One week ago, I wrote that the Productivity Commission’s Business Dynamism Inquiry may not be an insolvency inquiry in the conventional sense. Rather, it appears to be an inquiry into the economic environment within which insolvency operates. 

That distinction is important. 

If the Productivity Commission is examining business dynamism, productivity and economic renewal, then insolvency law must be viewed not merely as a legal process but as part of Australia’s economic infrastructure. 

That proposition is consistent with the way economists increasingly view insolvency systems internationally. 

The relevant question is not simply whether insolvency law functions effectively. 

The relevant question is whether insolvency law contributes to a more dynamic and productive economy. 

Insolvency and Creative Destruction 

Economists have long recognised that economic growth requires continual renewal. 

New businesses enter markets. 

Existing businesses expand. 

Others contract, restructure or fail. 

Resources move from less productive uses to more productive uses. 

The economist Joseph Schumpeter described this process as “creative destruction”. 

While the expression can sound harsh, the concept is central to modern market economies. Businesses do not merely succeed or fail in isolation. Their assets, employees, intellectual property, capital and market opportunities are continually reallocated across the economy. 

Insolvency law is one of the principal mechanisms through which that reallocation occurs. 

The question for policy-makers is whether Australia’s insolvency framework facilitates productive reallocation of resources, or does it impede it? 

Rescue Is Not Always Success 

The insolvency profession, myself included, views business rescue positively. 

That instinct is understandable. 

Preserving employment, maintaining customer relationships and protecting enterprise value are all worthy objectives. 

However, a Productivity Commission inquiry is likely to ask a different question. 

Is every rescue economically desirable? 

If a business emerges from a restructuring process but remains uncompetitive has the economy benefited? 

If capital and labour remain tied to a business that continues to underperform is that an efficient outcome? 

If competitors operating without restructuring concessions are placed at a disadvantage has the market been distorted? 

These are not criticisms of voluntary administration, deeds of company arrangement or small business restructuring. 

They are simply questions that arise when insolvency is examined through an economic lens rather than a procedural one. 

Success has often been measured by whether a company survives. 

Economists may measure success by whether resources are deployed more productively after the process concludes. 

The two perspectives are not always identical. 

The Difficult Question of Zombie Companies 

One issue likely to attract increasing attention is the existence of so-called “zombie companies” being businesses that continue operating despite lacking long-term commercial viability. 

International studies have suggested that zombie companies can reduce productivity by absorbing capital, labour and management resources that might otherwise flow to stronger businesses. 

The issue raises several questions. 

Does Australian insolvency law facilitate timely restructuring? 

Does it facilitate timely exit? 

Or does it sometimes permit commercial problems to be deferred rather than resolved? 

The Productivity Commission may be interested in these questions because they extend beyond insolvency law and into broader concerns about national productivity. 

The SME Challenge 

The Productivity Commission may also confront a reality long recognised by practitioners. 

Australia’s insolvency framework was largely designed around the corporate form. 

Yet most insolvency appointments involve small and medium enterprises. 

For many SMEs, the distinction between the company and its owners is largely theoretical. 

Directors frequently provide personal guarantees. 

Personal assets support business borrowings. 

Corporate failure often leads directly to personal financial distress. 

Despite this reality, Australia continues to operate separate systems for personal and corporate insolvency, administered by different regulators and governed by different legislative frameworks. 

Whether those arrangements remain optimal is likely to become an increasingly important policy question. 

The issue is not merely legal efficiency. 

It is whether the overall framework delivers better outcomes for small business owners, creditors and the broader economy. 

And what about those business owners that are not incorporated and operate as sole traders. The outcomes for those business owners are far more draconian than for business owners that operate using company structures and also, perhaps, trusts. 

Assetless Failures and Economic Confidence 

The Productivity Commission may also examine a problem that receives surprisingly little attention outside the insolvency profession. 

Large numbers of Australian companies are deregistered by Australian Securities & Investments Commission and disappear arising from failure to lodge annual returns without a process to conduct investigation.  

The consequence is that potential misconduct often remains unexplored. 

A market economy depends upon confidence that misconduct will be identified and addressed. 

Where significant numbers of companies are deregistered without investigation, questions arise regarding the integrity of the broader corporate framework. 

Measuring Success Differently 

Perhaps the most significant contribution of the Productivity Commission’s Inquiry will be to challenge how success is measured. 

Traditionally, discussions focus on: 

• recovery rates; 

• appointment numbers; 

• restructuring outcomes; 

• regulatory enforcement; 

• practitioner remuneration. 

Those measures remain important. 

However, they may not be the measures that matter most from an economic perspective. 

A broader assessment might ask: 

• Are productive businesses surviving? 

• Are unproductive businesses exiting efficiently? 

• Is entrepreneurship being encouraged? 

• Are creditors willing to extend credit? 

• Is capital being allocated effectively? 

• Is labour moving to higher-value uses? 

• Is productivity improving? 

These questions place insolvency within a wider economic framework. 

Preliminary Conclusions 

The Productivity Commission’s Business Dynamism Inquiry may represent a significant shift in how insolvency policy is discussed in Australia. 

Historically, insolvency reform has largely been examined through legal and procedural lenses. 

The Commission appears to be approaching the subject differently. 

Its focus is broader. 

It is concerned with economic performance, business renewal, competition and productivity. 

That broader perspective may ultimately require insolvency practitioners, regulators, policy-makers and academics to rethink some long-held assumptions. 

The most important question may no longer be whether Australia’s insolvency system operates efficiently. 

The more important question may be whether it contributes to a more dynamic, competitive and productive economy. 

If that is the inquiry’s focus, then the insolvency profession has entered a much larger conversation.