Covid Crisis – A need for Personal Insolvency Reform…?

In all of the recent discussions of “the biggest insolvency reforms for 30 years”, I find it surprising that virtually nothing has been spoken about bankruptcy or personal insolvency reform. 

The Government has focussed on a proposal for a new debtor in possession / VA-light style of regime, as well as a “simplified liquidation” process, both aimed at corporate SME business. This is well and good (although whether the proposed changes actually result in a workable and widely applicable new model for corporate SME insolvencies remains to be seen), but why is there no mention at all of personal insolvency reform?

Individuals (in the form of “Sole Traders”) are by far the largest in number of small business operators in Australia. When their businesses go bad, there is no corporate veil to hide behind, that individual risks losing everything, and bankruptcy is often the end result. Even where a corporate structure is used in small business, the owner often ends up carrying the can personally anyway, with personal guarantees for financiers and suppliers a fact of life and often personal responsibility for tax debts, thanks to Director Penalty Notices (DPNs) from the ATO.

AFSA manage the vast bulk of Australia’s bankruptcies (around 80%), though these generally tend to be the consumer end of bankruptcies (think credit cards and small loan debts). Private Trustees like myself on the other hand administer the balance of the bankruptcies, with many of these being people in small business.

Back in 2017 there was a worthwhile discussion (and a Bill introduced to Parliament) around the concept of a “12 month bankruptcy”. The idea being to allow entrepreneurial small business people who unfortunately fail, to resurrect themselves and start over again quickly. These seems akin to some of the current changes that are being hastened through parliament in the corporate insolvency space. Surely this type of idea for the failed individual also has more merit now than it ever did!  Whether a 12 month bankruptcy period alone is specifically the change we need right now may be debateable, but at least it was something aimed at modernising the bankruptcy regime! In the midst of the current pandemic and economic crisis where potentially thousands of small businesses are facing closure and are currently only being propped up by various forms of soon-to-end government support, it is surprising that the personal insolvency piece of the insolvency reform puzzle has been neglected (particularly given there is already a draft Bill sitting on someone’s shelf down at Parliament House!).

It seems pretty reasonable to expect that bankruptcy numbers will jump substantially in 2021 and it would certainly be great to see some thought leadership and discussion around change in this area from AFSA (the Government personal insolvency regulator) and from the accounting and insolvency industry professional bodies, before the crunch hits and we run out of time to tweak the system to suit these current special circumstances...