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 the Australian Small Business and Family Enterprise Ombudsman, Bruce 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.
“There are many reasons why a small business may become insolvent, with many outside of the business’ control,” he said.
“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.”
Accessible information
Mr Billson 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.
Mr Billson is calling 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.
Viability
Mr Billson 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.
“[Current practice] 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.”
Debt hibernation and financial support
Mr 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.
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 to provide the option to hibernate their 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.”
