Broad reforms to Australia’s corporate insolvency laws have been announced by the Hon Chris Bowen MP. The Review interviewed Minister Bowen on the development of the proposed changes and how a new insolvency regime will benefit the Australian economy.
What were the primary drivers behind the proposed Sons of Gwalia reforms?
In short, after careful examination of the issue, the Government determined that it is inappropriate for unsecured creditors – often small businesses or trade creditors – to be ranked alongside investors as creditors, even where those investors were misled.
Investors make a conscious decision to invest money in a company in the hope of sharing in the company’s profits. In doing so, they are entitled to expect proper disclosure from the company but must accept that they are taking a risk in making that investment.
Creditors, in contrast, are not hoping to increase their wealth by gambling on the future profitability of a company. They are often simply owed money for work already done or materials supplied.
So, while investors who have been misled into making that investment should rightly be able to claim redress, they should not rank alongside creditors in terms of receiving distributions when a company is insolvent.
In deciding to reverse Sons of Gwalia, the Government is not suggesting the legal basis to
the High Court’s decision was incorrect; only that it set a precedent that, from a policy standpoint, was inequitable.
In a broader sense, another major concern in respect of the Sons of Gwalia decision was its effect on access to, and the cost of, credit. Where risk increases, so does the cost of credit. And there was evidence that, as a result of the Sons of Gwalia decision, lenders and other creditors were limiting the availability of credit to companies – or imposing tougher terms or higher interest rates – where they were concerned about potentially having to share any funds with shareholders in the case of the company becoming insolvent.
What were the primary drivers behind the safe harbour/insolvent trading options paper?
Various representative groups, such as the Law Council of Australia, the Insolvency Practitioners Association and the Australian Institute of Company Directors, have publicly stated their concerns regarding the effects of the current laws. Individual firms, such as Henry Davis York, have also raised awareness of the issues concerned and contributed to the ongoing debate on how the law might be changed.
The options that have been put out for consultation are about addressing those situations where solvency cannot be confidently maintained during an attempted workout outside of external administration. The current laws may cause companies to be placed into external administration prematurely or in circumstances where external administration is not appropriate, by directors who fear personal liability if the company engages in insolvent trading.
This can result in a conflict between directors’ personal interests and the interests of the company and its creditors. We are looking at minimising this potential conflict.
The issue of the paper should not be seen as a signal that the Government is of the view that a company wishing to conduct a workout should not make all reasonable efforts to maintain solvency during a workout attempt – even if this involves payment of a significant premium for securing any necessary credit. Insolvent trading rules are there for a reason. They protect creditors, employees and consumers and minimise perceptions of counter-party risk in the economy.
How important is business rescue outside of external administration?
Different rescue mechanisms may be more appropriate in different circumstances. To maximise the number of successful business rescues, our insolvency regime needs to facilitate access by troubled businesses to a broad set of options. The vast majority of business rescues occur outside of external administration – either with or without expert assistance. Despite this, policy makers have tended to focus almost exclusively on enabling business rescues through external administration.
An informal workout may possess a range of possible advantages over a formal external administration. Informal workouts may enable improved utilisation of existing management expertise, reduce any negative impacts on goodwill and other asset values, provide greater potential for maintaining essential contractual arrangements and, through reducing perceptions of the likelihood of business failure, improve a company’s ability to continue to attract customers.
However, it must be kept in mind that there are possible disadvantages with informal workouts, such as a potential for a lack of transparency and the lack of protective mechanisms for minority stakeholders.
Any possible reforms will be directed at achieving an appropriate balance between assisting business rescues and other relevant policy objectives, such as creditor, employee and customer protection.
How do you think the proposed reforms will benefit the Australian economy?
The reversal of Sons of Gwalia will be good for business, creditors, employees and shareholders. It
will assist businesses in obtaining funding for investment and business growth. It will reduce business costs. It will aid business rescue and rehabilitation.
The package also contains a range of reforms to improve the efficiency of our insolvency regime. These will contribute towards more effective external administrations – rescuing businesses or reallocating capital back to productive uses. An insolvency system that seeks to provide value for money must address not just the quality and nature of its outputs but the costs involved in producing those outputs.
Any reforms that arise from the safe harbour paper will also be directed at promoting economic growth and entrepreneurship. The law should facilitate the reorganisation and rehabilitation
of productive businesses by the most efficient means possible.
Do you consider that it is important that Australia has some consistency in its approach to dealing with insolvency with other major developed countries?
