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Legal and Constitutional Affairs Legislation Committee
05/03/2018

PORTER, Mr Jason, Committee Member, New South Wales, Australian Restructuring Insolvency and Turnaround Association; and Director, SV Partners

WELLARD, Mr Mark, Legal Director, Australian Restructuring Insolvency and Turnaround Association

WINTER, Mr John, Chief Executive Officer, Australian Restructuring Insolvency and Turnaround Association

CHAIR: Welcome.We have your submission. Thank you very much for that. You've had information on parliamentary privilege and the protection of witnesses. I don't think it really counts in this instance, but, alas, we're required to give you that. You can make an opening statement and then we'll ask you a couple of questions. I think you're mainly here about the enterprise incentives agreement, rather than the other one. Over to you.

Mr Winter : Firstly, for the clarity of the committee, ARITA is the professional association that represents 86 per cent of registered trustees in Australia. While we're obviously interested in the changes of debt agreements for the implications that they may have as those facing personal insolvency choose one regime over another, we do not represent debt agreement administrators.

Regarding the proposed move from three-year to one-year discharge of bankruptcy, we recognise that the policy initiative arises from the Productivity Commission inquiry reportBusiness set-up, transfer, and closure. We worked very closely with the Productivity Commission on that report and we view it as one of the most valuable reviews of business life cycle that has been done in Australia. It announced many important initiatives, a significant number of which were ARITA policies which we advocated to the Productivity Commission. Those included reforms to create safe harbour for restructuring distressed businesses, and ipso facto moratoriums, which we now have becoming law.

The three-year to one-year bankruptcy move was not a policy position that we advocated, but we do recognise that Australia does have a more punitive personal insolvency regime than other comparable countries or economies, such as the UK and USA. We recognise that significant stigma is attached to that. We're aware that the intent of the policy transition was to support a better level of entrepreneurial risk in Australia. That is a laudable notion, which we fully support. However, it's fair to say that opinion is divided as to whether this measure will achieve that. Further, there are concerns that it may support the small percentage of bankrupts who seek to game the system and avoid their obligations. It's also reasonable analysis to conclude that, globally, regimes do tend to swing on a pendulum from longer bankruptcy periods back to shorter ones and then back again. It has occurred here in the past, the last time being 2003, and it has similarly occurred in the UK. Each time similar debate ensues as to the corresponding end of that policy spectrum. To that end, we accept that the setting is a public policy one. We're here today to offer you expert advice as to the pros and cons of where on that spectrum we sit, for there are, indeed, pros and cons at each point of that spectrum. Our members, who are experts in the field, also hold a range of views across that spectrum, which is why we have not chosen to advocate one preferred position over another.

In regard to debt agreements, we offer to provide advice about the implications of those proposed changes but we also, in our submission, have highlighted that the committee should be aware of the potential for those changes to shift the focus of those in financial distress from one personal insolvency option to another. It goes without saying that we strongly support moves to require higher levels of qualification for debt administrators and to improve the integrity of the debt agreement regime. We welcome the opportunity to assist the committee with its deliberations. Thank you.

CHAIR: Thank you very much for that. Have you, by any chance, had a look at the submission made by ASIC to the inquiry? I don't think you were here earlier this morning when they appeared.

Mr Winter : No. Regrettably, we weren't here this morning. Mr Wellard, would you—

Mr Wellard : I've had a brief look at that submission.

CHAIR: They made some suggestions about safeguards which they propose. I wonder if I could ask you, as a question on notice—and we have asked for any questions taken on notice to be responded to by this Friday—if you wouldn't mind having a look at their suggested safeguards and letting us know what you think about them.

Mr Wellard : I did have the opportunity, from time to time, to listen to the audiostreaming this morning, and I'm aware of one safeguard that, I think, was suggested in the ASIC submission. It was in relation to sole directorships and the issue of whether a bankrupt who, after exiting bankruptcy—after one year discharge, if that becomes the law—should be permitted to become a sole director. As I understand ASIC's submission, it is proposed that there be a requirement for them to be a co-director with someone else who can share the managerial responsibility of the company. I'm happy to take that question on notice, but at first blush it seems to me to be a sensible safeguard.

CHAIR: The second one was enabling ASIC to direct a person to undertake training.

