Given that ‘small business’ itself is defined in various ways, none of which is based on the legal structure of the business, it may not be surprising that small business bankruptcies are hard to pin down, definitionally, and in number.
As a rough guide, sole trader/partnerships comprise about half of small business in Australia, the other being corporate structures. As to the latter, there is much intertwining of personal and company debt and assets in particular through personal guarantees, so as to make the corporate-personal liability distinction much less relevant.
At the PJC hearing on 13 December 2022, there was discussion as to whether there was a need to combine the personal insolvency and the corporate insolvency frameworks. Much was initially made of the limited connection between bankruptcies and business failure.
Treasury said that business related bankruptcies were only a “small percentage” of the whole, though with deference to hearing from AFSA on that point.
The Productivity Commission representatives saw the figure at about 20 per cent of all bankruptcies, referring to the PC’s 2105 report. As example of the 80 per cent of bankruptcies that are not related to business activity, the PC referred to examples of an individual’s marriage breakdown or gambling or consumer activity.
The authority on the topic, AFSA, gave a different answer, that business related bankruptcies have in fact accounted for close to 38 per cent of all bankruptcies since 2007. For context, it said that this has ranged from 6,000 to 9,000 business related bankruptcies each year in the decade or so prior to the impact of COVID-19.
AFSA referred to its regulatory oversight of $18 billion in liabilities in the personal insolvency system of which $11 billion, or over 60%, was business related debt.
AFSA might be said to present the more reliable information.
Where does this leave us?
From the perspective of a small business that has, perhaps unwisely, combined personal and corporate debt and assets, its insolvency options are complicated, having to go to a trustee for personal liabilities and a separate liquidator for corporate liabilities. A bankruptcy of the owner complicates things more. There have been calls for harmonisation or co-ordination of MSE insolvencies both internationally, through UNCITRAL, and locally, in a submission of the ASBFEO to the Productivity Commission.
Also, the distinction between personal issues and business issues as being relevant in separating the two has been questioned. Studies have shown the adverse impact of marriage breakdown or gambling or excessive spending on a business, corporate or personal. There is always a person behind any business. Hence some hurdles involved in at least co-ordinating the two may be less significant than they appear.
Lack of data is a hurdle, as to the types of business bankruptcies – for example whether a bankruptcy arose from a sole trader enterprise or a corporate guarantee, or, for that matter, an ATO director penalty notice.
In the end however, a reality is that, given Australia’s separate departments, ministers, regulators and courts for each of personal and corporate insolvency, other hurdles would be the more significant. That Treasury thought the proportion of business bankruptcies was so low may well explain its so-called “small business” (corporate) restructuring process, whereby personal liabilities under guarantees are specifically excluded under any plan.
It is worth discussing though.