Monday, 7 December 2020
Corporations Amendment (Corporate Insolvency Reforms) Bill 2020; Second Reading
This Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 concerns insolvency. Legally, if you ask any lawyer, it's the situation where a person—natural or otherwise—is unable to pay their debts as and when they fall due. If you ask a nonlawyer, they'll tell you it's a crisis. It's a crisis for a business, it's a crisis for the family whose livelihood relies on that business and it's a crisis for the people who are owed money by that business. This bill before the House seeks to alter the legal arrangements surrounding small business insolvencies.
Temporary insolvency relief measures have been in place since March this year. Labor has proposed and supported many measures, including relief for directors from personal liability for trading while insolvent; increased thresholds at which a creditor can issue a statutory letter of demand upon a company; and increased thresholds at which creditors can initiate bankruptcy proceedings. These are all measures that have been applied to businesses across the economy. In addition, Labor has proposed and supported measures including the payment of wage subsidies, known as JobKeeper, and has called for and supported measures that have led to bank forbearance in respect of personal and commercial loans owed by businesses. It has called for and supported measures that provide for relief and forbearance by landlords, whether that be rent relief or other arrangements in relation to leases. In addition to that, we have called for and supported relief in relation to utilities bills, such as phone bills, electricity bills and the like.
A lot of these measures either end or start to taper off on 31 December this year. It might surprise many members of this place to learn that, in the midst of the greatest economic downturn since at least the Great Depression but most likely in the past 120 years, insolvencies are actually down—not by a little bit but by a lot. In fact, if you look at the number of insolvencies in May 2020 compared with May 2019, they're down 50 per cent. You might say that's an aberration concerning something that was going on in May, but, if you look at the figures in relation to June, July and August, you will see the same pattern. In fact, in July and August insolvencies are down by 60 per cent compared with the same period in 2019.
That tells us a few things. It tells us that the measures put in place by this parliament and by others are working. Those businesses that, in the midst of a crisis, would have gone to the wall actually haven't. They've either been able to put themselves into hibernation and look after their staff and creditors or been able to trade through this great difficulty. And of course that's a good thing. But something about this just does not ring true. If insolvencies are not just down but down by 50 and 60 per cent on the corresponding period last year, it's quite clear to us that at least a proportion of those businesses have been kept alive when otherwise they probably would not have been, whether through JobKeeper, bank forbearance, relief from paying rent and other payments, protection from action by creditors or the relaxation of arrangements for directors. We know that those insolvencies are going to kick up again.
Just in passing, it's interesting to note that over 55 per cent of insolvency practitioners have, over the period since March, actually been on JobKeeper themselves, because their normal trade has been interrupted. They would normally be dealing with insolvencies and bankruptcies, but that hasn't occurred. It looks like the majority of insolvency practitioners themselves have been on JobKeeper.
So we know there's something very abnormal happening. We know there's going to be big kick-up in insolvencies. The bill seeks to address this issue. We know that for hundreds of thousands of small businesses from coast to coast things have been pretty tough. There's been a lot of uncertainty for them and for their employees. We also know that ventures that were viable and prosperous at the beginning of the year are now, because of the COVID crisis, battling for their very existence. They need help, and Labor intends to support measures that are going to help them. We want to ensure that they get all the help they need. We agree that owners of small and medium businesses should have every chance to return to profitability, to trade out of their difficulties, to deal sensibly and legally with their creditors to ensure that, in the midst of disaster, it's not lose-lose but there is some win-win.
Insolvency processes can be a burden on both those debtors and those creditors in the midst of that crisis. But we also know that changes like this need to be done properly. They can't be rushed through. They have to be adaptable to the reality on the ground. We've found a hell of a lot of legislation that has been pushed through this place in the midst of the crisis hasn't been all perfect. Some of it actually hasn't been all good. A lot of it has had consequences that were either foreseen at the time but ignored by the government or unforeseen at the time and not remedied.
An example of a consequence that was foreseen at the time but ignored by the government was their unwillingness to deal with Labor propositions around the superannuation early access scheme. We knew that the way the government had the scheme put in place was going to leave a big back door open to fraud. Fraud has happened. There are hundreds of Australians who have had their life savings wiped out as a result of fraud that could have been avoided. That's one example; I am sure there are others. So it is absolutely essential that when we're passing legislation designed to deal with the crisis that we put in place mechanisms to ensure that it's well attuned to the crisis at hand but also doesn't saddle us with problems down the track that we will live to regret.
I want to make this point: when you change the rules in an insolvency situation you're always changing the balance of power between creditors on the one hand and those who owe them money. Whenever you do that, somebody is going to be better off than they were prior to the change. So, effectively, we are picking sides when we do that. There is no avoiding it. So this parliament has to get the balance right.
The bill is advanced as a measure to support small businesses. We want to do the sorts of things that are going to support small businesses. But we have to be very, very mindful of this: if we just look at an insolvency situation through the prism of the small business that is insolvent or potentially insolvent then we run the very great risk of ignoring the fact that amongst those people who are owed money are a lot of small businesses as well. So we need to ensure that, whatever we do in this space, we're getting the balance right. There will be unforeseen consequences. I predict there will be some unforeseen consequences with the best will of every member in this place. When we change the balance of power between those who owe money and those to whom money is owed, we are changing a commercial relationship and there will be consequences that we cannot predict today.
