A new small business restructuring process designed to keep owners in control has suffered an “embarrassingly” low take-up, an industry leader says, with extra complexity and costs deterring struggling business owners from taking part in the ‘simplified’ scheme.
The streamlined small business restructuring scheme was introduced by the Morrison government and came into effect on January 1, 2021, offering hard-hit business owners an alternative to existing administration processes.
Under the process, owners can stay in control of their businesses and continue to trade while they restructure their debts, instead of handing the reins to an external administrator appointed by the business’ creditors.
With the help of a small business restructuring practitioner, business owners can spend 20 days devising a restructuring plan.
Creditors have 15 days to vote on those proposals, with successful plans put into effect. Should a plan receive less than 50% support from creditors, businesses flow into the existing voluntary administration system.
Addressing the reforms in late 2020, former treasurer Josh Frydenberg said roughly three-quarters of all Australian businesses that initiate insolvency proceedings each year would be able to access the streamlined alternative.
But in a report summarising the scheme’s first 18 months, the Australian Securities and Investments Commission (ASIC) last week revealed just 82 businesses had opted for the simplified business restructuring pathway.
John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association (ARITA), says the scheme’s take-up is minuscule, even in the context of COVID-19 business supports and lower-than-average business collapses over the last few years.
“To put it in context, 82 is less than half of 1% of all insolvencies that happened during the same period,” Winter told SmartCompany.
“Nobody, by any measure, can claim it’s a success.”
Winter, whose organisation advocated for simplified rules as early as 2014, says liquidators are trying “very, very hard” to guide fixable small businesses into the process.
However, he contends the scheme is still too complex, with legislation covering the scheme stretching to dozens of pages. An ARITA flowchart simplifying the process even further still blows out to 13 pages.
“You cannot call it a simplified process,” Winter said.
“If the actual flowchart — forget the legislation — stretches beyond a dozen pages, that really underscores the insanity of this solution instead of being done how it should have been, which was a simple, straightforward process.
“Every single liquidator knows that this is an option use, and are all going to try it where they can, but this just shows that the regime is too expensive and not fit-for-purpose,” he added.
Those barriers present an ironic reality, he added: in some circumstances, it is cheaper and more efficient for struggling small businesses to pursue traditional administration proceedings than access the simplified business restructuring.
Worryingly, the hardship of working through the process may be keeping small business from what is, fundamentally, a solid scheme.
Some 66% of businesses that undertook a simplified business restructuring were found to be ongoing as of September 2022, ASIC said.
The Australian Taxation Office was identified as a creditor in 89% of restructuring plans which commenced over the reporting period, suggesting small businesses may need every option available to them as the tax office ramps up its compliance activities.
ARITA is not the only representative organisation to challenge the scheme’s implementation.
In a submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into corporate insolvency in Australia, the Australian Small Business and Family Enterprise Ombudsman called for a comprehensive review to diagnose the causes of its low uptake.
The Ombudsman suggested two tweaks to boost participation: allowing businesses with liabilities in excess of $1 million to take part, and softening its requirements around tax compliance and the meeting of employee obligations.
In its own report, ASIC cites stakeholder concerns over the scheme’s complexity, along with suggestions that lifting the liability threshold and adjusting tax compliance measures could increase its uptake.
Winter says expanding the threshold to $5 million would water down the scheme, and increase the likelihood it could be used as a tool for illegal phoenixing.
On tweaking tax compliance, Winter says there are valid arguments for some softening of those requirements.
“But at the end of the day, if a business is not able to pay, for example, its superannuation and the basic tax that it’s meant to do, it’s probably not a good candidate for rescue,” he said.
“The real answer is a radical simplification of the law,” he added.
“Because if you if you put that simplification in, then the cost of running this restructure becomes accessible and affordable to people.”
With the Parliamentary Committee set to table its report on insolvency law in May, Winter says he was optimistic the feedback from ARITA and other industry groups could lead to a more comprehensive reworking of “pancaked” insolvency legislation.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
