Jim Chalmers (Rankin, Australian Labor Party, Shadow Parliamentary Secretary to the Leader of the Opposition) Share this | Link to this | Hansard source

I rise today to outline Labor's position on the Insolvency Law Reform Bill 2015, knowing that insolvency is not often at the forefront of most Australians' attention or interest. Perhaps we think about insolvency only when we hear of high-profile cases of business stress, like, for example, the recent administration of Dick Smith, which is currently underway and ongoing. The reality is that the insolvency profession is an incredibly important part of our financial system. It caters for thousands of cases of business liquidation, administration and restructuring each and every year. It is for this reason that having a strong framework to underpin the insolvency profession is so important and why it is such a good thing that we are debating this legislation before the House today.

The bill does make some substantial changes to the way in which insolvency professionals are registered, disciplined and regulated. This legislation has been a long time in the making; it has been a long time coming. It was first triggered by the 2010 Senate Economic References Committee report into the regulation, registration and remuneration of insolvency practitioners in Australia—the case for a new framework—and the last Labor government went through an extensive consultation process on insolvency law reform which culminated in draft legislation in 2013, but unfortunately it was unable to be considered by this place prior to the last election.

I want to take the opportunity to acknowledge the work that was done by some great parliamentarians, three of whom are no longer here and one is retiring: David Bradbury, Robert McClelland, in the first instance, and my great friend the member for Oxley, alongside Nicola Roxon, who did a lot of the leg work. We see some of that consideration and some of the elements of that work in the draft legislation and in the bill, which we will be supporting through the parliament.

We do note, though, that the bill contains just part of the legislative reform to insolvency which has been foreshadowed by the previous reports and previous efforts and by the government itself. We have the Assistant Minister for Innovation here at the table. The government have flagged, through the innovation process, that there will be additional action taken as it relates to insolvency, so we wait to see the detail of those measures that they have flagged. This is the first instalment and, arguably, it will probably be the least controversial instalment of the insolvency arrangements. We wait to see the other components. We call on the government to release, as soon as possible, the full detail of the proposed reforms to the framework so that we can give the industry confidence and allow the insolvency practitioners the opportunity to prepare for the changes, consider them altogether and properly prepare for the sorts of changes that they need to make to help strengthen the framework that we are talking about.

We would all like to think that all businesses in Australia will be successful all the time, but the real world is obviously very different. If you take some ASIC statistics, last year they showed that something like 9,177 companies entered into external administration. Business failure can be a very stressful time for those involved—obviously for the owners but also for their loved ones, as well as the managers, employees, creditors and customers who may be affected. So it is a very sensitive part of the financial system. Insolvency practitioners, including 707 registered liquidators in Australia, have a number of roles to help manage this stress and to help turn around a business, if that is a viable option and is possible, or to salvage what they can to leave as few people out of pocket as they can.

While the current insolvency framework does a pretty good job of balancing the interests of creditors and businesses in distress—not in all cases but in many cases—there have been some high-profile cases of misconduct by corporate insolvency practitioners. Unfortunately, we only hear about the very high-profile cases of business failure or the very worst cases of misconduct, which I think is one of the reasons why insolvency practitioners received the lowest rating for perceived integrity in the latest survey of all the various ASIC stakeholders. We need to fix this by giving them a better structure in which to operate and give them a better set of guidelines and regulations. We need to help them become better at the work that they do. I am sure that, if that happens and we do that effectively, the reputation of these practitioners will improve.

Across the industry and within government there is broad agreement that reforms to the insolvency framework are needed to modernise the industry and improve the standards of practitioners. The 2010 Senate economics committee report that I referred to before, the one that led to that original Labor bill, found that the regulators had inadequate powers, that fees were overly inflated and that the registration process for insolvency practitioners needed to be strengthened. More recently the Productivity Commission's report, which was commissioned by my colleagues opposite, called Business set-up, transfer and closure, found some additional issues with Australia's insolvency regime, including flaws in the restructuring processes due to risk aversion and negative perceptions, long time frames for corporate liquidations and disproportionately onerous reporting and appeals processes.

I think we can all agree, no matter what side of the parliament we are on or what part of the industry or the broader financial system we are in, that there is room for improvement. There is room to improve the operation of our framework in the interests of all of the participants in the industry and, through them, the broader Australian community. Good insolvency law reform needs to successfully balance the needs of all the various stakeholders—all of those players I mentioned before. For example, businesses and creditors have the right to expect that any insolvency case will be resolved as quickly and as fairly as possible. They have the right to expect that industry professionals will be acting in their best interests and behaving ethically. At the same time, insolvency practitioners should not be overburdened by unnecessarily onerous regulation. They also need to be protected from creditors who can, at times, in a sensitive part of the system act emotionally and perhaps irrationally in these stressful situations. We believe that the legislative change in this bill more or less strikes that difficult balance quite well.

