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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. 

Australia’s limited insolvency reforms for small business

With our international trading partners recently meeting to examine ways to handle micro to small enterprise (MSE) insolvency impacted by COVID-19,[1] the Australian government – through the Treasurer and the Assistant Treasurer, Minister for Housing, and Minister for Homelessness, Social and Community Housing – has announced some partial reforms to “improve Australia’s insolvency framework for both small and large businesses”. 

Significantly however, the government ministers also responsible for small business insolvency – Senators Michaelia Cash and Amanda Stoker – were not included in the announcements, suggesting that their sector has further reforms to come. 

MSME business

As the Small Business Ombudsman’s research reveals, small business accounts for over 95% of all businesses and contributes much to the economy in terms of GDP and employment- Small Business Counts report (2020) | Australian Small Business and Family Enterprise Ombudsman (asbfeo.gov.au).  The range of business structures in Australia is comparable with that being discussed internationally.

According to UNCITRAL, existing standard business insolvency regimes are usually designed with the complexities and sophistication of larger enterprises in mind – Part 5.3A of the Corporations Act is a prime example. They may presuppose the presence of an extensive insolvent estate of some value and the active engagement of creditors and an insolvency practitioner, whereas in many MSE insolvency cases the business with have few creditors and assets and in many cases may be unable to reasonably fund an insolvency at all.[2]

That is consistent with the figures often extracted from ASIC records in Australia – that we have “a system that is barely supported by the assets of companies that enter external administration, and certainly is not designed to produce meaningful recoveries for unsecured creditors”: Corporate insolvency by the numbers | Australian Insolvency Law. That is a reason given for the need for a greater government role in the process: Insolvency Law is Failing SMEs | Australian Insolvency Law.

The insolvency reforms proposed in Australia by the Treasurer and Assistant Treasurer – May 2021

Small companies: For business trading through small companies, Australia’s “new simplified restructuring and liquidation process” – Part 5.3B Corporations Act, which commenced on 1 January 2021 – has not quite taken off, recent figures showing only 5 companies accessing the process so far, indicative perhaps of its misdirection or lack of need for the process: Comparing the start of Parts 5.3A and 5.3B | Australian Insolvency Law.  Part 5.3B was confined only to small business operating through companies with liabilities under $1m, among other limitations.  These are being tweaked but not enough.

It’s a worry if the government thinks that’s Australia’s “most significant insolvency reform in 30 years”, at least according to its marketers.

As to those many small company businesses that cannot afford the insolvency processes, and the reasonable costs of a practitioner appointed, the government maintains a policy approach whereby these can disappear by deregistration under s 601AB without review. This is instead of providing a government role in the process. An estimate is that these deregistered companies outnumber companies administered under Ch 5 of the Corporations Act by five to one.

Trusts: As for businesses operating through corporate trusts, the government says it will “consult” on how trusts, which are commonly and unsatisfactorily used by small businesses, are treated under insolvency law, and presumably under tax law as well.  This addresses a recommendation made in 1988 in the Harmer Report.

Safe harbours: Also, in relation to corporate businesses, the government again says it will review whether the 2017 insolvent trading safe-harbour provisions “remain fit for purpose”. The law required these to have been reviewed soon after September 2019 – s 588HA.  Since then, there have been three more safe harbours added, making four, with potential for a fifth: An insolvency safe harbour based on culture and tradition? | Murrays Legal Commentary.

Large businesses: And finally in relation to large corporate businesses, the government will consult on improving schemes of arrangement processes, including by introducing a clear moratorium on creditor enforcement while schemes are being negotiated. Some may see the need for this.

MSEs as sole traders, partners, directors: But as the Ombudsman reports, over 60% of small businesses operate outside corporate structures, as sole traders or partnerships, or in part as companies.  And while the separate legal entity aspect of corporate law can protect the company owners, those in the MSME sector invariably are often liable under personal guarantees, tax or insolvency laws.  This sector amounts to a significant area of operation of insolvency law but often ignored.

It is here that the government – and in particular Senators Cash and Stoker – are yet to announce law reforms in support of failed MSE businesses.  Australian bankruptcy law presently imposes at least 3 years of financial and social restrictions on small business operators, at some financial and economic expense.

As Mr Frydenberg says, “as Australia’s economy rebuilds, it’s important that as many businesses as possible have the opportunity to turnaround, restructure and survive”.

[1] Australian lawyers attending UNCITRAL’s Working Group V on MSME insolvency – May 2021 | Murrays Legal Commentary

[2] A/CN.9/WG.V/WP.172 – E – A/CN.9/WG.V/WP.172 -Desktop (undocs.org)

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