to adopt Chapter 11 was recently considered more positively in the Senate Standing Committee on Economics’ final report on the performance of the Australian Securities and Investments Commission. The Committee’s quotes a number of submissions it received which support the adoption of Chapter 11 principles with a view that they facilitate the resurrection of a company. The Senate Standing Committee recommended that the government commission a review of Australia’s corporate insolvency laws and consider the adoption of elements of the US Chapter 11 regime.[3]

YOUR OPPORTUNITY TO BE HEARD

Stakeholders such as insolvency practitioners are encouraged to provide feedback on the Interim Report by written submission to the Inquiry before 26 August 2014. Feedback is also sought on whether other issues are of greater priority than those covered in the Interim Report and which issues should be the focus of the Final Report.

The Inquiry is expected to provide a Final Report in November 2014, in which it will consider the submissions and make recommendations to the Treasurer.