Strong insolvency system necessary to boost productivity, minister says

In a speech to be delivered at the Australian Financial Security Authority (AFSA) Summit on Tuesday (18 November) and seen by Accounting Times, Andrew Leigh underscored the importance of a robust and trustworthy insolvency system for boosting productivity.

A robust insolvency system that handled bankruptcies smoothly and ensured creditors got a fair deal would incentivise more Australians to take business risks, which in turn could help resuscitate the country’s poor productivity, Leigh said.

“Every successful market economy rests on trust. … The personal insolvency system is one of the quiet foundations of that trust. It allows people to take risks, knowing that if things go wrong, there is a fair and lawful framework to resolve debts,” he said.

“It allows creditors to lend and supply, knowing they will be treated equitably. It allows those who have experienced hardship or business failure to re-enter the economy and contribute again. It keeps capital and talent circulating.”

Economic dynamism, the ability for new firms and fresh ideas to enter the market, is a key driver of productivity and thus rising living standards, Leigh noted.

However, over recent decades, Australia has seen a slowdown in firm formation and a smaller share of fast-growing young firms that drive productivity, worsening Australia’s productivity stagnation.

“Research shows that young firms account for around six in ten new jobs in Australia. A small number of high-growth firms are responsible for a disproportionate share of productivity gains,” Leigh said.

“These firms tend to start out more productive than their peers and increase that advantage as they expand. But they only succeed in environments where taking a risk is feasible, and where failure is survivable.”

The RBA has found that Australia’s declining competition and economic dynamism have cost the average Australian $3,000 in foregone productivity gains.

Leigh told the AFSA summit that Australia’s insolvency framework had become “complex, fragmented and difficult to navigate.” A key issue was the interface between corporate and personal insolvency.

“In many small businesses, the financial affairs of the individual and the company are closely intertwined. When a small business enters difficulty, the owner may face both corporate administration and personal bankruptcy considerations,” he said.

“Yet the pathways for each are distinct, with different processes, obligations and outcomes. The report found that for small enterprises, this can feel like navigating two systems at once at the very moment when stress is highest.”

Leigh said the government would pursue reforms to make the system easier to navigate and more coherent in structure.

He added that the government would crack down on abuse in the insolvency system by practitioners and proceed with reform to increase the threshold for involuntary bankruptcy, reduce the period that people were listed on the National Personal Insolvency Index and review Australia’s current bankruptcy and insolvency laws.

“When the system functions well, its impact is almost invisible,” Leigh said.

“When it falters, the effects are felt quickly: delayed transactions, rising costs of finance, damaged confidence and fewer new ventures. It is therefore not just a legal framework. It is part of how we support participation, opportunity and renewal.”