Why has the Australian government not yet decided on any further insolvency law changes for small business?

Australia MSE insolvency reform process seems to have halted, perhaps because of a poor reception to its January 2021 small company reforms, described as a ‘chimera of restructuring reform.’ Although consultation has proceeded on further small business reforms, including in personal insolvency, nothing has been announced. 

We suggest a range of reasons for this – including that Australia’s economic problems are over, or delayed for years; a recent change of responsibilities of government ministers; concerns about organised crime; and international negotiations that are yet to be concluded.    

The  Corporations Amendment (Corporate Insolvency Reforms Act 2020’s new small business restructuring process (Part 5.3B) goes only a little way to address the well-recognised issues in small business insolvencies and what was introduced has been very poorly received, recently described by respected academics as a ‘chimera of restructuring reform’.[1] This is perhaps evidenced by the very limited take-up by small companies, although consistent with a continuing low level of company insolvencies generally in Australia, and a re-bounding economy.

Since that new law commenced on 1 January, and with the government perhaps having learned from the process, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has joined the Treasurer’s portfolio, from which the existing limited reforms have emanated, no doubt prompting a useful reminder of the broader scope of small business.

Apart from, as the Ombudsman says, small business accounting for over 95% of all businesses, and employing 40% of the business workforce, small business comprises around 60% individuals as sole traders or in partnerships, and 40% as companies, often supported by personal guarantees.  With the limit of $1m for the new Part 5.3B, and personal guarantees not dealt with, it is evident that current reforms have limited coverage and that more change in the law, including personal insolvency law, is needed.

The puzzle is why that law reform has stopped, after the flurry of activity at the end of 2020?

As the Australian Financial Security Authority (AFSA) has recently advised,

“with JobKeeper ending and other temporary protections continuing to wind down, economists are predicting thousands of business failures and personal bankruptcies”

although that seems to be qualified and ameliorated by the fact that “AFSA records” are said to show

“up to a four-year lag between previous economic crises and peak numbers of people entering the personal insolvency system”.

AFSA sees this as a “potential sign that the economic effects of COVID-19 may be with us for some time yet”.

In anticipation, the Australian government has proposed further small business insolvency reforms, to the bankruptcy system, to “inform the government’s ongoing response to address the impacts of coronavirus (COVID-19)”. These include the impact on the Ombudsman’s large constituency of “unincorporated businesses such as sole traders and partnerships”.

But submissions on that and other changes closed in January 2021, and nothing has been heard since.  That’s the puzzle.

In the absence of any reasons given, and based on some informed conjecture, these factors, only briefly explained, may be relevant to the halt in law reform.

 Reasons for the government’s halt in insolvency reforms?

 1. Given the poor reception to its existing small business reforms, the government has taken fright at trying more, given the political dynamics around insolvency reform.

2. The AFSA records, as to the four-year delay in impact on insolvency numbers, may serve to support provide a more acceptable reason for the first point.

3. The transfer of the Small Business Ombudsman has however disrupted Treasury’s siloed approach, meaning that it has to consult with another department, Attorney-General’s.  That is taking time.

4. Following from that, and given recent ‘events’, the risks associated with, as one aspect of the small business reforms, doing away with the 3 year period of bankruptcy, might be seen as far too great. “Intelligence” on the last occasion, in 2018, when this was proposed, from the Australian Criminal Intelligence Commission (ACIC) “suggested that the reduction of the default bankruptcy period may increase the risk of serious and organised crime groups exploiting the bankruptcy provisions”.

5. The government is waiting on the UN’s Committee for International Trade Law (UNCITRAL) to issue the latest legislative guide for MSE insolvency, which might be imminent. That guide recommends a coordinated approach between personal and corporate business debt and explains how that might be achieved.  Waiting on UNCITRAL might be explained given that Australia turned up for the concluding MSE session (only) in May 2021 and its membership continues only to 2022.

6. The changes in government ministers among the Treasurer (corporate insolvency, small business individuals and companies, Small Business Ombudsman etc), and the Attorney-General and her Assistant (personal insolvency, Fair Entitlements Guarantee in corporate and in personal insolvency) and the Foreign Minister (UN, MSE insolvencies) has delayed consideration, or they are divided, or are yet to meet to discuss.

7. Other?

Comments, including from the relevant Ministers, are invited.  

Any change in the law reform agenda in Australia will be reported as announced.


[1] The chimera of restructuring reform: An opportunity missed for MSMEs in Pt 5.3B Jason Harris and Christopher Symes (2021) 36 Australian Journal of Corporate Law 1.

Other references available on request.

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