Is Australia’s insolvency regime on the right track?

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Dr Jane Rennie:
Hello and welcome to With Interest. I'm Dr. Jane Rennie, head of media and external engagement at CPA Australia. According to credit watch, the number of companies placed in external administration for insolvency purposes rose 13% in the year-to-June 2023, which makes the topic of today's podcast very timely. The Parliamentary Joint Committee on Corporate and Financial Services recently released a unanimous report into corporate insolvency in Australia. Senator Deborah O'Neill is the chair of this committee and joins me today to discuss the report. Welcome to With Interest, Senator O'Neill.

Senator Deborah O’Neill:
Good morning, Dr. Rennie, and it's lovely to be with you and your listeners.

Dr Jane Rennie:
Consistent with the credit watch data, CPA Australia members working in insolvency tell us they're also experiencing an increase in restructuring advisory work, increased referrals from banks and queries from trade creditors, as well as increased activity from the ATO and state revenue authorities. This notwithstanding that insolvency rates in Australia have been returning to their pre-COVID levels. Senator, to begin with, what can you tell our listeners about the review of corporate insolvency and what triggered it?

Senator Deborah O’Neill:
So I'm really very pleased to be with you, Dr. Rennie, to celebrate the work that's been delivered now in a unanimous report to the community of Australia. It was great to work with my colleagues. Like me, they all have a very significant interest in the proper functioning of the economy. And like me, many of them have small business family backgrounds or experiences that really made them pay attention and made us all pay attention to the reality of insolvency and its likelihood as a consequence of the COVID crisis that we've all been through. So I think we're very mindful of that reality.

And the other thing is it's been a really long time since a really fulsome review of insolvency laws has actually occurred. And I think it's fair to say that it was really our view that it was needed, that financial protections and avenues of restitution for individuals who might be at risk of personal insolvency due to their proximity to an insolvent, liquidated corporation were really working properly because we saw that interplay happening in too many constituents that were speaking to members of parliament and to myself as a senator. We wanted to make sure that they were really up to standard. And there was an equity issue about making sure that there were equitable outcomes for those people who were engaged in insolvency. And what we found was pretty well right across the sector, nobody was happy with the way things were operating. And that was a really significant indicator to the committee that we were on the right track, that it was worthy of investigation, and that we needed to think carefully about what would reset some of the commonly identified failure points of the prevailing regime.

Dr Jane Rennie:
So just by way of background then, what were the parameters of the committee's review?

Senator Deborah O’Neill:
Well, the terms of reference were quite solid. I was very pleased with the way that they turned out and that the committee assented to those on my suggestion. And we ended up looking into the matters such as the use of corporate insolvency in Australia, how that was actually being employed. We looked at the operation of the existing legislation. We also had a bit of a look at common law and regulatory arrangements, including some of the recent reforms there that the previous government under Mr. Morrison brought in as a very rapid response to the emerging realities of COVID.

They were core elements of our work, but we also looked at other areas of reform such as unfair preference claims and trust with corporate trustees, safe harbours, international developments. And we were keen to see that businesses got support to access the sort of corporate turnaround capabilities that they need in a timely and effective way. But I guess rounding it all out is the people who are working in the sector, not just the users of the sector. And that was about remuneration and the financial viability and also the conduct of corporate insolvency practitioners, including pre-insolvents practitioners, which really did raise significant concern for the committee. Clearly, there was a consideration also of the role of the government, government agencies in their partnership with the corporate insolvency system and how that works. So it was broad and it's quite a significant report. It's lengthy. And I encourage all of your listeners to read it.

Dr Jane Rennie:
And you mentioned that when you did start speaking with people about the corporate insolvency regime, it was pretty hard to find people who were happy with it as it's operating. Does that mean broadly that you and the committee members concluded that the current framework for insolvency is broken?

Senator Deborah O’Neill:
I think it's old. I think it's a long time since it's been critiqued. And I think it's a bit like that house on the street that you drive by where there's a little bit being added on here and a little bit being added on there and a little bit being added on somewhere else? And that might've been an appropriate response at the time, but ultimately there is a time for a proper review. And I guess sort of to jump ahead, the committee really looked at the things that need to happen in the near term. We don't want to build more on, but we do need to respond in a timely way to the challenges that are emerging in the Australian economy. So we have recommended near-term actions, but also a comprehensive review. And we sort of steered away from using the term root and branch because we know that people who are involved in the industry had a perception of that as a very long four, five-year process. And we don't think that it should take that long or that it need to take that long.

It does need to be thorough and comprehensive. And capacity to attend to the detail I think is beyond the resource capacity and time capacity of our committee. So we wanted something to be established that would be effective, deal with the very significant challenges of the interplay between different parts of law and the regulation, but also something that would be a productivity lift for the nation. So not just from a legal perspective, but how do we make this thing work in a way that is a productivity enhancer to make sure that when capital needs to be dissolved through the insolvency practitioner practices, whether it's personal or corporate, that there is a way in which that would happen effectively and at a cost that is worth spending to get the outcome of improved capital distribution and efficiency.

Dr Jane Rennie:
Well, I like your old house analogy, so I think I'll extend upon that. It sounds like you're describing a bit of a fixer-upper if we think in property terms. And the two ways that you and the committee members have suggested that it be fixed up is, one, that comprehensive review and then, two, a number of near-term reforms. But if we start with that comprehensive review, what was it in particular, what were the findings that led you to conclude that we needed a larger-scale review?

