Small businesses to be spared expensive voluntary administration process under insolvency laws change
A big change is coming to laws surrounding small businesses that went bankrupt during COVID-19, aimed at helping more people survive the economic crisis.
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Small businesses that have hit the wall during COVID-19 will get more help to survive the economic crisis under the biggest shake-up of insolvency laws in almost 30 years.
Treasurer Josh Frydenberg will announce the lifeline on Thursday, ahead of next month’s federal budget and just days before JobKeeper payment changes.
They aim to spare struggling small business owners from expensive voluntary administration processes, from which many do not recover.
Under the changes, which are based on the US bankruptcy model, financially struggling but viable companies with debts of less than $1m will get help to restructure their debts without losing control of their business.
The changes will also make it cheaper and faster for businesses that won’t survive to go through liquidation, which will help their employees and creditors to get more of what they are owed.
“These are the most significant reforms to Australia’s insolvency framework in almost 30 years, and will help to keep more businesses in business and Australians in jobs,” Mr Frydenberg said.
He said the reforms were “critical” to the government’s plan to revive the economy amid Australia’s first recession in almost three decades.
The new system will start from January 1, when temporary COVID-19 insolvency relief measures end.
The costs of administration can discourage small-business owners from engaging with the system to restructure their debts, and of those that do, 60 per cent collapse within three years. Under the changes, businesses will go to a “small business restructuring practitioner” to develop a debt repayment plan instead of going into voluntary administration.
The official will develop a plan within 20 business days for a flat fee, and the company must pay staff all of their entitlements and lodge any outstanding tax returns.
The restructure plan will then be put to creditors, who will have 15 days to vote on it.
If at least half of the creditors back the plan, it will be approved and debts will be paid according to the terms.
Creditors may get less than the full amount they are owed but more than if the business was put into liquidation.
A new simplified process for liquidation will also cut the time and costs for winding up a business by reducing requirements for reporting or calling creditor meetings.
Assistant Treasurer Michael Sukkar said the current “one size fits all” approach did not work for small businesses.
Reserve Bank governor Philip Lowe bluntly warned last month: “There will be insolvencies, there will be bankruptcies.” It was the “harsh reality” of the worst economic downturn in 100 years, he said.
The Federal Government has provided temporary relief under existing insolvency laws, which expires at the end of the year. That is expected to spark a rush of liquidations.