I recently searched ASIC’s insolvency notices website for notices of appointment for the new small business restructuring procedure in Part 5.3B of the Corporations Act 2001 (Cth). This revealed 8 notices of appointment (as at 20 April 2021), however 3 of those were for the same companies (Southside Staffing, Dessco and DST Project Management), with separate notices in February and March or April. Excluding the twin notices for these 3 companies reveals that a grand total of 5 SBRP appointments have been made so far. For all of the government’s promotion of how useful this procedure would be, covering supposedly 76% of all external administrations each year, we’ve ended up with 5 appointments in 4 months. This got me thinking as to how that compares with the start of Part 5.3A voluntary administration? Voluntary administration was introduced on 23 June 1993.

I’ve been working on an empirical study of voluntary administration for my PhD at the University of Adelaide and, as part of that work, I have a dataset of Form 505 lodgements, which shows that 7 VA appointments were notified to ASIC on the very first day that voluntary administration became operational, with a further 3 appointments over the next week (10 appointments in the first calendar month). A further 42 notices of appointment were lodged with ASIC in July 1993. In the first 4 calendar months of voluntary administration there were 142 notices of appointment.

The new small business restructuring procedure is off to a slow start. Why is that?

If small businesses aren’t using the new procedure it is not because of a lack of awareness. Searching small business insolvency or small business restructuring online will generate pages of Google ads for insolvency and restructuring advisors. Many have noted that the entry requirements for the new procedure are too strict (see for example the post on the AICD website this week also see my submission to the Treasury). The law sets an entry bar that most small businesses can’t reach.

It will be interesting to monitor levels of deregistrations over the next few months. I suspect that many small businesses have used their period of COVID protection from insolvency proceedings to run down inventory and with the withdrawal of job keeper and increased enforcement by banks and the ATO we will see a lot more ‘jingle mail’ from SMEs, where business owners simply walk away from their insolvent businesses.

The problem is not that the new procedure is too complex or uncertain (although it is!), the problem is that these businesses are simply too poor to go broke. We need the Federal Government to implement a business viability review scheme to help small businesses navigate through their options by paying for basic advice (like bulk billing). Let’s not be ‘penny wise and pound foolish’. Helping small businesses now with basic financial advice will help address the the growing risk of zombie companies as discussed by Stephen Bartholomeusz in Monday’s Fairfax papers. An ounce of prevention is worth a pound of cure. Don’t be fooled by the rosy stories of how great the economy is, take a walk down your local high street and count the empty shops. There is a lot of pain out there and we need a legal framework that acknowledges these problems and helps business owners to deal with them. Part 5.3B is not doing that, or at least not yet.