It's for this reason that we will be proposing some substantial amendments. They will do nothing to hinder the speed or the ability of the government to implement the changes which it judges to be necessary. Those measures will be legislated. They can go through the parliament this week, with the proviso that our amendments are accepted. Our amendments propose a review of the mechanism and a sunset of the mechanism once we have got beyond the crisis—not immediately. We'll be sensible about this. It's not immediately. This has got a long tail to go through. We know that. Businesses may need to have access to these emergency small-business insolvency provisions for some time. So we are not being reckless about this. We are being very mindful of the circumstances of those small businesses that may owe up to a million dollars and under the existing rules are unable to meet those debts, think they have a plan to trade out of it and want to put in place a new insolvency practitioner to help them to do that to deal honestly and credibly with their creditors and trade out of the business. Who could be against that? Of course we're for it. But we know that we are going through the biggest changes in insolvency provisions in over 30 years. We are moving very, very fast. The lives and livelihoods of thousands of Australians are dependent on us getting it right. A proper look back at how they're working is not only prudent but vital if these laws are to protect the very people that they seek to help: the small businesses of Australia.
It is important to note that this bill does not cover sole traders or partnerships. Some may observe that they're the majority of small businesses. It's not a criticism by the way; it's not a criticism of the bill, it's just observing a simple fact. There may be many of those amongst the pool of creditors. They certainly won't be the majority amongst those who owe money.
Let's have a think about who some of the owners of those small businesses are going to be, the people who are owed money. They will be subcontractors in the building trade. They might be a one-man or a one-woman courier and transport operator. They may be a small supplier to the retail or the restaurant trade. They may be a contractor in the tourism industry—not necessarily in the tourism industry themselves, but they supply goods and services to that industry. We can predict today that these are going to be some of the industries that are reasonably impacted by this.
Of course, it's in their interests that the bigger businesses with whom they trade are able to fight their way out and back to viability. But in the case where that's not going to be possible their interests also need to be considered. Maybe the $10,000 that they're owed by the insolvent business is the difference between whether they continue to trade or whether they go out the door themselves. So it's not as simple as saying: 'Let's just relax the insolvency laws. Let's just put these measures in place, because it's got the name "small business" in the title it is automatically going to be good for every small business in the country.' We're adjusting the relationship between one group of small businesses and another group of small businesses when we adjust these insolvency laws so we want to ensure we get it right.
A lot has been said about these bills somehow being an Aussie version of the chapter 11 insolvency rules. I'm pretty sure you know that that's not the case, Deputy Speaker Zimmerman. They fall somewhat short of that. Some may argue that's a good thing. In practice, what the bill does do is it establishes a new debt-restructuring process for eligible small businesses, which allows company directors a stronger role in the insolvency process—putting together a plan, trading themselves out of the problem. It puts in place a simplified liquidation process for voluntarily winding up an insolvent company. It puts in place an expanded set of situations where documents related to an administration can be provided and signed electronically. It makes sense. We've learnt to do a hell of a lot of things electronically that were thought to be a bridge too far before this crisis. It also establishes a new category of insolvency practitioner for small businesses with a small amount of debt recovery, and this has raised quite a degree of concern: It may work or there may be problems with it. There are a lot of regulations which support this bill—as with so much of the legislation that has come before this parliament during the crisis and before—a thin stream of legislation meandering its way through lush fields of delegated legislation! So it is with this bill, which is all the more reason why we need to have some reasonable caution and put in place some brakes, checks and balances about how this proceeds. A review and a sunset clause in these circumstances make absolute good sense.
We have not reached this position lightly, I have to say. Had we not had the opportunity to talk to small business associations, insolvency practitioners, representatives of unincorporated businesses and the like we might have said, 'This looks good on the face of it', but we have done those things. The bodies that I've just listed have expressed some concerns—some of the accountancy bodies have expressed the same sorts of concerns that we have—which include a lack of clarity in the powers, duties and obligations of different parties in the restructuring process. The concerns include inappropriate individuals potentially being able to be qualified as restructuring practitioners—that's the new qualification that I'm talking about. That's not a reason for us to say, 'Don't pass this bill,' but it is a reason for us to say, 'Let's have a little bit of legislative caution and put in place the checks and balances in the bill itself.' The third concern is the scale of business potentially captured by the eligibility criteria.
Many of these concerns, as I've said, have been raised by stakeholders across different sectors, including the Australian Restructuring Insolvency and Turnaround Association, major accountancy peak bodies, banks and the Australian Chamber of Commerce and Industry. We share their concerns. The consultation process for the bill has been extremely truncated, considering the scale of the changes proposed. One example: stakeholders had five days to make submissions on the exposure draft of the bill, and those submissions are yet to be published. Stakeholders, collective and individual, have raised concerns and they haven't had the ability to meet with a Labor representative. We don't know what their concerns are, because the government, not too keen on transparency in this or any other matter, has not published those submissions. That's just one example.
Much of the detail of the bill, as I've said, will be contained in those lush meadows of regulation that have not yet been finalised. As a result of all of this, it's unlikely that many of the technical issues identified by the stakeholders will have been addressed by the government by the time it passes through this place and the other place, assuming that it will. So, on the basis of that, I foreshadow now that, in the consideration in detail, I'll be moving two substantial amendments—the first being a statutory review and the second being a sunset clause on the provisions before the House. But now, in this second reading stage, I'll be moving an amendment to the question before the House, and I want to go to one particular provision within that second reading amendment. In that provision, you'll understand why we are insisting on a statutory review and you'll understand why we are insisting on a sunset provision. It says that the House:
(2) Calls on the Treasurer to abide by the requirements in Section 588HA of the Corporations Act 2001, which required the Minister to cause an independent review of the safe harbour insolvency provisions inserted into the Corporations Act 2001 by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 to be completed and tabled in parliament by September 2019.
I know you're familiar with that one, Deputy Speaker Zimmerman. Not only was it not tabled in parliament in September 2019; the review wasn't conducted. It goes to the heart of the matter that is before the parliament today. So why is Labor raising these concerns? Above and beyond all of the issues that I have already described, I say that this minister has form. Parliament directed the minister to conduct a review. He didn't. Parliament directed the minister to table that review. He couldn't, because he didn't. So if you want to know why Labor is insisting upon the amendments that I have foreshadowed, it's because this government and this minister have form. We will be insisting on a review. We will be insisting on a sunset clause.
