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Wednesday, 12 November 2008
Page: 6708

Senator CAMERON (1:23 PM) —I rise today on a matter of public interest concerning the failure of the Leader of the Opposition, Mr Turnbull, to remotely comprehend the damage that would flow to Australia from the introduction of US style bankruptcy laws in this country. In yet another dismal attempt to attract a bit of attention, Mr Turnbull last week announced that a future coalition government would introduce American style bankruptcy laws that allow companies to continue trading while insolvent. These are known as chapter 11 laws. According to a report in the Australian on 8 November, Mr Turnbull thinks that insolvent companies should be allowed to keep trading to:

protect jobs—

and to—

stop the needless destruction of value—

in insolvent companies. Mr Turnbull says that there are many cases where companies have been unnecessarily put into receivership. Interestingly, Mr Turnbull cited the case of media company John Fairfax, which was placed into receivership in 1991. Mr Turnbull apparently told the Australian:

Its defaults were actually only technical.

Mr Turnbull knows a lot about the collapse of Fairfax and the events that followed. I suspect that not all of it is merely technical. But he obviously knows nothing about the American insolvency laws and what bad news they are for shareholders, creditors and workers. According to a story by Michelle Grattan and David Rood in the Age on 25 August 2008, Mr Conrad Black, the disgraced former proprietor of Fairfax, wrote to Four Corners from his jail cell in the United States where he is serving time for fraud with what you could only describe as a character reference for Mr Turnbull. Mr Black said of Mr Turnbull:

Fifteen years ago there would have been some question about his judgement. That may no longer be the case.

Clearly, an American prison cell is no place from which to form accurate assessments about Mr Turnbull’s judgement.

The question of whether an insolvency regime based on chapter 11 of the United States bankruptcy code should be introduced to Australia has been debated from time to time in recent years. On each occasion the idea has been rejected by people who know a lot more about the subject than Mr Turnbull. The principal features of chapter 11 of the United States bankruptcy code are as follows. Companies may petition the US bankruptcy court at any time of their own volition. There is no requirement that the debtor company be in financial distress. Immediately upon the filing of a petition, there is an immediate stay on the ability of all creditors to recover funds from the debtor company. The debtor company is given 120 days to produce to the court a plan of reorganisation, which both allows the company to continue to trade and addresses the claims of creditors. If no plan is presented, creditors have a further 60 days to present an alternative plan to the court. During this period, the management team that drove the company into bankruptcy remains in control unless creditors can show fraud or some other cause that would persuade the court to appoint a trustee. The court retains a very substantial role at every step of the process.

Chapter 11 of the US bankruptcy code has been the subject of considerable criticism over many years. Most debtor companies filing for chapter 11 bankruptcy fail to be rehabilitated. Only about 6½ per cent of debtor companies under chapter 11 achieve long-term rehabilitation. Leaving management in control was described in an article in the Australian Financial Review on 9 December 2003 as:

… akin to leaving the fox in charge of the hen house.

The people responsible for causing the company to petition for bankruptcy relief are the very same people who claim to be able to manage the company back to financial health. The management who caused the company to get into financial distress retain the power and authority to undertake high-risk strategies in vain and futile attempts to keep the company trading. These managers have nothing to lose by speculative investment of the company’s remaining resources. Under chapter 11 bankruptcy, the principal beneficiaries are not the debtor company’s creditors; it is the management that brought the company to its knees that benefits. Chapter 11 bankruptcy is wide open to abuse. Companies often seek to the protection of a bankruptcy petition to avoid contractual obligations.

In a famous abuse of chapter 11, Continental Airlines filed for bankruptcy for the sole purpose of avoiding its obligations under its labour contracts with its employees. Other companies have filed for chapter 11 bankruptcy for the purpose of avoiding tort and civil liability and awards of punitive damages for negligence and malfeasance. The role of the US Bankruptcy Court is a major contributor to the blow-out in bankruptcy costs and this extends the time spent by debt accompanying bankruptcy prior to the eventual winding up.

I want to come back to the analogy that chapter 11 laws are akin to putting the fox in charge of the henhouse. Is Mr Turnbull seriously arguing that Ray Williams should still be running a restructured HIH, that Rodney Adler should be in charge of a restructured FAI, that Alan Bond should be running Bond Corporation, that the late Christopher Skase should have been allowed to continue to run Quintex, or that Jodee Rich should have been given an opportunity to keep One.Tel afloat despite his incompetence? This is simply Malcolm Turnbull demonstrating that he has not thought through this proposal. It demonstrates that arrogance, bluster and self-importance cannot hide an incapacity to understand the implications of a policy that will significantly disadvantage not only the Australian economy but working families. This policy proposal by Malcolm Turnbull demonstrates that he has no idea what is required for good corporate governance in this country.

