The ASBFEO (Ombudsman) has asked that the government fix what is said to be a broken corporate insolvency system in Australia before the apocryphal ‘insolvency tsunami’ hits.
A number of recommendations are made following its insolvency inquiry, based on stated “findings”. These are confined to businesses operating through a company, and not the large proportion of businesses operating as sole traders, whose interests may be served by another inquiry.
Recommendations
Some findings of the Ombudsman may be questioned, for example that small business owners know when to seek advice; they may well do, but they invariably don’t, or not to any effect it seems. In any event, to address this, the first idea is a Small Business Viability Review program is recommended whereby small business owners in significant financial stress can seek advice.
The report says that the COVID-19 pandemic, and other recent disasters, have shown that businesses ‘need a mechanism where they can take stock of their situation and prepare for the re-opening of trade’, hence a second idea is a Small Business Debt Hibernation instrument is recommended where governments declare a ‘systemic shock’, giving a minimum hibernation period from debt payment of 90 days.
A third idea is that banks should not charge default interest during any period that a business is impacted by some natural disaster.
Under the heading of “cost effective insolvency processes”, a finding is that insolvency processes “are focused on maximising the return to creditors, irrespective of the cost of the process or the effect on the business”; whereas “a restructure of business affairs, managed by the small business owner and with approval from a registered liquidator could have more positive outcomes, including providing a greater return to creditors”.
“Where businesses do need to be wound up, there is a concern that the cost of the process far outweighs any benefit to creditors, even where liabilities are small, and a business structure is simple”.
That is not so much a concern as a reality. In response, a fourth recommendation is made that there be
“a Directors’ Insolvency Agreement instrument for small businesses where owners of a business can provide a proposal to a liquidator on the best way to manage the business. The proposal may seek to restructure or to wind up the business, where a restructure must retain the existing company and a sale of the business and/or its assets must be to an unrelated party”
Once the small business owner and liquidator enter into a Directors’ Insolvency Agreement, an automatic 30-day moratorium from creditor actions and relief from insolvent trading commences. Provided the liquidator is satisfied that there is no criminal misconduct and it is in the best interests of creditors after considering other alternatives, the liquidator would then approve the small business owner’s proposal and report to creditors the estimated net benefit for each alternative considered and the rationale for approving the owner’s proposal.
As part of the report to creditors, the liquidator would seek to be appointed to finalise the agreement with “expenditure capped at their estimated total expenditure”.
Recommendation five is that there be a simplified liquidation process where the deficit of the business is less than $50,000. A liquidator would be appointed and the process would take no more than 30 days, and the liquidator must only do work to the value of $10,500. Secured creditors would be prohibited from taking enforcement action to recover their debt. The liquidator would, “without the requirement to rebuild any company books”, realise the assets of the business, and distribute funds realised to all creditors, proportionate to the level of debt held, irrespective of ranking, once employee entitlements have been paid. The liquidator must only do work to the value of $10,500. This would seem to require the services of a government agency, such as the Official Trustee, at that fee rate.
Significantly, the recovery of such assets “must exclude the sale of the principal places of residence of company officers and guarantors”; these may be left to any bankruptcy trustee to sell.
Recommendation six is to increase the statutory minimum for winding up demands to $5,000 and the statutory period to 30 days. Bankruptcy notices would remain the same it seems.
Recommendation 7 is expressed as ensuring that liquidators “may only pursue recoveries during external administration where the expected net financial benefit to creditors is estimated to be at least 10% greater than the cost”.
A “modernised approach to information” sharing is recommended under eight. All reports should be available, by default, electronically. There should be a trusted, centralised point of information. Reports should be limited to 2 pages, and written, like ASIC’s guidance, at an appropriate reading comprehension level.
Recommendation 9 is along similar lines, as to the need for electronic communications.
A finding is that “small business owners can understandably feel that an external administration has worked against their best interest”, understandably given the purposes of insolvency. Complaints processes need to be improved, with idea number ten being that the Ombudsman as an experienced and informed body be designated a “priority complainant”. ASIC would be required to investigate its complaint and report its findings and proposed actions to the ASBFEO within 90 days. The cost of the investigation into any misconduct should be borne by ASIC.
Outcome
Other more useful options for MSME insolvencies are coming out of international meetings, in which Australia itself is not involved and which unfortunately this inquiry did not access. Nor did it address the possible use of ASIC’s default deregistration process for insolvent companies.
However, this report of the Ombudsman will no doubt receive the level of attention it deserves.
