Federal Government’s Insolvency Reforms: throwing a lifeline to small businesses

Federal Government’s Insolvency Reforms: throwing a lifeline to small businesses

On 24 September 2020, Treasurer Josh Frydenberg announced new reforms to Australia’s insolvency regime to support Australian small businesses in their recovery from the COVID-19 induced recession.

These reforms seek to implement a new framework which alters the approach to insolvency for small businesses with liabilities of under $1 million to remain in control and attempt to recover independently by creating their own restructuring plan as opposed to the entity being handed to an administrator.

Mr Frydenberg has said that: “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.”

Prior to any restructuring plan being presented to creditors, all employee entitlements must be paid out. This implies that the company must possess some funds to propose the restructuring plan and not shift its liabilities onto employees without payment or entitlements. Importantly, companies will not be able to implement the new insolvency process more than once every seven years.

The reforms appear to provide a transition process out of the present economic climate created by the policies and moratoriums on insolvency and bankruptcy enforcement entered by the Government earlier this year in response to COVID-19.

Frydenberg intends to take the following new regime to Federal Parliament in the coming weeks:

1. Once director(s) appoint an insolvency practitioner, they will have 20 business days to establish and prepare a restructuring plan, with the assistance of the insolvency practitioner. During this period a moratorium on creditor enforcement action would apply;
2. Once a restructuring plan will be established, it will be presented to the company’s creditors for approval within 15 business days;
3. The restructuring plan will be approved if more than 50% of creditors endorse the plan. Once endorsed, it will bind all unsecured creditors;
4. In the event a majority of the shareholders vote against the restructuring plan, the process ends and directors may seek an alternative insolvency process.

“The reforms are a critical part of our economic recovery plan and will help to boost business confidence and dynamism across the economy by allowing viable businesses to survive as our economy rebuilds,” Mr Frydenberg said.

The new processes will be available to small businesses from 1 January 2021.

For further information, please contact Roser Lawyers.