Let me be clear: we support provisions to ensure that viable businesses are able to trade their way out of their difficulties and that viable businesses are able to deal honestly, cogently and credibly with their creditors. But we want to ensure that, in one year, two years or three years down the track, we don't look back and say, 'What the hell have we created here?', because it will be so difficult to unwind, and the government hasn't done what it undertook to do—once again, conduct a review and implement the recommendations of the review.
With those observations in mind, I formally move my second reading amendment and foreshadow that there'll be more to come:
That all words after "That" be omitted with a view to substituting the following words:
"whilst not declining to give the bill a second reading, the House:
(1) notes that the Government has:
(a) failed to provide adequate support for ordinary Australian small businesses during the COVID-19 pandemic, leading to a potential wave of insolvencies over the next year; and
(b) rushed through this legislation with limited consultation, providing stakeholders only five days to consider the exposure draft of this legislation; and
(2) calls on the Treasurer to abide by the requirements in Section 588HA of the Corporations Act 2001, which required the Minister to cause an independent review of the safe harbour insolvency provisions inserted into the Corporations Act 2001 by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 to be completed and tabled in Parliament by September 2019".
The original question was that this bill be now read a second time. To this the honourable member for Whitlam has moved as an amendment that all words after 'That' be omitted with a view to substituting other words. If it suits the House, I will state the question in the form that the words proposed to be omitted stand part of the question.
I'm pleased to speak in favour of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020. This bill implements the most significant changes to Australia's insolvency framework in almost 30 years and is part of the government's economic recovery plan to keep businesses in business and Australians in jobs. One of my earliest memories as a young lawyer was dealing with some cases of insolvency, and, as the member for Whitlam has correctly pointed out, when companies become insolvent, a lot of people are impacted—the people running the company, obviously, but also their employees and their creditors. And it's always really important to remember that the creditors aren't always the big banks or their big lenders; the creditors can include their trade creditors, and these can be small family businesses as well.
Historically, Australian law in relation to corporate insolvencies prioritised liquidation of a company over its restructuring, and, given that our definition of 'insolvency' is the inability to pay debts as and when they fall due and payable, this traditional approach didn't take account of an insolvent company's longer-term prospects. It didn't take into account its competitiveness, its assets and its brand value, and it was geared towards the premature closure and liquidation of a company. This approach didn't allow for the possibility that, through some restructuring or through some assistance, the company could return to profitability and preserve the interests of creditors. The underlying assumption of the historical approach was that insolvency was the result of deliberate malpractice by companies, and, accordingly, it placed greater emphasis on the protection of creditors.
Thirty years ago, with the introduction of the voluntary administration process, we moved our approach somewhat. We moved the historical approach by incorporating an option which was based on what's referred to as a 'rescue culture', and that is a culture that allows for financially constrained companies to reorganise themselves rather than be forced into liquidation. The underlying assumption of the rescue culture is that insolvency may not be a result of deliberate malpractice and that a second chance for the company could be in the longer-term interests of everyone. Prior to the enactment of the voluntary administration regime, Australia generally had a very poor record of restructuring businesses which would otherwise be quite viable, as it was always difficult to bind all creditors to the arrangements and the directors were exposed to being found guilty of insolvent trading. So the voluntary administration process was enacted to allow more companies to restructure and survive. It was intended to give companies a short period of time to restructure without having to deal with the demands of creditors, landlords, suppliers and other claimants.
The VA process, which was introduced 30 years ago, was a welcome introduction, and it has had some success in achieving its overall aims, but it's also been seen over the last 30 years that it does have some issues. First of all, the complex requirements around voluntary administration in Australia are more suited to large, complex corporate insolvencies. The fact is that the high costs of voluntary administration can also consume most or all of the value of a small business's assets, making it harder for businesses to restructure and reducing the willingness of a small business to engage with the system. Also, voluntary administration involves placing the business under the control of an administrator, which sometimes deters small and family-sized businesses from accessing the process. So the changes that are being introduced in this bill further build on the concept of a rescue culture and will provide for a new option to help small Australian businesses to restructure and increase their chance of surviving the economic impact of the coronavirus. The reforms don't exactly mimic but they draw on features of the US chapter 11 bankruptcy process, which allows small businesses to restructure their debts while remaining in control of their business. The process is available to incorporated businesses with liabilities of less than $1 million, and it will cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of which have fewer than 20 employees.
There are three key features to the reform package. First, while it's similar to the voluntary administration regime, unlike the voluntary administration regime, the new process adopts a debtor-in-possession model, where the small-business owner will remain in control of their business while a debt-restructuring plan is developed and voted on by creditors. The plan will be developed by the business owner in conjunction with an independent small-business-restructuring practitioner. The small-business-restructuring practitioner will have a much more streamlined role and more limited powers than an administrator in a voluntary administration. This reflects the reduced complexity of the new process and the businesses eligible to use it. The role of the practitioner will be to help determine if the company is eligible for this process, to support the company to develop a plan and review its financial affairs, to certify the plan to creditors and, if the plan is approved and endorsed, to manage the disbursements once the plan is in place. A practitioner will not be required to take on personal liability for a company or manage its day-to-day affairs.
It should be noted that, while the plan is being developed, unsecured and some secured creditors will not be able to take enforcement action against the company. The company and the practitioner will have 20 business days to prepare and present the plan, following which creditors will have 15 business days to vote on the plan, including voting on the remuneration of the practitioner. The plan must be supported by over 50 per cent of the creditors, in value, in order to be approved. Notably, any outstanding employee entitlements must be paid out in full before the plan is voted on by creditors. If the plan is not approved, the company can go into either voluntary administration or a streamlined liquidation process.
