Each of AFSA, ARITA and Financial Counselling Australia has issued a statement calling for better processes for resolution of claims for unpaid debt – Australians reminded of best practice approach to debt disputes as economic challenges continue, to address the problem early and to understand the options available to resolve debt disputes before formal insolvency is considered. Various pre-insolvency advice options are offered.
The insolvency system as a “last resort”
As suggested, manageable payment plans, hardship arrangements and similar alternatives are indeed good starting points for a debtor, and perhaps ending points, with bankruptcy really to be seen as very much a “last resort”. It does extinguish most debts, which is good, but its restrictions and impositions last at least 3 years, until 2025 or beyond. Debtors would want to weigh those up against other options. Similarly a creditor may well want to exhaust all other options first, and last – the much-bandied term – ‘interests of creditors’ – does not necessarily mean they will get their money back from a bankruptcy. Average dividend payments to creditors are 1.63c/$.
Small business and the Ombudsman – difficulties in navigating the insolvency system
Small and family businesses may not find it so easy to attend to their debt problems promptly, the Australian Small Business and Family Enterprise Ombudsman calling for improvements to insolvency processes, with insolvent business owners often being tempted to continue to trade due to the difficulties involved in winding up their affairs.
In a 2022 submission to the Productivity Commission, the Ombudsman, Mr Bruce Billson, says that the law should also be designed “to allow an exhausted business owner to exit graciously”, cost often being an impediment to that exit. His office informs us that there are 24 types of personal and corporate insolvency administration under the law from which a debtor may choose. He rightly says that efficient insolvency processes serves to promptly reallocate underused capital. Hence, tools could be provided which assist owners to review their viability at an early stage.
Those whose debts have arisen from a failed business therefore need to give close consideration to the options, given the potential for an insolvency to impact their license to trade. For sole traders and small one director companies, personal insolvency is as much an important feature as it is in relation to consumer credit. Hence AFSA has a campaign to “support small businesses that may be experiencing financial difficulty, especially because of the COVID-19 pandemic”: see afsa.gov.au/small-business. AFSA rightly acknowledges that the relationship between personal finances and business finances can be confusing, expressing concerns about debtors “at risk” who find their options “difficult to navigate”, no doubt referring to those 24 types of insolvency administration.
In a 2021 submission to government, the Ombudsman’s office had recommended a small business viability review by a trusted professional adviser for small businesses under stress: The bankruptcy system and the impacts of coronavirus | ASBFEO.
Another possible impediment to a debtor acting promptly is the 3 year period of bankruptcy, and the Ombudsman’s submission generally supported a reduction in the period of bankruptcy restrictions to one year as a means to address that. This impacts prompt attention to corporate insolvency, in that while a director is immediately released from their insolvent company, their personal guarantees can result in their bankruptcy for 3 years.
In that respect, the 2021 submission from the Ombudsman commented upon the reality that the economic impact of COVID-19 and other economic pressures do not discriminate between individual and corporate legal structures, with intertwined corporate and personal debt and assets quite common. The submission notes that, regardless, insolvency law requires corporate and personal debts and assets to be allocated into separate administrations. Insolvency law then involves the appointment of at least two insolvency practitioners – “a registered trustee (about your personal financial situation) or [and] a registered liquidator (about your company’s financial situation)”, and from different firms, to ensure independence. See Personal Bankruptcy and Liquidation of a Company (afsa.gov.au)
These issues remains with the government for decision.
AFSA’s focus on small businesses and their many options and those at risk of making the wrong decision in the mix of corporate and personal debt is very worthwhile.