‘Tsunami of insolvencies’ expected: Kate Carnell

An insolvency practices inquiry has released its final report with a key recommendation being the establishment of a program which would grant struggling small businesses a $5000 voucher to access a tailored plan from a trusted and accredited financial advisor.

The release of the report by the Australian Small Business and Family Enterprise Ombudsman Kate Carnell has come at a crucial time as many small businesses navigate the devastation of the COVID-19 pandemic, with large proportions surviving thanks to the JobKeeper wage subsidy which is now set to expire in March 2021.

“Sadly, many small businesses have been driven to the brink by factors outside of their control, such as the COVID crisis,” Carnell says.

“The reality is that Australia is now in the grip of a recession. Trading conditions are the worst we’ve seen since the Great Depression and many small businesses won’t survive.

“Our inquiry has found that the system as it stands does not work for small businesses.

“We know the sooner a small business seeks help, the more likely it is they can achieve a restructure or turnaround. But cash flow issues, compounded by falling revenue, may mean those small business can’t afford the professional financial advice they need.

“The ramifications of this could be devastating, both for the business and its owner and family, down the line.”

The report has also found the current insolvency practice is largely devastating for many small business which find themselves in the tunnel of windup action.

“Small businesses that have been through the liquidation process have told us their experience was so traumatic they will never fully recover, let alone try to start a new business down the track.

“Instead of getting the support they need to turn it around, small businesses too often find themselves on an express train to winding up with no control over the process.

“The system needs to change dramatically so that small business owners are given the chance to make important decisions about the future of their business, without being pushed into outcomes they don’t want – like losing their family home.”

Another key recommendation is the establishment of a small business debt hibernation instrument when a state, territory or federal government declares a systemic shock such as a pandemic or significant economic downturn.

“COVID-19 has shown that businesses need a mechanism where they can take stock of their situation and prepare for the re-opening of trade,” Ms Carnell says.

“The minimum hibernation period would be 90 days, during which payments on loans, rent, tax and other outgoings could be deferred.”

The Ombudsman’s report recommends establishing a Directors’ Insolvency Agreement where a small business owner can provide a registered liquidator with a proposal on the best way to manage the business.

“External administrations are focused on maximising the benefit to creditors, while the small business owner’s expertise and knowledge is often brushed aside, Ms Carnell says.

“Small businesses have spoken of stock being sold at a low point in the market, assets being put up for sale in publications that aren’t relevant to their industry and thousands being spent by registered liquidators to chase down payments worth far less than the amount spent.

“If the small business owner, with the approval of a registered liquidator, could restructure their affairs, it would likely lead to more positive outcomes, including a greater return to creditors.”

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