Reforms to small business insolvency pass Parliament

The reforms stated in the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 were announced as part of the delayed 2020-21 federal budget.

The federal government introduced the legislation to Parliament in November and it represents the most important changes to Australia’s insolvency framework in 30 years.

The legislation includes a new, simplified debt restructuring process that can be accessed by small businesses experiencing distress, which draws on key features of the Chapter 11 bankruptcy model in the US and will apply to incorporated businesses with liabilities of less than $1 million.

The process is estimated to cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of which have fewer than 20 employees.

There will also be a move from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, whereby eligible small businesses can restructure their existing debts while remaining in control of their business.

The new reforms also introduce new simplified liquidation pathway to allow faster and lower-cost liquidation, increasing returns for creditors and employees.

Treasurer Josh Frydenberg said complementary measures to enable more practitioners to enter the profession are also being implemented.

“Together, these measures will reduce costs, cut red tape and ultimately help more small businesses to recover from the COVID-19 crisis,” Mr Frydenberg said.

The new insolvency processes will be available for eligible small businesses from 1 January 2021.