Changes to Insolvency Laws for Small Businesses in Australia
Federal Government has recently announced that it intends to change insolvency laws with a focus on helping Australian small businesses that are struggling in the wake of the COVID-19 pandemic.[i]
The new laws would form a simplified system that would apply to businesses with less than $1 million in liabilities.
The proposed changes relate to two aspects of insolvency:
– Restructuring of company assets; and
– The liquidation process.
The Federal Government previously announced and enacted protections under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) shortly after the COVID-19 pandemic began. There are three relevant changes that this Act made. Firstly, the monetary threshold for a statutory demand was increased from $2,000 to $20,000. Secondly, the time allowed for a response to a statutory demand was lengthened from 21 days to six months. Finally, there is a form of temporary relief from personal liability that would normally arise from a breach of the directors’ duty to present insolvent trading under section 588G of the Corporations Act 2001 (Cth). These changes were valid through 13 September 2020 and were recently extended to now expire on 31 December 2020.
The new changes are suggested to be implemented at the beginning of 2021, which could be commenced immediately after the previous changes cease to operate on 31 December 2020. Given the impact that the removal of the previous rules would have, it is not surprising to see that significant changes to the insolvency rules are being proposed. This article intends to discuss the nature of the proposed changes as well as potential issues that may arise during the period of transition to the new rules.
The Nature of the Proposed Changes
The first relevant aspect of the changes considers the way in which companies would restructure in the face of insolvency. Under the new rules, company owners would maintain control of their assets through the restructuring process, such that they would become a ‘debtor in possession’.[ii] This reflects the system that is currently used in the United States.[iii] This proposes a fundamental change to insolvency in Australia.
