Bankruptcy Law Revision to Save Small Businesses on the Brink of COVID Collapse

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Thousands of small businesses on the brink of collapse will be thrown in as a lifeline under further bankruptcy law reforms.

The changes, which will be unveiled by Treasurer Josh Frydenberg on Thursday, will cover about three-quarters of businesses subject to insolvency today.

They will be based on the main features of the “Chapter 11” bankruptcy code used in the United States.

Key elements of the reforms include:

  • Introducing a new debt restructuring process for incorporated businesses with liabilities less than $ 1 million
  • Shift from a single ‘creditor in possession’ model to a more flexible ‘debtor in possession’ model, allowing eligible small businesses to restructure their existing debts while retaining control of their business
  • A 20 working day period for developing a restructuring plan by a small business restructuring practitioner, followed by 15 working days for creditors to vote on the plan
  • A simplified liquidation route for small businesses
  • Reduction of administrative formalities for the insolvency sector.

The changes follow the extension earlier this month of temporary insolvency and bankruptcy protections to support small businesses affected by the COVID crisis.

A row of businesses in Melbourne are closed due to the ongoing Stage 4 lockdown. Credit: PAA

As the temporary relief expires at the end of December, the number of companies placed under external administration is expected to increase.

Reserve Bank Governor Philip Lowe warned of the wave of business bankruptcies in August.

“There will be bankruptcies. There will be bankruptcies. There will be companies that will not recover. It is the harsh reality of an economic slowdown which is the worst in 100 years, ”he told Parliament’s Economic Committee.

Longer-term reforms are expected to start on January 1, subject to the passage of a law by parliament.

Josh frydenberg
Treasurer Josh Frydenberg is set to reveal changes to improve insolvency rules for small businesses. Credit: PAA

“These are the most significant reforms to Australia’s insolvency framework in almost 30 years, and they will help keep more businesses in business and Australians in employment,” said Frydenberg.

He said the government was also providing support totaling $ 314 billion to cushion the blow to households and businesses as part of its economic stimulus package.

Watch Treasurer Josh Frydenberg talk to Sunrise about the overhaul in the video below

Treasurer Josh Frydenberg threw a lifeline to struggling businesses by announcing a major overhaul of bankruptcy laws.


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