Small business insolvency reforms announced

Sep 28, 2020 | Government COVID-19 Stimulus

A range of small business insolvency reforms have been announced by the federal government to help businesses to restructure and survive the economic impact of the COVID-19 crisis.

The insolvency reform package includes:

  • A new formal debt restructuring process. This new process will be available to incorporated business with liabilities less than $1 million. The process adopts a “debtor in possession” approach, which will allow the business to continue trading under the control of the business owners, while a debt restructuring plan is developed and voted on by creditors. A 20 business-day period will be given for the development of the debt restructuring plan, with a subsequent 15 business-days for creditors to vote on the plan.
  • A new and simplified liquidation pathway. This new pathway will decrease the number of circumstances in which a liquidator can seek to claw back an unfair preference payment from a creditor that is not related to the company. Furthermore, only the liquidator will be required to report to ASIC (under section 533) in the event that there are reasonable grounds to believe potential misconduct has occurred. The pathway removes requirements to call creditor meetings and the ability to form committees of inspection. Safeguards will be added to prevent companies from using the process to undertake misconduct, including illegal phoenix activity.
  • Measures to encourage an effective response from the insolvency sector. These measures include the temporary waiver of fees associated with registration as a registered liquidator until 30 June 2022. There will also be more flexibility added to the registration of insolvency practitioners by removing overly rigid requirements.

According to Treasurer Josh Frydenberg:

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. 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.

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For more information, please visit the fact sheet released by the government.