Small business insolvency under the microscope as ombudsman investigates restructuring
Kate Carnell will investigate the operation of insolvency practitioners in a new inquiry that will examine why restructuring rates aren’t higher.
The behaviour of insolvency practitioners in restructuring collapsed businesses will be examined in a new inquiry announced by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) today.
Small business ombudsman Kate Carnell has invited small business owners across the country to submit their own experiences with insolvency practitioners, saying few businesses that enter formal insolvency are able to navigate their way through the process.
More than 8,000 businesses entered external administration in 2018-19, the ombudsman said Thursday.
Carnell is concerned about the “very low success rate” small business owners experience when trying to restructure a business under external administration, telling SmartCompany some liquidators have a conflict of interest.
“The incentives in the system aren’t built for turnaround,” Carnell says.
“Often, the investigating accountants become the liquidators, so it’s in their interests to recommend liquidation because they get another gig.”
Carnell says insolvency practitioners have contacted her office welcoming the prospect of an inquiry, acknowledging some firms are tarnishing the reputation of others.
“The good guys are fundamentally saying ‘we are keen to preserve the reputation of the industry’,” Carnell says.
Figures published by the Australian Securities and Investments Commission show liquidations accounted for 78% of business insolvencies in the December quarter.
Terms of reference for the inquiry, published Thursday, reveal ASBFEO will consider the current regulatory regime governing insolvency practitioners, as well as how transparent and costly the insolvency process is for small business owners.
“This inquiry will identify areas where practices can be improved and recommend changes to the system to achieve fairer outcomes for all parties involved,” Carnell said.
‘Cookie-cutter’ liquidators probed
Patrick Coghlan, chief executive of CreditorWatch, welcomes the inquiry, telling SmartCompany there’s room for improvement when it comes to getting better outcomes for businesses and creditors.
“Creditors are also greatly affected because they often end up with zero cents on the dollar after a liquidation,” Coghlan says.
Coghlan expects the inquiry to examine issues relating to the remuneration of insolvency practices and also pre-insolvency practices, particularly in relation to phoenixing activity.
He says the inquiry shouldn’t be about “slamming insolvency practitioners”, as he thinks most act appropriately, but should consider “cookie-cutter” practices that charge up-front fees.
“Their intentions I would suggest are not to try to save the business, but just close it down in the cheapest, quickest way possible,” he says.
Transparency to be examined
A previous ombudsman inquiry into small business loans found many owners feel like they aren’t kept in the loop when their businesses enter external administration.
Coghlan says the issue is twofold, requiring better education for small business owners about the intricacies of Australian insolvency law.
“Small business owners are very unlikely to be well educated in terms of insolvency and the legislation around that,” he says.
“There’s a big education piece required here as well.”
The ombudsman has established a reference group as part of the inquiry, which will be chaired by former Nationals senator John Williams, who worked on a 2010 senate inquiry into liquidators.
“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” Williams said in a statement circulated by ASBFEO on Thursday.
“This inquiry is essential to see if any systemic improvements can be made.”
An interim report is slated to be released in December, ahead of a final report scheduled to be tabled next February.
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