Wednesday, 10 February 2016
Insolvency Law Reform Bill 2015; Second Reading
The government is acting to restore confidence in the insolvency profession, which remains low following an adverse 2010 Senate Economics References Committee report into corporate insolvency. There have been numerous inquiries in which weaknesses in the existing laws and practices surrounding insolvency were comprehensively discussed. Members would also be aware that the coalition commissioned the Productivity Commission to examine the impact of the personal and corporate insolvency regimes on business exits. While we will not put the cart before the horse, the Insolvency Law Reform Bill 2015 certainly moves the cart back to the horse. It is the first real move in the right direction since 2007.
As a responsible government we will carefully consider the Productivity Commission inquiry and recommendations before deciding on the most appropriate balance of further action. I congratulate the minister for progressing this bill today because it will assist in building confidence in the insolvency sector. The level of confidence in the insolvency industry needs to be improved, despite increased activity by the Australian Securities and Investments Commission in relation to oversight for the corporate insolvency industry. Insolvency practitioners received the lowest rating for perceived integrity in the last survey of ASIC stakeholders.
While the government is considering the Productivity Commission's report and recommendations to ensure that financially distressed businesses are given the best opportunity to restructure—or be wound up efficiently where the business cannot be saved—there are things we can do now. This bill implements the first phase of the coalition's reforms aimed at strengthening and streamlining Australia's bankruptcy and corporate insolvency regimes. A key purpose of this bill is to restore confidence in the insolvency profession by raising the standards of professionalism and competence of practitioners while also identifying and then quickly removing the bad apples. This is done by aligning and strengthening the registration, disciplining and having regulator oversight of corporate insolvency practitioners.
It is worth noting that this bill is the first tranche of reforms to modernise Australia's insolvency framework in a very long time. The bill expands on efforts in the Howard government's Corporations Amendment (Insolvency) Act 2007 to streamline external administrations while better informing creditor decisions. Unlike Labor, the coalition recognises that government needs to do more than simply talk about problems as they grow into bigger, more complex and more expensive problems. We recognise there is a need to constantly review the status quo and take action to reduce risk and loss wherever possible while increasing productivity, efficiency and opportunity. We understand businesses and the problems they sometimes face because most of us know and understand the challenges and rewards in creating and managing a business. Indeed, there are still issues that need to be addressed.
As part of our regular and ongoing discussions with small business owners, Senator John Williams and I met with the owner of a machinery equipment hire company who was worried about how insolvency laws and practices intersect with the Personal Property Securities Act 2009 to unfairly load financial risk, by default, onto an otherwise unsuspecting business operator. One of the perverse outcomes associated with the PPSA is that a receiver can take possession and sell property on a site or business that is in receivership regardless of whether it is owned by another business or individual. That is right; someone else can have the title deed and the receipt for that piece of equipment—they own it under every other aspect of the law—but the receiver can move in and sell it as part of that arrangement.
In Maiden Civil v Queensland Excavation Services, for example, the New South Wales Supreme Court found a receiver's perfected security interest took priority over the unperfected security interest of another small business. In effect, if you own a business and lease two trucks valued at, say, $100,000 and the lessor goes broke and the receivers are then called onsite, ownership of those trucks and other property transfers to the receiver, so the person who actually owns those trucks and leases them loses them and the money he invested in them. Assuming you were the owner of the small business who leases these trucks to another business that fails and is in receivership, you are already out of pocket—usually you have mortgaged something or are paying leases off the equipment you have leased out—before you then lose income-generating assets. If the assets are carrying debt, you lose that asset and you lose the income but you still keep the debt. If it was a struggling business in a competitive market, it would sink and, indeed, many have. Many are small businesses started by mums and dads trying to save and investing their hard-earned savings to improve their lives and set their children up for a better future. This is neither fair nor reasonable for small businesses whose commercial operations include leasing property and equipment.
I trust that as part of the preparation for further reforms the minister will look into these issues and concerns raised by a small business operator who leases machinery and equipment. While the government will continue to consult with the community on further possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty, any future reforms will require an insolvency profession in which stakeholders can have confidence. The government believes progressing this package of reforms will provide benefits to creditors, businesses and insolvency practitioners because it will increase the efficiency of the insolvency administrations and cut unnecessary costs and red tape. This bill will remove unnecessary regulatory burdens while improving creditors' ability to get the information they really need when they need it. Over the first four years, these reforms are estimated to reduce compliance costs by about $50 million a year, with those savings flowing through to creditors as better returns.
Because ASIC and the Australian Financial Security Authority play an important role in promoting an efficient and equitable market for insolvency services, this bill strengthens the powers of the regulators to monitor insolvency practitioners, provide information to stakeholders and intervene in individual corporate and personal insolvencies where appropriate. ASIC will be given further powers to seek information or records from corporate insolvency practitioners—similar to the existing powers in relation to auditors. These new powers will help ASIC in its efforts to undertake proactive surveillance of corporate insolvency practitioners.
