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21 July 2020

Fix broken system before ‘insolvency tsunami’ hits: Ombudsman

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell says the Insolvency Practices Inquiry final report exposes the many systemic failures that have harmed small and family businesses, ahead of a predicted ‘tsunami’ of insolvencies to come.

The report, released by the Ombudsman today, details a suite of recommended changes to current insolvency practices that aim to achieve the best possible outcomes for small businesses in financial trouble.

Ms Carnell says the report comes at a critical time, given the COVID-19 pandemic - which has come on the back of devastating natural disasters - will likely trigger a wave of insolvencies in the coming months.

“Sadly, many small businesses have been driven to the brink by factors outside of their control, such as the COVID crisis,” Ms Carnell says.

“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.

“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. 

“Instead of getting the support they need to turn it around, small businesses too often find themselves on an express train to winding up with no control over the process.

“The system needs to change dramatically so that small business owners are given the chance to make important decisions about the future of their business, without being pushed into outcomes they don’t want – like losing their family home.”

The report recommends establishing a Small Business Viability Review program where small business owners experiencing significant financial stress can obtain a voucher of up to $5,000 to access a tailored plan from their trusted, accredited financial adviser.

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

“But cash flow 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.”

Another key recommendation is the establishment of a small business debt hibernation instrument when a state, territory or federal government declares a systemic shock such as a pandemic or significant economic downturn.

“COVID-19 has shown that businesses need a mechanism where they can take stock of their situation and prepare for the re-opening of trade,” Ms Carnell says.

“The minimum hibernation period would be 90 days, during which payments on loans, rent, tax and other outgoings could be deferred.”

The Ombudsman’s report recommends establishing a Directors’ Insolvency Agreement where a small business owner can provide a registered liquidator with a proposal on the best way to manage the business.

“External administrations are focused on maximising the benefit to creditors, while the small business owner’s expertise and knowledge is often brushed aside, Ms Carnell says.

“Small businesses have spoken of stock being sold at a low point in the market, assets being put up for sale in publications that aren’t relevant to their industry and thousands being spent by registered liquidators to chase down payments worth far less than the amount spent.

“If the small business owner, with the approval of a registered liquidator, could restructure their affairs, it would likely lead to more positive outcomes, including a greater return to creditors.”

Ms Carnell says the cost of insolvency should be capped for small businesses, particularly given the majority of small businesses entering liquidation have assets of less than $10,000.

“Throughout the course of this Inquiry, we have spoken with a range of registered liquidators who have indicated the minimum cost of a straightforward voluntary administration is about $12,000, while the average is closer to $50,000,” Ms Carnell says.

“For businesses that need to wind up, it is critical that the process be cost effective, quick and dignified.

“Ultimately if implemented, our Insolvency Practices Inquiry recommendations will go a long way to ensuring the Australian small business community retains its fighting spirit.”