Insolvency reforms for small businesses introduced

The Government has introduced the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 into Parliament.

The measures will apply to incorporated businesses with liabilities less than $1 million. The Treasurer states that the measures will change from rigid one-size-fits-all 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.

For those businesses that are unable to survive, a new simplified liquidation pathway will be introduced for small businesses to allow faster and lower-cost liquidation.

The measures are expected to cover around 76% of businesses currently subject insolvency – 98% of whom have less than 20 employees.

Reform measures

The Bill, introduced on 12 November, contains 5 broad tranches of change. These are intended to reduce the costs of external administration for small businesses and the compliance burden for insolvency practitioners, helping more businesses remain viable and improving the returns to creditors and employees when the business is unviable.

First, the formal debt restructuring process allows an eligible company to restructure their debts and maximise their opportunity for survival. The formal debt restructuring process will allow a company director to retain control of their business, and its property and affairs, while developing a plan to restructure their debt with the assistance of a small business restructuring practitioner.  

Second, an eligible company waiting to access the debt restructuring process will be provided with temporary relief from the director’s duty, under s 588G(2) of the Corporations Act, to prevent insolvent trading. An eligible company waiting to access the debt restructuring process will also have relief relating to responding to statutory demands from creditors. This aspect of the reforms will be implemented in the Corporations Regulations.

Third, the simplified liquidation process for eligible companies in a creditors’ voluntary winding up is intended to provide a faster and lower cost liquidation, increasing returns for both creditors and employees. The simplified liquidation process preserves and applies most of the existing framework for liquidation in a creditors’ voluntary winding up and adopts changes for a more fit-for-purpose and efficient process.

Fourth, to support these reforms, there are amendments to the registration of insolvency practitioners. The amendments to the requirements for registration of a liquidator are intended to provide more flexibility to the registration process while maintaining high professional standards.

Fifth, the reforms also expand the situations where documents relating to the external administration of a company may be given electronically, and permit the electronic signing of documents relating to the external administration. Future amendments to permit virtual meetings to be held  during external administrations will be made by amending related subordinate legislation.

Date of effect

The measures will take effect from 1 January 2021.

This article was first published in Thomson Reuters’ Weekly Tax Bulletin.

Ian has worked at Thomson Reuters for over 15 years as a senior tax analyst with expertise in income tax and GST. He has been involved in tax publishing for over 25 years.

Prior to his tax writing career, Ian worked as a manager for a Big 4 accountancy firm and then with a firm which provided specialist tax advice for the music and recording industry.

Ian holds a Bachelor of Economics degree, is a Chartered Accountant and a registered tax agent. Among other things, Ian is the author of the Australian GST Handbook, the GST Commentary Service, the Australian Financial Planning Handbook and the specialist income tax commentary services, as well as being a regular contributor to the news services.

Subscribe toTax Insight

Discover best practice and keep up-to-date with insights on the latest industry trends.