The federal government plans to change bankruptcy rules, following the American-style model to help small businesses struggling to recover or fold due to the corona virus infection.
- Financial institutions expect bankruptcy waves as emergency protections for business owners expire at the end of the year
- The treasurer says the reforms will allow small businesses to restructure debt while their business is under control.
- The cost of managing or liquidating a business can be very costly, consuming the remaining assets of small businesses.
The new system will be two-tier, with large companies operating under existing insolvency rules, while businesses with less than $ 1 million in debt have a simpler structure.
These changes can be seen in the fact that small business owners are in control of their company and assets rather than being immediately placed in the hands of an administrator or lender.
For a bankrupt small business it takes 20 days to come up with a restructuring plan, after which the lenders have to vote on whether to accept it within 15 days.
For small businesses that cannot be revived, the liquidation will be changed in an effort to make it quicker and easier.
The federal government wants to reduce liquidators’ investigative processes, mandatory meetings and reporting requirements.
Treasurer Josh Friedenberg believes these changes will allow potential businesses to escape the recession caused by the COVID-19 epidemic.
“The government’s new reforms highlight key aspects of the U.S. Chapter 11 bankruptcy process, allowing small businesses to restructure debt while their business is under control.”
The ‘wave of bankruptcies’ is expected
The number of companies entering into external management has dropped by 46 percent compared to last year, with many impossible businesses being accelerated by federal job keeper pay subsidies.
The cost of managing or liquidating a business can be costly, so some small businesses use all of the remaining assets in the process.
There are concerns that many small businesses in the financial sector, including the Reserve Bank, ASIC and the Small Business Ombudsman, are postponing the restructuring and are facing more debt as a result.
They expect bankruptcy waves once the emergency protection for business owners expires later this year.
Those emergency protections include restricting the legal demands of lenders, giving companies more time to respond to creditors’ requests, and eliminating personal liability for business in the event of insolvency.
Similar rules for personal bankruptcy are in effect until December 31st.
The federal government is trying to address concerns that there will not be enough insolvent coaches to deal with the number of businesses that need to be restructured or disbanded by the end of this year.
To that end, the federal government is proposing a number of initiatives to encourage more professionals in the field, such as waiving registration fees for two years and creating new bankruptcy coaches who can only operate with a simplified small business process.
There will also be protections for small businesses that announce they want to restructure, but will not have immediate access to a bankrupt coach.
The changes foreshadow a new financial strategy
Treasurer Josh Friedenberg describes the changes in his address to the Australian Chamber of Commerce and Industry.
With the federal budget less than fifteen days away, Treasurer Josh Friedenberg will announce the coalition’s new fiscal strategy.
With huge spending on jobkeeper pay subsidies and other COVID-19-related economic support, the government is dropping its focus on redistributing the budget.
Instead, the new fiscal strategy will focus on supporting the country’s economic recovery from the recession triggered by the COVID-19.