Govt changes insolvency laws to keep SMBs afloat

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Govt changes insolvency laws to keep SMBs afloat

The federal government has introduced changes to Australia’s insolvency framework to help small businesses affected by the economic impacts of COVID-19.

The reforms would allow businesses with liabilities of less than $1 million to restructure their debt, similar to the Chapter 11 bankruptcy model in the United States.

The announcement from federal treasurer Josh Frydenberg said the reforms would cover about 76 percent of businesses subject to insolvencies, and 98 percent of those businesses have less than 20 employees.

“Together, these measures will reposition our insolvency system to reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses get to the other side of the crisis,” the announcement read.

The government also introduced other reforms to give the businesses more flexibility to either restructure or wind down operations “in an orderly manner”.

The one-size-fits-all “creditor in possession” model will be replaced with the “debtor in possession” model, where businesses can restructure their debts without giving up control to appointed administrators.

Small business restructuring practitioners were given a twenty business day period for the development of a business’ restructuring plan, followed by fifteen business days for creditors to vote on the plan.

A new liquidation pathway was also developed to simplify the process while also being faster and cheaper for businesses.

Some additional measures will also be brought in to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

For more information, the government has also released a fact sheet detailing the processes along with a couple of case studies.

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