Zombie businesses get second chance with major reforms to Australia’s insolvency laws
Thousands of zombie businesses are on the brink of bankruptcy, but the most significant reforms to Australia’s insolvency framework in almost 30 years will give them a chance to fix their debt and get back on their feet.
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More zombie businesses will be resurrected to prevent them dragging down the economy when COVID safeguards snap back to normal next year, in the biggest change to insolvency laws in almost 30 years.
The scheme is intended to save thousands of small businesses forced to the brink by the recession from being wound up unnecessarily by creditors.
Treasurer Josh Frydenberg will announces the reforms today, less than two weeks before the most important budget since the Global Financial Crisis and days before JobKeeper begins to be stepped back.
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From next year, small businesses driven to the wall will get a second chance to stay afloat under new rules which will given them a better chance to restructure their debt and keep creditors from winding them up.
Mr Frydenberg said the proposal drew on US bankruptcy laws, which put more power in the hands of businesses, rather than creditors, when restructuring debt.
“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,” he said.
“The reforms are a critical part of the economic recovery plan and will help boost business confidence and dynamism across the economy by allowing viable businesses to survive as our economy rebuild.”
There are already about 400 companies a month going into external administration due to debts this year, but this is about half what it was last year due to temporary relaxations made to the insolvency laws put in place to combat the COVID-19 restrictions which are due to end on December 31.
The new reforms will apply to incorporated businesses with liabilities of less than $1 million and kick in from January 1, if passed through Parliament later this year.
Instead of the debt restructuring process for embattled small businesses being led by creditors, the new scheme will allow them to retain control of their business during the process.
Instead of necessarily having to enter a voluntary administration process, business owners will be able to work with a “small business restructuring practitioner” to develop a restructuring plan within 20 days.
Creditors will then be given 15 days to vote on the plan, with at least 50 per cent needed to back it to be approved.
If voted down, the company owners can then opt to go into voluntary administration or use a proposed new simplified liquidation process.
The new liquidation process remains largely the same, but there will be some changes like removing requirements to call creditor meetings and the ability to form committees of inspection and a simplified dividend process.
The introduction of voluntary administration in 1993 was the last reform to insolvency of this magnitude.
