“Turn a fresh page”: What the massive corporate insolvency report means for small business

Australia’s corporate and personal insolvency laws should face a comprehensive review, and improvements to small business restructuring pathways should be investigated as a priority, according to a massive report on the nation’s insolvency regime.

The Parliamentary Joint Committee on Corporations and Financial Services tabled its long-awaited report on Wednesday afternoon, nearly nine months after endeavouring to hear how the insolvency system is benefiting the Australian economy — and the ways it needs to improve, both for businesses and practitioners.

What does it say?

The joint committee heard from insolvency experts and business representatives who claimed the sheer mass and complexity of the insolvency system is making it hard for businesses and individuals to access the support they need, when they need it, at a reasonable cost.

With that in mind, the bipartisan review found cause for “a comprehensive and independent review of Australia’s insolvency law, encompassing both corporate and personal insolvency”.

“In the committee’s assessment, Australia’s corporate insolvency system is overly complex, difficult to access, and creates unnecessary cost and confusion for both debtors and creditors,” the report said.

The committee makes particular note of small businesses, stating that “debtors, particularly smaller businesses, regard opportunities for restructure as lacking and system costs as excessive”.

It proposes the federal government commission a “holistic” review to take place as soon as practicable, suggesting an existing body could be empowered to get that review underway.

A “root and branch” review, as some experts have called for, will take time.

Given the need for businesses to access the right support today, the committee suggested a number of quicker fixes to take place before that holistic review is completed.

Small business restructuring reform

Notably, the report focuses on streamlining and strengthening the Simplified Debt Restructuring (SBR) system, which since January 2021 has allowed eligible small businesses to restructure their debts while remaining in control of the business.

In a report summarising the scheme’s first 18 months, the Australian Securities and Investments Commission (ASIC) in January revealed just 82 businesses had opted for the simplified business restructuring pathway.

At the time, John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association (ARITA), said the ironic complexity of the SBR was keeping small businesses from accessing it, and restructuring professionals from administering it.

While the rate of small businesses pursuing this pathway has increased through 2023, the parliamentary committee recognised the need for change.

“The committee acknowledges that in the context of the pandemic, it was important for the previous Government to progress the SBR reforms relatively quickly,” the report said.

“However, stakeholders have identified issues, potentially arising from the rushed legislation and implementation with limited consultation. The committee considers that it should have been possible to improve the consultation process while still legislating in a timely way.”

The committee states that any tweaks should be carefully balanced.

The scheme currently covers businesses with liabilities of no more than $1 million; organisations like ARITA have said lifting it too high could add extra complexity while allowing illegal phoenix activity to sneak in.

A lack of industry professionals specifically signing up for the SBR scheme was also noted.

Evidence put before the committee said just one small business restructuring practitioner had been registered as of January this year, with six applicants being rejected.

Simplified liquidation tweaks

Running parallel to the SBR system is the simplified liquidation stream, which since January 2021 has provided a streamlined option to small businesses which do not see restructuring as a viable option.

Like the SBR stream, the committee found it was rarely used in comparison to pre-existing pathways between January 2021 to the end of September 2022, even when considering the lower-than-average number of liquidations of the time due to COVID-19 support measures.

Respondents to the inquiry told the committee that the system is complex and costly, while shortened time reporting timeframes compared to existing pathways complicated matters.

“As a result, there were few incentives for insolvency practitioners or creditors to use simplified liquidation,” the report said.

The federal government should consult on methods to improve the system as soon as practicable, the committee recommends.

Bringing personal and corporate insolvency closer together

Given the close ties of personal and business finance for entrepreneurs, the review also recommends a closer look at how those insolvency streams work together.

During the hearings, ARITA president Michael Brereton laid out his concerns this way:

At the moment you have this complicated scenario where many small-business owners have to deal with both a registered liquidator that’s administered by ASIC and the bankruptcy trustee that’s administered by AFSA. It’s very, very complicated.

It makes it extremely complicated for those individuals in the SME space and generally in small business for them to try and work out how to navigate their way through financial difficulty while having to deal with two different practitioners administered by two different bodies. It’s just extremely complicated.

That ought to change, the committee found.

The comprehensive review should investigate and make recommendations to “enhance public interest objectives and the effectiveness of, and interaction between, the personal and corporate insolvency systems,” the review said.

What do experts say?

So far, industry response to the report has been positive, with insolvency practitioners suggesting a holistic review will make their job easier — and improve pathways for small businesses facing financial hardship.

“This is a great example of our elected representatives working in a bipartisan way to review our laws and make recommendations that will have a profoundly positive impact on the efficient operation of our economy, save more jobs and businesses and deliver better outcomes for creditors,” Winter said on Wednesday.

Beyond the committee’s support of a ‘root and branch’ review, one of the key items on ARITA’s wishlist, Winter said focus on the relation of personal and corporate insolvency streams “will significantly reduce costs and complexity and make a lot more sense for those in small and micro-businesses in particular”.

In its own statement, the Association for Business Restructuring & Turnaround welcomed the calls for a holistic review.

It represents a “timely opportunity to turn a fresh page and redesign the entire insolvency framework in order to match our technology-driven, post-pandemic and emerging innovative small & family business community,” it said.