On 24 September, Federal Treasurer the Hon Josh Frydenberg MP announced planned changes to Australia’s insolvency laws that will for the first time see small businesses categorised differently to large businesses. The changes of law are planned to take effect from 1 January of 2021.

Under the new structure, based on the United States’ Chapter 11 bankruptcy process, small businesses with a total debt of less than $1 million owing to creditors will be able to retain control of their business and plan their recovery independently without being handed over to administrators.

Following the temporary measures introduced in March to protect businesses from being forced into administration during the COVID-19 pandemic, the government has reported that roughly 2000 businesses have been spared thanks to these measures so far.

The Treasurer’s announcement comes as more than one million businesses and companies are currently kept afloat with JobKeeper payments, which is soon to be reduced before ending in March 2021.

The change in law will see small businesses able to pay a flat fee after calling in small business advisers and will then have 20 days to propose a way to trade out of debt to creditors. Creditors will have a further 15 days to vote on the proposed plan, and if approved, will be put into action.

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

“The Government’s new reforms 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.”

Business who are placed under voluntary or involuntary administration often find that their last remaining assets are used to repay debt and close the businesses within a three-year period.

Mr Frydenberg has said the new process “will see our system move from a rigid, one-size-fits-all ‘creditor-in-possession’ model to a more flexible ‘debtor-in-possession’ model.

Creditors will still be able to reject proposals given by small businesses and their advisors, which will result in the existing process of external administrators taking control of the business.

To protect the workers of the small businesses, any entitlements that are due to workers must be paid out in full before a plan is submitted to creditors.

To prevent misuse of the system, small businesses will not be able to use the new insolvency process more than once every seven years. Mr Frydenberg has also warned that safeguards will be put in place to prevent ‘phoenix’ activity.

The Victorian Chamber of Commerce and Industry has welcomed the announcement, with Chief Executive Paul Guerra saying, “today’s announcement from the Treasurer will be met with sighs of relief from small business owners who have their backs to the wall.”

“These unprecedented times call for innovative measures to protect businesses and jobs so we can come out swinging on the other side.”

Help and support

The Victorian Chamber will continue to work with both Federal and State Governments to support all Victorian businesses receive the support they need to be able to reopen, restart and recover from the pandemic.

If you would like to be involved in our advocacy work, please contact policy@victorianchamber.com.au.