“Broken system”: Ombudsman finds insolvency practices working against small business

Small business ombudsman Kate Carnell has urged insolvency practice reforms to address a “broken system” for SMEs, amid an expected surge in small businesses hitting the wall later this year.

Handing down its inquiry into insolvency practices on Tuesday, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) argued tailored systems should be created to simplify insolvency for small businesses and enable them to have greater control over the process.

Carnell characterised the need for reform as urgent, given how the COVID-19 pandemic has exacerbated financial stresses facing small business owners.

“The reality is that Australia is now in the grip of a recession. Trading conditions are the worst we’ve seen since the great depression and many small businesses won’t survive,” Carnell said in a statement.

“Our inquiry has found that the system as it stands does not work for small businesses.

“Small businesses that have been through the liquidation process have told us their experience was so traumatic they will never fully recover, let alone try to start a new business down the track.”

There were 10 recommendations in total; here are the broad strokes.

• Create a “small business viability review” where distressed firms can obtain $5,000 advice vouchers.
• Establish small business debt hibernation where a systemic shock (i.e. a pandemic) has been declared.
• Create directors insolvency agreements, allowing business owners to propose restructures to liquidators.
• Simplify liquidations where net debt is low, ensuring the process takes less than 30 days and is cheaper.
• Increase minimum debt for statutory demands to $5,000 and the response period from 21 to 30 days.
• Prevent liquidators from pursuing recoveries for creditors where expected returns are lower than costs.
• Simplify insolvency information provided to creditors and include plain-language fact sheets.
• Digitise communications with creditors and business owners during external administrations.
• Better target investigations and the recording of financial misconduct to those with a track record.
• The Australian Banking Association should amend subparagraph 179A (a) of the banking code so it applies to all small businesses, not just farmers.

In essence, ASBFEO found existing insolvency processes aren’t working for small businesses, forcing them to sacrifice more control than is necessary, pay high fees and deal with time-consuming and complex red tape.

The recommendations canvas several legislative changes and reforms that corporate regulator ASIC and the Australian Banking Association (ABA) would need to implement.

For example, proposed changes to the banking code would ensure all small businesses are covered by a provision that stops default interest charges in cases where a business with a loan is affected by a systemic shock, such as a pandemic.

“We know the sooner a small business seeks help, the more likely it is they can achieve a restructure or turnaround,” Carnell said.

“But cashflow issues, compounded by falling revenue, may mean those small business can’t afford the professional financial advice they need.

“The ramifications of this could be devastating, both for the business and its owner and family, down the line.”

The full review is available online here.

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