The Morrison Government in early May said that it is pursuing further measures to improve the Australian insolvency framework. Announced in the lead-up to the Federal Budget, it prompted enthusiasm that the budget might take these issues further, releasing more detail and paving the way for clarity around the insolvency regime as the recovery continues.
However, this didn’t eventuate. And whilst we in the industry widely welcome any government move to bring about reform through consultation, it seems this will remain a piecemeal process, and a complete review is not yet proposed.
In the budget a year earlier, the government announced what it called “the most significant reform to Australia’s insolvency framework in 30 years,” and this came into effect on 1 January of this year. They essentially created a new simplified restructuring and liquidation process for small companies, designed to give directors the control and flexibility to restructure or wind down operations.
This COVID-specific legislation was brought in at short notice to allow small businesses to use the debtor-in-possession model. In practice, this legislation is an ineffective solution and isn’t working as intended, and we’re seeing very little demand nationally from small business.
Many countries have conducted a complete review of legislation and solutions for corporations, trusts, and personal insolvency, so Australia has some room to improve.
Vibrant, growing economies will exhibit modern legal frameworks to embrace and accelerate investment, employment, and procedures to deal with delinquent borrowers and businesses going through stages of growth and suffering financial distress.
Legal frameworks have undergone major reviews and structural reform in some jurisdictions, including Singapore and the U.K. Many other jurisdictions, including Australia, have not conducted holistic reviews or enacted structural reform and continue to make iterative changes to existing legal frameworks.
Thorough review and structural reform needed
This type of review hasn’t happened in Australia in four decades, with the final Harmer Report being released more than 30 years ago. There have been numerous reports and enquiries since then, but no effective change.
The Morrison government has indicated the following list of issues for review but is yet to provide the necessary detail about extending current frameworks.
- Review of Safe Harbour legislation
- Debtor in possession regimes including schemes of company arrangements
- Amendments to SBR legislation
- Simplified liquidation procedures
- Insolvency of trusts and legislation for trusts
- Negotiation between small business and the Australian Taxation Office around outstanding debts
The current system is not broken, so the opinion of some is that it should not be changed.
However, we believe that there should be a fresh Productivity Commission review of the legal framework operating in Australia. There have been multiple reports over the years, but recommendations are often not implemented. In specific relation to the legislation that became effective on 1 January 2021, we believe there was insufficient consultation.
There is a real opportunity now to consult with industry on these matters. The SBR debtor-in-possession model is intended to be a DIY model, almost delivered in an IKEA flatpack. The result has not been fit for purpose after the government failed to engage satisfactorily with the industry in its construction.
Timely and thorough consultation with industry could avoid a repeat.