Safeguards have been put in place to prevent the process from being used to facilitate corporate misconduct such as illegal phoenix activity. They include a bar on the same company or directors using the process more than once within a prescribed period, which is seven years, and the provision of a broad power for the insolvency practitioner to stop the process. Additional mechanisms are also included as part of the restructuring process, to ensure that creditor interests are represented and protected.
Unfortunately, due to the COVID pandemic and recession, not every business is going to survive, so the second part of the package which is in this bill is a new, simplified liquidation pathway for small businesses, to allow faster and lower-cost liquidation, increasing the returns for creditors and for employees. The current regulation around liquidation in Australia, including mandated investigative functions, is suited to large, complex company failure, where intentional misconduct may have been involved. However, most liquidations in Australia relate to relatively small businesses, who overwhelmingly fail honestly. In these cases, the cost of the liquidation can consume all or almost all of the remaining value of a company, leaving little for the creditors.
Under the new liquidation process outlined in this bill, regulatory obligations will be simplified so that they are commensurate to the asset base, the complexity and the risk profile of eligible small businesses. The simplified liquidation process will retain the general framework of the existing liquidation process, with modifications to reduce the time and the cost. As currently occurs, the small business can appoint a liquidator, who will take control of the company and realise the company's remaining assets for distribution to the creditors. The liquidator will also still investigate and report to creditors about the company's affairs and inquire into the failure of the company. Time and cost savings are going to be achieved through reduced investigative requirements, requirements to call meetings and some of the reporting functions.
The third measure introduced by this bill is basically a set of complementary measures to ensure that the insolvency sector can respond effectively, in both the short and the long term, to increased demand and to the needs of small business.
In conclusion, the new restructuring process is aimed at not only enhancing the rate of successful restructuring outcomes but also providing a pathway for distressed small businesses that historically would never have entered into voluntary administration due to the costs and the loss of control associated with that process. As I said at the outset, this bill implements the most significant reforms to Australia's insolvency framework in almost 30 years and is part of the government's economic recovery plan to keep businesses in business and to keep Australians in jobs.
Thanks very much for the opportunity to speak on the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020. As the member for Curtin and others, including my friend and colleague the member for Whitlam, have noted in their contributions, a properly functioning insolvency regime is critical to ensuring that funds flow properly in Australia and gives lenders, borrowers and creditors the confidence to do business and support each other. We have seen relief provided during the peak of this crisis with the temporary relaxation of rules related to trading while insolvent.
This arrangement recognised the depth, the magnitude and the seriousness of the crisis that we are in; it recognised the temporary restrictions that were placed on business and the difficult situation that many businesses were in; and it gave directors some relief from civil penalties for trading while insolvent. These were only temporary arrangements, and the government has since announced the measures in this bill before us now, which aim to provide a more streamlined insolvency process for small business. The key features of the bill are the implementation of a new debt-restructuring process for small incorporated companies and a new streamlined liquidation pathway for small incorporated companies.
The new debt restructuring process provides a debtor-in-possession model, which will allow small business owners to retain control of their businesses while implementing a restructuring plan that's been agreed by their creditors. These plans will be developed in conjunction with a new category of independent small-business restructuring practitioner.
The government also says it's introduced safeguards to prevent the process from being used for corporate phoenixing, which is very important—it's a practice that's estimated to cost Australians up to $5 billion every year. The bill also introduces a new simplified liquidation pathway for small businesses, designed to reduce the costs of winding up businesses that will not survive.
In summary, the bill implements significant reforms to the Australian insolvency framework—reforms which the government says will help Australian small businesses restructure following the COVID-19 pandemic. There's no more important time for the government to be providing support to small businesses. It's crucial that distressed businesses have access to the right processes and structures necessary to reboot their businesses or, if necessary, to wind down their operations in an orderly manner. It's clear that not all businesses will survive to the other side of this crisis. To the extent that we can appropriately help some of those restructure their business and emerge on the other side, we, on this side of the House, obviously support that as well. But we need to remember that not all small businesses can access these provisions, and some may actually be worse off.
Most Australian small businesses are sole traders or partnerships, and they won't benefit from changes to the Corporations Act to make restructuring their debts easier. Indeed, in lots of ways, they have the most to lose. As we've seen so many times, when restructuring or insolvency goes wrong, it's frequently small businesses and subcontractors who end up holding unpaid invoices. So, for an ordinary tradie who works as a subcontractor to a larger business, a poorly run insolvency process can lead to disaster for them. Sole traders may be left struggling to meet payments on their house or to put food on the table for their family. We need to be conscious and cognisant of that part of the small-business community in particular.
That's why we'll be moving amendments to this bill to ensure that there is a review process and a sunset clause in place—not because we disagree with the idea of streamlined insolvency and restructuring but because we know the stakes are so high if this insolvency process is wrong.
The government's claiming these reforms are the most significant for insolvency in 30 years, and yet they appear to have been implemented with very limited consultation. Treasury only had the exposure draft legislation up on their website for five days. When you consider the magnitude of what we're thinking about here, that's clearly not good enough. We still haven't seen submissions in relation to this legislation. We've done a lot of consultation of our own, though. We know that there is anxiety about the lack of consultation, and people are worried about the detail of the draft laws that are before us.
Labor support the sensible reform of these laws. We want small businesses to have the support and structures they need. But, time and time again, we've seen in this place the big announcement, the rushed through legislation, and the subsequent issues that emerge because there hasn't been enough consultation and there hasn't been enough consideration of the detail. That's why we think a sunset clause is necessary, to ensure these changes aren't locked in without an appropriate review. A requirement for review on its own is not sufficient, given the government keeps missing legislative requirements for reviews. Our amendments will ensure that these very significant changes to the Corporations Act are appropriately reviewed and considered before being made permanent.
