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PC News - March 2016

Barriers to business set-up, transfer and closure

In a recently released inquiry report the Commission provided advice for public policy on disruptive new business models, government approaches to supporting start-up activity, and closure processes for insolvent businesses.

The existence of barriers to business set-up, transfer and closure can have a detrimental impact on the efficient operation of markets and economic growth. Such barriers can be a function of government regulation, market structures, industry specific arrangements and interactions, or broad cultural features (such as attitudes to entrepreneurial activity, risk or to business failure).

The Australian Government asked the Productivity Commission to conduct a broad ranging investigation into impediments faced by those setting up, transferring or closing businesses in Australia. The Commission's final report was released on 7 December 2015.

The business landscape is hindered by longstanding regulatory issues

There are around 2.6 million businesses registered as operating in Australia. Businesses are set-up for a variety of reasons and in any one year there is a churn of business entries and exits in Australia that is comparable with other countries.

While it is relatively easy to start a business, a number of longstanding issues with specific regulatory requirements and regulator engagement practices remain unaddressed. This creates ongoing unnecessary costs to businesses, communities and taxpayers. The Commission called for governments to take action on previous recommendations of the Commission and others that remain valid and largely unimplemented.

The challenge of new business models: fixed term exemptions

The emergence of new business models is a fundamental aspect of an innovative and growing economy. New business models have the scope to improve consumer choice, increase the utilisation of existing capital or labour, and/or lower the prices at which products or services are provided. The Commission's report emphasised that the default position of governments should be to allow entry of innovative new business models, not restrict them or protect incumbents.

Regulators need to be able to respond flexibly and transparently to new business models and ensure that regulatory frameworks are capable of adapting quickly to cope with new technological developments. The Commission recommended across-the-board legislation for fixed term exemptions to specific regulatory requirements that deter entry by business models that do not fit within the existing regulatory framework. Conditions may be placed on exemptions to ensure no material increase in the risk of adverse outcomes for consumers, public health and safety orthe environment.

Entrepreneurial ecosystems

  • The entrepreneurial ecosystem is the environment in which entrepreneurial activity and innovation is undertaken. These ecosystems are made up of product or service markets, government, finance, infrastructure, knowledge and ideas, culture, support and the right people with the rights skills all interacting in a cog like fashion to drive the entrepreneurial ecosystem.

Entrepreneurial activity

There is a growing focus among governments in Australia and overseas on supporting high growth potential start-ups and the role entrepreneurial communities play in start-up success. This reflects the growing recognition of start-ups as a catalyst for competition, productivity, employment and income growth, and virtuous cycles of innovation and investment.

The inquiry report found that entrepreneurial activity is generally only successful and self-sustaining if driven by entrepreneurs (rather than governments). Targeting individual elements or 'failures' within the ecosystem, without considering the whole, is likely to be ineffective or even detrimental.  In particular, identifying the local factors in need of attention and minimising unnecessary regulatory impediments is a strongly preferred approach for governments to take.

Embrace the concept of risk: early use of a safe harbour

The Commission's recommended reforms to Australia's corporate insolvency regime are intended to enable the restructuring of economically viable companies, and where restructure is not possible, provide procedural certainty to creditors, with less emphasis on punishing financial failure. The Commission found that while a wholesale change to the corporate insolvency system (such as the adoption of the United States' 'chapter 11' framework) is neither justified nor likely to be beneficial, some specific reforms are warranted. These include:

  • restricting formal company restructuring procedures to those businesses that are capable of being economically viable in the future
  • introducing a safe harbour defence to allow directors to explore early restructuring options without liability for insolvent trading
  • introducing a streamlined liquidation process to reduce the time and expense of winding up businesses with few or no recoverable assets
  • requiring all directors to obtain a director identification number.

The Commission's recommended framework for corporate restructuring and insolvency

  • The Commission's recommended framework for corporate restructuring and insolvency

Summary of the Commission's key recommendations*

  • Regulation of new and innovative business models

    Some new business models, particularly those that exploit digital technology, challenge existing regulatory arrangements or cause associated businesses to operate in regulatory grey areas. An across-the-board legislative shift is required to enable explicit exemption of classes of new businesses, for a fixed period, from particular regulatory requirements, where these deter entry but exemption does not threaten consumer, public health and safety, or environmental outcomes.

  • Governments and entrepreneurial activity

    Any assistance programs must work within, and not distort, existing entrepreneurial communities to enable the capture of knowledge and network spillovers, beyond what would otherwise occur. Any assistance to entrepreneurial activity should:

    • avoid targeting particular business sizes, models, technologies or sectors
    • focus on strengthening ecosystems and networks
    • be modest relative to the scale of the market, be conditional on measurable private sector 'buy in' that exceeds government contributions, and include a clear exit strategy for government that is established at the outset.
  • Access to finance is not a barrier for most new businesses but some specific areas need to be addressed

    • Crowd-sourced equity funding should be a financing option available to any small company. There should be caps on the level of investment possible by small-scale 'mum and dad' investors, but no caps for sophisticated and professional investors.
    • Superannuation fund trustees should not be required to allocate funds to particular asset classes or investments, including venture capital or small businesses.
    • The Australian Government's tax incentive scheme, the Venture Capital Limited Partnerships, should be closed to new registrations. Tax incentives under the Early State Venture Capital Limited Partnerships should remain limited to seed and early stage investments and be back-ended (to reward success and avoid tax minimisation). Both schemes should be subject to an independent evaluation.
  • Restrictions on bankrupts should be reduced

    The default exclusion period and restrictions on bankrupts in relation to access to finance, employment and overseas travel should be reduced from 3 years to 1 year, with the trustee and courts able to extend this period to prevent abuse. The obligation to repay debts should continue to be required for 3 years or until bankruptcy discharge.

  • Some specific reforms to Australia's corporate insolvency regimes are needed

    • Formal company restructuring through voluntary administration should only be available when a company is capable of being a viable business in the future.
    • A 'safe harbour' defence should be introduced to allow directors to explore, within guidelines, restructuring options without liability for insolvent trading.
    • Where a company is undergoing voluntary administration it should not be possible to terminate contracts, solely due to an insolvency event. Such companies remain obliged to meet any contractual obligations.
    • A simplified liquidation process should be introduced to reduce the time and expense of winding up businesses with few or no recoverable assets.
    • All directors should be required to obtain a director identification number.

* A complete list of recommendations is available in the overview of the inquiry report.

Business Set-up, Transfer and Closure

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