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Why SMEs should ‘debt hibernate’ instead of insolvency

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.

Mr Billson 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.


Mr Billson, who will appear before a parliamentary inquiry today, 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.

And 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,” Mr Billson said.

“Small businesses face a disproportionate burden in navigating the full suite of legislation governing insolvencies, as they are often time poor, and have less access to specialist advice than their larger counterparts.

“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.”

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.”

Mr Billson said establishing a business viability program would make it easier for small business owners to access person-to-person expert business advice and support.

“This would be a viability service to improve businesses’ financial acumen, forward planning skills, and understanding of insolvency processes. It would also provide an opportunity to identify cash flow or other problems early and provide tools to remedy them, such as through restructuring, which may avoid an insolvency,” he said.

Mr Billson 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,” 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.”

Mr 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.

Mr Billson hit out at the high costs of liquidation and the lack of certainty regarding time taken and fees. He cited the 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.

Mr Billson said this could be addressed by upskilling appropriate small business advisers to better manage business viability and highlight early concerns regarding the solvent nature of a business.

He also noted the potential to target 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.

Mr Billson said insolvency legislation in Chapter 5 of the Corporations Act was complex and difficult to understand. It stretches 3,900 pages and includes over 1,000 unique defined terms, with 570 of those defined more than once. This legislation is accompanied by 1,300 pages of Corporations Regulations.

“Important information should be written in simple English with less technical wording and governments should ensure information is made available in other languages to better support businesses from culturally and linguistically diverse backgrounds,” he said.

“And, unbelievably, this information is currently not easily available in one place. Insolvency information is scattered across multiple platforms, which makes it difficult to find and easy to miss potentially critical information. This may result in accidental non-compliance.”


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