The mere fact that we do not follow the approach adopted in the corporate insolvency laws of other countries is not in itself a compelling reason for us to change. The advantages and disadvantages of any proposed reforms must be assessed on their merits.
Insolvency laws of different countries cannot be compared in a meaningful way without also examining the context in which they operate. Insolvency laws must be viewed as part of a larger regime of commercial law directed at promoting economic activity while providing some protection for various stakeholders. The insolvency laws of any country must be crafted in light of the other laws with which they interact – directors’ duties, capital adequacy requirements, disclosure rules, etc.
It is also important to note that different countries place different levels of importance on different policy considerations, such as the relative importance of employee or consumer protection.
That said, any significant divergence in our laws from those prevailing in other major developed countries may provide a compelling reason for at least examining whether we have got our laws right. We must also keep in mind how any significant divergence may affect cross-border economic activity and international competitiveness.
Are there any other aspects of Australian corporate insolvency law that you consider ripe for reform?
On 20 August 2009, the Prime Minister and the New Zealand Prime Minister signed an outcomes agreement for developing cross-border economic initiatives.
The enhancement of cross-border insolvency arrangements is specifically referred to in that agreement. Australia and New Zealand are in a unique position to advance enhancements to our cross-border insolvency arrangements. Our countries have a close relationship, similar insolvency laws, significant cross-border commerce and investment and have broadly compatible relevant regulatory frameworks. There are also pre-existing trans-Tasman arrangements and treaties that can facilitate the implementation of a streamlined cross-border insolvency regime. Work is already underway on that project.
The Senate has also initiated an inquiry into the insolvency profession and the role of liquidators and administrators, their fees and their practices, and the involvement and activities of the Australian Securities and Investments Commission in respect of the industry. Submissions close on 12 February 2010, with a report to come on 31 August 2010. The Government will be paying close attention to the views expressed by stakeholders to that inquiry.
When do you anticipate that the proposed reforms will be implemented?
The Government intends to introduce the package of reforms into Parliament as soon as is practicable.
We need to ensure that we get any insolvent trading safe harbour provisions right. Submissions on the discussion paper are due by 2 March 2010 and all submissions will need to be given proper consideration. I also intend to release a draft Bill for public consultation once a decision is made on any changes to the insolvent trading regime. We will therefore be looking to introduce the Bill in the Spring parliamentary sittings in September.
It is intended that separate legislation that covers the reversal of the Sons of Gwalia decision as well as the other technical changes to the insolvency laws will be introduced into Parliament in the first half of 2010.
Is there anything further you would like to add about the reform package?
I urge those interested to read and make submissions on the safe harbour discussion paper.
In making any submissions, I ask that people not limit themselves to commenting on their favoured option, but also to state why they are of the view that the other options may not be appropriate.
Also, when commenting on any preferred option, it would assist the Government if those making submissions did not merely provide arguments in support of its adoption. If an option has any genuine weaknesses, it would assist if these were identified and suggestions were made as to how these might be minimised or countered.
As for the rest of the package, I urge your readers to look at the exposure draft Bill when it comes out. The devil is often in the detail – and we want to be sure that any changes have the desired effect.
What reform are you most proud of in your ministerial career?
As Competition Policy and Consumer Affairs Minister, I oversaw the most significant reforms to consumer and competition policy in Australia in decades – through the criminalisation of cartel conduct, reducing barriers to entry for foreign investment, the introduction of a national unfair contract terms law and a component pricing regime.
As the Minister for Financial Services, Superannuation and Corporate Law, I am working on reforms to Australia’s corporate governance framework, including executive remuneration and directors’ liability and the
reform and modernisation of Australia’s financial planning and superannuation system.
Chris Bowen MP
The Hon Chris Bowen MP is the Minister for Financial Services, Superannuation and Corporate Law. After the Rudd Labor Government was elected to office in December 2007, Mr Bowen assumed the dual roles of Assistant Treasurer and Minister for Competition Policy and Consumer Affairs. He was promoted to his current role in June 2009.
Mr Bowen, 37, was born in Sydney and holds a Bachelor of Economics degree from Sydney University. He first won elected office as a councillor on the Fairfield City Council in 1995 and was appointed mayor three years later. He was elected to Federal Parliament in 2004 as member for the western Sydney electorate of Prospect.
Recent significant actions taken by Mr Bowen include announcing reforms to corporate insolvency laws, releasing the Johnson Report on the development of Australia as a financial centre, amending laws to strengthen compliance and prudential regulation of players in the finance sector and regulating to improve disclosure for deposit takers and insurance companies.