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Insolvency reforms deemed a lifeline for struggling SMEs

Adrian Flores
Adrian Flores
24 September 2020 1 minute readShare
Insolvency reforms deemed an lifeline for struggling SMEs

The reforms to insolvency announced by the federal government have received broad approval from industry stakeholders right across the small to medium enterprise space.

Responding to the insolvency reforms announced by Treasurer Josh Frydenberg, Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell welcomed the reforms which she said were in line with the recommendations she put forward in the Insolvency Practices Inquiry final report handed down in July.

“Our July report found that, in many cases, small businesses were not getting the chance to turn their business around and instead finding themselves on an express train to winding up with zero control over the process,” Ms Carnell said.

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“The changes announced today by Treasurer Josh Frydenberg will go a long way to fixing that problem.”

Council of Small Business Organisations Australia (COSBOA) CEO Peter Strong was in particular happy with the “debtor in possession” model put forward in the insolvency reforms, calling it one of the changes needed “in this time of deep crisis”.

 

“There are many businesses out there who have operated successfully and professionally for many years that now find themselves needing to restructure due to a once-in-a-generation crisis that is not of their own making,” Mr Strong said.

“This measure demonstrates respect for those business owners, for the jobs of their employees and for the economy overall.”

MCorp Advisory practice lead Abi Curtis said the insolvency reform package provides the perfect opportunity for those who are proactive enough to use them as a springboard to restructure or compromise debts now.

“What we’re seeing is that many are struggling on as usual, waiting for the incentives to cease rather than starting now. For a small upfront cost, businesses can get out ahead of this, before the metaphorical gun is put to their head,” Ms Curtis said.

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“The emergency protections limit statutory demands by creditors, give companies more time to respond to creditors’ demands and remove personal liability for trading while insolvent.”

However, CreditorWatch chief economist Harley Dale was more cautious about the insolvency reform package, noting that while the decision to apply US-style Chapter 11 bankruptcy laws that will allow small businesses to trade their way out of insolvency is well intentioned, it will do little to generate jobs and growth down the track.

“In August, RBA governor Philip Lowe warned that a considerable number of insolvencies would emerge, with many businesses unlikely to recover from the ‘forced economic hibernation’ imposed in March. That remains the case, regardless of any legislation that allows companies to continue trading while insolvent,” Mr Dale said.

“The focus should therefore be on those small businesses who have a viable capability of emerging from the COVID environment with their balance sheets intact and an ability to successfully trade without government support.”

Insolvency reforms deemed a lifeline for struggling SMEs
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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