There are a few major components of this reform in the bill. First of all, it reforms the registration framework for practitioners by strengthening their registration requirements. It compels them to renew their registration every three years and meet training requirements. It removes the distinction between registered and official liquidators. It reduces the period of experience that applicants must possess before they can apply for registration. That is the basket of issues that relate to registration.

There is another basket of issues around disciplinary action. The bill will largely introduce stronger disciplinary powers. It will allow the regulator to ask practitioners to show cause if they have breached their obligations and present why they should remain in the industry. There will be a disciplinary committee. There are a whole range of measures around discipline. The bill increases the penalties for a range of offences relating to misconduct, including failing to maintain adequate and appropriate insurance.

The third set of issues are around the two primary regulators in the area, which are ASIC, as I have already mentioned, and also the Australian Financial Security Authority. ASIC does the corporate side and AFSA covers the personal side. This bill gives them further powers to seek information or records, and it places a greater onus on practitioners to notify the regulators when matters arise. The final bunch of issues are around additional rights for creditors. There are a whole range of issues relating to that basket.

Despite generally supporting the bill and the reforms that are before us, we do want to put on the record for the benefit of the House here tonight four issues that concern us and that we want to identify and monitor. The first one is that the bill defers some fine detail to a legislative instrument called the 'insolvency practice rules'. The intended insolvency practice rules have not been released yet. They should be released to allow practitioners the opportunity to prepare for the change in regime. That is the first concern.

The second one is that the bill claims a compliance saving of $50 million, which the industry itself has said is completely wrong. It says that the regime will cost them substantially. I am reluctant to say in a largely bipartisan contribution that those opposite have form when it comes to overclaiming savings from red tape reductions, but we will watch that claim of a saving of $50 million with some scepticism.

The third concern is that, as a mentioned before, there are more components coming. We think you can minimise the cost to the industry if you release all the parts of the insolvency reforms close together to give people the opportunity to consider them together and try to harmonise the various phase-ins of the separate tranches of law reforms.

The fourth area of concern is around ASIC funding. This is a very contentious area. Some proposed changes for a user-pays model for ASIC have not been finalised. There have been a couple of years of fairly substantial cuts to ASIC. If we want ASIC to do its job, we have to make sure it is adequately resourced to do that job. Despite these concerns, as I said, we will be supporting the Insolvency Law Reform Bill through the parliament.

I want to take this opportunity to thank in particular the peak industry body, the Australian Restructuring Insolvency and Turnaround Association or ARITA, and particularly the CEO, John Winter, for sharing their thoughts on the bill with my office and also for providing honourable members with a very helpful summary of the various issues. It was a very balanced contribution from John Winter and ARITA that was very much appreciated by this side of the House.

We call on the government to release the insolvency practice rules and all the other proposed changes to the framework. When we see those, we will approach them the same way that we have approached this set of changes, with the interests of industry participants as our core priority and, through them, those of the broader Australian community, which relies so heavily on a good set of financial regulations to make sure that all parts of the financial system work for people and not against them.

David Coleman (Banks, Liberal Party) Share this | Link to 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.

Terri Butler (Griffith, Australian Labor Party) Share this | Link to this | Hansard source

It is a pleasure to follow my colleague, the member for Banks. The member for Banks and I co-chair a bipartisan parliamentary friends group on enterprise and innovation. It is certainly wonderful to have such a bipartisan focus on those issues, and one of the very important questions that comes up in our discussions frequently is: what are the right insolvency settings for Australian law?

It is fair to say that nothing stirs the blood like a discussion about insolvency law, in my view. You would have to look far to find something as exciting and as interesting as insolvency law. The reason I say that, of course, is that it is inherently political. The question of how governments, regulators, employees, small businesses—who are suppliers to firms—small investors, banks and other creditors should be treated, when a business cannot pay its debts as they fall due and payable, is obviously one that affects a broad range of interests and, for that matter, a broad range of rights,. So the way insolvency practitioners conduct themselves—the way liquidators and administrators conduct themselves—when it comes to handling both creditors' rights and the interests of the business that they may be trying to salvage, in the case of an administrator, is really important. It is a really important question for consideration by this parliament. That being the case, it is sensible to revisit and improve the standards to which those practitioners adhere.