Mr Winter : We strongly support director training. It is one of the notable areas of a lack of requirement when it comes to starting a business. Obviously, a proprietary limited business gives you significant advantages in terms of its structure, yet there are very few obligations that are placed on directors. So we are certainly strongly in favour of directors having better skills, and we believe that that would actually reduce overall insolvencies.

CHAIR: Thanks for that. Another one was providing extended disqualification periods for serious conduct including phoenix activity. Does that, at first blush, seem to be along the right direction?

Mr Winter : We would certainly support that. Indeed, in terms of the various anti-phoenixing submissions that are around at the moment, we're strong advocates of that. We think that the enforcement of that should be much more administrative than it currently is. The complexity that's required for ASIC, or other enforcement agencies—the ATO et cetera—to take action in the face of any phoenixing activity is quite onerous. It's expensive. Where there's clear evidence of malfeasance in that regard, we do believe that it should be rigorously and strongly enforced.

CHAIR: The fourth one was creating a new class of automatically disqualified persons where there's been repeat conduct. I guess all of these things require detail and drafting that you can't really comment upon here, but does that sound like it's going in the right direction?

Mr Winter : Again, with the same intent, I would agree. We will, though, come back to you on those, as questions on notice, with more fulsome answers.

CHAIR: I'm just wondering whether the adoption of those would be welcomed by that group of your members which is not quite onside with the bill as proposed.

Mr Winter : I'll ask Mr Porter, who is one of our committee members and also a registered trustee himself, if he might like to share his opinion.

Mr Porter : I'm a trustee and a liquidator as well. I think that's going along the right lines there. There are certainly many repeat offenders that we see frequently, time and time again. Whether entrepreneurs are among those is yet to be seen, I guess. Some are and some aren't. I certainly think those measures would be very useful and would be supported by those of us in the profession who don't necessarily support the reduction down to one year.

Mr Winter : If I can add to that, part of the reason that we have a number of trustees who take Mr Porter's view is that our members tend to see those recidivists more than other areas of the community, and it breeds a healthy element of cynicism when it comes to how those people will conduct themselves through a bankruptcy process. So trustees are always somewhat nervous about losing any of the powers they have to enforce certain outcomes, particularly against these more troublesome individuals. It needs to be said that they are a small percentage of the overall number, but they're the ones that our members tend to see. They're at the worst end of the spectrum.

Mr Porter : They're the ones who attract the most publicity and the most public confidence, which prompts a lot of the debate.

CHAIR: I've mentioned Christopher Skase and Alan Bond before. That's the difficulty of finding the genuine bankrupts and those who are just gaming the system. ASIC's proposals might help us along that way—if they're feasible and practical, of course. Thanks for your submission. I might leave it there and pass to the deputy chair.

Senator PRATT: In paragraph 2.3 in your submission, on the debt agreement reform bill, you discuss the capping of the length of agreement to three years. Are you opposed to the three years?

Mr Wellard : The substantial point we're making in that part of our submission is that, debt agreements being intended to be an alternative to bankruptcy, it's not necessarily the case that the cap, if there is to be one—and we're generally supportive of a cap on payment time frames—needs to align with bankruptcy income contributions. I appreciate that whatever the cap is and wherever it's set is ultimately an arbitrary setting at one level. But, as an alternative to a bankruptcy procedure, we're simply making the point that it need not necessarily align with the income contribution period.

Senator PRATT: It's not arbitrary, in the sense that it's a balance on the sustainability of repayments and someone being able to move on with their life, versus how much of the debt, and in what time frame, is likely to be repaid.

Mr Wellard : Absolutely. We completely support the tenor of the changes to ensure that debt agreements are sustainable. The point I was making about arbitrary time settings is that whether it's four, five or three years is ultimately a call that needs to be made. We're, for instance, supportive of measures to ensure that we don't have excessively long payment plans. Anecdotally, I've heard of some payment plans running on for seven or eight years. I understand and have no issue with that.

Senator PRATT: Is the current limit supposed to be five? If so, why are they running on that long?

Mr Wellard : I understand that the five years has come from what is the average, typical payment plan term at the moment.

Senator PRATT: Personally, I think I'm reasonably supportive of three years, and I guess that's because I'm keen to see consumers that have had large amounts of credit debt pay as much of their dues as they can and then move on. But I take your point that we could look at at least setting it in stone for a maximum, be that three, four or five years, and for it not to run on beyond that.

Mr Wellard : Yes, we're certainly supportive of a limit. We were just raising the question as to where the limit should be set and on what basis.

