THE Australian Small Business and Family Enterprise Ombudsman, Kate Carnell is leading an inquiry into Austrlia's insolvency system. The goal of the inquiry is to investigate and assess "if current insolvency practices achieve the best possible outcome for small and family businesses in financial trouble".

Anecdotally, with virtually no businesses that enter into voluntary administration emerging to trade again, the inquiry is most likely to reveal that small businesses are particularly vulnerable to being summarily liquidated. Even large, well-resourced and asset-rich businesses that have entered voluntary administration in recent years -- such as Cubby Station and Arrium, the former BHP steel company that had a range of brands including OneSteel -- were liquidated and sold to international buyers at major markdowns to their balance sheet values, losing shareholders, including large pension funds, billions of dollars. 

Questions of whether insolvency practitioners have the continuation of a business, once restructured, as a priority will be raised as will the thorny issue of the fees that are charged by administrators and the correspondingly lower returns to creditors.

“This inquiry will shine a light on the insolvency system and uncover if it encourages practitioners, in the first instance, to restructure the small or family business to turn it around," Ms Carnell said. 

“Unfortunately the Banking Royal Commission wasn’t asked to look at the role of insolvency practitioners and that was a missed opportunity.

“We know there is a very low success rate in restructuring Australian businesses under external administration and the impact of the insolvency process is often devastating for the small business owner.

“Few small businesses that enter formal insolvency administration are able to navigate their way through the process to reach a restructuring agreement," she said.

“The latest data reveals more than 8,000 businesses entered external administration in 2018/19. Of those, small and family businesses in rural and regional Australia have been among the hardest hit.”

Ms Carnell said the Insolvency Practices Inquiry would examine:

• the existing insolvency system through the experience of small business
• the degree of transparency of the governance, processes and costs of practitioners including legal advisers, valuers, investigating accountants, administrators, receivers and liquidators
• how the insolvency of a small or family business may lead to bankruptcy for the owners
• how the framework impacts the practices and fees of insolvency practitioners.

As part of the inquiry, the Ombudsman has established a reference group, chaired by former Senator John Williams, to act as a forum for input and discussion on the challenges faced by small and family businesses facing insolvency. 

Mr Williams took a lead role in the 2010 Senate Inquiry into the regulation, registration and remuneration of liquidators.

“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” Mr Williams said.

“This inquiry is essential to see if any systemic improvements can be made.”

“Our Small Business Loans Inquiry identified a lack of transparency for the small business owner when a creditor commenced debt recovery action,” Ms Carnell said.

“The small business owners felt they had lost control of their business and in cases where the business was wound up, they felt the process was poorly managed.

“This inquiry will identify areas where practices can be improved and recommend changes to the system to achieve fairer outcomes for all parties involved.”

Small and family businesses that have faced financial difficulties and restructured or wound up their business can share their stories by completing a survey.

An interim report will be released in December with a final report to be handed down in February 2020.

www.asbfeo.gov.au

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THE Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has urged the Federal Government not to abolish the low-cost innovation patent regime. Ms Carnell said the impending move to do so would create a significant barrier to small businesses and Austalian innovation.

“It would be a mistake to phase out the innovation patent system without any replacement,” Ms Carnell said.

“Although we acknowledge the current system is not perfect, it’s the only viable way for SMEs to access temporary or short-term IP protections, which is essential, particularly when disputes arise. Abolishing the innovation patent system would effectively leave small businesses vulnerable to large businesses stealing their ideas and inventions. 

“Small businesses face significant hurdles when trying to protect their IP rights," Ms Carnell said. "They don’t have in-house lawyers or patent expertise and often experience difficulties in accessing risk capital.

“That’s why my office continues to strongly argue against phasing out the innovation patent regime and instead either improve the existing system or replace it with something better.

“Many small businesses rely on the innovation patent system to attract funding. Investors won’t even look at a company that doesn’t have those protections in place," she said.

“Standard patents are more expensive and can take over two years to get. It’s just not a viable option for small businesses that want to protect their products.

“The fact is, by phasing out the innovation patent system, many of these small businesses will look to import products rather than innovate and that has serious ramifications for Australia’s economy," Ms Carnell said.

“This week the Senate will debate the innovation patent as part of a suite of proposed intellectual property law changes and I urge them to support amendments stopping the abolition of the innovation patent regime.” 

www.asbfeo.gov.au

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Religious discrimination Bill a potential minefield for sponsors like Qantas

INSTITUTE of Certified Management Accountants (ICMA) CEO Janek Ratnatunga is urging Australian finance professionals to pay close attention to the Australian Government’s draft Religious Discrimination Bill – and particular attention to what is being called the ‘Folau Clause’.

Professor Ratnatunga said the Folau Clause relates to the case of sacked top-level Australian rugby union player Israel Folau, whose comments on his private social media account, based on his religious beliefs, led to the termination of his contract with Rugby Australia.

Under the Folau Clause, additional requirements will be imposed upon businesses with annual revenue of at least $50 million when it comes to standards of dress, appearance or behaviour that limit religious expression. 

The Bill states that such restrictions must be shown to be necessary to “avoid unjustifiable financial hardship on the business”. The process of calculating potential financial hardship will fall on financial professionals, particularly management accountants.

Prof. Ratnatunga said, “The application of the ‘Folau Clause’ means organisations will have to prove that their social media rules relating to religious expression, and subsequent actions taken, are in place to protect their brand.

