Why the government is changing the law

John Martin interviews the Hon Christopher Pyne MP, Minister for Industry, Innovation and Science.

It is 25 years since the last structural changes to Australia’s insolvency laws were recommended. Innovation Minister Christopher Pyne explains, in this interview with HDY, why the Government is proposing these important reforms and how they fit within the Government’s innovation agenda.

Q. Why is innovation so important to the Australian economy?

A. As the impact of an unprecedented mining investment boom subsides, new sources of economic growth are needed to maintain industry’s competitiveness and meet new challenges. Innovation, in all its many forms, is central to the restructuring of Australia’s economy, creating new businesses, jobs and exports.
Innovation is the most important long term means of increasing the productivity of Australian businesses and thereby lifting national prosperity. OECD analysis shows that more than 50% of our economic growth comes from investment in innovation and that this will become more pronounced (up to 80%) over the next 50 years.
Empirical evidence from the ABS also strongly confirms the value of innovation to businesses: those that undertake innovation report significantly higher levels of productivity, profitability and propensity to export, compared with businesses that are not innovation-active. Although innovating firms accounted for only 37 per cent of businesses in 2012-13, they accounted for over 60 per cent of revenue and employment in the economy as a whole. Businesses with a higher degree of innovation novelty have an even greater impact.

Q. Why is it important to create the right conditions for entrepreneurs and sensible risk-taking to flourish?

A. An entrepreneurial culture encourages businesses, particularly start-ups, to create new ventures and pursue potential new markets. Business confidence to invest in research and innovation depends on a healthy ecosystem in which markets appropriately balance risk and reward, for example through venture capital and taxation settings.
By international standards, Australia has a strong record in starting new businesses with an ecosystem that is mostly hospitable to entrepreneurial endeavour. We have one of the highest rates of entrepreneurship in the world. Between 2006 and 2011, start-ups (firms younger than three years old) added 1.44 million full time-equivalent (FTE) jobs to the Australian economy, whereas all other firms shed more than 400,000 FTE jobs. However, we have been less successful in growing our many new small and medium-sized businesses into larger firms that are internationally competitive. This suggests that the conditions for risk taking by Australian businesses have not been as been as effective as in other countries.
Early stage venture capital in particular is characterised by high levels of risk as investors try to assess the uncertain commercial prospects of innovations. The Australian Innovation System Report 2015 shows that Australia’s venture capital industry is recovering slower than the leading countries like the US and Israel. In 2014, Australia’s early stage venture capital investment as a percentage of GDP was, at 0.007 per cent, just half the median for OECD countries.

Q. At a macro level, how do the insolvency reform aspects of the Innovation Statement support growth and economic prosperity?

A. Insolvency laws affect wealth creation and employment growth through various channels, including by influencing the appetite for risk taking by management and providers of capital; and by enabling troubled businesses to readjust and recover.
The insolvency aspects of the Government’s Innovation Statement focus on promoting entrepreneurship and supporting a culture that encourages more businesses to take risks on new ideas.

Q. What were the primary drivers behind the insolvency reform aspects of the Innovation Statement?

A. There have been longstanding concerns held by the business community regarding the negative impact of our insolvent trading and ipso facto laws on business rescue attempts.
A number of industry bodies and other stakeholders have been calling for change for many years.
The Prime Minister has been publicly on the record over that time supporting insolvency law reforms that enable the rescue of those businesses that can and should be saved.

Q. How do you see the insolvency reform aspects of the Innovation Statement benefiting the Australian economy?

A. Australia’s business environment is increasingly subject to change.
This change is driven by factors such as technological innovation, new business models, globalisation, demographic shifts and the evolving international landscape.
The Government understands that sometimes entrepreneurs will fail before they succeed – and may learn more from failure than from success.
Business needs to be nimble and adaptive. Where our laws get in the way of this occurring, they need to change.

Q. How important is facilitating business rescue outside of formal court processes?

A. Overwhelmingly, troubled businesses are reorganised and rescued outside of formal insolvency processes – and yet the focus on insolvency law reform has tended to be on trying to improve these processes.
Formal insolvency processes (such as liquidation and voluntary administration) form essential parts of the underlying legal infrastructure supporting business, but the facilitation of informal business rescue processes needs to be supported.

Q. Australia’s insolvency laws now appear to be moving closer to those elsewhere in the world. Is international consistency important, or does this greater alignment simply reflect a shift in emphasis towards rehabilitation and the importance of preservation of economic value?

A. The change will bring Australia’s insolvency laws some, but not all, of the way towards the approach under the United States’ Chapter 11 bankruptcy code.
This is to create laws that encourage innovation and entrepreneurship.

Q. How do these proposed reforms interrelate with the Insolvency Law Reform Bill 2015 introduced to the House of Representatives on 3 December 2015?

A. The Government has recently introduced the Insolvency Law Reform Bill 2015. This Bill is focussed on supporting professionalism and competence in the insolvency industry; improving the efficiency of insolvency administration; and driving better outcomes through increased competition for insolvency services.
Key aspects of the reforms include the introduction of new registration and disciplinary frameworks for practitioners, regulator powers and mechanisms for reviewing the conduct of administrations.
The Bill contains a range of changes to streamline administrative processes and avoid unnecessary costs.
The reforms also greatly improve the ability of creditors to obtain information on performance and to ‘hire and fire’ practitioners based on that performance.

Q. What objectives are sought to be achieved by the proposed prohibitions on ipso facto clauses?

A. The proposed prohibition of ipso facto clauses is directed at ensuring that the provision of goods and services necessary for the operation of a business are not disrupted when attempting a business rescue, merely because the attempt is occurring.
It recognises that making ipso facto clauses unenforceable during a company restructure will prevent other parties terminating contracts which can destroy the company’s business and lead to liquidation.

Q. When do you anticipate the proposed reforms will be implemented?

A. The Government will release a proposals paper in the first half of 2016 with a view to passage of legislation in mid-2017.

Q. Are there other aspects of Australia’s insolvency laws that you consider ripe for closer examination and possible reform?

A. The Government will be considering the remaining insolvency recommendations in the Productivity Commission’s report on Business Set-up, Transfer and Closure, which was released on 7 December.
The Government will also be responding to the Senate Economics References Committee handed down its report on Insolvency in the Australian construction industry, which was released on 3 December.

John Martin Partner

John is a leading lawyer in both financial sector dispute resolution (complex and regulatory) and corporate insolvency and restructuring, with a particular specialty in cross-border insolvencies. He is recognised by his clients, peers and legal directories as a leader in his field.

Domestically, John advises on large and complex insolvencies and assists in finding solutions for financial institutions with regulatory and other complex issues. His clients include several of Australia's major banks, as well as insolvency practitioners appointed to insolvent entities.

Internationally, John has advised in connection with insolvencies in England, Fiji, Bermuda, Cambodia, Cayman Islands, Brunei, and Norfolk Island. His cross-border experience includes acting for the liquidators of an insolvent bank, and various liquidators of insurance and reinsurance companies.

John is a recognised authority on insolvency issues, with articles published in media outlets such as The Australian Financial Review and the Insolvency Law Journal. He has presented at numerous domestic conferences as well as internationally in the US, England, South Africa, Singapore, Canada, New Zealand, and the Netherlands.

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