Inquiry launched into SME insolvency practices

On Thursday, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, announced an inquiry into the insolvency system, to 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,” said Ms Carnell.

“Unfortunately, the banking royal commission wasn’t asked to look at the role of insolvency practitioners and that was a missed opportunity.”

She revealed that there is a very low success rate in restructuring Australian businesses under external administration, while 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,” said Ms Carnell.

The 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.

The ASBFEO’s 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 investigating accountants; how the insolvency of a small or family business may lead to bankruptcy; and 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.

Mr 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,” Mr Williams said.

“This inquiry is essential to see if any systemic improvements can be made.”

The inquiry is also expected to identify areas where practices can be improved and recommend changes to the system to achieve fairer outcomes for all parties involved. An interim report will be released in December with a final report to be handed down in February 2020.