Inquiry launched into insolvency practices for small business

The Australian Small Business and Family Enterprise Ombudsman launches inquiry into insolvency practices

The Australian Small Business and Family Enterprise Ombudsman, has announced an inquiry into the insolvency system, to determine whether small and family businesses in financial trouble are being treated fairly

10 October 2019 | Staff Writers

There are more than two million small business in Australia, defined as having a staff of less than 20, between them employing one in every three private sector workers in the country. These small enterprises account for 96% of all the business across the country.

According to the Australian Bureau of Statistics, 60% of start-up businesses will fail in the first five years. Though it is often thought poor financial management is the leading cause of small business failures a 2018 survey by the University of South Australia found that only 14% of failed small business cited this as the primary cause of their demise. The leading factors were lack of leadership, planning and poor market research.

For those that fall victim to financial failure many are left with creditors lining up to recover their funds, that means 8,000 small businesses each year are forced into a managed insolvency. The problem is most insolvency practices are geared to trim the fat off larger failed business which still have cash and assets, albeit not enough to cover their creditors.

The problem, identified by the Small Business Ombudsman, is when insolvency accountants and lawyers employ “big business” measures to address small business issues. Says Ombudsman Kate Carnell, “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.”

One of the most striking failures of insolvency practices was uncovered by independent financial news website which reported on a small retail chain business in South Australia. In that case the administrators and lawyers accumulated more than $500,000 in fees to pursue a claim of just $28,000 against the owner’s former partner.

The lawyers and liquidators both ended up in court where a Supreme Court Justice handed down a damning report of the culture of lawyers and liquidators entering profit sharing schemes at the expense of insolvent businesses.

“This inquiry,” says Ms. Carnell, “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.”

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

Mr Williams who was a member of 2010 Senate Inquiry into the regulation, registration and remuneration of liquidators, says, “It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness. This inquiry is essential to see if any systemic improvements can be made.”