Researcher calls for overhaul of Australia’s insolvency frameworks

“When you're dealing with small businesses, there's really this great deal of mixing of personal and corporate funds,” Bull said.

“So if something goes wrong with the company … it's not just your company that will suffer those consequences. It's you as an individual, as a result of those personal guarantees. And the issue with that is it enlivens both the corporate and the personal insolvency frameworks at the same time.”

Bull said that the current incongruity between Australia’s personal and corporate insolvency systems imposed additional costs and stress on small business owners.

“They're paying double the costs, double the complexity, double the duration, because the company has to go through the SBR rating. But as soon as their restructuring plan is approved by creditors, the creditors can call upon their personal guarantees and then they have to go down the personal insolvency regime,” she said.

While businesses could restructure their business debts under the SBR scheme, personal debts could not be compromised under the same agreement. For small businesses, where the line between personal and business debts was often blurred, Bull said this was an oversight.

“The personal guarantee relates to the principal debt. You've compromised the principal debt as part of your restructuring plan. Why then can the creditors go after you for the difference between the amount they've compromised and the total debt?” 

“It doesn't seem right. And I think that's an oversight. I think what needs to happen is that personal guarantees can be compromised as part of the restructuring plan.”

The fact that debts needed to be $1 million or less for a business to be eligible for an SBR was another sticking point for some in the industry, Bull said. She said that practitioners wanted to be able to exclude certain creditors from that debt figure, such as the directors themselves, or other related parties willing to write off their debts.

“If they're happy to write their debt off, and often they are just to keep their business running well, then why should they be included in that 1 million debt limit?” Bull said.

“And then if we did that, it would probably truly achieve what this regime is trying to, which is to help less complex businesses through this process.”

She added that the ATO tended to adjust its information requirements with little notice to practitioners, causing frustration and reputational damage for those who submitted a plan on behalf of a client only for it to be unexpectedly rejected. 

“The main issue at the moment is they [the ATO] are not giving practitioners enough time to get ready for the change in approach, and they change it from time to time,” Bull said.

“They'll just suddenly send out a note that says, oh, by the way, we need this now and we're not going to accept this plan. A month or a week ago, they would have accepted a plan on those terms. And so the practitioners say, well, we feel quite frustrated by that.”

Bull said that fixing Australia’s insolvency system could boost the country’s poor productivity performance by supporting entrepreneurship and enabling aspiring business owners to get back on their feet smoothly.

“You might have a great business idea and you just really want to give it a go. If it doesn't work, let's get you out of that business quickly, pay out the debts as much as you can so that you can get back into doing your next great business idea,” she said.

“We don't want to stifle entrepreneurship, but unfortunately in Australia we've got this real stigma about accessing insolvency frameworks.”

In a speech delivered last Tuesday (18 November), Andrew Leigh, Assistant Minister for Productivity, Competition, Charities and Treasury, said a robust, trustworthy insolvency system was necessary to support economic dynamism and productivity.

“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.”

Bull said that fixing Australia’s insolvency framework was both an economic issue and a deeply personal one for the small business owners facing insolvency.

“Insolvency, even though it happens to a small percentage of companies, is still such a big economic issue. If we don't have a framework that helps our businesses get in and out quickly, we're basically stopping those directors from trying again and from moving on.”

“It also has personal implications for them. You know, they're losing their houses and it breaks up their families. It has mental health issues that arise from it. There are so many flow-on effects from insolvency that you can't just look at it from a few numbers perspective.”