ASBFEO insolvency inquiry highlights need for ARITA’s own Financial Recovery Law Reform Commission

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has today released a discussion paper arising from its Insolvency Practices Inquiry.

As the professional body representing around 85% of all registered Liquidators and Trustees, ARITA has already commenced a detailed review of the paper and will lead an industry-wide response to the questions it raises.

'The ASBFEO discussion recognised that the cost of an insolvency can be high. It also seems to be advocating for more reporting and work to be done by liquidators with directors and creditors. Yet it doesn’t recognise that more work simply means more cost and, regrettably, every insolvency reform in the last two decades has simply added more cost to the process by adding more steps,' says ARITA CEO John Winter.

'Few people recognise that in the majority of insolvencies, there’s not even enough money or assets left to cover the actual cost of the legally required insolvency processes. Australia has around 650 liquidators and that small group collectively has to write-off around $100 million per year in unrecoverable fees largely because of government red tape. This doesn’t serve anyone well.

'While the paper acknowledges that most small businesses don’t seek help early enough, it says that the cost of voluntary administration is too high. Our fundamental and long-standing proposition is that seeking help early means getting proper, qualified help well before you need to consider any insolvency or bankruptcy process.

'The best help for those in financial distress will generally be from an ARITA member because they are the qualified experts and they can help businesses avoid an insolvency altogether if help is sought early enough,' says Winter.

'The paper also talks about directors of a small business feeling as though they lose control in an insolvency. That is actually the very basis of our current insolvency framework – directors, those who led the business into insolvency, are meant to be sidelined. A liquidator takes full control of the business, and the creditors become the key stakeholders. If directors want to retain some level of control, this is a further incentive to get help before they are insolvent or likely to be insolvent.

'We welcome that, with the release of this discussion paper, there is now a mechanism for the profession to engage with ASBFEO around this Inquiry.

'Most importantly, though, the discussion paper further highlights the need for the root and branch reform of our entire corporate and personal insolvency regime that ARITA has called for. We recently announced that, given the lack of a cohesive and wide-ranging review of the insolvency regime since the Harmer Inquiry in the 80s, that we were launching our own Financial Recovery Law Reform Commission to run during 2020.

'While it’s disappointing that this falls to us a relatively small professional association to undertake, we feel that leadership needs to be shown,' concluded Mr Winter.

Download the Insolvency Practices Inquiry Discussion Paper