The Australian Small Business and Family Enterprise Ombudsman has issued a COVID-19 Recovery Plan, of May 2020.
Within that the Ombudsman makes some recommendations about ‘turnaround and insolvency’, which this article examines.
As the Ombudsman says, there are around 3 million small businesses in Australia – 98% of all Australian businesses – with an economic contribution nearing $400 billion, employing well over 5 million people.
It might also be added that most of Australia’s collectable tax debt is owed by small business – about $16.5 billion pre-virus, up from $15.1 billion the year before. And Fair Work Ombudsman reports show the extent of abuse of employee payment laws by small business.
Although the Ombudsman talks about people in business, there is no mention of bankruptcy and individual persons among the recommendations, only companies. The reality is that a person going bankrupt now due to the impact of COVID-19 may remain bankrupt until at least 2023.
Turnaround and Insolvency
Under this heading, as the O explains, when insolvency processes commence,
‘the person who knows the most about the business itself [the owner] is cut out of the process whilst costs eat away at any remaining business value. The Insolvency processes should be more efficient so that businesses are able to continue trading wherever possible, and creditors are paid’.
That is indeed the Australian position, with any debtor in possession model invariably rejected. That may need to be changed.
“Fit for business” checklist
A major recommendation made is that the Ombudsman develop and publish a “fit for business” checklist which provides information and considerations for small business owners when they are considering the complete financial position of their business.
This could be used as a triage service for small businesses to be directed to registered professional advisers who can provide advice on the viability of continuing business.
A government grant should cover the fee, which should be capped at $5,000.
A ‘small business liquidation product‘
A small business liquidation product should also be developed, with a maximum charge (possibly $5,000) and a 30-day maximum timeframe for completion’.
But as the Ombudsman reports, 83% of companies in liquidation have assets of less than $100,000 and in 91% of liquidations, unsecured creditors, including the ATO, receive zero cents in the dollar.
Finding $5,000 to wind these up would therefore be difficult, including someone to take on the job for that amount. Professor Jason Harris has commented that ASIC statistics show that in most insolvencies, there is not even enough money or assets left to cover the cost of the insolvency processes, let alone pay anything to creditors. Many liquidators are unpaid. Similarly, AFSA reports that in over 30% of bankruptcies, trustees are unpaid for their work.
Assuming there are funds, more difficult would be the recommendation to ‘ensure’ that costs charged are proportionate to the size of the business. That properly would mean that if the real assets of a business were say $20,000, the law should not require an adviser to work for more than say $4-6,000 in costs, including ASIC levies and search fees.
As I often quote Michael Kirby:
“the task of insolvency administration is inherently expensive. Principally this is so because of the intensive nature of the investigation of accounts (sometimes in a shambles and sometimes deliberately deceptive) that the insolvency practitioners must analyse and understand. … It is unreasonable to demand that skilled professionals should perform their functions at low cost”.
Demand thresholds and time to pay
Another recommendation is that there be an increase in thresholds for creditors being able to issue a statutory demand from $2,000 to $5,000, with 45 days to respond. The empirical evidence upon which the Ombudsman recommends this would be interesting to see.
ASIC and proportionality
Complaints against liquidators are to be investigated properly, again, it is assumed, with ASIC adopting the same proportionate approach.
The Ombudsman says it should act as concierge to businesses undergoing financial and other difficulties, modelled on the Small Business Tax Concierge service. Some, or many, may query the expertise of the Ombudsman to do that.
The Ombudsman acknowledges the lack of knowledge of small business owners in closing their business – little things like employee leave entitlements, superannuation payments and probably general taxes as well.
Alarmingly, the Ombudsman reports that business owners ‘do not normally check to see if an adviser is regulated, or … even illegal’; which makes one wonder how they have run their business. The Ombudsman notes that there are many unregulated business advisers with a profit motive as their primary interest; and no doubt many who are regulated as well.
The Ombudsman says that many businesses will not survive the current COVID arrangements, or they will reopen while technically insolvent, saying with some understatement that
‘it is likely that we will see some owners abandoning their businesses’.
Therefore, the Ombudsman seems to say, the safe harbour laws should be extended by 12 months.
Where a business enters administration, small businesses will be able to create a proposal to be lodged with a registered liquidator on how to deal with the assets and liabilities of their business.
ASIC will monitor the actions of the liquidator – and no doubt the actions of the owner, and creditors and other advisers. ASIC will also assess remuneration reports for the $5000 against the expected net benefit to all creditors, which may even be more than the 1c/$ presently paid.
Small business insolvencies are receiving attention internationally in view of the commonality of the difficulties they present. Options include a combined regime for personal and corporate liabilities; streamlined default insolvency processes subject to any creditor or regulator intervention; the need for the state to address assetless insolvencies; and the extent to which an insolvency practitioner is required at all.
As to assetless estates, Professor Jason Harris and I have also suggested a ‘triage’ arrangement, like that suggested by the Ombudsman, but with a government liquidator handling the task. See Managing the insolvency curve – a new government role is needed?
None of these ideas are mentioned by the Ombudsman, nor the Australian government’s rejection of the useful business Productivity Commission recommendations for small business liquidations in 2015.
Ideas raised by the Ombudsman in other parts of the Recovery Plan may be useful.