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Insolvency reforms to support small business

Insolvency reforms to help small bsuiness
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The government recognises that despite support to get through the COVID-19 outbreak, not all businesses are going to remain viable. Many small businesses will have significantly increased levels of debt in order to remain in business during the COVID-19 pandemic.

The Government is making changes to our insolvency framework to better serve Australian small businesses, their creditors and their employees. The changes will introduce new processes suitable for small businesses from 1 January 2021, reducing complexity, time and costs for small businesses. These permanent and temporary measures will expand the availability of insolvency practitioners to deal with the expected increase in the number of businesses seeking to restructure or liquidate.

The changes will also enable more Australian small businesses to quickly restructure and to survive the economic impact of COVID-19. Where restructure is not possible, businesses will be able to wind up faster, enabling greater returns for creditors and employees.

The package of reforms features three key elements:

Debt Restructuring

Currently, requirements around voluntary administration in Australia are more suited to large, complex company insolvencies. The new debt restructuring process will adopt a ‘debtor possession model’ where the business can continue to trade under the control of its owners, while a debt restructuring plan is developed and voted on by creditors.

Liquidation Pathway

The costs of liquidation can consume all or almost all of the remaining value of a small business, leaving little for creditors. Under the government’s new process, regulatory obligations will be simplified, so that they are commensurate to the asset base, complexity, and risk profile of an eligible small business.

Temporary Relief Measures Extended

The government announced a further extension of relief measures to 31 December 2020. The temporary increase in the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000; and a temporary increase in the time companies have to respond to statutory demands they receive from 21 days to 6 months. In addition, there is a temporary relief for directors from any personal liability for trading while insolvent, with respect to any debts incurred in the ordinary course of the company’s business.

The temporary relief measures give businesses needed breathing space and highlight the importance of working with financial professionals as soon as required, ensuring that your small business has the best chance of success. If you require any business advice please contact us.

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