Overall, we are supportive in principle of these changes. We support small business. We support them not just in word, but in deed. That's why we have been fighting, for example, for the JobKeeper payment not to be cut prematurely, because 1.5 million Australian workers and, I think, 400,000 Australian businesses are still relying very heavily on JobKeeper. If you want to support small business, you can do something about insolvency, but you should also do something to ensure that you don't pull the rug out from under small businesses before they're ready to go out again.
I rise to support the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020—reforms that will be the most significant in our nation's insolvency framework for three decades. These are reforms that are imperative for small business who have faced financial stress this year due to the COVID pandemic. These reforms complement the Morrison government's JobMaker plan to ensure Australia emerges from the pandemic stronger, more resilient and competitive in our global economy.
Since the beginning of COVID, the Australian government has provided unprecedented levels of economic support for families and for the 27,000 small businesses in my electorate of Higgins. This support has included a range of economic measures. Tax relief measures of up to $2,745 have already passed parliament. Temporary tax incentives will allow 29,000 businesses in Higgins to write off the full value of any eligible asset they purchase to support new investment and, importantly, increase business cashflow. We've also supported the JobKeeper payments, which have supported 8,600 businesses in Higgins, to keep employees connected to their employers. The cashflow boost has also helped 6,300 small and medium businesses provide payments to help them stay afloat.
This bill forms part of the next phase of our economic recovery plan for small businesses. We need to keep small businesses in business so that Australia can stay in business. The Morrison government's reforms will help small businesses like those in my electorate of Higgins, many of which have had to incur significant debt. And we need to help make sure they can restructure and survive the devastating impacts of COVID.
In 2015, the Productivity Commission reported that almost 60 per cent of companies that enter voluntary administration are deregistered within three years. Accordingly, the new restructuring process that forms part of this bill is aimed at enhancing the rate of successful restructuring whilst providing a clear pathway for distressed small businesses that historically would never have entered voluntary administration due to the costs and the loss of control associated with this process. Where restructure is not possible, businesses will be supported to wind up faster, enabling greater returns for creditors and for employees to be paid fairly. These changes will introduce new processes suitable for small businesses from 1 January next year, reducing the complexity, time and cost burdens for small businesses. Our reforms will cover roughly 76 per cent of businesses subject to insolvencies today, 98 per cent of which have fewer than 20 employees.
Our insolvency system is facing challenges. There is an ever-increasing number of small businesses that are now financially distressed due to the severity of the COVID crisis. This can be seen very clearly in my home state of Victoria after very long and deep lockdowns that unfortunately had to be undertaken due to the failings of the state government with regard to hotel quarantining and contact tracing. The one-size-fits-all approach, which imposes unfair duties and obligations on business regardless of their size and administration, is no longer suitable; the current requirements are more suited to large, complex company insolvencies. That is why this bill is so important—so small businesses can prevent prolonged distress and begin the process of engaging with the insolvency system early if needs be. I've spoken to so many small businesses in Higgins and I know that what they want is simplicity and flexibility.
The reforms draw upon key features from chapter 11 of the Bankruptcy Code in the United States, which helps small businesses restructure and survive the economic impact of COVID. It is critical that our economy begins to recover and that businesses have flexibility to either restructure or wind down their operations in an orderly manner. Key elements of the reform in this bill include the introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million. We're moving from an inflexible, one-size-fits-all creditor-in-possession model to a more flexible debtor-in-possession model. This will allow small businesses to restructure their existing debts and continue trading under the control of their owners who know the business best. Accelerating the period to 20 days for the development of a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan, is another reform that will be very helpful to the sector. A new and simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation is another measure that will be helpful to this area. Complementary measures to ensure the insolvency sector can respond effectively, both in the short and long term, to increased demand and to meet the needs of small businesses is one thing that we've heard about from the sector with regard to how to deal with the financial stresses that they are facing.
Our government understands that it will take time for practitioners to familiarise themselves with the new processes and to register as a small business restructuring practitioner. This will mean that not all small businesses will be able to access the process immediately on 1 January 2021. To address this transitional issue, an eligible small business will be able to declare to its creditors, through ASIC's published notices website, its intention to access the restructuring process. Our government is preparing to support the expected increase in the number of companies being put into external administration as the temporary relief measures expire at the end of December. The reforms in this bill will help those businesses to successfully get to the other side of the crisis. It is imperative we support them through this very tough and challenging time. I know the measures that we've announced to date have had a positive impact; they've allowed businesses to weather the storm. What we will do now is help them to move past the storm. Importantly, there are safeguards which will be implemented to prevent the process being used to facilitate corporate misconduct such as illegal phoenix activity. Phoenix activity is whereby a company is liquidated or abandoned to avoid paying its debt and a new company is then started to continue the same business activities without those debts. Obviously, that is something we wish to avoid as a government. These provisions include a prohibition on related creditors from voting on a restructuring plan, a bar on the same company directors using the same process more than once within a prescribed period, which is proposed to be seven years, and the power for a practitioner to stop the process where misconduct is identified.
Our government has been on the front foot from day one of this global pandemic. We've supported everyday Australians and small businesses to get to the other side of this crisis. On 22 March, our government announced temporary measures to help financially distressed businesses through JobKeeper and JobSeeker. I've never met a person who hasn't seen them as incredibly important economic measures, and it's broadly understood by the Australian public that these were very necessary steps to take. On 7 September, we announced a further extension of these support measures, which I know businesses in my community have greatly appreciated and utilised. The reforms in this bill will reposition our insolvency system to reduce costs for small businesses and to reduce the time they spend during that process. Ultimately, this will lead to greater economic resilience.
