David Coleman (Banks, Liberal Party) Share this | Hansard source

I am delighted to have the opportunity to speak this evening on these important provisions in the Insolvency Law Reform Bill 2015. It is a particularly important area of law, because this is a very good example of where the Commonwealth parliament's role in regulating corporations intersects with the very practical reality of operating business in Australia. Most businesses most of the time do not preoccupy themselves with what is happening in Canberra or what a particular piece of legislation might say, but in situations that either involve insolvency or may involve insolvency the laws that are made in this place are extremely important. So this area, as it pertains to the operation of corporations law in Australia, really is a core business for this parliament.

I think that it is important to take a step back and effectively say, 'What should the purpose of regulation in this area be?' It is particularly important that we think about that. What is the goal of insolvency law? What are we trying to achieve? It seems to me that one of the goals of law in this area should be to minimise the number of occasions on which companies do, in fact, enter into that formal insolvency process, because, once that process is triggered, in the vast majority of cases the outcome is not a good one for the shareholders of the business, for the employees of the business and, indeed, for the creditors of the business. So keeping businesses out of insolvency, where it is possible to do so, should be a goal of federal law. That is something that is very important in the National Innovation and Science Agenda, as announced prior to Christmas. I will come back to that in a moment.

Keeping businesses out of insolvency where possible is very important. Another thing that is very important is that, if you do get into an insolvency situation, our laws should be structured in such a way as to maximise the chance of creditors getting paid, so that as many creditors as possible get paid. They have the legal right to be paid. They are not always paid, of course, but our laws should do everything that they sensibly can to ensure that creditors get paid. Our laws should also help to ensure that the assets of the business which has entered into insolvency live on in some form. Whilst a particular business might not be able to survive, it is often the case—indeed, it should generally be the case—that that business has assets which can continue on in some other structure. Those assets should continue, because investment has been made into them and because those assets often employ a lot of people. It is in everyone's interest for the assets of that insolvent business to live on in some form—through a new owner or whatever the case may be. These should be goals—and, indeed, they are goals—of the government's legislation.

One of the problems in this area—as has been identified in previous government reports and in the practical experience of many Australian business people—is that sometimes the insolvency process itself does not function effectively. Not all insolvency practitioners are competent. Some of them charge too much, and some of them, frankly, do not do a very good job. Sometimes when an insolvency process is triggered, too much of the time, resources and assets of the insolvent company get wrapped up with the administrator or the insolvency practitioner themselves, in terms of their fees and so on. Too often the proportion of the assets of the company which should have been returned to creditors or which should have been able to be restructured in some way is absorbed by the actual insolvency practitioner themselves. That is not good for anyone. So that is the background to this area of law.

Before Christmas, as I said, the government, in the National Innovation and Science Agenda, announced a couple of very important changes pertaining to this space. One of the very important areas here is this area of insolvency and directors duties. I see that the Assistant Minister for Innovation is here in chamber, and he well understands the importance of this area and, indeed, has campaigned for reform in it. What happens at the moment is that, with the way the law is structured, if a director is found to have allowed a company to trade beyond the point at which it was insolvent then that director can be, and often is, held personally liable for the debts that were incurred post that point at which the company was no longer solvent. That makes sense. We obviously do not want a situation where directors are carrying on with a business that is not going to be able to pay its debts. That is completely inappropriate; it is effectively making false contracts with people who continue to provide services to those parties. It is obviously very, very wrong.

The problem is, though, that it is often not at all clear whether a business is, in fact, insolvent. There is a legal test, which can be applied, about being able to pay all debts when they become due, but it is a grey area. It is a particularly difficult area for smaller companies—start-ups and the technology sector, where I have some experience, and a range of other small businesses as well. That is because it is not as though, as a management team, you have perfect visibility of all the things that are likely to happen over the next three to six months. Often one reasonable director might form a different view to another reasonable director about whether a particular contract is likely to be signed or whether a particular opportunity is going to crystallise. If your view is that that opportunity will crystallise and that that contract will be signed, then the company is not insolvent. Sometimes, if your view is that that future event will not occur, that would mean that the company is insolvent. So it is not a black and white matter of simply being able to determine very clearly whether or not a business is insolvent at a particular point in time, and that is particularly the case for small companies. Larger companies, of course, go through these insolvency processes much more rarely. But a very large number of small businesses at some point in their lifetime find themselves at a point where things are not going that well, where a promised event does not happen, where the big client walks away or where the product that they have been working on with such great expectations turns out not to be as good as they had hoped.