Senator PRATT: So you are supportive of a limit. Will the limit affect profitability of your members?

Mr Winter : Our members don't do debt agreements.

Senator PRATT: You do insolvency.

Mr Winter : We do bankruptcies.

Mr Wellard : I am aware of submissions that I have read to the effect that returns might be compromised. I don't think we in particular—

Senator PRATT: Not that there is necessarily a problem with that, because—

Mr Wellard : We don't have really an informed basis to make a submission on that particular point, but I'm aware of the submission that's been made by other parties who have made submissions.

Senator PRATT: In terms of businesses that have a capacity to be turned around—and, in this bill, we're talking about individuals—what proportion of things that you're turning around or restructuring are individuals as opposed to companies?

Mr Winter : We cover both personal insolvency in terms of formal bankruptcy and registered liquidators doing corporate insolvency work. As comparatives, there are 710 registered liquidators in Australia, and I'm sure my colleagues from AFSA will confirm the number, but I think it's about 230? It's less—210, I think. There we go; somewhere closer to that. AFSA are always standing by to assist us. So you can see that the volume is much greater in the corporate insolvency space, and that's the great majority of our membership, but I would say that, of the 200-odd trustees, the vast majority, some 95 per cent, are also registered liquidators as well, so there is a duality of that role.

Senator PRATT: And your members are only dealing with those businesses—

Mr Winter : Our members, and Jason is a good example here, could deal with a bankruptcy which has no particular overlap with a corporate insolvency.

Senator PRATT: So it would just be personal debts.

Mr Winter : Just a personal insolvency, absolutely.

Senator PRATT: And you're acting for someone who is trying to manage their insolvency to prevent themselves from going bankrupt?

Mr Winter : No. At this point, they would be moving into a bankruptcy arrangement. Some of our members will give people advice, but, generally, the type of personal insolvents that we're dealing with have already reached that point. Jason, do you want to add anything?

Mr Porter : That's correct. They're mostly at that point where they need to file their own petition or there is a creditor pursuing them into bankruptcy through the court process.

Senator PRATT: In terms of some of the other evidence we've heard today whereby debt agreements and the like should only be made available to people who have a housing asset that they're trying to protect—in the main, unless people have other reasons—clearly bankruptcy can be a better path than being on an unsustainable debt repayment. Is that something you would foresee as being desirable for some people?

Mr Winter : I think you've probably exposed the biggest issue that we face. There are, as you know, a variety of personal insolvency options. One of the most important discussions we need to have—and this is why we are particularly glad to see that the committee had pulled these two items of legislation together—is about what cohort of people in what type of financial distress should be being channelled down the options of personal insolvency via bankruptcy debt agreements under part IX. That sort of issue and that mapping is frankly more subjected to aggressive marketing, particularly by some of the big debt agreement firms, rather than people being able to make informed choices on their own. Certainly, financial counsellors do provide that advice. There are some very good debt agreement operators out there who do provide good advice, but there are others who are aggressive marketers.

It is a concern, for example, that clear advice is not being mandated to be given to people at that early point, when they can very clearly and simply understand what best suits them, rather than have somebody else tell them what best suits them. AFSA have some very helpful information on their website, but we think it's one of those things that should be required to be handed to people as they're confronting those choices themselves. At a policy level we really need some clarity around which groups should be going into which type of option. That goes to the heart of your question. If you are somebody who simply has a consumer debt and you have a home as an asset, is a debt agreement the right way or is a bankruptcy a better way forward?

Senator PRATT: It was put to us—and I'd be interested in what your experience of this is—that if you don't go into a debt agreement over a consumer debt then you might be more likely to lose your house. Conversely, it was also put to us that people who own credit card debt, because it links back in large part to the banks, don't want to see people losing their houses over credit card debt. We have to work out who has the right line on that, so that consumers can move on in the best way possible. Do you have a view about that?

Mr Winter : There is one point that I would make around that. When you have a lack of enforcement around a lending obligation simply because a bank or other lender doesn't want the bad PR, that's not really the right framework for a policy decision. If there is an enforcement, you should be balancing the policy based on what can reasonably carried out, not whether banks are simply not enforcing at the moment, which we know is part of the case. Again, I think we need to have absolute clarity as to which cohort should be going into which situation.

