Celia Hammond (Curtin, Liberal Party) Share this | Hansard source

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.

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