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ASBFEO says complex and expensive administration procedures fail small businesses facing crises they cannot control.
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Small business calls for overhaul of insolvency laws
14 December 2022
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12 minute read
Insolvency laws should be overhauled and simplified to give small businesses a better chance of surviving crises they cannot control, the small business ombudsman says.
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Australian Small Business and Family Enterprise Ombudsman Bruce Billson, who appeared before a parliamentary inquiry yesterday, said a “debt hibernation” facility would allow small businesses to pursue a credible restructure, save jobs and rebuild.
He also said the insolvency provisions cried out for simplification because they consisted of 3,900 “impenetrable” pages plus an additional 1,300 pages of regulations that were nearly impossible for time-poor business owners to navigate.
“Important information should be written in simple English with less technical wording and governments should ensure information is made available in other languages to better support businesses from culturally and linguistically diverse backgrounds,” he said.
“And, unbelievably, this information is currently not easily available in one place. Insolvency information is scattered across multiple platforms, which makes it difficult to find and easy to miss potentially critical information. This may result in accidental non-compliance.”
Mr Billson said a small business debt hibernation program would include a freeze on tax and other fees as well as government financial support.
It would be triggered by shocks beyond the control of a small business and provide the option to hibernate business debts, restructure and continue trading. The program could also include tools to allow businesses to assess their viability and assist with future planning.
“The current insolvency framework assumes that the failure of a business is due to poor management of that business. Yet, when a crisis shocks an economy, even the best managed businesses will face enormous headwinds and may not survive,” he said.
“Small and family businesses have suffered a series of rolling disasters beyond their control, such as floods and bushfires and the COVID-19 shutdowns, and while governments may offer support, the assistance is not guaranteed, is inconsistent across jurisdictions, varies with each shock and often delays, rather than mitigates, the impacts.”
Debt hibernation is one of several recommendations made by the ombudsman to improve the insolvency laws, which are being reviewed for the first time in more than three decades.
He also called for an emphasis on optimising and preserving value in a business instead of asset fire-sales, noting liquidators get paid three times as much to shut down a business as they do to save it.
He said it was vital small businesses received more timely advice, written in plain English, and that their trusted advisers were upskilled to better manage business viability and highlight early concerns regarding potential insolvency.
“The perceived negative stigma surrounding insolvency and a lack of accessible information regarding individual business performance, industry benchmarks and insolvency processes, means small and family businesses may not realise they have viability issues,” he said.
A merger of personal and corporate insolvency systems would be a sensible step because small business and personal finances were uniquely intertwined, he said. Almost 50 per cent of small business loans were secured by personal assets, such as the family home, and the most recent data showed 35 per cent of all personal insolvencies were business-related.
“Insolvency can occur in any sized company but it is particularly devastating for small businesses, which have less cash flow to mitigate against disruptions, are often under-insured, and have fewer options and legal tools and protections than larger companies,” Mr Billson said.
“Small businesses face a disproportionate burden in navigating the full suite of legislation governing insolvencies, as they are often time poor, and have less access to specialist advice than their larger counterparts.
“There are many reasons why a small business may become insolvent, with many outside of the business’ control. Entrepreneurs with great ideas may not always succeed the first time. In fact, many of our greatest companies and inventions were started by people who failed the first time.
“Yet, the current insolvency system is not sympathetic to honest failure and genuine prospects for recovery of the business or business owner. The lifecycle of a small business should include a simple, early exit strategy should the business begin to become unviable.”
Mr Billson said COVID-19 support contributed to significantly lower insolvency numbers over the past two years, with 4,912 in 2021–22 and 4,235 the previous year.
In the year prior to the pandemic, there were 8,105 administrations.
“With the resumption of ATO debt collection, compounded with inflation and interest rate rises, stretched global supply chains, rising costs of materials and energy and labour shortages, corporate insolvencies have started to return to pre-pandemic levels,” he said.
Mr Billson said establishing a business viability program would make it easier for small business owners to access person-to-person expert business advice and support.
“This would be a viability service to improve businesses’ financial acumen, forward planning skills and understanding of insolvency processes. It would also provide an opportunity to identify cash flow or other problems early and provide tools to remedy them, such as through restructuring, which may avoid an insolvency.”
Mr Billson said current insolvency practices in Australia were costly, complex and difficult to navigate, and did not take account of the unique characteristics and challenges of the small business sector.
“It seldom considers an insolvent company’s longer term prospects, its competitiveness, assets or brand value, and is geared towards closure and liquidation,” he said.
“The system does not encourage the possibility that, through restructuring or assistance, the company could return to profitability and preserve the interests of creditors, investors, business owners and other key stakeholders including staff.”
Mr Billson hit out at the high costs of liquidation and the lack of certainty regarding time taken and fees.
He cited the example of a small business with assets worth $1 million which had been advised it would cost $60,000 to liquidate the company, but six months later the cost had ballooned to $500,000 — half the value of the assets.
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