Federal govt announces “most significant” insolvency reforms in 30 years to help save struggling small businesses

The federal government will undertake the “most significant” reforms to Australia’s insolvency framework in 30 years to help more small businesses restructure and survive the economic impact of COVID-19.

The reforms draw on key features from Chapter 11 of the Bankruptcy Code 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, and moving from a one-size-fits-all ‘creditor in possession’ model to a more flexible ‘debtor in possession’ model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.

The reforms also include a 20-business-day period for the development of a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan, as well as a new and simplified liquidation pathway.

The government said complementary measures will be introduced to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

The reforms will cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees.

“Together, these measures will reposition our insolvency system to reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses get to the other side of the crisis,” according to a joint media release issued by Treasurer Josh Frydenberg and Assistant Treasurer Michael Sukkar.

The reforms come after the government announced temporary regulatory measures to help financially distressed businesses get to the other side of COVID-19 back in March, which have since been extended to 31 December 2020.

The new insolvency processes will be available for small businesses from 1 January 2021.

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