Federal Government to Adopt Us-Style Insolvency Rules to Help with Expected Wave of Business Closures

The Federal Government has announced it will 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 is two-tiered. Large companies will work under existing insolvency rules, while business with liabilities of less than $1 million will have access to 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 will 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 cannot be revived, liquidation would be changed, too, in an effort to make it quicker and easier.

The changes aim to limit liquidators’ investigative processes, mandatory meetings, and reporting requirements.

According to Treasurer Josh Frydenberg

  • The changes will allow viable businesses to survive the recession caused by the COVID-19 pandemic.
  • 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.
  • 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.

Compared to 2019, the number of companies entering external administration is down 46%, with many unviable businesses being propped up by the Federal Government’s JobKeeper wage subsidies.

A criticism of the current system is that the cost of putting a business into administration or liquidation is so expensive that some small businesses find the process consumes all of their remaining assets.

The changes follow concerns in the financial sector, including regulatory bodies that many small businesses are putting off restructuring and incurring greater debt as a result.

  • A wave of insolvencies is anticipated once emergency protections for business owners expire on 31.12.2020.
  • These emergency provisions include limiting statutory demands by creditors, giving companies more time to respond to creditors’ demands and removing personal liability for trading whilst insolvent.

Similar emergency provisions for personal bankruptcy introduced in March also apply until the end of the year.

The Federal Government will also address concerns that there will not be enough insolvency practitioners to deal with the number of businesses that need to restructure or liquidate at the end of the year.

Several initiatives are proposed to encourage more professionals into the field, including waiving registration fees for two years and creating a new class of insolvency practitioners who will have their work limited to the simplified small business process.

Protections for small businesses will be introduced for those who announce they want to restructure but cannot get immediate access to an insolvency practitioner.

More details will follow in the Federal Budget to be handed down on 5.10.2020.

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