Government tables insolvency reforms in parliament, paving the way for new system to start on January 1, 2021

Small businesses could have access to a new insolvency framework in January if legislation introduced by the federal government on Thursday passes parliament. 

The government unveiled plans to overhaul Australia’s insolvency system in September in response to the economic crisis caused by the COVID-19 pandemic, presenting a suite of reforms that would see Australia move to a ‘debtor in possession’ insolvency model, instead of a ‘creditor in possession’ model. 

If passed by parliament, the new system will be in place on January 1, 2021, however, it’s not yet clear if the Labor opposition will support the legislation. 

Writing for SmartCompany in September, Shadow Small Business Minister Brendan O’Connor welcomed the reforms, while also raising concerns about future access to capital for businesses that use the restructuring provisions and risks to employee entitlements after businesses are restructured.

On Thursday, Treasurer Josh Frydenberg described the reforms as “the most significant changes to Australia’s insolvency framework in 30 years”, which will “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,” he said in a statement. 

Under the new model, incorporated businesses with less than $1 million in liabilities that are facing insolvency will be able to retain control of their businesses and continue trading while restructuring debts. 

This differs from the current model in which creditors are able to appoint external administrators to insolvent small businesses, however, the new system would still allow creditors to vote on restructuring plans. 

The reforms will also include a new liquidation process for small businesses, with streamlined meeting and reporting obligations, which Frydenberg said will allow for “faster and lower-cost liquidation”. 

Meanwhile, “complementary measures” will also be put into place for insolvency practitioners to increase demand from small businesses in the short and long term. 

The Treasurer said the insolvency reforms are expected to cover about 76% of businesses that experience insolvencies, almost all of which have fewer than 20 employees.

They follow temporary insolvency protections offered to businesses throughout 2020, including temporary increases to both the threshold at which creditors can issue statutory demands and the time in which companies must respond to statutory demands. 

These measures, which also protect businesses owners from any personal liability for trading while insolvent, will be in place until December 31, 2020. 

Small business ombudsman Kate Carnell said on Thursday the legislation represents “enormous progress”.

“These landmark reforms will be a game-changer for small businesses, particularly those that have been heavily impacted by the COVID crisis,” she said in a statement. 

“Instead of finding themselves on an express train to winding up with no control over the process, these changes will ensure small businesses will have the option to turn their business around, giving them a fighting chance to survive,” she added. 

However, Carnell once again called on the government to fund a small business viability program to give business owners access to accredited financial advice about the future of their business. 

Carnell’s office has previously teamed up with key accounting groups to push for such a program, which would provide business owners with grants worth up to $5,000 to get tailored advice. 

“Unfortunately, small businesses with cashflow issues, compounded by falling revenue, may not seek out professional advice because it is deemed unaffordable. This could prove to be devastating for the business, staff and family,” she said. 

Further details about how the new insolvency model will work for small businesses are available in this article.