He said attempts to tackle problem, such as the Small Business Restructuring scheme, had ignored advice and added more layers to an over-complex system.

“If the government had listened and put in a truly simplified structure we’d have lots more businesses – instead, less than 200 businesses have gone through this in the couple of years that it’s been in operation and that’s an extraordinary failure,” said John Winter of the Australian Restructuring, Insolvency and Turnaround Association.  

Speaking on the latest Accountants Daily podcast Mr Winter said the current parliamentary joint committee inquiry into insolvency should treat the problem as “low hanging fruit” that could be rapidly addressed.

“We want to see that radical simplification before we even get to a root-and-branch review,” he said.

“Let’s fix up this because as the pressure comes on in the economy, accountants in public practice are going to be able to say to their clients, there’s a way for you to survive, there’s a way for us to keep doing business together in the future.

“That is, I’m going to connect you with somebody in this space and you can do a small business restructure to manage your debts down and get out the other side and be profitable into the future.”

One stumbling block was the treatment of trusts in insolvency, which had been an issue since the last big inquiry on the topic in the 1980s.

“Now that trusts are endemic in almost every small business, what we need is a quick fix there that allows a liquidator to properly get those assets and treat them as part of the business like they were intended,” Mr Winter said.

“Right now, the situation is the liquidator has to go off to court and get approval to do it. It’s almost always granted, but it adds another layer of cost.”

He said the insolvency regime had been designed for big business but small businesses in distress acted differently.

“It’s really important to understand that most small business insolvencies are largely without assets, there’s almost nothing left.

“If you think about the reality of most small businesses, directors of those businesses – who often don’t think of themselves as directors – will just keep running it until well beyond the point where it should have been shut down with that attitude of you can’t get more broke and broke, or maybe I’m going to win the lotto.

“So there’s nothing left.

“So you need to be able to have a very simple process that doesn’t cost a lot and get that sorted.”

And he said a top-to-bottom revamp of the law would acknowledge the interplay between personal and business assets.

“A lot of small businesses are either sole-traders, in which case they don’t have a company entity and they go straight into a bankruptcy process, or they are small incorporated businesses and their assets are inextricably linked with the owner of that business.

“So they’ve got the house in there as security for the debt, or they’ve got big owner’s loan accounts and all that sort of thing.

“In that situation you end up with this bizarre outcome where you’ve got to have a registered liquidator appointed to deal with this small business that might only have $10,000 worth of assets.

“And then you’ve got a registered bankruptcy trustee who’s got to deal with the personal stuff, and the two don’t meet. And so that’s another gross inefficiency in the market that could absolutely be fixed.”

“One of the ways to do that is also reduce the two regulators [ASIC and the Australian Financial Security Authority] that we’ve got down to one, cut the costs out, keep it simple, get some returns.”