Insolvency rules for small business overhauled

The Federal Government has announced plans to overhaul the existing insolvency rules as a measure to help small businesses that are currently struggling with thge COVID-19 crisis.

Under the new measures, current insolvency and bankruptcy protections will now be extended up to 31 December 2020, providing longer relief for small businesses that may be facing the threat of action by creditors and extend temporary relief for directors from any personal liability for trading while insolvent.

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell hailed the measure as one that will make it easier for small businesses to restructure or wind up.

“It’s clear the Federal Government has heard our concerns that current insolvency practices do not work for small and family businesses,” Carnell said. “Our July report found that in many cases, small businesses were not getting the chance to turn their business around and instead finding themselves on an express train to winding up with zero control over the process. The changes announced today by Treasurer Josh Frydenberg will go a long way to fixing that problem.

“The reforms will allow small businesses to restructure their debts while remaining in control of their business and for those businesses that sadly do need to wind up, the liquidation process will be changed to make it quicker and easier,” Carnell added. “We also welcome protections for small businesses that want to restructure, but are unable to get immediate access to an insolvency practitioner.”

Carnell noted that the ASIC data shows insolvencies are tracking at close to 50 per cent below 2019 levels, which shows the extent to which government stimulus and protection measures are keeping businesses on life support, including businesses that have not been viable for some time.

“Deloitte Access Economics modelling estimates about 240,000 small businesses are at risk of failure. This highlights the need for small businesses to sit down with their trusted financial adviser for a viability assessment. Unfortunately, a measure to address this critical first step was missing from today’s announcement,” Carnell said.

“That’s why my office continues to recommend the establishment of a small business viability program, where small business owners facing financial stress can obtain a voucher valued up to $5000 to access tailored advice on the state of their business. The voucher would ensure small businesses have access to the expertise they need to judge business viability,” she added.

Carnell admitted, however, that small businesses with cashflow issues, compounded by falling revenue, may not seek out professional advice because it’s deemed to be unaffordable, which can be devastating for the business owner and their family.

“We know the sooner a small-business owner experiencing financial stress seeks assistance from an accredited professional, the better the outcome. Crucially, these measures give otherwise viable small businesses more time to recover, preventing a wave of unnecessary insolvencies,” Carnell concluded.

The Treasurer’s announcement was also welcomed by the Business Council of Australia (BCA).

“For thousands of small business people, this will be a lifeline, giving them the chance to keep their doors open and get through this pandemic,” the BCA’s chief executive, Jennifer Westacott said. “The changes will give thousands a chance to get advice, make a debt restructuring plan and keep their doors open. It will save businesses and jobs.

“With careful safeguards and agreement from creditors small businesses will get the flexibility to plan a path out of insolvency and keep control of their businesses,” Westacott added. “Big and small businesses rely on each other, so we welcome moves that will also keep crucial supply chains working.”

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