Presented by Jones Partners

The Parliamentary Joint Committee on Corporate and Financial Services recently conducted an inquiry (“The Inquiry”) into the efficacy of corporate insolvency law within Australia. The Inquiry contained both commentary and recommendations for the current system. The focus of the Inquiry was to investigate ways of protecting and maximising value for the benefit of all interested parties, with consideration for the COVID-19 pandemic, changing global and domestic economic conditions, supply shortages and challenges faced by certain industries. The following passages are a short summary of some key findings.

Illegal Phoenix Activity

In recent years, there has been a notable increase in illegal phoenix activities. Illegal phoenix activity is defined by the ATO as when “a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements”. This practice remains a significant challenge of the insolvency sphere. It is notoriously hard to prove, and the overwhelming number of cases make it impossible for ASIC to effectively regulate under their current model. Illegal phoenix activity victimises creditors and employees, with subcontractors being most adversely affected. The current system is failing to provide adequate protections to creditors and employees and there is a severe absence of accountability for wrongdoers.

Restructuring Avenues for Small and Medium Sized Enterprise

In the past, insolvency legislation has faced significant scrutiny for its “one size fits all” approach, with this lack of differentiation between different sized companies regularly preventing small and medium sized enterprises (SMEs) from achieving commercially viable turnaround. However, the Small Business Restructuring, introduced in January 2021, has somewhat alleviated this issue, with this restructure becoming increasingly popular amongst smaller enterprise. The process is cheaper, more efficient and allows directors to maintain greater control and autonomy throughout the process. Further review is still needed, with a particular emphasis on reconsideration for the $1 million debt limit on eligibility.  

Insolvent Trusts

The Inquiry also critiqued the current operation and regulation of insolvent trusts. Currently, corporate trusts are dealt with by the Corporations Act, whilst trusts benefitting a natural person are regulated by the Bankruptcy Act. The Inquiry raised the issue that this legislation was not designed to deal with trusts and is somewhat unfit for purpose. Insolvent trust law has always had a somewhat unhealthy dependence on common law, with many principles based on precedent established decades ago, before trusts become frequently used in commercial operations, and long before they could become insolvent.  The Inquiry also highlighted the inconsistency between different state and federal jurisdictions.

Cross Border Complexity

Another challenge faced by insolvency practitioners during the pursuit of funds for creditors is the added complexity that arise in international money transfers. These procedural differences in legal systems can create challenges and add significant time delays to proceedings. International commercial transactions are more common than ever before, as are insolvencies across borders. It is a widely held opinion that Australian insolvency legislation has fallen behind the international community and needs significant overhaul.