“Liquidators get paid three times as much to shut down a business as they do to save it,” says Australian Small Business and Family Enterprise Ombudsman Bruce Billson, who’s called for an overhaul of insolvency laws that are now being reviewed for the first time in more than three decades.
 |
| 'Current system not sympathetic to prospects for recovery': ASBFEO Bruce Billson |
“Small businesses should have better access to ‘debt hibernation’ instead of being made insolvent when they face a crisis beyond their control, so they are better able to pursue a credible restructure, save jobs and rebuild,” according to Billson.
It is one of several recommendations made by the Ombudsman to improve Australia’s insolvency laws which are being reviewed for the first time in more than three decades.
Billson has 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 the solvent nature of a business.
“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.
Billson, who appeared on Tuesday before a parliamentary inquiry, called for a simplification of the insolvency provisions in the Corporations Act which he said was “an impenetrable 3,900-pages with an additional 1,300 pages of regulations that were near-impossible for time-poor small business owners to navigate.”
He said the merger of the personal and corporate insolvency systems would be a sensible step because small business and personal finances were uniquely intertwined with almost 50% of small business loans secured by personal assets, such as the family home, and the most recent data showed 35% 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 underinsured, and have fewer options and legal tools and protections than larger companies.
“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.”
Billson said COVID support contributed to significantly lower insolvency numbers in the past two years than in a regular year, with 4,912 corporate insolvencies in 2021-22, following 4,235 in 2020-21. In the year prior to the pandemic, there were 8,105 administrations.
“With the resumption of Australian Taxation Office 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.
“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.”
He said current insolvency practices in Australia were costly, complex and difficult to navigate, and do 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. 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.”
Billson said insolvency practitioners were typically only paid approximately one-third of the fees to restructure a business compared to what they were paid under a liquidation appointment.
He hit out at the high costs of liquidation and the lack of certainty regarding time taken and fees, citing an 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.
He also noted the potential to target liquidator training options towards women, to enable more balanced gender representation in insolvency practices. Of the 649 registered liquidators in Australia, only 60 – or 9% – were female.
The full submission is available: HERE
