Federal Government to adopt US-style insolvency rules to help with expected wave of business closures

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The Federal Government is planning to overhaul insolvency rules, adopting an American-style model to help small businesses struggling because of the coronavirus pandemic to either restructure or fold.

The new system would be two-tiered, with large companies required to work under existing insolvency rules while business with liabilities of less than $1 million having a simpler system.

The changes would see small business owners remain in control of their company and assets, rather than immediately being placed in the hands of an administrator or creditors.

An insolvent small business would have 20 days to come up with a restructuring plan and creditors would have to vote on whether to accept it within 15 days after that.

For small businesses that can’t be revived, liquidation would be changed, too, in an effort to make it quicker and easier.

The Federal Government wants to cut liquidators’ investigative processes, mandatory meetings and reporting requirements.

Treasurer Josh Frydenberg believes the changes will allow viable businesses to survive the recession caused by the COVID-19 pandemic.

“The Government’s new reforms draw on key features of the US Chapter 11 bankruptcy process allowing small businesses to restructure their debts while remaining in control of their business.”

‘Wave of insolvencies’ expected

A sign reading "sorry we're closed" hangs in a window.
A sign reading “sorry we’re closed” hangs in a window.(Unsplash: Tim Mossholder)

The number of companies entering external administration is down 46 per cent compared to last year, with many unviable businesses being propped up by the Federal Government’s JobKeeper wage subsidies.

The cost of putting a business into administration or liquidation can be expensive, so much so that some small businesses find the process consumes all of their remaining assets.

There is concern in the financial sector, including from the Reserve Bank, ASIC and the Small Business Ombudsman, that many small businesses are putting off restructuring and incurring greater debt as a result.

They are expecting a wave of insolvencies once emergency protections for business owners expire at the end of the year.

Those emergency protections include limiting statutory demands by creditors, giving companies more time to respond to creditors’ demands and removing personal liability for trading whilst insolvent.

Similar provisions for personal bankruptcy are also in place until the 31st of December.

The Federal Government is also seeking to address concerns that there won’t be enough insolvency practitioners to deal with the number of businesses needing to restructure or liquidate at the end of the year.

To that end, the Federal Government is proposing several initiatives to encourage more professionals into the field, such as waiving registration fees for two years and creating a new class of insolvency practitioners who will only work with the simplified small business process.

There would also be protections for small businesses who announce they want to restructure but can’t get immediate access to an insolvency practitioner.

Changes foreshadow new fiscal strategy

Treasurer Josh Frydenberg will detail the changes in a speech to the Australian Chamber of Commerce and Industry.

With the Federal Budget less than a fortnight away, Treasurer Josh Frydenberg will also foreshadow the Coalition’s new fiscal strategy.

With enormous spending on JobKeeper wage subsidies and other COVID-19 related economic supports, the Government is abandoning its focus on returning the budget to surplus.

Instead, the new fiscal strategy will focus on supporting the nation’s economic recovery from COVID-19-induced recession.


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