Call for a ‘debt hibernation instrument’

John Kavanagh

Small Business Ombudsman Kate Carnell

The Australian Small Business and Family Enterprise Ombudsman has called for the creation of a “small business debt hibernation instrument” that would allow business owners to defer payments on loans, rent, tax and other ongoing payments for a period of 90 days or more during a “systemic shock”.

It also wants the limit on bank debt escalation in the Banking Code of Practice to be applied more broadly.

These recommendations are included in the ASBFEO’s Insolvency Inquiry Report, released yesterday.

The report is critical of the current business insolvency system, saying: “Often where small businesses are seeking support to turn around their business in response to financial pressures, they find themselves on an express train to winding up with no control over the process.”

The report also recommends that businesses in significant financial stress be funded to access professional advice.

It has called for a change in the way external administrations are handled, to reduce the cost to the business.

It has also recommended a simplified insolvency process and changes to the information provided to creditors.

As part of its inquiry, the ASBFEO surveyed small business. One in five small businesses that have been through external administration reported the process involved the bank appointing a receiver to collect and sell enough of the secured assets to repay the debt owed.

Communication between the bank, the receiver and the business was poor and the business owners felt they had very little control over the process.

The experience of dealing with the Australian Taxation Office was much the same.

A majority of respondents said the focus of liquidators and creditors was on winding up a business, rather than considering a restructure.

Yet the majority of liquidations return no money to unsecured creditors.

The report said: “The current framework fails to operate efficiently. The majority of creditors to small businesses are small businesses themselves, with their debt unsecured.”

The ASBFEO said debt hibernation would work in such a way that during the period of hibernation the business owner would be required to engage with creditors to negotiate a return to repayments with varied terms.