Ombudsman launches insolvency practices inquiry

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell is launching 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.

The inquiry comes as stats show that few small and family owned businesses successfully come through external administration. There is also disquiet over the way mechanisms such as the Deed of Company Arrangement (DOCA) are used, with print companies a prime example of using the controversial tactic.

Carnell said, “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.”

Print business owners often complain bitterly that the external administration process benefits no-one but the administrators themselves. The biggest case in print recently was Picton Press in Perth, whose administrator Cor Cordis managed a controversial DOCA, which enraged the ATO and the rest of the Perth print community, then ended up at loggerheads with the owners Dennis Hague and Gary Kennedy, before asking creditors to pull the pin, after having collected a handy $612,000 for their troubles, from sales of $3.1m.

The DOCA was also at the centre of a storm involving Sydney signage operator Skope and Clear Skies and numerous related entities, which effectively enabled Skope to clear 70 per cent of the $2.3m debt accrued by Clear Skies through not paying the ATO and suppliers, leaving the taxpayer and the rest of the signage industry to foot the bill.

Carnell said, “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 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.

“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 Insolvency Practices Inquiry will examine the existing several areas including: the 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; 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.

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

Carnell added, “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.