Alex Hawke (Mitchell, Liberal Party) Share this | Link to this | Hansard source

On behalf of the Chair of the Parliamentary Joint Committee on Corporations and Financial Services, I present the following reports: Report on the 2021–2022 annual reports of bodies established under the ASIC Act, Statutory inquiry into ASIC, the Takeovers Panel, and the corporations legislation: ASIC licence transfers and Corporate insolvency in Australia.

Reports made parliamentary papers in accordance with standing order 39(e).

by leave—Section 243 of the ASIC Act requires and empowers the committee to undertake certain actions in order to maintain oversight of the activities of ASIC, the Takeovers Panel and the corporations legislation. The three reports which I've tabled today have been completed pursuant to this section.

I do want to make some remarks about our corporate insolvency report. The committee resolved, as members will know, to commence an inquiry into corporate insolvency in Australia in September 2022. The terms of reference adopted by the committee were wideranging and included matters such as trends in insolvency, the operation of the existing framework, areas for reform, supporting access to corporate turnaround capabilities, the role, remuneration, financial viability and conduct of insolvency practitioners, and the role of government agencies. The committee received 78 submissions and held five public hearings, and the committee's final, unanimous report contains 28 recommendations.

In the committee's assessment, Australia's corporate insolvency system is overly complex and difficult to access. It creates unnecessary cost and confusion for both debtors and creditors. Tellingly, few parties seem satisfied with the system as it currently stands. Unsecured creditors are understandably frustrated by stubbornly low returns in insolvency processes. Debtors, particularly smaller businesses, regard opportunities for restructure as lacking and the system costs as excessive. Insolvency practitioners and other observers consider the system is not appropriately resourced to achieve its purposes.

The committee concluded that to address the shortcomings of the corporate insolvency system there is a need for an independent and comprehensive review that addresses the system as a whole. The committee's final report identifies a number of issues that should form part of such a review, including the purposes and objectives of the system, the interaction between the personal and corporate insolvency systems, and a holistic review of the current insolvency pathways. The committee has also highlighted several matters that should be dealt with in the near term outside of any comprehensive review, which will take time. These include implementing the recommendations of the safe harbour review, reforms to the eligibility requirements to become a registered liquidator, and improving the treatment of trusts in insolvency.

I want to say a few words about statutory oversight as well. This is the committee's first report of the 47th Parliament under its statutory inquiry role under subsection 243(a) of the ASIC Act. ASIC licences to operate financial services are being transferred between companies without ASIC being able to check whether the new licence owners meet the licence requirements. ASIC has advised the committee that such transfers occur about 200 times a year. In our unanimous report the committee concluded that existing regulatory arrangements for ASIC license transfers could be improved by ASIC including information in its annual report about how many licence transfers are occurring, ASIC auditing on how many occasions a licence was transferred to an entity that previously had a licence application rejected by ASIC, ASIC examining the transfer of all high-risk licences, and, finally, a review of the economic incentives for companies to acquire an ASIC licence through a transfer rather than applying to ASIC for that licence.

On the annual reports front, subsection 243(b) of the ASIC Act requires the committee to examine reports prepared by the bodies established under that act. In undertaking the review of the reports prepared for the 2021-22 financial year, the committee reviewed the reports of eight bodies: the Australian Securities and Investments Commission, the Takeovers Panel, the Companies Auditors Disciplinary Board, the Financial Reporting Council, the Australian Accounting Standards Board, the Office of the Australian Accounting Standards Board, the Auditing and Assurance Standards Board and the Office of the Auditing and Assurance Standards Board. The committee was satisfied that each of the annual reports met their reporting requirements and was pleased to see that the bodies had implemented recommendations made by the corporations committee in previous reports.

The annual reports bring important matters to the parliament's consideration. For example, the Companies Auditors Disciplinary Board's annual report highlighted ongoing resourcing challenges both in its administrative support and in appointments to the board itself. The committee observed that these matters have now been raised in consecutive reports. CADB observed, in its most recent report, that the constraints impacted its ability to effectively discharge its statutory mandate. While noting that additional appointments have been made in the intervening period, the committee has encouraged Treasury, ASIC and CADB to work together to urgently remedy this issue and ensure that it is not repeated.

