A Victorian government agency will reconsider the grant applications of about 12,000 small businesses worth up to $120 million.
State Ombudsman Deborah Glass has found thousands of applications for the government's $10,000 Business Support Fund were denied because they remained in draft awaiting further information.
Others weren't processed because forms contained typographical or numerical errors, involving email addresses or other information.
"The department made mistakes. People made mistakes," Ms Glass wrote in her report tabled in state parliament on Tuesday.
"Despite the stress and anxiety caused by COVID-19, in an environment where their businesses were being destroyed, people were being penalised for their honest mistakes."
The Department of Jobs, Precincts and Regions was not equipped to handle the influx of demand, with only five people initially staffing its call centre.
That number later grew to 500, although outsourced workers were not granted access to the department's case management system.
While sympathetic to the time pressures on implementing the program, Ms Glass said many of the 1100-plus complaints could have been resolved internally if the department was "more reasonable".
"Good intentions got lost in translation," she wrote.
"The aim of the fund was laudable, to support a hugely vulnerable cohort affected by lockdown.
"But administering it inflexibly undermined its very purpose.
"The people were forgotten in the process."
The department has committed to reopening the scheme for eligible businesses owners who were denied the $10,000 grant.
"Sometimes, it takes the nudge of the ombudsman's elbow to encourage public servants to do the right thing," Ms Glass said.
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