Craig Kelly (Hughes, Liberal Party) Share this | Hansard source

It gives me great pleasure to speak this morning on the Insolvency Law Reform Bill 2015. Contrary to some of the contributions from the other side of the chamber, the insolvency industry is a most important industry to our economy. In the time available I would like to go through why this bill is needed, the changes we are making and the potential for further changes to our insolvency industry.

Firstly, the simple reason we enjoy such prosperity, today, compared with times past is we have entrepreneurship. Entrepreneurs have been prepared to go out and take risks with new ideas or products. It is about the way they do things and innovate to improve products and services we enjoy so much today. The difficulty is, there is always risk with that, because uncertainty runs through the process of innovation.

You can have the best experience, the best judgement, the best planning to reduce that uncertainty and risk, but it can never be eliminated. No-one has a crystal ball to know what the future will hold and what ideas and experimentations in business, products and services will be suitable for the future. We know that most experiments, in any field, fail. To quote economist John Kay:

Most decisions are wrong. Most experiments fail. It is tempting to believe that if we entrusted the future of our companies, our industries, our countries, to the right people, they would lead us unerringly to the promised land. Such hopes are always disappointed. Most of Thomas Edison’s inventions did not work, Ford, Morris and Mao ended their careers as sad, even risible figures. Bill Gates missed the significance of the Internet, Mrs Thatcher introduced the poll tax, and Napoleon died in exile on St Helena. Even extraordinarily talented people make big mistakes.

But because most decisions are wrong and most experiments fail, it is also tempting to believe that we could manage businesses and states much better if only we assembled sufficient information and cleverer people, and debated the issues in length.

We know from experience that is not how our economy works. That is not how innovation occurs. That is not how entrepreneurship works either.

We have seen the recent example, here in Australia, of the Masters hardware group—established by, perhaps, Australia's strongest retailer, Woolworths, and the Lowe's hardware group of the USA. They have billions of dollars worth of capital at their disposal and the best minds in the retail sector; yet they appear to have burnt through $3 billion worth of capital in a failed experiment. You would think that if you put all that business experience together you would come up with a successful business model.

The problems were that for all the experience of Lowe's in the USA they did not fully appreciate the different consumer trends in the USA and Australia. Although there are some similarities, there are big differences between consumer preferences in those markets. To try to transplant what works in the USA into the Australian hardware market was always bound to fail.

The other issue that the executives from Lowe's probably did not understand enough of was the difference between our competition laws in Australia and those of the USA. In the USA, suppliers to Lowe's hardware stores would all be dealing under that country's Robinson–Patman Act, an anti-price discrimination act that requires them not to put any one company at a competitive disadvantage against another in the price that they sell products for. No such laws apply in Australia. Therefore, the incumbent player, which was Bunnings, was able to put pressure on suppliers in Australia to prevent them giving similar deals to the Masters group. These are exactly provisions that, if they did that in the USA under the Robinson–Patman Act, would be in breach of US antitrust laws. But, in Australia, they could get away with it. I doubt very much whether those executives of Lowe's in the USA understood that significance when they came to Australia.

With the failure of the Masters group we saw that the difficulty with our competition is about what happens when you have overly concentrated markets. New ideas and new business experiments need to be trialled in small gaps. Lowe's rolled out 63 stores until they worked out that they were unviable and decided to close them down. Business experiments are far better when they are done in small steps. If they work, they are repeated and repeated and rolled out. If they do not work, they are closed down efficiently and quickly.

Masters is an example of the companies that close down. But if you look at the statistics from our ABS that record business entries and exits, it gives us some idea about the churn, or the creative destruction, that occurs in our economy. Each year we lose between about 12 and 14 per cent of the existing businesses in the economy. They close down and go out of business. We can go back to 2010 to the latest figures from the ABS and look at the more than two million businesses that were operating in Australia in 2010. If we start off with 100 per cent, by 2011 we were down to 86½ per cent. In one year we lost 13½ per cent of businesses that were operating in 2010. The businesses surviving by 2012 was down to 76 per cent. After three years, in 2013, the survival rate was down to 68 per cent, and by June 2014 the survival rate was 61.7 per cent. Close to 40 per cent of businesses that had been operating in the economy back in June 2010 had closed their doors by June 2014.

