It is no secret that insolvency processes such as liquidation and external administration can be financially burdensome and extremely stressful for all those involved. What can often be neglected is how these processes might have a greater detrimental impact on small and family businesses when compared to large, sophisticated corporate conglomerates. In an attempt to level the playing field, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell announced yesterday an inquiry into insolvency practices.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has today announced an inquiry into the insolvency system, to investigate if current insolvency practices achieve the best possible outcome for small and family businesses in financial trouble.

“This inquiry will shine a light on the insolvency system and uncover if it encourages practitioners, in the first instance, to restructure the small or family business to turn it around.

“Unfortunately the Banking Royal Commission wasn’t asked to look at the role of insolvency practitioners and that was a missed opportunity.

“We know there is a very low success rate in restructuring Australian businesses under external administration and the impact of the insolvency process is often devastating for the small business owner.

“Few small businesses that enter formal insolvency administration are able to navigate their way through the process to reach a restructuring agreement.

“The latest data reveals more than 8,000 businesses entered external administration in 2018/19. Of those, small and family businesses in rural and regional Australia have been among the hardest hit.”

The Insolvency Practices Inquiry will examine:

  • the existing insolvency system through the experience of small business
  • the degree of transparency of the governance, processes and costs of practitioners including legal advisers, valuers, investigating accountants, administrators, receivers and liquidators
  • how the insolvency of a small or family business may lead to bankruptcy for the owners
  • how the framework impacts the practices and fees of insolvency practitioners.

As part of the inquiry, the Ombudsman has established a reference group, chaired by former Senator John Williams, to act as a forum for input and discussion on the challenges faced by small and family businesses facing insolvency.

Mr Williams took a lead role in the 2010 Senate Inquiry into the regulation, registration and remuneration of liquidators.

“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” Mr Williams says.

“This inquiry is essential to see if any systemic improvements can be made.”

“Our Small Business Loans Inquiry identified a lack of transparency for the small business owner when a creditor commenced debt recovery action,” Ms Carnell adds.

“The small business owners felt they had lost control of their business and in cases where the business was wound up, they felt the process was poorly managed.

“This inquiry will identify areas where practices can be improved and recommend changes to the system to achieve fairer outcomes for all parties involved.”

Small and family businesses that have faced financial difficulties and restructured or wound up their business can share their stories by completing this survey.

An interim report will be released in December with a final report to be handed down in February 2020.

One of the key objectives in any external administration is to attempt to restructure and salvage the business in hopes of returning it to its owners to continue trading. A system that is prejudicial towards small businesses could ultimately discourage future entrepreneurs and impact local economies. Hopefully, this inquiry can lead to a productive dialogue about the best way to achieve this objective in the context of small businesses, and possible reforms stemming from these discussions. It will be interesting to see the findings of this inquiry and what impact they could have on the insolvency regime.