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Ombudsman launches investigation into dodgy insolvency practices

Australian Small Business and Family Enterprise Ombudsman Kate Carnell has announced an inquiry into the insolvency system that will look at the “very low success rate in restructuring Australian businesses under external administration.” The move comes amid industry outrage over alleged phoenixing and abuse of insolvency provisions.

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   'This inquiry will shine a light on the system':
    Small Business Ombudsman Kate Carnell

Carnell says her office will investigate if current insolvency practices achieve the best possible outcome for small and family businesses in financial trouble.

“This inquiry will shine a light on the insolvency system and uncover if it encourages practitioners, in the first instance, to restructure the small or family business to turn it around. Unfortunately the Banking Royal Commission wasn’t asked to look at the role of insolvency practitioners and that was a missed opportunity.

“We know there is a very low success rate in restructuring Australian businesses under external administration and the impact of the insolvency process is often devastating for the small business owner. Few small businesses that enter formal insolvency administration are able to navigate their way through the process to reach a restructuring agreement.

Latest data reveals more than 8,000 businesses entered external administration in 2018/19. Of those, small and family businesses in rural and regional Australia have been among the hardest hit, Carnell says.

The Insolvency Practices Inquiry will examine:

  • ·the existing insolvency system through the experience of small business
  • ·the degree of transparency of the governance, processes and costs of practitioners including legal advisers, valuers, investigating accountants, administrators, receivers and liquidators
  • ·how the insolvency of a small or family business may lead to bankruptcy for the owners
  • ·how the framework impacts the practices and fees of insolvency practitioners.

As part of the inquiry, the Ombudsman has established a reference group, chaired by former Senator John Williams, to act as a forum for input and discussion on the challenges faced by small and family businesses facing insolvency.

Williams took a lead role in the 2010 Senate Inquiry into the regulation, registration and remuneration of liquidators.

“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” Williams says. “This inquiry is essential to see if any systemic improvements can be made.”

Carnell adds: “Our Small Business Loans Inquiry identified a lack of transparency for the small business owner when a creditor commenced debt recovery action. The small business owners felt they had lost control of their business and in cases where the business was wound up, they felt the process was poorly managed.

“This inquiry will identify areas where practices can be improved and recommend changes to the system to achieve fairer outcomes for all parties involved.”

Small and family businesses that have faced financial difficulties and restructured or wound up their business can share their stories by completing this survey.

An interim report will be released in December with a final report to be handed down in February 2020.

Last month, a Wide Format Online industry survey found widespread concern about how some companies can either phoenix or use ‘shill’ subsidiaries to accrue debt and wind them up owing large sums - then effectively compete on an unlevel playing field when they re-emerge.