Josh Frydenberg Presser
Josh Frydenberg Presser

New bankruptcy lifeline for struggling small business

Small businesses on the brink of collapse due to COVID-19 will be thrown a job-saving lifeline to restructure and stay afloat through massive reforms to bankruptcy rules.

Struggling owners will no longer be burdened with the huge cost of going through voluntary administration when they hit financial trouble, provided they can reach an agreement with creditors under a faster and simple new scheme starting January 1.

Treasurer Josh Frydenberg will on Thursday unveil permanent changes to insolvency rules shifting away the current "one size fits all" system the federal government believes is reducing the opportunity of small businesses to restructure and survive.

About 400 Australian companies have entered administration each month of the pandemic - a number likely to soar once current temporary insolvency changes and other supports wrap up.

Normal rules would force small business operators swamped with debt due to the COVID-19 shutdown to hand over the reigns to an external administrator at significant cost.

But under the new proposed process, small businesses with liabilities of less than $1 million would be able to seek reorganisation advice from insolvency experts for a flat fee.

If the company's board agrees to appoint the expert - known as a Small Business Restructuring Practitioner (SPRB) - a plan to restructure will then be developed within 20 business days.

Treasurer Josh Frydenberg will announce changes to insolvency to keep more small businesses afloat after COVID-19 pandemic passes. Picture: NCA NewsWire / Gary Ramage
Treasurer Josh Frydenberg will announce changes to insolvency to keep more small businesses afloat after COVID-19 pandemic passes. Picture: NCA NewsWire / Gary Ramage

During this time, the owners continue to control the business and can trade as normal, with special rules kicking in preventing unsecured and some secured creditors from taking action against them.

These protections are the same as what would ordinarily apply in voluntary administration, except in this instance the owners maintain control of their company.

The SBRP then sends a repayment plan to creditors, certifying the small business is able to meet the terms, and if at least half of those owed money agree the owners can continue operating while paying down the debt.

Mr Frydenberg said the "significant reforms" would help keep more businesses afloat and sure up jobs.

"The reforms are a critical part of our economic recovery plan and will help to boost business

confidence and dynamism across the economy by allowing viable businesses to survive as our

economy rebuilds," he said.



"(They) draw on key features of the US Chapter 11 bankruptcy process allowing small businesses to restructure their debts while remaining in control of their business."

Assistant Treasurer Michael Sukkar said the government believed a "one size fits all approach" to insolvency did not "work" for small business.

"We also believe that a small-business owner should get the opportunity to decide on how to

reorganise their business or whether to wind down," he said.

"These fundamental reforms will give nearly 80 per cent of business owners the opportunity to consider their options in a more timely and cost-effective way."

Mr Sukkar said the government wanted businesses to recover "strongly" when the pandemic has passed.

"It will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner," he said.

The government's reform package also includes a simplified liquidation pathway for small businesses to quickly dissolve and be better placed to pay money owed to employees and creditors.

The measures are due to start in 2021, provided legislation passes parliament.

Originally published as New bankruptcy lifeline for struggling small business