Feds will adopt American-style insolvency rules to deal with expected wave of business closures, says Treasurer Josh Frydenberg

The federal government plans to overhaul insolvency rules, adopting a US-style model to help small businesses struggling due to the coronavirus pandemic restructure or fold.

The new system would be two-tiered, with large companies required to follow existing insolvency rules, while companies with liabilities of less than $1 million would have a simpler system.

The changes would allow small business owners to retain control of their business and assets, rather than being immediately placed in the hands of a trustee or creditors.

An insolvent small business would have 20 days to propose a restructuring plan, and creditors would have to vote on whether to accept it within 15 days.

For small businesses that cannot be revived, liquidation would also be modified, with the aim of making it faster and easier.

The federal government wants to reduce liquidator investigation processes, mandatory meetings and reporting requirements.

Treasurer Josh Frydenberg believes the changes will allow viable businesses to survive the recession caused by the COVID-19 pandemic.

“The government’s new reforms build on key features of the United States Chapter 11 bankruptcy process allowing small businesses to restructure their debt while maintaining control of their business.”

“Wave of insolvencies” expected

A sign reading ‘sorry we are closed’ hangs in a window.(Unsplash: Tim Mossholder)

The number of businesses entering external administration is down 46% from a year ago, with many non-viable businesses being supported by the federal government’s JobKeeper wage subsidies.

The cost of putting a business into administration or liquidation can be costly, so much so that some small businesses find the process consumes all of their remaining assets.

“Rather than going into a liquidation process where they lose control of the company, we want these companies to retain control, restructure their balance sheets, find a deal with creditors and then come out on the other side of this virus case,” Mr. Frydenberg said.

The financial industry, including the Reserve Bank, ASIC and the Small Business Ombudsman, are concerned that many small businesses are delaying restructuring and going into debt as a result.

They expect a wave of insolvencies once emergency protections for business owners expire at the end of the year.

These contingency protections include limiting legal claims by creditors, giving businesses more time to respond to creditors’ demands, and removing personal liability for insolvency transactions.

Similar provisions for personal bankruptcy are also in place until December 31.

The federal government is also seeking to address concerns that there will not be enough insolvency practitioners to handle the number of businesses due to be restructured or liquidated at the end of the year.

To this end, the federal government is proposing several initiatives to encourage more professionals in the field, such as waiving registration fees for two years and creating a new class of insolvency practitioners who will only work with the simplified process for small businesses.

There would also be protections for small businesses that announce they want to restructure but cannot get immediate access to an insolvency practitioner.

The changes foreshadow a new fiscal strategy

Treasurer Josh Frydenberg will detail the changes in a speech to the Australian Chamber of Commerce and Industry.

With less than a fortnight before the federal budget, Treasurer Josh Frydenberg will also prefigure the Coalition’s new budget strategy.

With huge spending on JobKeeper wage subsidies and other COVID-19 related economic supports, the government is abandoning its goal of returning the budget to surplus.

Instead, the new fiscal strategy will focus on supporting the country’s economic recovery from the COVID-19-induced recession.

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