The Australian Small Business and Family Enterprise Ombudsman has written a newspaper article about the ‘Insolvency Practices Inquiry’ in the context of the impact of the bushfires on small to medium business enterprises [SMEs] in Australia, writing that
“[t]he bleak reality is that many of these small businesses will not survive … while others will experience financial difficulties at the very least”.
The inquiry, and the article, focus on ‘external administration’, broadly meaning an insolvent company’s liquidation or administration. If the person has operated their business through a company, walking away as a director is relatively prompt, legally. In fact, the liquidation of a company with large losses will not constrain the director from soon starting over.
But the reality is that although a SME owner has the protection of limited liability through their company, the owner will invariably have given personal guarantees of the company’s liabilities, such that walking away from those will take much longer.
These liabilities may be of such an amount that the person may need to consider going bankrupt.
In contrast to their quickly ended company role, a person going bankrupt in 2020 will remain in bankruptcy for 3 years, until 2023. During that period there are various on-going restrictions imposed upon them, including in relation to setting up another company or running a business.
A one year bankruptcy?
The government had proposed to reduce that 3 year period to one, back in 2015, and then again in 2019, in common with England and other jurisdictions, but the legislative process has stalled. ‘Business bankruptcies’, that is, those who become bankrupt out of a failed business, whether it be a company or as a sole trader, were not seen as economically significant.
Recent government funded research suggests that there are in fact more business bankruptcies than have previously been recorded, who will take some time to come out of their business activity restrictions. As to consumer debt, the outcome of the banking inquiry may put a person’s ‘decision’ to borrow in perspective; many debts are not a matter of legal ‘choice’.
Along with those differences in outcomes, our current separate laws and regulation for liquidation and bankruptcy would be an impediment to handling many an SME business owner’s failure on a holistic basis.
Internationally
Australia is not alone in this issue with SMEs representing a large proportion of many an overseas economy. UNCITRAL has noted that the standard business insolvency processes, in particular the central role of the court and the extensive involvement of an insolvency professional, are often not appropriate for Micro and SMEs, and their creditor stakeholders are smaller and less willing to oversight and take part in the process. This has prompted UNCITRAL to work towards developing various best approaches to MSME insolvencies, both personal and corporate, in which Australian lawyers are involved.
The business owner’s perspective
The Ombudsman’s inquiry into our insolvency laws therefore can’t be confined to company liquidation. Business owners won’t be impacted according to how the law sees their financial plight.
But unless and until our insolvency laws focus on the economic business entity, rather than the legal, responses to small business failures will remain fractured and less effective.
The government’s response
That may be some time, given the priority given to even limited insolvency law reform. The government’s response to a 2015 recommendation for a streamlined regime for corporate failures, only, was that it supported it in principle but on the other hand ‘Australia’s corporate insolvency framework is generally sound and reforms should focus on specific, not fundamental change’. But the government did support reduction in the period of bankruptcy to one year, one reason being to allow bankrupt individuals to attain quick financial rehabilitation.
The Ombudsman may find that our insolvency laws are not quite as ready for the 21st century as they might be.
Next: what part of Australia led the world in the retention of debtors’ prisons in the 19th century?