We know small businesses are the lifeblood of our economy. We also know that this has been an unprecedented crisis. The Australian public knows we have their back and the Australian public knows that we're responsible when it comes to economic measures. I commend this bill to the House.
I rise today to speak in favour of the second reading amendment to the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 and the proposed substantive amendments which the member for Whitlam referred to during his earlier contribution.
As the member for Whitlam and the member for Rankin both indicated, we support the key measures contained in this bill in principle. But for a number of reasons, including those referenced in speeches given by those opposite, including the member for Curtin and the member for Higgins, about the importance of these reforms we believe that it's appropriate that there be a statutory review included in the bill. We also believe that it's appropriate that there be a sunset clause.
Before commenting on the provisions in this bill and our approach to it, I just want to set out very briefly the fact that this bill has three main elements. Firstly, there is the new debt-restructuring process for eligible small companies which allows company directors a stronger role in the process. Secondly, there is a simplified liquidation process for voluntary winding up of insolvent companies and, thirdly, there is an expanded set of situations where documents related to administration can be provided and signed electronically.
As earlier speakers on this side of the House have indicated—and the member for Whitlam ran through a number of measures in some detail—over a number of years the ALP has supported improvements and strengthening of insolvency provisions, so we are very supportive of insolvency provisions that are suitable and which are as appropriate as possible, given the circumstances. In addition to that, in the current circumstances where, obviously, there has been a severe economic downturn in recent months as a result of COVID, we have supported a range of measures, including loan flexibility and of course, as a number of earlier speakers indicated, JobKeeper. We called for that for quite some time before the government finally embraced it as a measure. All of these different measures have interacted in ways that have made it more possible for companies to keep going as long as possible for the benefit of creditors, for the benefit of the owners of those companies and for the benefit of employees. So we have supported any number of measures over the years in relation to insolvency regulations specifically, but also a number measures over recent months to help companies, whether they be large or small, to get through this very difficult period.
I just want to make an observation—and, again, the member for Whitlam touched on this earlier—that insolvency is one of the more complex areas of financial regulation, involving, at its core, a set of balanced interests. On occasions, those interests can be conflicting. There are occasions where it's in the interest of a range of different stakeholders for a company to continue trading and to try to get through its situation, but there can be situations which one might describe as zero-sum. If one looks at all of the stakeholders in a situation where insolvency is imminent and where a company might be in serious trouble, one can quickly reel off a significant number of stakeholders. Obviously, there are the creditors; there are the owners of the company; the employees will have a significant stake, not just in the company and whether it survives or not but often in the way in which a company might fail and what impact that might have on their benefits; and then of course there's the broader public good. This is clearly an area where there are externalities and where the way in which companies trade and their prospects for survival during broader economic downturns have an impact on other companies.
Again, to make reference to a situation that other speakers on my side have already made reference to, if you have a regulatory system that tries to give more space to companies to trade out of situations in which they're facing difficulty then of course the other side of that ledger is that companies facing difficulty are going to accrue more debts. If it turns out that they can't pay those debts, the other side of that transaction is going to suffer some harm as a result. This is all a matter of balancing interests, of risk assessment and, ultimately, one would hope, setting up a regulatory arrangement that is for the greater good. But it is the inherent complexity of all of this, the inherent balancing of sometimes-competing interests, that should make us very cautious—doubly so, given that both speakers opposite, the member for Curtin and the member for Higgins, have given very persuasive indications that this is a major set of reforms. Indeed, both of them indicated that this is the most significant proposed set of reforms in relation to insolvency law for three decades. That should make us doubly cautious, given both the magnitude of the reforms and the fact that they relate to something so inherently complex and sensitive.
We can all reel off a number of regulatory principles that we believe should be applied, such as transparency and consistency—consistency on one hand yet, on the other, treating different entities differently where that makes sense—and flexibility, while at the same time providing protections. Again, we can imagine a whole range of different regulatory objectives that one might balance in different ways. I think the member for Curtin gave a very interesting example of that, where the laws were reformed some decades ago to give greater emphasis to allowing survivorship. But, again, any changes of that nature in the regulatory balances embedded in the system have to be undertaken in a very cautious way so as not to lead to unintended consequences.
What are some of the unintended consequences? Well, one that we think is material is that the risk of illegal phoenixing might be affected by poorly designed regulation. As other speakers have indicated already, a number of elements of this consultation process occurred over a handful of days. The fact that this is a significant risk is something that we believe should make parliament cautious. As all of us in this place know, illegal phoenixing has the potential to cause serious harm to vulnerable individuals. The cost to business is significant. Some have estimated that it is between $1.1 billion and $3.1 billion. The cost to employees through lost, unpaid entitlements is somewhere between $31 million and $298 million, and the cost to government from unpaid taxes is well over $1½ billion by some estimates. Of course, some of these estimates are difficult to pin down because of the very nature of the phenomenon that we're talking about.
That's one example. Another example of a regulatory risk is eligibility. It is true to say that all of us in this place want to give small companies more of a chance to survive where that makes sense; of course we want to see that. But when we draw eligibility lines, we necessarily put some companies on one side of that line and some companies on the other. We also need to understand that many Australian small businesses are sole traders and partnerships and won't benefit from changes to the Corporations Act to make restructuring their debts easier. Again, we need to be very conscious that, while eligibility lines must be drawn, where those lines are drawn is going to have serious implications, particularly, as I referred to earlier, in a world of zero-sum games, potentially. That's another dimension of this regulatory suite that we need to be very cautious about.
There are a whole range of stakeholders who understand the complexity of what we're talking about. There's the Australian Restructuring Insolvency and Turnaround Association as well as the major accountancy firms, the major accountancy peak bodies, the banks and the Australian Chamber of Commerce and Industry. Many of these bodies, these stakeholders, have expressed serious concerns about the process. That in and of itself should make us very cautious.