That is the purpose of this bill: to reform, to modernise and to further professionalise insolvency practice. This bill cannot be divorced from its broader context, which is Australian insolvency laws and the ongoing debate about their consequences, both for individuals, for creditors—small creditors particularly—and for the broader economy. As I said, insolvency laws are inherently political and that also makes them inherently controversial. That is because at the end of the day we are talking about livelihoods—we are talking about the livelihoods of employees; we are talking about the livelihoods of their families; and we are talking about the livelihoods of small business suppliers. I am talking about the contract cleaners who have contracted to a firm, which may be their major client. What happens when the firm goes broke and cannot pay its debts? Think of those people, for example, whose lives have been affected by the great corporate failures of Australian history—the Ansetts, the HIHs—but also think about the people who have suffered in garden variety insolvencies and liquidations, like the employees and, for that matter, taxpayers who suffer when a firm goes broke, winds up in insolvency and the next day there is a phoenix company rising from the ashes with the same individuals involved but with a different corporate entity.

These are important political questions that ought to be the subject of consideration by this parliament. The way insolvencies are handled is an issue that affects people's lives, but it is not just an issue that affects people's lives—though that is very important—it is an issue that affects, as I said, broader economic issues. For example, insolvency law settings, or the public perception of them, arguably affect directors' behaviour. One argument often made is that the fear of insolvent trading laws actually makes directors more timid than they should be. It is an argument that fear gives rise to a risk averse culture, and it is something that has a lot of currency at the moment, as we talk about how to make directors, firms—particularly new firms—more entrepreneurial and more risk ready or to have a greater risk appetite. How do we get our firms in Australia to have that risk appetite and move away from a risk aversion that in some people's view a hallmark of Australian culture.

It is possible, in my submission and unfortunately quite likely, that the risks to directors have been exaggerated or that they loom larger in the imagination than in real life and in the letter of the law. I say that, having regard to the concerns some directors have. Why wouldn't they have them? They are told to be worried about these risks. They are told that they need to think about how to avoid the risk of, for example, a contravention of the insolvent trading laws in the Corporations Act.

It is not just my view that those risks have been exaggerated to directors. It is also a point the Productivity Commission made in its Business set-up transfer and closure inquiry report, which stated:

…the spectre of action looms larger than the actual (likely) consequence. The rate of successful enforcement of insolvent trading actions is low. There were only 103 insolvent trading cases between the law's introduction in 1961 and 2004. While the court ordered that compensation be paid in three quarters of those cases, more serious sanctions were extremely rare. Only 15 per cent of cases involved criminal proceedings, and only two cases involved an order banning directors from managing companies.

Since 2004, ASIC reports that they have commenced action for insolvent trading for circumstances involving five companies only between 2005 and 2011.

Two cases involved civil action, both resulting in the winding up of a company.

The remaining three cases involved criminal action. In one instance, the action was abandoned. In another, a director was fined and required to perform community service, but was subsequently imprisoned for failing to complete the community service.

The point of reciting that quote is to say to the directors of this country, and also to this parliament, that we not only have to deal with the question of what might be the legal impediments to a less risk averse culture; we have to talk about what might be the perceived impediments to a less risk averse culture.

When you think about the very low rate of prosecutions, the very low rate of actions, under the insolvent trading provisions of the Corporations Act, you will see that it is at least possible that the risks to directors have been exaggerated and overstated. That is fine if you are, for example, a professional adviser trying to sell training to directors about how to avoid their risks—you want them to be cognisant of their risks. It is, of course, important that, as a director, you are cognisant of your risks; you have legal obligations to be cognisant of those risks. But as a parliament we have to find a way to strike a balance between appropriate levels of cognisance of risk and appropriate levels of risk appetite.

It is only by being bold and entrepreneurial that firms will be able to grow and scale in the weight that we want them to—and I think everyone in this parliament wants to see Australian firms thrive, be bold, brave and succeed. It is really important that we remember in these situations that it is not just a question of what the black letter law says; it is not just the question of what the actual risks for directors are. That is important, and we certainly do have to make sure that the legal settings are right—of course, we do—but we also need to make sure that there is a realistic understanding of the risks posed to directors and to firms by the laws. And in doing those things we have to provide sufficient comfort to directors that they can be bold, that they can be very brave.

I know that the coalition wants to provide some very broad options for directors to avoid liability, and I think that is a matter that will be debated down the track. But in thinking about the risk aversion issues, in thinking about the protection that ought to be offered to directors, there are people that we should not forget, and those are the people who I mentioned at the outset—the employees, the small business suppliers, the small creditors, the mum and dad investors who suffer in insolvencies. There will always be an important role for drawing the right balance.

Debate interrupted.