Personal insolvency reform in Australia

The government is convening a “national roundtable with key stakeholders” on 2 March 2023 in relation to personal insolvency law under the Bankruptcy Act.  This will occur in parallel with a Parliamentary Joint Committee inquiry into corporate insolvency, which has a further hearing the day before, on 1 March 2023.

According to the Attorney-General, our “insolvency laws have not been subject to a comprehensive review since the Harmer report in 1988 – decades prior to the digital age and the widespread use of e-commerce”. This is an opportunity to assess whether the personal insolvency system is “fit-for-purpose”, with a focus on “pressure points of the current system, critical reform areas and longer-term priorities”.

Principles and aims of personal insolvency will need to be revisited as well.

Parliamentary Joint Committee inquiry into corporate insolvency

While the PJC is looking at corporate insolvency, under Treasury, issues concerning personal insolvency have arisen.  Apart from the fact that small business in Australia comprises around half sole trader/partnerships and half corporate structures, many SME “corporate” insolvencies involve blended corporate and personal assets and liabilities. Also, according to AFSA, around 40% of personal insolvencies arise from small business.  Corporate insolvency and its reform specifically exclude resolution being given to concurrent personal liabilities of the corporate business owner.

Thus, it has been said that

“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 …”.[1]

US studies have examined the extent to which personal difficulties cause corporate business bankruptcies,[2] for reasons including the owner’s matrimonial property disputes; personal and family health problems, including illness or death of key personnel; and theft and criminal loss.  Even the concept of consumer debt is not always sound when the business provides the financial support for the owner and their family. 

Part Five of the UNCITRAL Legislative Guide on Insolvency Law is to similar effect.  It says:

“33. A number of States have insolvency laws that apply different rules to business debts as opposed to personal or consumer debts. In the context of MSEs, it may not always be possible to separate their debts into clear categories. Individual entrepreneurs, owners of limited liability MSEs and their family members may all be involved in the business and use consumer credit to finance the business either as start-up capital or for operations. Business insolvency may lead to personal or consumer insolvency once a business fails, even if the business is a separate legal entity. For that reason, separate proceedings with different access conditions and procedural steps applicable to various debts involved in MSE insolvency may not be an optimal solution. The MSE Insolvency Guide recommends therefore that all debts of an MSE debtor should be covered in a single simplified insolvency; where that is not possible under applicable domestic law, it recommends that at least procedural consolidation or coordination of linked insolvency proceedings should be ensured…

… procedural consolidation or coordination of those proceedings would not only be procedurally convenient and cost-efficient but would also facilitate sharing of information to obtain a more comprehensive evaluation of the situation of the various parties involved and finding the best solution for all concerned”.

All this is compounded by that fact that insolvency practitioners’ independence requirements generally prevent them from being liquidator of a company and trustee of the directors’ bankruptcy.[4]   In those cases, there is generally a need to have separate practitioners appointed from separate insolvency firms. 

Co-ordination or harmonisation of the processes of small business insolvency

The economic efficiency of this separation has been questioned in Australia and productivity recommendations have been made by the ASBFEO, for one, for co-ordination or harmonisation of the processes of small business insolvency.[5] 

As to government attitudes and priorities, the recent so-called “small business restructuring reforms” were introduced by the government in some haste as from 1 January 2021, to address fall-out from COVID-19 impacts.  However these reforms – Part 5.3B – only focus on corporate liabilities and specifically do not seek to resolve any personal liabilities from guarantees given, or other personal liabilities.[3] 

In contrast, the then Attorney-General’s inquiry into personal insolvency, of 2021, also with a focus on the impacts of COVID-19 on small business, went nowhere.  Nor did the government’s announcement of 2015 that the period of bankruptcy be reduced to one year. 

With personal insolvency handled by Attorney-General’s and corporate insolvency by Treasury [which also handles the ASBFEO, ASIC and the ATO], and the PJC having only a corporate insolvency focus, there may be difficulty in having a comprehensive review of the personal insolvency system as the Attorney invites.   


It should also be mentioned that personal insolvency is under review in the UK, and although, unlike Australia, it comes under the one minister and agency, that review appears to take the same approach to small business insolvency as in Australia.


[1] Design Of Insolvency Regimes Across Countries 2018 OECD Economics Department Working Papers No. 1504 by Müge Adalet McGowan and Dan Andrews, citations omitted.

[2] Warren and Westbrook “Financial Characteristics of Businesses in Bankruptcy” (1999) 73 Am Bankr LJ 499, 560–561.  See also Guide on the Treatment of Insolvent Micro and Small Enterprises in Asia, a joint project by the International Insolvency Institute and the Asian Business Law Institute, 2022, Features of MSEs, pp 14-16.

[3] For example, the protection of a guarantor under CA Part 5.3B applies only during the period of restructuring: s 453W CA.

[4] ARITA Code, Independence; unless with court leave.

[5] Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Submission to the Productivity Commission’s 2022 Inquiry into Australia’s Productivity Performance called for “Improvements … to insolvency processes for small and family businesses”.  


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