The government recognises that confidence in how practitioners handle the funds of external administrations—as well as the protection from potentially negligent behaviour—is crucial to the overall confidence in Australia's insolvency laws. Reforms to the registration framework for practitioners will improve the balance between the need to protect consumers of insolvency services and the need for a competitive market that provides the best opportunity for maximising returns to creditors.
In line with the current arrangements for personal insolvency practitioners, a practitioner will need to renew their registration every three years and, at that time, they must show evidence of compliance with any new requirements for continuing professional education set by the regulator as well as demonstrate that they have maintained their insurance coverage. Any rules made, following the passage of this bill, will require new entrants to have completed formal insolvency-specific tertiary studies as well as accounting and legal studies. Importantly, corporate insolvency practitioner registration will no longer be indefinite.
Responses from insolvency and legal firms, and representative bodies, indicate there is a broad acceptance of the policies underpinning this bill. Minor and technical amendments were made in response to some concerns that the bill may have an unintended consequence for the efficient management of insolvencies. This bill is another very good example of how the coalition is using consumer and industry experience, committee research, academic studies and economic modelling to inform the legislative approach and administrative action we are now taking.
While I recognise there is more detailed reform to come, following detailed consideration of the Productivity Commission report and recommendations, I am pleased we are now taking the first big step in the right direction since the Howard government. Shame on those opposite for doing nothing for so long. I commend this bill to the House.
It gives me great pleasure to speak this morning on the Insolvency Law Reform Bill 2015. Contrary to some of the contributions from the other side of the chamber, the insolvency industry is a most important industry to our economy. In the time available I would like to go through why this bill is needed, the changes we are making and the potential for further changes to our insolvency industry.
Firstly, the simple reason we enjoy such prosperity, today, compared with times past is we have entrepreneurship. Entrepreneurs have been prepared to go out and take risks with new ideas or products. It is about the way they do things and innovate to improve products and services we enjoy so much today. The difficulty is, there is always risk with that, because uncertainty runs through the process of innovation.
You can have the best experience, the best judgement, the best planning to reduce that uncertainty and risk, but it can never be eliminated. No-one has a crystal ball to know what the future will hold and what ideas and experimentations in business, products and services will be suitable for the future. We know that most experiments, in any field, fail. To quote economist John Kay:
Most decisions are wrong. Most experiments fail. It is tempting to believe that if we entrusted the future of our companies, our industries, our countries, to the right people, they would lead us unerringly to the promised land. Such hopes are always disappointed. Most of Thomas Edison’s inventions did not work, Ford, Morris and Mao ended their careers as sad, even risible figures. Bill Gates missed the significance of the Internet, Mrs Thatcher introduced the poll tax, and Napoleon died in exile on St Helena. Even extraordinarily talented people make big mistakes.
But because most decisions are wrong and most experiments fail, it is also tempting to believe that we could manage businesses and states much better if only we assembled sufficient information and cleverer people, and debated the issues in length.
We know from experience that is not how our economy works. That is not how innovation occurs. That is not how entrepreneurship works either.
We have seen the recent example, here in Australia, of the Masters hardware group—established by, perhaps, Australia's strongest retailer, Woolworths, and the Lowe's hardware group of the USA. They have billions of dollars worth of capital at their disposal and the best minds in the retail sector; yet they appear to have burnt through $3 billion worth of capital in a failed experiment. You would think that if you put all that business experience together you would come up with a successful business model.
The problems were that for all the experience of Lowe's in the USA they did not fully appreciate the different consumer trends in the USA and Australia. Although there are some similarities, there are big differences between consumer preferences in those markets. To try to transplant what works in the USA into the Australian hardware market was always bound to fail.
The other issue that the executives from Lowe's probably did not understand enough of was the difference between our competition laws in Australia and those of the USA. In the USA, suppliers to Lowe's hardware stores would all be dealing under that country's Robinson–Patman Act, an anti-price discrimination act that requires them not to put any one company at a competitive disadvantage against another in the price that they sell products for. No such laws apply in Australia. Therefore, the incumbent player, which was Bunnings, was able to put pressure on suppliers in Australia to prevent them giving similar deals to the Masters group. These are exactly provisions that, if they did that in the USA under the Robinson–Patman Act, would be in breach of US antitrust laws. But, in Australia, they could get away with it. I doubt very much whether those executives of Lowe's in the USA understood that significance when they came to Australia.
With the failure of the Masters group we saw that the difficulty with our competition is about what happens when you have overly concentrated markets. New ideas and new business experiments need to be trialled in small gaps. Lowe's rolled out 63 stores until they worked out that they were unviable and decided to close them down. Business experiments are far better when they are done in small steps. If they work, they are repeated and repeated and rolled out. If they do not work, they are closed down efficiently and quickly.