The sensible thing that we are proposing here is that, in light of these concerns, in light of the fact that there is a material risk of unintended consequences, a sunset clause and a statutory review are entirely appropriate. As the member for Whitlam indicated when making reference to his second reading amendment, a statutory review is essential given that in this area this government has shown a willingness to not undertake reviews when not compelled by statutory provisions. So we are, for that reason, going to insist on a statutory review in this case.
I will go to a couple of comments, and there are many, many comments I could go to. Ryan Lennon of Kott Gunning Lawyers said:
In perhaps the clearest display of the haste with which these reforms were prepared, and are being enacted, the period for submission from the "insolvency industry" was effectively two days …
A number of speakers have talked about different elements of this process being what one can only say was rushed. I go back to contributions made by the member for Curtin and the member for Higgins. Both of them said, 'This is the most significant reform in this area for 30 years.' Yes, of course, we want to see reforms go through this parliament which make it easier for businesses to survive where they can. We want to see reforms which promote jobs growth. But if those opposite, on one hand, are saying this is the biggest reform for three decades and we have serious stakeholders, on the other, saying, 'We were given a handful of days to days to respond,' at the very least that raises concerns about potential unintended consequences in a very complicated piece of legislation.
Some opposite made reference to the fact that this has parallels with chapter 11 provisions. The Australian Restructuring Insolvency and Turnaround Association said that any parallels drawn with chapter 11 provisions show that whoever made those parallels doesn't know what they are talking about. That's concerning, because I think the Treasurer has, on occasion, made that parallel. So, again, these are reasons we should perhaps be more cautious than the bill as currently formulated is.
It has been a rushed consultation process. Stakeholders had only five days to make submissions on the exposure draft of the bill. Five days for something this complex, this momentous, is not enough. As the member for Whitlam pointed out earlier, so much of the detail of what we're going to see is going to be in the regs. This is something we see as a somewhat concerning trend in a number of areas of regulation. Given the complexity of this reform and how serious it is, if there is a lot of detail in the regs it only reinforces the appropriateness of a statutory review and a sunset clause. The fact that so much of the detail is not going to be seen by this parliament when we vote on this bill reinforces the need for this parliament to insist upon additional protection.
We support in principle what this bill is trying to achieve, but we need to acknowledge that insolvency is an area of regulation that is inherently complex. It inherently involves trading off different interests. Of course, while all of us in this place can say that we want more jobs and we can all say that we want firms that have a good prospect of surviving to have an opportunity to survive, we also need to acknowledge that when you tweak insolvency laws it has impacts on other stakeholders. It doesn't just impact on the entity you're trying to help. For that reason, we need to be cautious. We need to be more cautious than how this bill is currently formulated. This government needs to be sensible. We have indicated we're supportive in principle of what it's trying to do here, but this government needs to be sensible and accept a couple of very modest and appropriate amendments and to basically provide this parliament with a guarantee that there will be a review and an appropriate sunset clause.
The Corporations Amendment (Corporate Insolvency Reforms) Bill is a phenomenon that has come out of the COVID-19 crisis. COVID-19 has changed everything in Australia, in a way, but nothing has been as dramatic as the rapid rise in unemployment and, I'm pleased to say, the rapid return of employment as the COVID restrictions are lifted. When the crisis first hit, a lot of things were done which, in the history of the nation, will go down as quite amazing. Not only was JobKeeper, which everyone is familiar with, introduced but the initiative to improve cash flow by rebating PAYE taxes kept a lot of companies functioning by basically giving them tax relief. These were two great reforms.
This insolvency reform, which has borrowed things from the US chapter 11 bankruptcy measures, has also been born out of the COVID-19 crisis. We were potentially faced with many more businesses falling over and being liquidated, and it was quite an appropriate response. The change in this is that the debtor, rather than the creditors, is in possession of the business. For those of you that haven't been through or seen someone go through an insolvency or a liquidation, that is quite a major change. But there are certain caveats to it, and I will go through some of those later.
Having been around a regional town that's been through boom and bust and having known many tradesmen and businesspeople, I know it's sometimes a bit of a bloodbath. When a business is failing, there are people called unsecured creditors—often tradesmen who may be sole traders or in a partnership—and they get left behind in the wake. Many businesses that are on the road to collapse get put into forced administration or into a liquidation process, and the liquidation process and the fire sales that happen mean that, rather than coming out with something, they exit with nothing. They're in negative territory, and there's a knock-on down the chain to all the subcontractors and other people, who also go under as a result. I was really pleased to see that the directors of businesses won't be able to take up these provisions if phoenixing of their business is involved, or if they've done that before, or if the companies are currently undergoing restructuring or have been through restructuring once in the last seven years.
The process up to now has been directors have been given relief by section 588G(2) of the Corporations Act so they can't be charged with trading whilst insolvent. This legislation is to try and formalise it going forward from January next year. It's really important to note that a lot of wise heads have looked at this and put some common-sense things in. Other speakers have mentioned the need to have skilled and appropriately qualified small-business-restructuring practitioners. I know some accountants and financial advisers have moved into those roles, but you actually have to have been registered as a liquidator to be able to do it. I know there are many people who have made a profession out of restructuring and saving businesses, and there are some, unfortunately, for whom the liquidation process has been like vultures cleaning out and taking the last meat off the bones of a failed company. It is distressing when that happens.