Senator Deborah O’Neill:
The reason that we need a comprehensive review in addition to the government taking on the need for the near-term actions, I think the fundamental reason is the complexity in the system, the interplay and the interweaving of the many parts. And good governments take their job seriously. They show up for their day job and for the hard yards. And that is the careful thinking to make sure that what is advanced in new legislation does the job that it’s intended to do. And you don't do that in a hurry without good advice. So that is why we have recommended for a comprehensive review.

Jacqueline Blondell:
If you're enjoying this podcast, you should check out our in-depth business and finance show, INTHEBLACK. Search for INTHEBLACK on your favourite podcast app today. And now, back to With Interest.

Senator Deborah O’Neill:
We have clearly identified ideas about what that comprehensive review should undertake, and it's a considerable list. But I think the committee knows what we can do and where the limits of our resource capacity and the time that we have. I mean, we're nearly halfway through the first term of the Albanese government. It would be, I think, ridiculous for the committee to take on the burden of such a significant piece of complex work with barely 18 months to go before the next election.

Dr Jane Rennie:
And then there are a series of near-term reforms. Why was it that the committee felt that these issues should be dealt with separately and sooner than in a comprehensive review?

Senator Deborah O’Neill:
Well, we just felt the need was significant and likely to increase in terms of the response capacity that's required to deal with the insolvencies. We're returning to pre-COVID period of time. All the evidence that we've seen indicates that there could well be further increases in the need for insolvency practice and support for businesses. So we really thought hard and long about what might need to occur as quickly as possible to make sure that we would assist the Australian people and the Australian economy by giving advice to government along the lines that we did.

Dr Jane Rennie:
Many of our listeners in fact work in the accounting profession and we count among them insolvency practitioners. What did the review uncover regarding the numbers, qualifications, and availability of insolvency practitioners?

Senator Deborah O’Neill:
Well, it was a pretty patchy view. One of the things that we certainly noticed was that there was an incredibly low percentage of female insolvency practitioners. And given that the reality of female participation in so many other parts of our economy, that was rather shocking. The other thing is there are so many more female entrepreneurs. And if people want to be able to choose a female insolvency practitioner, they're very high in demand and very few in number. So we were shocked by that. So we made a recommendation about dealing with the very significant requirements.

I think it was 4,000 hours and it had to be continuous. That just doesn't attend to the reality of great women making a fantastic participation, but also needing to take some time for parental leave. So that was one of the important recommendations. Also, we definitely got a sense of the conflicting requirements of the various bodies that have governed the insolvency industry and how that put insolvency practitioners in what they really described to us as very precarious situations. And the questions remain for me about the remuneration structures. Some of the recommendations, particularly recommendations 12 and 13 in the report go to that.

Dr Jane Rennie:
CPA Australia made a submission to the review. Among our recommendations, we called for changes to the small business restructuring regime to remove some of its inherent disadvantages and increase uptake by small businesses. What consideration did the committee give to that issue?

Senator Deborah O’Neill:
We gave great consideration to it, not just because of the strength of your submission on the matter, but because of the evidence that we found supporting that submission, that there were despite the, I think in this case I can say the best interest of the previous government to try and respond to emerging realities, there were some inherent disadvantages that were embedded in the regime that was ultimately established. And it's clear that something's not working. So we've certainly made recommendations around that. But I think recommendation eight actually goes to that particular matter, that as soon as practicable, the government consider and consult on the potential reforms to the small business restructuring pathway and the simplified liquidation pathway.

Dr Jane Rennie:
CPA Australia also called for incentives for businesses to access professional advice. And it's our experience that financially distressed businesses often seek advice too late. But we know those who do are more likely to survive or achieve an orderly transition. Did the committee consider the issue of access to advice?

Senator Deborah O’Neill:
Yes, we certainly did. And I think that part of the response to that needs to be embedded in that recommendation that I just spoke of there, that the small business restructuring pathway needs to be a pathway, not just a incremental movement towards that pathway where things start to really get serious about deconstructing the business. Before that people need some assistance, and I think that we need that to be part of the consideration of a suite that covers the whole range of responses that's needed. I think the evidence bears that out that there's a need for, "I'm in a tricky situation here.

I'm not quite sure where to go. Who can I talk to?" Despite the work of ASBFEO, I think a lot of people are very, very, very separate from these business opportunities that government funds and provides, but not everybody knows about them. And we also had some discussions about the particular kinds of literacies that business owners have. And it's great to have a kind of literacy that allows you to stand up a business and make money. And not everybody has the financial literacy that an accountant would have to interact with the system. And not everybody has an accountant. So one of the challenges is always to make the legal avenues and the practical responses to challenges available to everybody regardless of their literacy level. I think that's a challenge for us.

Dr Jane Rennie:
Well, there's certainly a lot of interest in the implementation of these recommendations. Are you able to tell us anything about the discussions that you've had with government about responding to the report?

Senator Deborah O’Neill:
Okay. So the requirement, and it's usually observed in convention, is when such a report as this lands that it's received by the relevant minister or ministers, and that it's given review time. So six months would be the normal time in which a government might consider such a report and then come back and report back to parliament. And I have to say that I'm very proud of the government's level of response to reports in that timely fashion so far. And I'm hopeful that we'll get a response in that time period with an indication from the government about its plans. And you never know, there might be action sooner than that.

Dr Jane Rennie:
That's all we've got time for today. Thanks very much to our guest, Senator Deborah O'Neill. Links to the Corporate Insolvency in Australia report as well as to CPA Australia's submission to the review are included in the show notes. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. We hope you can join us again for another episode of With Interest.