The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) launched the Insolvency Practices Inquiry in October amid concerns at “a very low success rate in restructuring Australian businesses under external administration”.
Ombudsman Kate Carnell said it was unfortunate that insolvency practitioners escaped scrutiny under the banking and financial services royal commission.
“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,” she said at the time.
However, the Australian Restructuring Insolvency and Turnaround Association (ARITA) lambasted the terms of the inquiry, calling it “very naïve” and “more about generating media attention than actually seeking to improve the insolvency regime”.
Draft report reveals findings to date
In the lead-up to Christmas, the ASBFEO launched a draft paper outlining some of the experiences of business owners, with over 300 small-business operators sharing their personal insights since the inquiry began.
The draft report noted the insolvency industry believes poor restructuring rates are due to business owners leaving it too long before seeking help.
“The key message from the practitioners and other service providers is that small businesses experiencing financial difficulty wait too long before seeking professional advice and assistance. Small-business owners ignore the signs of financial distress, hoping or believing that things will improve, until it is too late,” it said.
However, the report noted that the views of business owners were very different.
“Where they do seek help early, the current system appears self-defeating, as the costs of a voluntary administration often consume or exceed the assets of the company,” it said, adding that the financial and mental health of directors is squarely on the line as a result.
Lack of transparency
From the views gained from small-business owners to date, the inquiry has already noticed a couple of troublesome trends emerging.
One of these is an apparent lack of transparency for the actual owners of the business.
“There is no obligation to consult with, or keep other officers informed of, the company during the process,” the report stated.
“Where the small-business owners and directors – often the same individuals – are creditors to the company, they will receive the reports and updates provided to all creditors.”
It quoted one business owner as stating that the appointed advisers “didn’t consult or involve me at all”, while another claimed to have been “literally locked out of my own profitable business”, adding “I tried to assist and offered help as documented in numerous correspondence[s], but all my offers were ignored”.
In another instance, at least one director was forced into personal bankruptcy after a liquidator was appointed while they were travelling abroad.
“A small-business director was travelling overseas when a creditor lodged an application for winding up of the company. A liquidator was appointed and the directors could not afford legal representation to challenge the appointment, nor the liquidator’s subsequent actions. This led to personal bankruptcy,” it stated.
These and other similar experiences were in stark contrast to how liquidators suggested they perform their duties, according to the ASBFEO’s report:
“Contrary to the experiences shared by small businesses through our online survey, our consultations with registered liquidators indicated that in many circumstances the registered liquidator does engage with the directors of a small business,” it said.
“Where the relationship is collaborative, the registered liquidator is able to investigate the affairs of the company and determine its future direction quickly.”
The other key complaint of the insolvency sector was the costs charged. Multiple directors reported the initial costs quoted being dwarfed by the actual amounts charged.
“Costs were outrageous. In writing they quoted $30,000; they charged $260,000,” one was quoted as saying.
“[P]rior to their appointment, their total fees estimate was $250,000 and they indicated the administration would take around six weeks. Their fees have totalled over $1 million and continue to increase after two years,” said another.
The report itself noted that administration fees are often larger than the business’s entire pool of assets, and that liquidators have advised even the most basic of voluntary administration appointments “can cost between $40,000 to $60,000”.
“Statistics from ASIC show that since 2004, over half of the insolvencies had total estimated assets of less than $50,000; for 2017-2018 it was 78 per cent of all insolvencies,” it said.
The Ombudsman is continuing to seek the experiences of small and medium business owners with insolvency advisers, with submissions closing on 27 January 2020. The survey can be completed through the ASBFEO’s website.