Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Does small business count?

This Ombudsman’s follow up report – Small Business Counts – examines small to medium business enterprises (SMEs) from an economics and technology perspective, including as to how SMEs have responded to the COVID-19 impacts.  It is quite a useful report, to a point.

But it does not tell us much about the legal structures of SMEs  – whether they operates as companies or individual sole traders, and in what proportions. That is important when explaining how SMEs are dealing with their financial difficulties, a main focus of government in 2020. 

The proportions

With some guesswork, based on the report, the proportions are <40% companies >60% sole traders. As to the former, many ‘companies’ are de facto sole traders in that they are single director/shareholder companies set up to secure some legal protection from personal liability, and tax and other concessions, for the owner.

As close as we get to the issue is that the report says:

“Most businesses are non-employing businesses (e.g. sole traders), which account for 62.8% of all businesses (Chart 1). Micro businesses that employ 1-4 people account for a further 25.7% of all businesses, while the remainder of the small business category [comprises] businesses that employ 5-19 people, which account for 8.9% of all businesses”.

But, that is not close enough because, for example, many a small company would also be a non-employing business.

In any case, ABS and other data seem to confirm these percentages, in particular that companies account for less than 40% of small businesses, with the remaining sole trader or partnership businesses comprising over 60%.

Which then raises the issue …

The legal distinction between an individual and a company is important in many respects, including when explaining insolvency. Which then raises the issue that when the report talks of insolvency, it refers only to those less than 40% companies confronting external administration and not the more than 60% individuals who might face bankruptcy.

It follows and is consistent with the Ombudsman’s ‘welcoming the passage of legislation, overhauling the national insolvency framework’,  being the new Part 5.3B and simplified liquidation processes, for what is a limited proportion of corporate small businesses.   The Ombudsman said nothing about the insolvency consequences of the > 60% of individuals, nor does this report.

Personal insolvency

As to those individuals, while bankruptcies are well down on numbers of last year, they are increasing, with the latest figures showing around 27% of new bankruptcies arising from those in business, mainly construction, health care and social assistance, and retail.  AFSA also reports on the type of debt being found in these business related personal insolvencies, including others in small business.

A small business person going bankrupt will remain in bankruptcy for 3 years.

Do small business individuals count?

That is, while the Small Business Counts report says that ‘behind every number in this report is a person’, the report ignores the potential adverse consequences for individual sole traders in financial difficulties, one such consequence being bankruptcy.  There are no relevant reforms announced in bankruptcy.  The Ombudsman should understand that, as should others.

The ASBFEO comes under a department responsible through a minister for employment and industrial relations, ‘including small business’. As to its knowledge of small business, see Where’s personal insolvency nowadays? Australian parliamentary confusion

As to what all these figures mean, or don’t mean, for the processes of small business insolvency, see Do the Australian small to medium business insolvency reforms add up?

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