The search for balance between debtor and creditor interests; private or official enforcement; and legislative or judicial regulation is at best complex and at worst like searching for the Holy Grail. In truth it is unsurprising, when you consider that an insolvent debtor, by definition, is unable to meet its financial commitments thereby resulting in loss or inconvenience to all stakeholders. Throughout history insolvency regimes have reflected the moral code of the community. It is not surprising then, that in a time of cultural diversity and complex business interactions our insolvency regime is also diverse and complex. To understand the “yin and yang”, or lack thereof, in our insolvency regime, it is worth exploring its foundation and development in our country’s history.
Before focusing on our own history, it is interesting to consider the approach taken over the years in handling insolvency events by other nations and cultures. An insolvency regime of sorts can be traced back to ancient civilisations. Both the Egyptians and Romans established a form of dealing with an individual’s insolvency. According to researchers, the Egyptians favoured an enforcement against an individual’s property, thought to be preferred due to the state’s claim to the individual primarily for military purposes. Whereas, under early Roman law, a creditor was entitled to enslave a debtor after three demands for payment were left unsatisfied. The common element being restitution of sorts, but a clear disparity in the method. It is also worth noting that enforcement actions were taken privately with the moral guidance of the community predominantly dictating the rights of each party.
The English Way
To properly consider the roots of Australia’s legislation, we must review the history of the English insolvency laws. Most significantly, in the 13th century, legislation was passed providing for the imprisonment of delinquent debtors. The law was clear, non-payment equalled imprisonment. It is thought that imprisonment was necessary due to the ineffective laws pertaining to enforcement over a debtor’s property at the time. Certainly, incarceration was likely an effective means of motivation to a forgetful debtor, but the law did not provide a filter for those who were the subject of simple misfortune. Whilst, minor reform to enforcement rights were made “debtor prison” continued well into the 19th century as a matter of common enforcement practice and, whilst no longer the norm, can still be found in some of our legislation today.
In the early days of the New South Wales colony, there was no specific referencing to insolvency laws in legislation. However, the 1787 First Charter of Justice did provide for the arrest of a delinquent debtor if the amount was greater than £10. In 1823, the Supreme Court of New South Wales was created and empowered to deal with insolvency matters. Whilst the Australian colonies adopted the laws of England, the Court seemed to regard the insolvency laws as more guidance, instead opting to take a flexible and innovative approach to their application. This is likely due to the reliance on the use of credit to drive the new colony’s economic growth. As a result, the balance shift between the interests of creditors and the rehabilitation of debtors began. The colony had recognised that to survive and flourish, change was required. Methodologies allowing an insolvent debtor’s resources and skill sets to be recycled back into the community began to come to the fore.
Post Federation – Individuals
Despite a shift towards debtor rehabilitation rather than simply creditor recourse, the development of a unified and simplified insolvency regime in Australia was hampered by the approaches taken by each of the colonies (both pre and post federation). Australia’s insolvency regime had its own “rail gauge” saga. In 1928, a uniform federal piece of legislation addressing the handling of an individual’s bankruptcy was introduced – the Bankruptcy Act 1924 (Cth), which was later replaced by the Bankruptcy Act 1966 currently used today. Importantly, the 1966 Act established for the first time a central point of reference to handle the management of an insolvent individual debtor’s affairs, now called the Australian Financial Security Authority (“AFSA”). Unfortunately, the fate of uniformity for the corporate insolvent debtor was still a long way off.
Post Federation - Companies
In the mid-19th century, we saw the emergence of the company as its own legal entity, ensuring limited liability to shareholders. This naturally led to a requirement for the administration of an insolvent corporate debtor’s affairs. Initially handled through an adoption of the principals established in bankruptcy, the development of uniform legislation to deal with insolvent companies, throughout Australia, only arrived in 2001. However, with the increasing complexity of companies’ business dealings, the administration of the affairs of an insolvent company required specific expertise. In the 1970’s the National Companies and Securities Commission, later the Australian Securities Commission and now ASIC, was introduced in an attempt to move towards national uniformity. This also led to the registration of Liquidators; private individuals who have met the requirements of training and experience required to administer the affairs of an insolvent corporate debtor.
In 1988, the Harmer Report: modernising corporate insolvency, initiated substantial changes in the Australian insolvency landscape. The report was commissioned due to a dramatic increase in insolvencies, which is largely attributed to the changing availability and use of credit facilities within the community at the time. Some of the outcomes from the report were the introduction of the Voluntary Administration regime and the rewriting of the insolvent trading legislation to limit individual creditor’s rights and move towards a focus on creditors as a collective. Recently, the introduction of the Safe Harbour regime has seen the pendulum continue to swing towards insolvent debtor rehabilitation rather than creditor retribution.
What is next?
The recent Royal Commission into the banking industry has exposed some of the tactics used by today’s financial institutions to entice the use of credit facilities, but ultimately it has also highlighted our community’s reliance on, and acceptance of, credit. If history has taught us that the balance between debtor and creditor rights is dictated predominantly by community beliefs and values, as we move further towards complicating our business dealings (for example with the rise of trust structures), it seems unlikely that Australia’s insolvency regime will be simplified any time soon. The continued reliance on credit facilities to drive opportunity and growth comes with inherent risk. The understanding that effective use of risk can lead to great results. However, inevitably with greater risk comes a greater chance of failure as well.
The continued complexity of the insolvency regime means that it’s often difficult to understand it in its entirety. Accordingly, we at Insolvency Intel (Powered by Jirsch Sutherland) are always available for your assistance
October 2018 - FNSCRD501 and FNSCRD505 - FNS51520 Diploma of Credit Management
 Levinthal, ‘The Early History of Bankruptcy Law’, (1918) 66(5) University of Pennsylvannia Law Review 223,224.
 Allsop and Dargan ‘Chapter 16 The History of Bankruptcy and Insolvency Law in England and Australia’ in Gleeson, Watson and Peden, Historical Foundations of Australian Law Volume II ‘Commercial common law’ (The Federation Press, 2013) 415, 417
 Companies Act (1862) Vic
 Murray and Harris, Keay’s Insolvency Personal and Corporate Law and Practice (Thomson Reuters, 7th Ed, 2011), 8.