Small business insolvency advice via the Ombudsman

The federal government’s current focus on personal insolvency law reform coincides with Small Business Month in NSW and the Small Business and Family Enterprise Ombudsman’s pending and timely report on business resilience in the face of natural disasters.  See ASBFEO Newsletter March – OMBUDSMAN’S INQUIRY NAVIGATES ROAD TO RESILIENCE (

In the context of natural disasters, including COVID-19, the Ombudsman has offered advice in this latest newsletter on MSEs facing financial difficulty, with a caution that the “relationship between your personal finances and your business finances can be confusing”.

That acknowledges a reality that personal and corporate debt is often intertwined and perhaps for that reason, the Ombudsman refers in the newsletter to personal and corporate insolvency advice from AFSA.

Coincidentally, AFSA’s advice for MSE businesses experiencing financial difficulty is “don’t wait until you are under water”, and offers guidance, perhaps too prematurely for some, on the insolvency processes.

MSEs’ intermingled corporate, business and personal debt

The involvement of AFSA is consistent with constant calls for insolvency regimes to accommodate the particular issues in relation to MSEs and family enterprises, including the problems of their intermingled corporate, business and personal debt.

As is increasingly recognised, in particular in light of the impact of COVID-19, both corporate and personal insolvency need to be aligned and connected.  In Australia, while the sole focus of the government has been on saving corporate structures, little has been done for the majority of MSEs operating as sole traders, or as directors with guaranteed debt. As it has been explained:

“While the different features of corporate insolvency regimes also apply to personal insolvency regimes, personal insolvency regimes are often more relevant for entrepreneurs and small businesses. Indeed, the corporate vs non-corporate distinction in assets and liabilities is often blurred for small firms, either because lenders require personal guarantees or security – e.g. a second mortgage on the owner’s home – or because prior to incorporating and obtaining limited liability protection, entrepreneurs typically use personal finances”.[3]

Australia’s recent involvement with MSE insolvency guidance through the UN likewise explains that an

“insolvency law may require procedural consolidation or coordination of linked business, consumer and personal insolvency proceedings in order to address comprehensively intertwined business, consumer and personal debts of individual entrepreneurs, owners of limited liability MSEs and their family members”.[4]

Locally, ARITA has also explained that

“existing insolvency laws also do not support micro and small to medium business insolvencies. This not only puts us out of step with global best practice but also, in effect makes our system unresponsive to 97% of Australia’s businesses. Additionally, our laws fail to grapple with the heavy overlap of small business insolvencies and any associated personal bankruptcy for the directors of those businesses. This adds a further significant burden for small business people in financial distress as they have to navigate through two different insolvency regimes”.

AFSA’s guidance

In its guidance, AFSA says that it is

“important to understand your personal liability – this means the debts that you need to pay even if they are under your business name”,

or indeed under the person’s company persona.

AFSA’s website explains the 3 years plus period that the business restrictions continue, an aspect of the Attorneys-General’s review. As to that, while a natural disaster might impact a person’s business and their finances in 2022, through bankruptcy, the law has to consider whether the business and personal restrictions should be carried through to at least 2025, or even 2023. And this is in comparison with a person who has operated their failed business solely through the legal fiction of a company, who can immediately move on.


The Attorneys-General’s law reform process will no doubt have regard to AFSA’s statistics of 2019-2021, released in December 2021, including as to the costs and minimal returns of personal insolvency.

More recently, the regular fortnightly personal insolvency figures released by AFSA will also assist. While necessarily fluctuating (the latest, to 20 February 2022, 328, down from 370 the fortnight before), the reality is that personal insolvency numbers are about half what they were two years ago.  That reality may continue, given the time for a rethink that COVID-19 has allowed.  But natural disasters are said to be happening more unpredictably.

As to small business, the common industries leading to personal insolvency continue to be construction, along with transport, and health care and social assistance.  Retail often also features. Whether these change in 2022 in light of current problems remains to be seen.


High figures in construction have existed for some time, as the collapse of Probuild is said to show.

In this particular fortnight, 46% of those who were in a construction business went into bankruptcy, of the 32% overall.[5]

Those with building licences will generally lose them on their bankruptcy under state laws, often for 3 years.  See AFSA’s full list of types of employment affected: Employment restrictions | Australian Financial Security Authority ( At least though, if the bankrupt had a business, including one operated through a company, the trustee takes responsibility for its sale and the business itself might survive.

The dangers

Also, irrespective of the reduction in the period of bankruptcy in federal laws, the restrictions under state laws, often expressed to be for 3 years, may continue.

But when one considers the dangers that bankrupts present – bankruptcy offences are listed as a ‘serious Commonwealth offence’ under federal law along with extortion, armament dealings, espionage, sabotage and slavery[6] – one can understand state laws may take a while to change, as have federal laws.


[1] nil.

[2] nil.

[3] OECD Economics Department Working Papers No. 1504, Design of insolvency regimes across countries, McGowan & Andrews, September 2018.

[4] A/76/17 V.21-05810 UNCITRAL Legislative Recommendations on Insolvency of Micro- and Small Enterprises

[5] AFSA says that its business-related personal insolvency statistics include people who have traded as a sole trader, including as a contractor, sub-contractor or similar, or been involved in a partnership, and/or been a director/secretary (member) or held a management role in a company.

[6] Crimes Act 1914 s 15G.

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