Insolvency laws give small business “breathing space”

Small business owners facing insolvency due to the global pandemic will be able to prevent financial collapse through legislative changes announced by Federal Treasurer Josh Frydenberg.

Announcing the changes at an Australian Chamber of Commerce and Industry (ACCI) event on September 24, the Minister said changes to the nation’s insolvency framework were designed to help small business stay trading.

The reforms, based on key features from Chapter 11 of the Bankruptcy Code in the US, will allow business owners with liabilities of less than $1 million to stay in charge while they manage their debts.

ACCI chief economist Dr Ross Lambie said the new measures would help those 900,000 small businesses relying on financial support who face insolvency before the end of 2020.

“Small business owners are increasingly stressed about revenue loss and mounting debt. No doubt this stress will increase sharply over the next few months as the payment deferral for loans, rents and payroll tax end,” he said.

“Under the current legislation, small business owners stand to lose everything – the family home used to guarantee the business as well as their life savings. Today’s measures mean they have the space to restructure their debts and, if necessary, their business, and negotiate directly with creditors before the administrators are called in.

Dr Lambie added that the measures should go some way to reducing the “overwhelming sense of powerlessness” that sets in under the current system and provide small business owners with breathing space to be able to trade out of their situation.

He said it was not in the creditor’s interest for the administrators to be called in to fold a business with them gaining only a few cents in the dollar owed.

“It is much better if they can come to an arrangement so that the business can continue trading, or the business can be liquidated sooner without an expensive, drawn-out legal process that leaves them with nothing,” he said.

“While the new arrangement will save many businesses, we recognise that some business will not be able to cover their debts and continue trading. We hope the new arrangements will encourage these unviable businesses to make the decision to fold early, to sit down with their creditors and negotiate an outcome that enables them to walk away with dignity, and some of their assets in tacked, so they can look to start a new business when conditions improve.”

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