Further insolvency reforms on the table, but government warned against “piecemeal” approach

Insolvency practitioners have welcomed a federal government commitment to consult on further reforms for the industry, but say more “piecemeal” changes to Australia’s insolvency regimes could create even more complexity for business owners. 

Ahead of next week’s federal budget, Treasurer Josh Frydenberg has announced the government will look to introduce a number of reforms that build on the insolvency changes that came into effect in January. 

On Monday, Frydenberg revealed plans for a number of reviews aimed at “further simplifying and streamlining” insolvency laws to support viable businesses to restructure as the economy recovers from the effects of the pandemic. 

In the first instance, the government will consult on how trusts are treated under insolvency law, given how commonly this business structure is used by small businesses. 

It will also consult on how to improve schemes of arrangement processes, including by bringing in a moratorium on creditor enforcement while such schemes are being negotiated.

Finally, Frydenberg said the government will review the insolvent trading safe-harbour provisions that were introduced in 2017, to determine if the provisions “remain fit for purpose”. 

In the one specific change noted in Monday’s announcement, the government revealed plans to increase the threshold at which creditors can issue statutory demands on a company from $2,000 to $4,000. 

This increase, which follows public consultation throughout February and March this year, is designed to “help prevent distressed but viable companies from being pushed into liquidation over small debts”. 

“As Australia’s economy rebuilds, it’s important that as many businesses as possible have the opportunity to turn around, restructure and survive,” Frydenberg said in a statement. 

John Winter, chief executive of the Australian Restructuring Insolvency and Turnaround Association, welcomes the focus on industry consultation — something he says did not occur with the last suite of changes, which came into effect at the start of the year. 

Australia has some 22 different insolvency regimes, Winter notes, and these legal arrangements are “incredibly complex”. 

The insolvency reforms introduced in January — which moved Australia closer towards a ‘debtor in possession’ insolvency model instead of a ‘creditor in possession’ model — were “rammed through in record time”, says Winter, and consultation with the sector happened “far too late”. 

The government needs to get “the brightest people in the room” this time and ensure there is genuine consultation, he adds. 

“Root and branch” review needed

While Winter welcomes the reviews in principle, he is concerned that the government may be taking a “piecemeal approach” to reforms and not addressing underlying, structural issues with the country’s insolvencies practices. 

“Once again, this is more bandaids on a broken framework,” he tells SmartCompany.

“We believe there needs to be a root and branch review to radically simplify the cost and complexity of insolvency in Australia,” he says. 

The treatment of trusts in insolvency law is something that needs to be addressed, says Winter, as the vast majority of business owners establish trusts when they first go into business, and this creates “a massive amount of complexity” in an insolvency event. 

However, Winter argues a “textbook solution” to the issue was proposed back in the 1988 Harmer inquiry and it’s been “left by many governments to sit on the vine for a long time”. 

Winter also believes there is scope to improve the current schemes of arrangement processes, but says the government should be mindful that leading Australia down the path towards US-style Chapter 11 bankruptcy protections would represent a “big cultural swing” that is “not going to sit well with a lot of people”. 

This is because Australia has a very strong culture of protecting the rights of creditors, he explains. 

“We’ve only had a few really big business collapses in the last few years … where schemes of arrangements might have added to it, and the people running those administrators are experts in such schemes anyway,” he says. 

Similarly, Winter says that, while small, the change in the threshold for making statutory demands from $2,000 to $4,000 also represents a shift against creditor rights, which in his view, needs to be recognised. 

That being, he says the adjustment does reflect the commercial reality that not many people would pursue costly enforcement action for debts below the threshold and it may help stamp out business owners being subject to “nasty actions … for token amounts”. 

At the end of the day, insolvency arrangements are used by businesses that generally do not have much money to spend, says Winter, and so it is important that reform agendas are not based on “too much tinkering” or adding more requirements on those using the system.