“However, as the impact of individual social media activity on brand reputation is impossible to quantify, the draft bill instead defines the impact on the brand in financial terms, i.e. as causing ‘unjustifiable financial hardship on the business’.”

In the case of Rugby Australia, Prof. Ratnatunga said, its primary revenue is derived from ticket sales, broadcast rights, government grants and sponsorships.

“The revenue source that has garnered the most attention for potentially unjustifiable financial impact is corporate sponsorship, which accounts for 22 percent of Rugby Australia’s total income,” Prof. Ratnatunga said. “Rugby Australia’s major sponsor, Qantas, clearly has to distance itself from the Folau case, as it may be considered an accessory to any breach and become a target for legal action if Rugby Australia is found guilty of wrongful dismissal.”

Prof. Ratnatunga believes this poses a conundrum for sponsors like Qantas.

“For example, if the Folau case arose after the Bill was passed in its current form, Rugby Australia would have to prove that Qantas was going to discontinue sponsorship, thereby demonstrating ‘financial hardship’. At the same time, Qantas would have to reject any such claim, or face the consequences of Mr Folau winning his case and citing them as an accessory to any breach.”

WARNINGS FOR SPORT, UNIVERSITIES

Prof. Ratnatunga warned, if the Bill passes, corporates will need to be extremely careful of sponsorship agreements. This would also be true of organisations such as universities, which have been the subject of much debate regarding external sponsors and their influence on free speech.

Prof. Ratnatunga provided a hypothetical example of a University of Melbourne academic posting a private social media comment that is “very supportive of the Dalai Lama returning to Tibet and rejuvenating Buddhism there”. If this led to the possibility of losing sponsorship from the Confucius Institute, would Melbourne University be justified in terminating that academic’s contract under the Folau Clause?

Prof. Ratnatunga said, “Again, what if an academic in a university that is sponsored by the Ramsay Centre for Western Civilisation posted the following comment on social media: ‘The only thing Western civilisation has done is spread Christianity with the gun.? Would the university be justified in terminating that academic’s contract under the Folau Clause?”

Prof. Ratnatunga posed a final question: “Should corporates offer their views on social issues unrelated to their core businesses?

“Corporates are justified in ending sponsorship deals with individuals and other organisations for bad behaviour, sexual discrimination and the like, both publicly and privately, but threatening to end sponsorship agreements as a result of religious comments posted on private social media accounts by employees or other contractors on religious issues that have little or no relation to their core business is another matter,” he said.

www.cmawebline.org

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THE Small Business Fair Dismissal Code "in its current form, is not working in the way it was originally intended,” according to Australian Small Business and Family Enterprise Ombudsman, Kate Carnell.

Ms Carnell, has handed down a comprehensive review of the Small Business Fair Dismissal Code, recommending a suite of changes to help small business employers meet their obligations.

"It is ambiguous and open to interpretation, particularly by lawyers, which means too many small businesses are being pulled into unfair dismissal hearings which are costly and impact productivity," Ms Carnell said. 

“The vast majority of small business operators are hard-working Australians with good intentions.

“The recommendations in this review aim to give small business operators clear guidelines to deliver certainty around complying with the code.

“Importantly – the recommended amendments and checklists are designed to guide a small business employer through a fair dismissal process, not to make the dismissal process easier," Ms Carnell said.

“We know that small businesses do not make the decision to end a worker’s employment lightly. Research by the Fair Work Commission found one of the key challenges for small business operators was attracting and retaining good staff and that good employees were highly valued.

“Small businesses can’t afford to engage in costly and stressful legal action. They don’t have the support of a HR department when faced with the difficult decision to end a staff member’s employment," Ms Carnell said.

“That’s why it’s critical for the code to drive fairness, and set out clear expectations for small business employers.

“According to figures released by the Fair Work Commission, during the first three months of this year it received 3,583 unfair dismissal applications.

“Most were settled during mediation, but for the 172 cases that were presented to the Commission, 111 (65%) were dismissed because they were without merit or deemed legally invalid, meaning they should not have gone to the Commission in the first place," she said.

“By taking the ambiguous language out of the Code such as ‘reasonable grounds,’ ‘valid reason,’ and ‘reasonable chance’ and improving the checklist questions, small businesses will be in a much better position to comply.

“We want the Code to work, so that small businesses are doing the right thing and there’s less need to engage lawyers,” Ms Carnell said.

Ms Carnell said the review contains recommendations in three key areas:     

• Amendments to ensure the code meets its intended functions and objectives and provides certainty on what is required of small business employers to ensure a dismissal is fair.
• Improving small business education and awareness in relation to the Code and checklists to help them meet their obligations.
• Clarifying the unfair dismissal claims process for small business employers and employees.

The Small Business Fair Dismissal Code was formed as part of a report 'Forward with Fairness: Labor’s plan for fairer and more productive Australian workplaces' in recognition that small business owners do not have the time or expertise to navigate the complex unfair dismissal system. When the code came into effect in 2009 under the Labor Government, the interpretation of the code was challenged in the courts and, on occasion, by members of the Fair Work Commission.

Ms Carnell said that created uncertainty for small business employers, as following the code was no longer a reliable way of ensuring a dismissal was going to be deemed fair.

In April 2018, the Australian Small Business and Family Enterprise Ombudsman released its report 'Workplace Relations- Simplification for Small Business'.  That report recommended ASBFEO lead a review of the Small Business Fair Dismissal Code and checklist.

www.asbfeo.gov.au

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