Australia’s latest MSE and personal insolvency law reform – this is supposed to be a “long-term approach”?

The Australian government seems to be putting the final touches to reforms of its insolvency law regime that commenced with the onset of COVID-19. These have included restrictions on the rights of creditors to pursue insolvency action during the pandemic (2020) and a streamlined small company business restructuring and liquidation regime (2021). 

These latest reforms (2022) concern personal insolvency – Bankruptcy system – options paper, January 2022. The government says these have less need to respond to the impacts of COVID-19 on small business enterprises, as its January 2021 call for submissions had suggested, rather, a long-term approach is required. 

That long-term approach should now be assisted through Australia’s just completed role in developing international best practice insolvency rules for micro to small enterprises (MSEs).[1] And 2022 is a year in which the government has foreshadowed a review of existing Australian insolvency law. 

Some background

As in most jurisdictions, Australian micro-small-medium enterprises (MSMEs) are a significant group.  They comprise 96% of all Australian organisations and employ over 4.5 million people. According to ASIC, it is “a fast growing, dynamic and financially important sector” but facing a “tough environment … including difficulties accessing finance, red tape and compliance costs and the increased threats to business viability posed by the pandemic”.

Also like many jurisdictions, Australia quickly imposed restrictions in March 2020 on the rights of creditors to pursue MSMEs and others to insolvency during the pandemic. Insolvent trading laws were also relaxed.

In further response, to a segment of corporate MSMEs, in January 2021, the government introduced laws providing for the ‘streamlined’ reorganisation or liquidation of small corporates: Part 5.3B Corporations Act.  Alternate informal routes by way of default deregistration/dissolution for those companies that could not afford the liquidation process were retained, and continue to be much used: Chapter 5A.

While these streamlined corporate processes never met what was expected to be a “tsunami” of insolvencies, they were in any event considered to be ill-directed and they have had little use.[2]

Despite creditor restrictions being removed in 2021, rather than a tsunami, the numbers of bankruptcies and liquidations have remained very low, but with government financial support ending, time will tell whether insolvency numbers will climb, or whether there has been a fundamental shift away from the increasing strictures of the formal regimes, perhaps to the growing “informal sector of the economy”.

The proposed further reforms

The experience with Part 5.3B corporate process may be dictating what is a slower response by the government in 2022 to the further personal insolvency reforms now proposed in the options paper.

Part 5.3B specifically excludes the often-incurred personal liabilities of the company’s owners, under guarantees or tax law.

That then brings into focus Australia’s personal insolvency regime to which the business owners may be subject. Bankruptcy in Australia lasts for at least 3 years, and previous attempts to reduce it to one year have been successfully resisted, including by many in the industry, one argument being that organised crime would benefit.[3]


The only government concession now, in 2022, is to impose a one-year period, but with more grounds for extensions of the period to be made available.

There is an extensive existing array of such grounds; an example given by the government regulator AFSA is that if “Rose” fails to advise her trustee of her new phone number, her trustee can extend her 2022 bankruptcy for 5 years, to 2027.[4]  The statutory protections of bankrupts from abuse of the discharge system are limited.

Reforms are also proposed to the non-bankruptcy Part IX debt agreement process, by which debtors pay off an agreed proportion of their debt over time, with a proposal to extend this to 5 years.

There are monetary asset, income and debt thresholds to access debt agreements. In 2018, with significant inflation in home prices, the government was obliged to double the then asset threshold.  With numbers of debt agreements falling, what might be described as Australian property price hyper-inflation is prompting the government to again lift that threshold.


The various other options in the paper continue the highly regulatory approach of Australian insolvency law, including in respect of countering the offerings of more informal approaches to debt resolution.

A long term approach

In the options paper, the government says it is looking at a longer-term approach beyond COVID-19, a novel idea.  Long term, while Australian bankruptcy law remains based in the 19th century, with the UK’s 1883 Bankruptcy Act still providing much of its archaic wording, the recent publication by UNCITRAL of its Legislative Recommendations for MSE insolvency laws, with which Australia has been involved, should prompt some new thinking.

Even before the coronavirus, many had seen the need for more focused insolvency laws for smaller enterprises, something in the nature of “putting the consumer at the centre of product design”, as ASIC would say. Australia’s Productivity Commission report of 2015 is a local example. The impact of the virus has now given that guidance greater relevance.  The government did create the role of the Australian Small Business and Family Enterprise Ombudsman in March 2016[5] to attend to the interests of MSMEs – corporate and personal – and their COVID-19 concerns on behalf of small business have been constant.

UNCITRAL’s 2021 Recommendations are too detailed to cover here but they seek to address problems of many MSEs, well described as including

“intermingled business and personal debts and a centralized governance model in which ownership, control and management overlap … often unsophisticated in financial, business management, legal and insolvency matters. … strong concerns over stigmatization arising from insolvency, [affecting] their behaviour in the period approaching insolvency. …. their creditors are disengaged and disinterested to assist … costs of their efforts may outweigh the benefits”.

Significantly, failure to address these needs creates a danger of MSEs being “driven to the informal sector of the economy”.

Intermingled personal and corporate debt

One main issue identified by UNCITRAL is the intermingling of personal and corporate debt, through personal guarantees and tax liabilities, often compounded by a lack of documentation of ownership of assets and sources of funds.  It raises the concept of insolvency laws that resolve all debts of a business, however that business is defined in insolvency terms. For example, Australian tax, consumer and other laws define small business in terms of turnover or number of employees, as does the Ombudsman: see Small Business Counts | ASBFEO.

Review of insolvency law?

While the governmental division of responsibility for insolvency law reform in Australia makes any co-ordinated insolvency law reform difficult, one further opportunity should arise this year.

Major changes were made in 2017 to harmonise processes and concepts in both personal and corporate insolvency law, through the Insolvency Law Reform Act 2016 (ILRA). This was a belated attempt to address a call for harmonisation in the 1988 Harmer and other reports.  Since 2016, that has not continued, largely because personal and corporate insolvency in Australia is administered by separate government ministers, regulators, laws and courts.

However, the impact and effectiveness of those ILRA reforms were subject to review, 5 years after their 2017 implementation: [6]. The reviewers were those responsible for Australian insolvency law and policy – the Treasury including ASIC and the Attorney-General’s Department including AFSA.  The since-created role of Small Business Ombudsman, which covers all small business, would also be a significant contributor.

In the meantime, submissions on this current options paper are due by 25 February 2022.



[1]  UNCITRAL Legislative Recommendations on Insolvency of Micro- and Small Enterprises (2021) | United Nations Commission On International Trade Law

[2] The chimera of restructuring reform: An opportunity missed for MSMEs in Pt 5.3B Jason Harris and Christopher Symes.

[3] ACIC to Senate Committee, 5 February 2018

[4] AFSA’s named bankrupt in Official Trustee Practice Statement 5 – Objections to discharge from bankruptcy, 2021.

[5] Australian Small Business and Family Enterprise Ombudsman Act 2015

[6] See [9.377] and [9.381] of the  INSOLVENCY LAW REFORM BILL 2015 Explanatory Memorandum (

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published.