Government proposes reforms to insolvency regime for small businesses

In the last 24 hours, the Treasurer has announced the Federal Government's plans to significantly reform the insolvency regime for small businesses, with new laws to take effect from 1 January 2021. This is the day after expiry of the Government's current measures that limit creditor enforcement action during the COVID-19 crisis.

The proposed reforms seek to provide a solution to the anticipated wave of insolvencies that will inevitably occur in early 2021. The proposal - a debtor-in-possession model, where the company can keep trading under the control of its owners while a debt restructuring plan is developed and voted on by creditors.

Companies with liabilities of less than $1 million will be able to keep trading while they develop a debt restructuring plan with a "small business restructuring practitioner" over a 20-business day period. Creditors then have 15 business days to vote on the plan. The plan must be supported by more than 50% of the creditors by value.

Employee entitlements must be paid in full before the plan is voted on by creditors, which may be one of the stumbling blocks to the Government's proposal working in practice.

There has been limited consultation with the insolvency profession over the Government's proposal, so issues and questions will emerge in the coming weeks as draft legislation emerges before the end of Parliament's sessions this year and the proposed commencement of the reforms for the start of 2021.

We will write more on these proposed reforms as the details emerge. In the meantime, we provide this link to the government's insolvency reforms to support small business fact sheet.

Publication date: 24 September 2020

Authors: Keiran Breckenridge, Special Counsel; Bonnie-Anne Talese, Lawyer

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.