These things happen all the time, and that is often when companies get into this grey area of potentially being concerned about insolvent trading. If you are a director in that situation then of course the natural inclination is to limit your personal liability and basically protect yourself from the risk of personal liability. What often happens is that directors will say, 'Look, we should put this company into administration,' and sometimes that occurs prematurely. Sometimes the consequence of that is that a business which was in fact a very promising one—it had immense potential and should have been able to trade through the difficulties that it was facing—was not able to do so because it got shut down. This is not good for creditors, it is not good for employees and it is not good for our economy, because often these smaller businesses are the ones that are forward leaning in adopting new technologies and take us to that next level of growth. What we say in the National Innovation and Science Agenda is that, if directors in that situation appoint a turnaround specialist—an appropriately accredited specialist—to come in, look at the situation and determine the next step, those directors will not be personally liable under the insolvency provisions. That is a good thing, because it means that the appropriate professional will come in, look at the situation and determine what can be done, and the directors themselves will not be in that situation of prematurely putting companies into administration, which so often occurs. This is a very good outcome of the National Innovation and Science Agenda.

The other really good aspect of the agenda, so ably led by the minister and the assistant minister, is the reform to the so-called ipso facto provisions. Basically, the ipso facto provisions are provisions in contracts which say that, if you go into some sort of insolvency event, all bets are off, contracts are over—end of story. It often operates a bit like a poison pill for companies where that event of insolvency or restructuring just shuts down the whole operation. It has a very detrimental effect on the ability of creditors to get paid and on the ability of any of the assets to effectively be salvaged from the situation. What we say in the innovation agenda is that those ipso facto 'all bets are off' clauses will not be sanctioned under Australian law, and this will mean that there will be fewer of these artificial situations where companies are tipped over the edge when they otherwise would not be. So these are important provisions, and they were announced in the innovation statement just before Christmas.

The bill we are discussing today also addresses some of the concerns I discussed earlier about how sometimes too many of the assets of an insolvent business are absorbed in the process of the insolvency as opposed to the substance of dealing with the issues of paying creditors and so on. There are three main elements that the Assistant Treasurer has focused on in her efforts here. The first is to give ASIC greater oversight over the insolvency profession. There is no denying that there is a significant number of complaints about practitioners in the insolvency field, and successive governments and successive inquiries have found that this is an area in need of some reform. This involves a tighter disciplinary framework—a capacity for ASIC to ensure that people have the appropriate professional skills and, very importantly, power for ASIC to suspend or deregister liquidators who are doing the wrong thing and not demonstrating that they are actually acting in the best interests of the creditors. These are very important changes here. It is very important that insolvency practitioners are not a law unto themselves, and so these changes will help to ensure that that is the case.

The other thing that is important in this legislation is the changes in relation to the power of creditors. Creditors in an insolvency situation of course have a lot on the line. They might be owed thousands or indeed millions of dollars. At the moment there are a range of problems with the way that creditors interact with insolvency practitioners; but it seems to me that the most problematic aspect is that, once an insolvency practitioner of the various kinds is in place, it is very, very difficult for creditors to remove that insolvency practitioner. Generally, creditors are required to go to court to make that happen, and of course there is cost involved in that, a whole time issue and a complexity. And so, as a practical matter, what do creditors do? They say: 'It is too much hassle. We won't do it.' As a consequence, this gives the insolvency practitioner perhaps an unreasonable degree of leverage over creditors and an unreasonable degree of power in the whole situation. This legislation says: if creditors in number and in value in terms of the debts that they are owed decide to replace an administrator—who, after all, is there to represent their interests—they can do so. So, without going to court and all of the cost and formality and time that that involves, a majority of creditors can remove an insolvency professional who they do not feel is representing their interests as effectively as they should. That is a very common sense change—as indeed the entire bill is—and I am pleased to see that it is being supported by the opposition.

The other area which the legislation broadly looks at is getting rid of some of the artificial distinctions between insolvency professionals who act in bankruptcy, personal type proceedings and corporate proceedings and to get rid of the somewhat artificial definitions there and in most cases give insolvency practitioners the capacity to operate in a range of different situations as opposed to them being required to have what is known as an 'official liquidator' class of registration, which, again, involves some complexity. This has not added a great deal of value to Australian insolvency practice but it has created complexity for professionals, cost and so on. Consistent with the goals of this bill, we seek to remove complexity where it does not add anything and to engender simplicity. Through both the National Innovation and Science Agenda and the bill that we are considering today, this government is very much about reforming insolvency processes to make them better for creditors and for businesses. I commend the bill to the House.

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