Masters is an example of the companies that close down. But if you look at the statistics from our ABS that record business entries and exits, it gives us some idea about the churn, or the creative destruction, that occurs in our economy. Each year we lose between about 12 and 14 per cent of the existing businesses in the economy. They close down and go out of business. We can go back to 2010 to the latest figures from the ABS and look at the more than two million businesses that were operating in Australia in 2010. If we start off with 100 per cent, by 2011 we were down to 86½ per cent. In one year we lost 13½ per cent of businesses that were operating in 2010. The businesses surviving by 2012 was down to 76 per cent. After three years, in 2013, the survival rate was down to 68 per cent, and by June 2014 the survival rate was 61.7 per cent. Close to 40 per cent of businesses that had been operating in the economy back in June 2010 had closed their doors by June 2014.
The figures are even more significant for the 294,210 businesses that started in 2010. I think anyone who started up a business in 2010, when the Labor government was in control, deserves a medal on their chest. If we look at their survival rate, by 2012—one year later—we were down to 79 per cent. We were down to 59 per cent by 2013, and by June 2014 we were at 50 per cent. So half of the businesses that started in 2010 had gone out of business by 2014.
That is something we should not say is a bad thing. We need businesses out there experimenting and trying new ideas. As long as there are replacement businesses coming in, the rate of business exits—if we could call them that, rather than failures—is something we should not worry about, because we need to get that continuing cycle of fresh experimentation where there is failure and trying again to get that business model that will actually work. We need those added incentives in the economy because experimentation is always risky.
But in our insolvency industry we also need a system where we can have quick and efficient closure of business experiments that do not work. That way, we can regenerate those assets back into the economy to continually feed that cycle of fresh experimentation and fresh innovation. It is openly admitted that the current insolvency laws in this country need some change. Just as we ask businesses to innovate, change and adapt in the community, we need to do the same thing in our insolvency industry.
I now have a few comments. Matthew Woods, head of KPMG, has said about the current law:
The current law significantly discourages risk taking …
If it discourages risk taking, we need to have a good look at it. He went on:
Many commentators have compared Australia with the US in terms not only of insolvency laws but culture. I would agree we need to start celebrating our entrepreneurs and innovators as they do State-side …
That is what we need to do. We need to have a cultural change in this country. We need to have a change where we celebrate our entrepreneurs and our innovators. We need to celebrate and understand that business exits do occur. In Silicon Valley, the home of innovation in the world, it is often said that unless you have been involved in several business exits, several businesses that have not worked or, if you want to use the word, failure you are actually inexperienced, because they understand that you learn more from your failures than you do from your successes.
This is the culture that we need to embed in our country if we are to continue the prosperity of our nation. That is why we need to address our insolvency laws. The 2010 Senate Economics References Committee was highly critical of the current regime. They also indicated that confidence in the regulation of the corporate insolvency profession remains low. We need to see our insolvency professionals as heroes of the free market, people that can help engage companies in a quick turnaround or quickly turn around assets and get them productively back in the economy. That is what we need and that is what this bill starts to address.
The bill contains five measures. Firstly, the bill will empower creditors to better protection of their own interest by giving them the ability to determine what information they provide to an insolvency practitioner and when. Secondly, it will reduce the regulatory cost of insolvency administration in order to improve returns to creditors through better facilitating the electronic provision of documents, streamlining remuneration approvals and processes, and aligning administrative rules across personal and corporate insolvency. Thirdly, and most importantly, it will increase competition in the market for insolvency services by empowering creditors to remove a poorly-performing insolvency practitioner without going to court and enabling the appointment of an independent specialist to review the performance of an insolvency practitioner. Fourthly, it will increase the powers available to the Australian Securities and Investments Commission in order to improve the regulator's ability to proactively identify and investigate allegations of misconduct. Fifthly, and finally, it will strengthen the disciplinary mechanisms for liquidators.
This bill is a small but important step on the way to improving our insolvency laws. We need to look at some of the provisions in chapter 11 in the USA. I do not say that we should bring all those provisions in, but there are many chapter 11 provisions of the US insolvency law that I believe would strengthen our insolvency laws and help get a more accurate balance between the debtors and the creditors.
