The federal government’s insolvency reform package, announced in September, has now been introduced into the Parliament with the aim to reposition the insolvency system to help more small businesses restructure and survive the economic impact of COVID-19, Treasurer Josh Frydenberg said on Thursday.
Deemed the most significant changes to Australia’s insolvency framework in 30 years, the package draws on key features from Chapter 11 of the Bankruptcy Code in the US, and is expected to cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom have fewer than 20 employees.
“As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner,” said Treasurer Frydenberg.
As part of these changes, a new debt restructuring process will be introduced for incorporated businesses with liabilities of less than $1 million.
“By moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, it will allow eligible small businesses to restructure their existing debts while remaining in control of their business.
“For those businesses that are unfortunately unable to survive the economic impacts of the coronavirus outbreak, a new simplified liquidation pathway will be introduced for small businesses to allow faster and lower-cost liquidation,” the Treasurer noted.
Complementary measures will also be enacted to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business.
Some of these include the temporary waiver of fees associated with registration as a registered liquidator for approximately two years until 30 June 2022.
According to Treasury, following the passage of legislation through the Parliament, these new insolvency processes will be available for small businesses from 1 January 2021.
“Together, these measures will reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses through the recovery phase of the COVID-19 crisis,” said Mr Frydenberg.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, welcomed the Treasurer’s announcement, noting that the legislation tabled will make it easier for small businesses to restructure or wind up and are in line with the recommendations made in the Ombudsman’s Insolvency Practices Inquiry final report.
“These landmark reforms will be a game changer for small businesses, particularly those that have been heavily impacted by the COVID crisis,” Ms Carnell said.
“Instead of finding themselves on an express train to winding up with no control over the process, these changes will ensure small businesses will have the option to turn their business around, giving them a fighting chance to survive.”
She noted that for those businesses that sadly need to wind up, the liquidation process will be simpler, faster and cheaper.
“We know the pandemic, which followed a devastating season of natural disasters, has driven many small businesses to the brink.
“Modelling by Deloitte Access Economics estimated about 240,000 small businesses are at risk of failure.
“This is exactly why small businesses need to sit down with their trusted and accredited financial adviser for a viability assessment as a matter of urgency,” Ms Carnell said.