Insolvency reforms to support small business introduced to Parliament

The reforms, which were announced by the government on 24 September 2020, are poised to reposition the country's insolvency system to help more small businesses restructure and survive the economic impact of COVID-19.

"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 Josh Frydenberg on Thursday. 

As part of the insolvency changes, a new debt restructuring process will be introduced for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the Chapter 11 bankruptcy model in the US.

By moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, the government aims to give eligible small businesses the chance 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.

"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," said Mr Frydenberg. 

Following the passage of legislation through the Parliament, these new insolvency processes will be available for small businesses from 1 January 2021.

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