In my remaining time, I want to mention the recent demise of the Dick Smith stores, which were recently placed into administration and, as I understand it, liquidation, and the status of gift cards. This is something we need to look at. As things stand at the moment, if you had bought a gift card from a Dick Smith store, you are basically placed as an unsecured creditor and you will go to the very back of the queue—unless you purchased it with a credit card, in which case you can get a refund because you were not provided the service under the credit card. So a tip for consumers: use your credit card if you are buying a gift card. But for those who paid cash for a gift card instead of buying stock—as opposed to obtaining a service—we need to look at whether these people should be unsecured creditors. One of the first questions for an liquidator to ask when he comes in is: who owns the stock? Firstly, is it the business or is it some of the creditors? Where the stock has been supplied on consignment or under retention of title, first dibs on that stock should go to the supplier. But, if someone has walked into a shop, seen all the stock and said, 'Rather than taking some of the stock today, I will give you a cash payment, you give me credit and someone will come in and pick from that stock,' I believe they should be on a higher rung on the ladder when it comes to the provisions of the liquidators and have greater preference than they currently do. That is something we should look at as we continue our improvement of the insolvency law in this country.
I commend this bill to the House.
Firstly, I would like to thank those members who have contributed to this very important debate, including, in the chamber today, the member for Ryan, the member for Hughes and also the member for Griffith. The Insolvency Law Reform Bill 2015 implements a package of reforms that will strengthen and streamline Australia's personal bankruptcy and corporate insolvency regimes. A strong and efficient insolvency regime is fundamental to a responsive and productive economy. The reforms in this bill will contribute to increased confidence in the professionalism and competence of Australia's insolvency practitioners, promote competition in the market for insolvency services and remove unnecessary costs from insolvency proceedings. This bill addresses concerns about the regulation of insolvency practitioners that have been raised in a number of parliamentary inquiries, including, most notably, the 2010 Senate Economics References Committee inquiry into the regulation of insolvency practitioners.
The changes will also reduce legal complexity, risk and duplication by bringing the corporate and personal insolvency regimes more in line with each other. By aligning, simplifying and removing unnecessary regulatory obligations on both insolvency practitioners and creditors, this reform package is expected to have a net deregulatory saving of around $50 million per year.
To boost confidence in the professionalism, competence and regulation of insolvency practitioners, amendments in this bill will raise the standards for registration as an insolvency practitioner. Following commencement, practitioners will be required to be interviewed and assessed by a three-person expert committee prior to registration to demonstrate their competence. Practitioner registrations will be required to be renewed every three years rather than continuing indefinitely. There will also be new requirements to undertake insolvency-specific education and to obtain and maintain appropriate professional indemnity and fidelity insurance. These changes will bring the registration process for corporate insolvency more in line with that of personal insolvency. In addition, decisions on registration as a corporate insolvency practitioner will now be able to take into account the applicant's conduct in their personal insolvency practice.
Amendments in this bill will also strengthen mechanisms to monitor practitioners and discipline them where there has been misconduct or wrongdoing. The Australian Securities and Investments Commission, referred to as ASIC, will now have the power to give a 'show cause' notice to a corporate insolvency practitioner in particular situations—for example, where it believes the practitioner has breached a condition of his or her registration. If ASIC is not satisfied with the response, it may refer the matter to a disciplinary committee, which will have a range of options available to discipline the practitioner, including stripping the practitioner of his or her registration.
The reforms in this bill aim to promote market competition on price and quality by making practitioners more accountable to creditors and empowering creditors to protect their own interests. The amendments will give creditors the ability to determine when and what information they are provided by an insolvency practitioner, and ASIC will be able to direct a practitioner to comply with a creditor's request for information. Under changes in this bill, it will also be easier for creditors to remove poorly-performing practitioners. The amendments provide for creditors to remove practitioners through a resolution of creditors rather than having to go through the lengthier and more burdensome process of seeking court orders. These changes will give creditors more power to monitor and take positive steps where they believe that the actions of the liquidator do not represent good value for money.
Many of the changes in this bill are aimed at removing unnecessary obligations on practitioners and streamlining current processes. These changes will reduce costs and increase efficiency in insolvency administration, helping to improve the return to creditors. For example, the existing obligations on external administrators to hold initial, annual and final meetings will be removed, with creditors having expanded rights to obtain reports or require meetings when desired.
The amendments will also facilitate more efficient communication by allowing, for example, the use of electronic means to provide documents rather than requiring hard copies to be provided. To streamline the remuneration approval process, the bill introduces a new statutory default remuneration amount for each insolvency. This amount will be $5,000 indexed annually and recognises key tasks which every practitioner must perform at the beginning of the administration. Remuneration determinations will continue to be subject to review by the court, for corporate insolvency administration, and by the Inspector-General in Bankruptcy, for personal insolvency. The government will soon release and consult on the updated insolvency practice rules that accompany this bill.
The changes in this bill represent significant reform of Australia's insolvency regime. However, this is only the first phase of the government's plans to strengthen and streamline the system. The government will continue to engage with the business community on additional reforms to improve the insolvency regime and remove unnecessary costs in insolvency administrations— with the second phase focussing on business rescue and small business insolvencies. I commend this bill to the House.
Question agreed to.
Bill read a second time.