Insolvency Inquiry to revamp small business practices

By Nick Hall | 10 Oct 2019 View comments

Australian small businesses in financial trouble may have a new course of action, should a new Insolvency Inquiry overhaul the current practices.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell on Thursday announced an inquiry into the insolvency system.

The Insolvency Inquiry aims to investigate if the current practices achieve the best possible outcome for small and family businesses currently struggling with financial pressures.

“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,” Carnell said.

Over the last few years, a number of family-run franchise outlets have entered insolvency as a result of poor financial adherence. However, speculation has emerged regarding the effectiveness of the current restructuring process.

“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,” Carnell said.

Insolvency is a difficult financial situation for any business to enter, however in the current lending environment, the effects can be amplified. Carnell suggested that more often than not, small businesses that enter insolvency are unable to recoup their business.

“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,” she said.

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

Insolvency Inquiry objectives

The new Insolvency Inquiry is set to examine a range of measures, procedures and structures surrounding insolvency in small business.

Specifically, the Insolvency Inquiry will target the degree of transparency of the governance, processes and costs of practitioners including legal advisers, valuers, investigating accountants, administrators, receivers and liquidators. Additionally, it will examine how the insolvency of a small or family business may lead to bankruptcy for the owners and how the framework impacts the practices and fees of insolvency practitioners.

To help bolster the Insolvency Inquiry, the ombudsman has also established a reference group chaired by former Senator John Williams, who was instrumental in the Senate inquiry into franchising.

The reference group will act as a forum for input and discussion on the challenges faced by small and family businesses approaching insolvency.

“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” Williams said. “This inquiry is essential to see if any systemic improvements can be made.”

Small Business Loans Inquiry

The new Insolvency Practices Inquiry isn’t the ombudsman’s first look into small business conditions in recent times. A 2016 Small Business Loans Inquiry revealed a lack of transparency for the small business owner when a creditor commenced debt recovery action.

“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,” Carnell said.

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

The ombudsman is encouraging small and family businesses that have faced financial difficulties and restructured or wound up their business to share their stories through an online survey.

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