The figures are even more significant for the 294,210 businesses that started in 2010. I think anyone who started up a business in 2010, when the Labor government was in control, deserves a medal on their chest. If we look at their survival rate, by 2012—one year later—we were down to 79 per cent. We were down to 59 per cent by 2013, and by June 2014 we were at 50 per cent. So half of the businesses that started in 2010 had gone out of business by 2014.

That is something we should not say is a bad thing. We need businesses out there experimenting and trying new ideas. As long as there are replacement businesses coming in, the rate of business exits—if we could call them that, rather than failures—is something we should not worry about, because we need to get that continuing cycle of fresh experimentation where there is failure and trying again to get that business model that will actually work. We need those added incentives in the economy because experimentation is always risky.

But in our insolvency industry we also need a system where we can have quick and efficient closure of business experiments that do not work. That way, we can regenerate those assets back into the economy to continually feed that cycle of fresh experimentation and fresh innovation. It is openly admitted that the current insolvency laws in this country need some change. Just as we ask businesses to innovate, change and adapt in the community, we need to do the same thing in our insolvency industry.

I now have a few comments. Matthew Woods, head of KPMG, has said about the current law:

The current law significantly discourages risk taking …

If it discourages risk taking, we need to have a good look at it. He went on:

Many commentators have compared Australia with the US in terms not only of insolvency laws but culture. I would agree we need to start celebrating our entrepreneurs and innovators as they do State-side …

That is what we need to do. We need to have a cultural change in this country. We need to have a change where we celebrate our entrepreneurs and our innovators. We need to celebrate and understand that business exits do occur. In Silicon Valley, the home of innovation in the world, it is often said that unless you have been involved in several business exits, several businesses that have not worked or, if you want to use the word, failure you are actually inexperienced, because they understand that you learn more from your failures than you do from your successes.

This is the culture that we need to embed in our country if we are to continue the prosperity of our nation. That is why we need to address our insolvency laws. The 2010 Senate Economics References Committee was highly critical of the current regime. They also indicated that confidence in the regulation of the corporate insolvency profession remains low. We need to see our insolvency professionals as heroes of the free market, people that can help engage companies in a quick turnaround or quickly turn around assets and get them productively back in the economy. That is what we need and that is what this bill starts to address.

The bill contains five measures. Firstly, the bill will empower creditors to better protection of their own interest by giving them the ability to determine what information they provide to an insolvency practitioner and when. Secondly, it will reduce the regulatory cost of insolvency administration in order to improve returns to creditors through better facilitating the electronic provision of documents, streamlining remuneration approvals and processes, and aligning administrative rules across personal and corporate insolvency. Thirdly, and most importantly, it will increase competition in the market for insolvency services by empowering creditors to remove a poorly-performing insolvency practitioner without going to court and enabling the appointment of an independent specialist to review the performance of an insolvency practitioner. Fourthly, it will increase the powers available to the Australian Securities and Investments Commission in order to improve the regulator's ability to proactively identify and investigate allegations of misconduct. Fifthly, and finally, it will strengthen the disciplinary mechanisms for liquidators.

This bill is a small but important step on the way to improving our insolvency laws. We need to look at some of the provisions in chapter 11 in the USA. I do not say that we should bring all those provisions in, but there are many chapter 11 provisions of the US insolvency law that I believe would strengthen our insolvency laws and help get a more accurate balance between the debtors and the creditors.

In my remaining time, I want to mention the recent demise of the Dick Smith stores, which were recently placed into administration and, as I understand it, liquidation, and the status of gift cards. This is something we need to look at. As things stand at the moment, if you had bought a gift card from a Dick Smith store, you are basically placed as an unsecured creditor and you will go to the very back of the queue—unless you purchased it with a credit card, in which case you can get a refund because you were not provided the service under the credit card. So a tip for consumers: use your credit card if you are buying a gift card. But for those who paid cash for a gift card instead of buying stock—as opposed to obtaining a service—we need to look at whether these people should be unsecured creditors. One of the first questions for an liquidator to ask when he comes in is: who owns the stock? Firstly, is it the business or is it some of the creditors? Where the stock has been supplied on consignment or under retention of title, first dibs on that stock should go to the supplier. But, if someone has walked into a shop, seen all the stock and said, 'Rather than taking some of the stock today, I will give you a cash payment, you give me credit and someone will come in and pick from that stock,' I believe they should be on a higher rung on the ladder when it comes to the provisions of the liquidators and have greater preference than they currently do. That is something we should look at as we continue our improvement of the insolvency law in this country.

I commend this bill to the House.

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