Frydenberg‘s bankruptcy law reforms will save small business amid pandemic

Thousands of small businesses on the brink of collapse due to the COVID-19 pandemic will be thrown a lifeline under new reforms to insolvency laws.

Thousands of small businesses on the brink of collapse will be thrown a lifeline under new reforms to insolvency laws, Treasurer Josh Frydenberg announced on Thursday.

Drawing on key features of Chapter 11 of the Bankruptcy Code used in the United States, the changes will cover around three-quarters of businesses subject to insolvencies, brought on by the ongoing financial toll of the COVID-19 pandemic.

“Many businesses who are doing it tough through the COVID crisis because of health restrictions, they have had to close their doors but the liabilities have kept building up,” Mr Frydenberg said.

“The focus is to give those business owners more control as they deal with these liabilities.”

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Treasurer Josh Frydenberg unveiled the changes to bankruptcy laws today. Picture: Gary Ramage/NCA NewsWire

The Treasurer wants these businesses – 98 per cent of which have less than 20 employees – to work with an insolvency practitioner to devise a plan to repay accumulating debts over time so they can “stay in control”.

“This will apply to those businesses with liabilities of less than $1 million, that’s about 76 per cent of small businesses who are currently going through the insolvency process,” he said.

Key elements of the reforms include:

• The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million.

• Moving from a one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.

• A period of 20 business days to develop a restructuring plan by a small business restructuring practitioner, followed by 15 days for creditors to vote on the plan.

• A simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.

• Red tape cuts for the insolvency sector.

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Workers push trolleys past an empty shop in Melbourne’s CBD in early August. Picture: William West/AFP

“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.

Reserve Bank governor Philip Lowe warned that a wave of business failures were on the horizon in August.

“There will be insolvencies. There will be bankruptcies. There will be some businesses that will not recover,” he told a parliamentary committee.

Subject to parliament passing legislation, the longer-term reforms are set to start on January 1. Similar provisions for personal bankruptcy are also in place until December 31.