Mr Turnbull is not the first person to consider introducing US-style insolvency laws to Australia, though he is one of the very few to think it is a good thing. Following the collapse of Ansett and HIH, there were musings among some self-interested people about an American-style bankruptcy law for Australia. In an article in the Australian Financial Review on 3 June 2003, the administrators of Ansett, Mark Korda and Mark Mentha, concluded that American-style bankruptcy would not have saved Ansett and was not the answer for Australia. In their article, Mr Korda and Mr Mentha noted that Qantas had complained that the chapter 11 protection afforded to some of its American competitors put Qantas at an unfair competitive disadvantage. Qantas claimed at the time that this disadvantage was part justification for staff cuts and other cost cutting designed to maintain its competitive position. Korda and Mentha noted that a chapter 11 bankruptcy filing by Ansett and the resulting dilution of priority for Ansett employees would have relegated $650 million in employee entitlements to unrecoverable status. That is what Malcolm Turnbull is proposing for Australia. Mr Korda and Mr Mentha said:

Community expectations to give entitlements priority are evidence of the Australian public’s aversion to this US-style solution.

Mr Korda and Mr Mentha concluded in their article:

It is evident from the US aviation experience that a Chapter 11 solution is not always enduring. In any event, it is the equity holders, employees and unsecured creditors who fund the Chapter 11 process and who bear significant risk after reorganisation.

Mr Korda and Mr Mentha then ask the question: is that equitable? Well, I say it is not. But Mr Korda and Mr Mentha are not the only ones who disagree with Mr Turnbull. In November 2006, the former Parliamentary Secretary to the Treasurer, the member for Aston, Mr Pearce, released the draft Corporations Amendment (Insolvency) Bill 2007 for public comment. Mr. Pearce said this:

Australia’s insolvency regime has long been regarded as world-best, with jurisdictions such as the United Kingdom and New Zealand adopting the voluntary administration procedure that has been developed in Australia. The Bill will make a number of minor adjustments to develop this procedure further …

…            …            …

These measures demonstrate the Government’s commitment to ensure that employee entitlements are appropriately protected.

But now Mr Turnbull, in one of his characteristic ‘look at me, look at me’ moments, has unilaterally changed coalition policy through an article in the Australian newspaper. Not only does Mr Turnbull’s policy change fly in the face of the considered position of those very few sensible people who remain in the coalition; it is completely at odds with the advice provided by the government’s advisory body on these matters, the Corporations and Markets Advisory Committee. In a brief paper entitled ‘Should Australia Adopt an Insolvency Regime Based on the US Chapter 11 Bankruptcy Code?’, the advisory committee made these blunt assessments of the value of the American code to Australia:

In the post-HIH environment where corporate governance has become a watchword of heightened importance, adopting a debtor in possession regime such as Chapter 11 would be inconsistent with attempts to promote greater corporate governance.

…            …            …

Adopting a Chapter 11 type regime would fly in the face of the well accepted need to minimise the role of the courts.

…            …            …

Chapter 11 has repeatedly been shown to produce too few rehabilitated companies in the long term, to be very expensive and take an inordinate amount of time to administer.

…            …            …

In the circumstances Part 5.3A of the Corporations Act is working well and there seems little merit in Australia adopting an insolvency regime based on Chapter 11 of the United States Bankruptcy Code.

If changes are to be made to the Corporations Act in Australia,  the focus of the changes should be on increased corporate governance and the protection of the most vulnerable creditors—employees. Mr Turnbull’s support of chapter 11 bankruptcy laws actually demonstrates that the Liberal Party have not abandoned Work Choices. Work Choices was about putting ordinary Australians at a severe disadvantage in the workplace. Mr Turnbull’s proposition on chapter 11 brings the Liberal Party right back to that very same point. Chapter 11 bankruptcy laws would seriously disadvantage Australian workers. They already disadvantage American workers. Australian workers would also stand to lose the right to collectively bargain, as Australian bankruptcy courts could arbitrate on chapter 11 restructuring. Workers’ collective agreements could be terminated, annual leave reduced, annual leave loading and long service leave taken away. Penalty rates and allowances could be reduced or removed as part of chapter 11 restructuring.

The deficiencies in chapter 11 are clear: workers sacrifice their jobs, pay, benefits and conditions, while failed executives are protected and continue to access generous compensation entitlements and rewards. As recently as June 2008, the AFL-CIO made submissions to the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary of the US congress. Those submissions went to the lack of equity in chapter 11 bankruptcy laws. The conclusion of the AFL-CIO is that there are serious deficiencies in chapter 11 laws. Workers and retirees are bearing a grossly disproportionate burden of an employer’s bankruptcy. Workers are suffering because more can be taken away, much more easily, and with wholly inadequate remedies for the workers. American workers are facing deep cuts in wages, benefits, pensions and health benefits as a result of chapter 11 actions. I call on Mr Turnbull to admit his mistake and indicate that in the interests of workers and in the interest of good corporate governance he will not pursue chapter 11 type bankruptcy laws within Australia.