Comparing the start of Parts 5.3A and 5.3B

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.

Caution Sign – Hard Times Ahead

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.

9 responses to “Comparing the start of Parts 5.3A and 5.3B

  1. Prof, when you talk about business viability review scheme (great idea it is!) are you suggesting an Informal Restructuring to keep it a going concern?

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  2. I can’t take credit for the business viability review scheme as it was recommended by the ASBFEO in their Insolvency Practices Inquiry, but I strongly support it and have been pushing for it in my writing and public speaking. I gave a fuller explanation of my thoughts on this in my blog post about business doctors, linked in this post. I think we need a middle point between businesses getting into financial distress and then choosing a formal procedure. It might be a waste of time and money for some businesses to go into a formal procedure. It might also be a bad outcome for some businesses to use a formal procedure. My point is, how is the business owner supposed to know the difference? That’s why we need an advisor to filter companies into the right avenue. IPs and other advisors can do this obviously, but small business often can’t afford them so a government voucher like bulk biking for GPs could help them get advice earlier while there is still something left to save.

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  3. The reason you are seeing 8 appointment notices for 5 companies is the extra 3 are notice of the Restructuring Plan phase commencing.

    So not only have there only been 5 SBRP appointments, 2 have failed without proposing a plan.

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  4. Great insight Jason. To put more context, I recall the introduction of VAs and the scepticism about it at the time however in hindsight it was a big step forward. SBR is flawed and will not be the small business panacea in its current state. Hopefully it will be tweaked to become a more useful tool.

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  5. Pingback: Australia’s limited insolvency reforms for small business | Murrays Legal Commentary·

  6. Great post Prof Jason! Ultimately this whole thing comes down to how small businesses get the best out of this procedure! I am just comparing with India and this analogy is very much applicable there too. Fro India, until and unless they create a framework which is cost- effective and swift, no fancy phrases like “pre-pack” can same them! I look forward to read your recommendations on Pt 5.3B.

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  7. Pingback: Australia’s limited insolvency reforms for small business | Murrays Legal Commentary#·

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