Insolvency Reforms to Help Aussie Small Businesses

Insolvency Reforms to Help Aussie Small Businesses
Federal Treasurer Josh Frydenberg during a press conference in the Mural Hall at Parliament House on June 11, 2020 in Canberra, Australia (Sam Mooy/Getty Images)

Small businesses will be protected from needlessly being wound up under changes to be announced by the Morrison government on Sept. 24.

The reforms to be unveiled by Treasurer Josh Frydenberg will cover around three-quarters of businesses subject to insolvencies today.

They will draw on key features of the “Chapter 11” bankruptcy code used in the United States.

Key elements of the reforms include:

* The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million

* Moving from a one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, allowing eligible small businesses to restructure existing debts while remaining in control of their business

* A period of 20 business days to develop a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan

* A simplified liquidation pathway for small businesses

* Red tape cuts for the insolvency sector.

The changes follow the extension earlier this month of temporary insolvency and bankruptcy protections to support small businesses impacted by the COVID crisis.

As the temporary relief expires at the end of December, the number of companies being put into external administration is expected to increase.

Reserve Bank governor Philip Lowe warned of the wave of business failures in August.

“There will be insolvencies. There will be bankruptcies. There will be some businesses that will not recover. That’s the harsh reality of an economic downturn that’s the worst in 100 years,” he told parliament’s economics committee.

The longer-term reforms are earmarked to start on January 1, subject to parliament passing legislation.

“These are the most significant reforms to Australia’s insolvency framework in almost 30 years, and will help to keep more businesses in business and Australians in jobs,” Frydenberg said.

He said the government was also providing support totalling $314 billion to cushion the blow for households and businesses as part of its economic recovery plan.

By Paul Osborne