The Financial System Inquiry 2014 (the Murray Inquiry) recently released its Final Report.

The Final Report recognised the impact which corporate administration and bankruptcy has upon the broader financial system, but it failed to examine those areas in any specific detail. Instead, the Final Report simply provided the following recommendation:

Recommendation 36

Consult on possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty.

Whilst that may seem a little dissatisfying at first, the Final Report did go on to observe that:

1. Australia’s external administration provisions are ‘generally working well and do not require wholesale revision’.
2. ‘Safe harbour’ provisions, which would permit restructuring efforts and protect directors who seek expert advice in that regard, may be meritorious.
3. ‘Ipso facto’ clauses, which automatically deem a company to be in default of a loan agreement if they enter external administration, can hamper restructuring attempts.

Surprisingly, the Final Report also accepted that ‘a few’ elements of the United States’ Chapter 11 framework did merit consideration. This represented a significant departure from the Murray Inquiry’s view in its Interim Report, in which it opined that the Chapter 11 regime was costly, left control in the hands of those responsible for financial distress, maintained capital in businesses likely to fail and created more uncertainty for creditors.

The Final Report also noted that the existing external administration regime has some, possibly unnecessary, complexities. These include:

1. The overlap between corporate and personal insolvency, especially in the case of small and medium-sized enterprises (SMEs).
2. The complaint processes for external administration and external administrators ‘could be improved’.
3. The potential efficiencies of technology are not well utilised in many insolvency and external administration processes.

The panel correctly noted that Government consultation has already commenced on the former two of these. In relation to the latter, it made the following recommendation:

Recommendation 39

Identify, in consultation with the financial sector, and amend priority areas of regulation to be technology neutral.

Embed consideration of the principle of technology neutrality into development processes for future regulation.

Ensure regulation allows individuals to select alternative methods to access services to maintain fair treatment for all consumer segments.

Of course, the vast majority of the observations in the Final Report are moot, given that the Murray Inquiry did not make any specific recommendations regarding external administration. Despite this, the observations may nevertheless suggest that policy-makers are becoming open to a more collaborative and flexible approach to insolvency; the Australian Restructuring Insolvency and Turnaround Association has heralded the report as welcoming ‘restructuring moratorium views’.

It certainly creates an interesting background against which the exposure draft of the Insolvency Law Reform Bill can be assessed. Submissions on that draft closed on 19 December 2014, and will make for interesting reading for the industry.

For more information in relation to this, please contact Simon Gallant.