The final winding-up of a failed Tasmanian investment scheme after 22 years focuses attention on two current inquiries into corporate insolvency and investment laws, writes Professor Pamela Hanrahan.
In March, the Federal Court judgment in ASIC v Piggott Wood and Baker  FCA 193 finally concluded one of Australia’s longest- running liquidations. It brought to a close the winding-up of the Piggott Wood & Baker (PWB) mortgage investment scheme in Tasmania, which collapsed in the late 1990s.
The scheme was first established by PWB, a “prominent legal practice” in Tasmania, in the 1960s. Over several decades, it grew into a large pooled mortgage investment scheme that aggregated client funds and invested them in real estate and property development. Until the laws relating to managed investment schemes (MIS) were amended in 1998, these schemes operated outside financial sector regulatory arrangements and were instead overseen by local law societies. By December 1998, the loans outstanding through the scheme exceeded $60m. As Justice Shaun McElwaine observed, by then PWB was “a medium-sized banker” by Tasmanian standards.
However, by the late 1990s, “imprudent lending practices'' brought about its demise. In 2001, the two PWB partners responsible for the scheme were successfully disciplined in the Tasmanian Supreme Court for their mismanagement of the scheme. By December that year, the liquidators had been appointed. Extensive litigation followed, including against the HIH Group, which was the law firm’s primary indemnity professional insurer. Of course, the collapse of the HIH Group in March 2001 — another two decades-long liquidation, which also concluded this year — complicated matters further.
The PWB liquidators’ appointment was made under the MIS legislation that allows a court to wind up an unregistered MIS and “to make any orders it considers appropriate for the winding-up of the scheme”. That’s it. There is no statutory regime for winding up either registered or unregistered MIS. The liquidator, the regulator and the Tasmanian courts were left to unscramble the PWB egg “within the appropriate general law framework”.
The end of the PWB liquidation coincides with an eight-month inquiry into corporate insolvency currently being conducted by the Commonwealth Parliamentary Joint Committee on Corporations and Financial Services (PJC). The inquiry was launched in September 2022 and is due to report at the end of May.
The PJC’s terms of reference are very broad. They include examining the operation of existing legislation, common law and regulatory arrangements for insolvency, including the small business restructuring reforms (2021); the simplified liquidation reforms (2021); the illegal phoenixing reforms (2019); and the operation of the Personal Property Securities Act 2009 (Cth) in the context of corporate insolvency. The PJC has also invited submissions on other potential areas for reform, including unfair preference claims, trusts with corporate trustees, insolvent trading safe harbours and international best practice.
Another area of focus for the PJC is the role of government agencies in the corporate insolvency system, including the Australian Taxation Office’s role and enforcement approaches to corporate insolvency; and the role, funding and operation of relevant bodies, including the Assetless Administration Fund and the Small Business and Family Enterprise Ombudsman. It is also looking at the role and effectiveness of the Australian Securities and Investments Commission (ASIC) as the corporate insolvency regulator. In October 2022, the PJC launched a further inquiry into ASIC’s “capacity and capability to respond to reports of alleged misconduct” — which may include examining what ASIC does with the reports that must be filed by insolvency practitioners when they suspect someone involved with an insolvent company has committed an offence.
In Australia, the corporate insolvency and personal bankruptcy regimes are separate. As the PWB case illustrates, there is no statutory regime for winding up trusts such as trading trusts, or registered or unregistered MIS. So far, the PJC is limiting itself to the arrangements for corporate insolvency although it is worth noting that — at least in the SME space — maintaining these silos may be unhelpful.
Given the breadth of its terms of reference, the PJC may struggle to come to terms with the complexity of the corporate insolvency regime and its interaction with other parts of the system in eight months. There are calls for a more comprehensive review of the insolvency laws with the aim of significantly modernising and streamlining the rules across the economy.
Arguably, it is well overdue. The last comprehensive review of the insolvency laws — known as the Harmer Report — was established by the Attorney-General in 1983. Conducted by the Law Reform Commission over several years, it published the comprehensive General Insolvency Inquiry final report in 1988. The resulting reforms — including the introduction of Australia’s voluntary administration regime — took another five years to implement. Even then, some key recommendations from Harmer were never adopted, and a later review by the Corporations and Markets Advisory Committee into MIS insolvencies was also left on the shelf. So, despite some recent bolt-ons, including during the COVID-19 pandemic, the basic architecture of Australian insolvency laws is now looking very dated.
There is a local precedent for a more ambitious approach. Over the past decade, Singapore’s insolvency landscape has been significantly reshaped after two major inquiries published by the Insolvency Law Review Committee (ILRC) in 2013 and the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (DRC) in 2016. The ILRC mandate was to modernise Singapore’s insolvency laws. The DRC was intended to enhance Singapore’s effectiveness as a centre for debt restructuring. New legislation, known as the Insolvency, Restructuring and Dissolution Act 2018, came into operation on 30 July 2020, consolidating the statutory provisions governing corporate and personal insolvency.
Also in March, Assistant Treasurer Stephen Jones announced that Treasury would conduct a review of the regulatory arrangements for MIS. That review will touch on scheme failures of the kind experienced by the PWB clients in Tasmania, including the collapse of the Sterling Income Trust, Trio Capital and Timbercorp Securities. In that review, Treasury has been asked to consider “whether an insolvency regime is required for MIS”. Hopefully, that discussion can be integrated into a broader project to come from the PJC’s current work.
Insolvency is complicated. Like Tolstoy’s unhappy families, it may be that every insolvent enterprise is unhappy in its own way. But the cost and personal toll for those caught up in complex liquidations like PWB make clear the need to ensure that the law is as efficient as it can be. The first step may be the PJC’s report to the parliament later this month, particularly if it recommends a more holistic approach.
Please join Pamela Hanrahan as she hosts a webinar on 9 May.
This article first appeared under the headline 'Going Bust' in the May 2023 issue of Company Director magazine.
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