Senator PRATT: What can reasonably be carried out then, in your view, when someone has a large credit card debt and an asset like a house? If they sell their house, they're not necessarily going to go bankrupt because that's probably enough to clear their credit card debt. They're probably not the kind of cases that you're seeing—or are they?

Mr Porter : Not really, but there are some options already available for people to protect their home and do compromise deals with creditors, which are called personal insolvency agreements. That requires a special resolution of creditors, which is a majority in number and 75 per cent in value. The bigger creditors will almost always have the say on that, whether that's the tax office, who are quite often the most prevalent creditor in bankruptcies as well as corporate administrations. At the end of the day banks and creditors don't like bankrupting people. It's an expensive process for them to go through with the filing fees and the legal fees. It's not the first thing that comes to their mind—going down that path is the last thing that comes to their mind. Quite often creditors will sell their debt to debt collectors, and the debt collector will be making that decision rather than the original creditor.

Senator PRATT: One of the things that doesn't seem to be particularly well thought through in this bill, as far as I can tell, is differentiating between consumer credit debt and debt that's tied up in business interests. There seems to be and argument that the business interests need to be—that you need to be able to move on quickly so that you can re-engage in business. That's part of the government's agenda. But it doesn't seem to have been separated out from those who need to go bankrupt because they simply have no assets and it would be cheaper for them, when they have only a small income, to just go bankrupt. The stakeholders that have appeared today seemed to only be talking about different halves of that. As you say, Mr Winter, no one's worked out who is going down which path. What advice do you have to us to unpick that?

Mr Winter : Part of the problem with the messiness is that there is a very messy overlap between small business insolvency and personal insolvency. That's because, if you think about the person who runs the corner store, or the tradie, their personal assets are often heavily interwoven with their 'corporate' assets. When they get to that point, there is a saying: you can't get more broke than broke. And they tend to actually overlay those obligations even more so that's why it ends up messy; it's very hard to put a dividing line between those two areas. And that is one of the reasons that so many of our trustees are also liquidators; they see those matters coming together.

Where the balance point sits on it is the most challenging question of all. There is a reason you are not getting clear advice on it and that is because, as we said in opening statement, it is a pendulum and where you swing it really does tend to depend on the economic environment at the time. It is simply very hard to give you a definitive answer. All we can say is that as long as there is clarity around the cohorts and where they should sit, people will naturally fall through those categories. If you watch over time, AFSA produces incredibly helpful statistics on the way that personal insolvency agreements, debt agreements, bankruptcies have changed over time. You can see linear declines in things like personal insolvency agreements because they have fallen out of failure in part because of the heavy marketing of debt agreements but also in part because asset values have changed and it has made it more attractive move into others. So you can very clearly see how you can adjust the levers and set those once you define who should be which cohort.

Senator PRATT: Yes, but it is not always easy, as you say, to work out who goes where. Do you think that if that is clear that a maximum three years is the right path?

Mr Winter : Do you mean on the debt agreements?

Senator PRATT: Yes.

Mr Winter : Coming to Mr Wellards point, as long as there is clarity, as long as there is not an un-ending tail to the arrangement, I think that helps creditors make assessments as to the risks that they carry and it is important to us what risk creditors carry in all of these mechanisms. As long as there is clarity that helps define who is going to which channel.

CHAIR: Mr Porter, you are on the side of leaving it at three years?

Mr Porter : From a personal point of view, yes. I guess that comes from my practice being more heavily involved in the more complex matters where fraud is involved or shifting of assets away from people so the creditors are really losing out, which is probably opposite to the consumer bankruptcies which you are talking about with the debt agreements, which are churn and burn—for want of a better word—of getting them in, getting them out and rehabilitating them. Some of the work I do takes longer than a year to find assets, to trace them all around the world, to see what people are doing.

CHAIR: That's why the ASIC proposals might be of some comfort to you.

Mr Porter : That could be right. It could be as simple as changing the Corporations Act to leave bankruptcies at three years but just change when you can be a director again after one year and then putting in extra training or a second director as well rather than changing the whole bankruptcy regime.

CHAIR: I was rather rudely calling you by calling you by your surname when I said, 'That's Porter's position.' The secretary misunderstood me and thought I was talking about another Porter. My final question is: do you have a conflict of interest? You are not related to Christian Porter?

Mr Porter : No.

CHAIR: Because he's the ultimate decider in these things. Thank you very much, gentlemen. We very much appreciate your professional advice and the time you've taken to come and assist the committee.