Insolvency Law is Failing SMEs

Michael Murray and I recently wrote a short note for the Sydney Law School website (see here) that commented on the recent report by the ASMFEO on SMEs and insolvency practice. In the note we argue that the current framework for insolvency and restructuring is not producing good outcomes for SMEs and needs reform. The pandemic is going to produce a large increase in SME failures and we need an insolvency law framework that meets these needs. Our current framework is too complex, slow and expensive to produce acceptable outcomes for SMEs or their creditors. We need to rethink what our insolvency law can and should achieve for stakeholders.

Michael and I will continue working on this topic in our future writings and would welcome comments and suggestions.

5 responses to “Insolvency Law is Failing SMEs

  1. Thanks Jason and well done.

    One of the many excellent aspects of our VA process is that it explicitly states a purpose in s435A, to maximise “the chances of the company, or as much as possible of its business, continuing in existence.” Most of the rest of the Corporations Act appears to be aimed towards maximising the return to creditors. And, different again, Kate Carnell’s view seems to be that insolvency laws should maximise the chances of the owners to continue to own and control the business. Each of those in their own context is worthwhile, but while we have (at least) three different somewhat mutually exclusive objectives, then any reform is going to dissatisfy any two of the three perspectives!

    IMO one of the most important things we need to do is set a clear and consistent objective for our insolvency regimes so that we have a single objective to measure against.

    Liked by 1 person

  2. Completely agree Geoff, that’s why a new Harmer style inquiry into Insolvency that is charged with determining what the goals of a modern insolvency law should look like is needed. We seem to be hemmed in by path dependence to only consider our existing options. It’s almost a zero sum game where any increased flexibility is condemned as a free kick to phoenix operators. I think we need to separate out the commercial aspects of insolvency and restructuring from the enforcement aspects. Leave chasing crooks to ASIC and then the public can see what they are really getting for their ‘user pays’ system. Leave IPs to focus on realising assets at maximum value for creditors. This might also mean that many current insolvency cases need a government liquidator or government funding.

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  3. Hi Jason,
    In my view the key to saving viable small companies from failure and excessive loss is to facilitate an affordable restructuring process. Here is my suggestion of a process that does not require massive law change:
    Qualifying criteria
    no more than $1 million in unsecured creditors
    no more than three months of superannuation outstanding and lodgement’s made
    no more than two quarters of BAS outstanding and all lodgement’s up-to-date
    Required documents upfront (at time of appointing an Administrator)
    a ROCAP
    a plan of reorganization
    delivery of all books and records required by the proposed Administrator (including access to cloud computer records)
    Effect of appointment
    The Administrator is appointed to gives notice to all creditors
    The Directors ** remain in control of the company and are personally liable for debts incurred during the administration.
    The administrator is charged with expressing an independent view of the success of a restructuring.
    Immediate creditor restraints
    From appointment through to proposal meeting, no enforcement of any security interests, lease terminations etc. are available
    asset sales can only be in the ordinary course of business
    Proposal meeting of creditors
    The administrator is to call a meeting of creditors with an accompanying report issued 15 business days after appointment, such report will encompass the general reporting requirements for typical voluntary administrator reports and meeting held resolutions passed outcomes determined etc in the usual way.

    Liked by 1 person

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