I commend the reports to the House.

Daniel Mulino (Fraser, Australian Labor Party) Share this | Link to this | Hansard source

by leave—I also thank the other committee members who were involved in the production of this report and all of the witnesses who gave their time to give evidence. It's a very significant contribution to the development of policy in this important area. When some people think of insolvency, they think of it as a very technical area not necessarily relevant to people's day-to-day lives. But I would argue that insolvency law is in fact one of the key underpinnings of the economic dynamism of our economy.

In 1911, Nicholas Murray Butler, who was a philosopher and, at the time, president of Colombia University, said, with respect to limited liability:

… I say that in my judgment the limited liability corporation is the greatest single discovery of modern times, whether you judge it by its social, by its ethical, by its industrial or, in the long run,—-after we understand it and know how to use it,—by its political, effects. Even steam and electricity are far less important than the limited liability corporation, and they would be reduced to comparative impotence without it.

The Limited Liability Corporation is in one sense a bureaucratic and an administrative creation, but it does have a huge effect on our economy. If you read the paragraphs around this quote, you see that the impact of the limited liability scheme that was created in advanced economies was partly the ability for people to come together in their investments and create organisations of scale. But I would argue that the limited liability is also very important because it is a very effective risk allocation mechanism, and it is risk allocation which is so critical in the modern economy. Investors, of course, are protected from losing more than the capital that they put in, in general terms. The reason I raise this is that insolvency law is also partly about defining risk and allocating risk within our economy in a way that promotes economic dynamism. I believe it's deceptively impactful, in much the same way that I think the creation of the Limited Liability Corporation is deceptively impactful.

In its 1999 document titled Orderly and Effective Insolvency Procedures, the IMF stated that it's possible in broad terms to state there are two objectives of most insolvency systems. The first overall objective is the allocation of risk among participants in a market economy that is 'predictable, equitable and transparent'. The achievement of this objective plays a critical role in providing confidence in the credit system and fostering economic growth for all participants. The second objective of an insolvency law that it defined was to protect and maximise value for the benefit of all interested parties and the economy in general. Clearly, risk management is at the heart of it; value maximisation is at the heart of it.

A recent OECD paper framed the importance of insolvency law when it said:

Policies affecting the way failing firms can exit markets or be restructured can shape aggregate productivity through a variety of channels … These include the strength of market selection—which increases in the economy's ability to dispose of non-viable firms and facilitate the restructuring of viable firms—and the scope and speed at which scarce resources consumed by failing firms can be reallocated to more productive uses.

Insolvency law is absolutely critical to the efficient allocation of capital, to risk taking and to efficient risk allocation. That is why I believe getting insolvency law right is so important.

The report that was completed recently by our committee made a number of observations about Australia's corporate insolvency system, as the previous speaker indicated. It is that it is overly complex, difficult to access and creates unnecessary costs and confusion for both debtors and creditors and that much reform of insolvency law in recent years has been piecemeal. The report contains a number of recommendations in relation to how we consider strengthening insolvency law and 28 recommendations that aim to either address shortcomings or improve outcomes in our corporate insolvency system. It also contains a number of recommendations in relation to near-term reform or actions that should be progressed independent of any future comprehensive review, for example, steps to improve data access, particularly longitudinal time series data of key aspects of our system, and reforms to the small business restructuring pathway and changes to eligibility requirements for registered liquidators to address the gender imbalance in the profession. This is an incredibly important aspect of our law. It is one that has a profound impact on our overarching economic dynamism and productivity.

I recommend this report to the House.

Alex Hawke (Mitchell, Liberal Party) Share this | Link to this | Hansard source

I move:

That the House take note of the report CorporateInsolvency in Australia.

Ross Vasta (Bonner, Liberal Party) Share this | Link to this | Hansard source

The debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.