Businesses are rarely neatly arranged when insolvency strikes

While the government is thinking about the various recommendations of the PJC Report[1] about improving our current corporate insolvency laws, I have been trying to find how existing insolvency practice deals with what is often described as the ‘blended’ nature of assets and liabilities of many small businesses. 

That is, as the Small Business Ombudsman described in his submission to the PJC,

“The current insolvency system assumes a neat distinction between a business and an individual, whose distressed financial circumstances do not intersect with one another. Businesses are rarely so neatly arranged. … for incorporated entities, Directors guarantees, personal collateral used to secure finance, and statutory sanctions that create a personal Director obligation or liability, add to the blending. The utility of the insolvency system would benefit from a better recognition of this blending of business and personal interests”.

And that

“small business and personal finances are uniquely intertwined. For example, it is common practice for small business owners to use personal assets, such as the family home, as collateral in obtaining business loans. In September 2022, 49% of outstanding business finance to small businesses was residentially secured. The close link between corporate and personal insolvency is also confirmed by AFSA’s September 2022 data, which shows that 35.7% of all personal insolvencies were business related”.[2]    See also Personal insolvency reform in Australia – Murrays Legal

It is a difficult law reform concept to combine the two types of insolvency but that can be considered in due course.  In the meantime, I assume good insolvency practice in the industry is to give a whole of business explanation to owners of insolvent corporate businesses that the law requires both types of debt, and asset, to be dealt with separately? 

This would require the pre-insolvency adviser or a prospective liquidator to find out from the business owner whether there are any guarantees, tax penalties, or personal debts incurred, or personal assets used. 

Temporary protection only

Corporate insolvency does give some temporary protection from guarantees. In the case of a Part 5.3B small [corporate] business restructuring, s 453W Corporations Act prevents the enforcement of guarantees against a director or their spouse or relative, but only during the restructuring period, not once a plan is approved.  That is, even though a creditor may be paid an amount under an approved plan, any residual amount owing is still recoverable from the director personally, unless resolved some other way.   Similar but limited protection applies under Part 5.3A: s 440J.


I must be looking in the wrong places because I can’t see the important coalface issue that the Ombudsman describes mentioned in much or any of the guidance, checklists and marketing information of liquidators? 

Any assistance is welcome …


[1] Report of the Parliamentary Joint Committee on Corporations and Financial Services on Corporate Insolvency

[2] Submission to PJC, footnotes omitted, 2 December 2022


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One Response

  1. The trick is rather in the framing. Do we have an ‘insolvency’ system, any more than we have a ‘commercial’ system? The issues of corporate/personal liability are built into the idea that we allow companies to carry on business: no creditor is ever going to be keen to deal with an entity without substance, and many of the creditors most often encountered in insolvency – the revenue, warranty claimants, tort victims etc – have little to no way to avoid dealing.

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