Hopefully, if the company are allowed to declare, 'We're drowning; we 've got problems; we might go under,' they can get a sort of time-out, call in a qualified restructuring practitioner, notify their creditors and then go through a 20-working-day process of deciding how they're going to get out of the situation and take steps so that they don't submerge, they get their sales up and they trade out of it—particularly as the trigger for a lot of this was COVID-19, which isn't a normal business phenomenon. Something like this happens every hundred years, and a lot of good businesses wouldn't have even been contemplating this if COVID hadn't come along. That's why I said these changes are born out of the phenomenon that we have in front of us. After this 20-working-day restructuring plan has been worked through, there's another 15 days of analysis by creditors. The creditors still get a say in it, obviously. Secured creditors haven't lost their security, by the way. Unsecured creditors, the fine details of that, would be worked out with the small business restructuring practitioner and the applicable laws.
Overall, I think this is a good initiative, because we will save a lot of inherently good businesses that have had a short-term interruption to normal business, not normal flow of credit. A lot of people think that businesses, particularly in the construction game, do it because they've got a whole bundle of money piled up, just sitting there, waiting to be spent on building X, Y or Z. But, like lots of construction projects, it relies on credit and it relies on drawing down progress payments from your creditors and, at the same time, making future sales and getting the building done on time and having the people who have signed up to purchase or to lease, then, giving you cash flow. If that's interrupted—say, a government body is holding back taxes or has put a claim on you, for any reason—that can bring mighty empires down.
I've seen it in my area and I've seen it in the big smoke. One of the biggest construction companies in the country that's been around forever has had problems. Reading the financial pages, it appears that they had a problem getting some money that they deemed was owed to them by another level of government. So people have to realise that credit and money running through a business is like blood running through us. If the circulation fails, all things can come unstuck. We had the big daddy of them all. We had COVID-19. So these chapter 11 concepts that we have married with our pretty sound and solid insolvency rules, I think will be a good thing.
I support the bill. I think it will be good. We will keep a watching brief on it. I suspect most of the people in the House have the same opinion as me: we don't want to throw the baby out with the bathwater but we want to give these businesses a chance to trade their way out of COVID-19 and go on to flourish and keep all those people employed. Most of the businesses are small businesses that will be eligible for this. If they've got liabilities greater than a million dollars, no can do; it's back to regular rules. A lot of these small businesses know their business better than any liquidator and most administrators, and, giving a pause in proceedings, I think, will let many of them—not all of them—get through to the other side and go on to flourish. I commend the bill to the House.
Everyone knows how hard this pandemic has hit small businesses. There are many people who have worked their entire lives to build up a family business, who have never taken a cent in support payments from the government, who have found themselves not only needing support—it might have been through JobKeeper; it might have been through some of the cashflow measures—but also, sadly, losing their business and needing support in the form of unemployment benefits. We also know that as the government withdraws supports like JobKeeper more businesses are going to hit the wall. We are concerned that, at the end of this month, an avalanche of insolvencies are expected to hit at the end of the regulatory freeze on bankruptcies. That is a human story and a human tragedy for so many people who have put their heart and soul into their business. As speakers before me have said, Labor is supportive, and I'm supportive of this government working to help small businesses, in particular, get through this period if they can.
The Treasurer and Assistant Treasurer announced in September what they described as US chapter 11-style insolvency reforms, changes to see small businesses at risk of collapse able to keep trading and work out their problems with a small-business-restructuring practitioner instead of appointing an administrator. Whilst on paper this may be a good idea, and perhaps ultimately it may work, the great concern is that this is another example of a photo opportunity without follow-through, of an announcement that sounds like it might address a really significant problem but turns out not to be based on the hard policy work having been done.
One of the significant concerns for my electorate of Dunkley is that the majority of small businesses aren't eligible for these reforms. These measures are only for incorporated businesses, which means that sole traders, partnerships and family businesses structured in other non-incorporated ways will miss out. I can tell this House that I had almost an avalanche of inquiries into my office early on when the government finally decided to bring in wage subsidies in the form of JobKeeper, particularly from sole traders and partnerships who were going to be left out. This is not a small cohort of small businesses in this country. It's a significant cohort of people, a significant cohort of families who need to pay the bills, who need to pay their mortgages, who have debts that have racked up because they've tried to keep their business going, notwithstanding that they may have been eligible for JobKeeper. They are likely to miss out, with the way that this legislation and this scheme are structured.
There is also the concern that the changes could just push the insolvency issue further down the supply chain to other small businesses and sole traders. One of the big concerns, particularly in my electorate, is whether or not this will actually be a negative for the tradies, for the trades men and women who have set up their own businesses and who usually work as subcontractors on larger projects, on credit for other businesses. They often work on housing projects and expect to be paid at the end of it, but the pandemic crisis has hit, and they haven't been paid. Will this legislation and this process mean that they will get their money, or will sole traders, partnerships and family businesses just be left out in the cold? Will they be able to get the unpaid invoices paid? If they can't, they're the people that are going to continue to struggle to pay the bills to keep their families afloat.
The plight of subcontractors, particularly in the construction and building industry, as I said, is something that is right at the heart of many of the suburbs in my electorate where trades men and women work for themselves. It was too often the case before the pandemic that we would see a tradie working as a subbie to a larger business and ending up out of pocket when that larger business either failed or disappeared without paying their bills, when they pocketed the fees for the contract but didn't pass it down to the small businesses below them. This was always a concern before the pandemic, and we're worried that it will be a greater concern now.
That's why I was proud that the Labor Party took to the last election a commitment to a tradies guarantee for cascading trusts, to make sure that those hardworking trades men and women who work on large projects as subcontractors can be guaranteed that, at the end of the day, no matter what the head contractor does, they will get paid for their work. This was a policy based on a review called the Murray review. That review, amongst a number of things, identified that 22 per cent of all insolvency events happened in the construction sector, with 1½ thousand construction companies entering into external administration in 2016-17 alone. This is something that the federal government can and should be looking at to help subcontractors. The federal government, through its procurement policy, has the ability to put in place cascading statutory trusts to make sure that—