Government announces insolvency reforms to back small businesses

The reforms, which draw on key features from Chapter 11 of the Bankruptcy Code in the US, are expected to help more small businesses restructure and survive the economic impact of COVID-19. 

Key elements of the reforms include:

• The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the Chapter 11 bankruptcy model in the US.
• Moving from a rigid 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.
• A rapid 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.
• A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.
• Complementary measures 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.

According to the government, 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," said Treasurer Josh Frydenberg in a statement. 

On 22 March 2020, the government announced temporary regulatory measures to help financially distressed businesses get to the other side of COVID-19, and on 7 September this relief was extended to 31 December 2020.

According to the Treasurer, the new processes will be available for small businesses from 1 January 2021. 

However, recognising that it will take time for practitioners to become familiar with the new processes and to register as a small business restructuring practitioner, the government has come up with a solution for small businesses that won't be able to access the process immediately on 1 January 2021.

In this case, an eligible small business will be able to declare its intention to access the simplified restructuring process to its creditors, including through ASIC’s published notices website. Following the declaration, the existing temporary insolvency relief would then apply to the business for a maximum period of three months, until they are able to access a small business restructuring practitioner or other insolvency practitioner. 

As a transitional measure, the ability to declare such an intention will be available until 31 March 2020.

To view the government’s full fact sheet on the reforms, click here.