The federal government is trying to overhaul bankruptcy laws as 240,000 small businesses face collapse

Small businesses are at risk of collapse. (Chris Putnam, Barcroft Media via Getty Images)
  • Treasurer Josh Frydenberg said the federal government is introducing “the most significant reforms of insolvency law in almost 30 years” in response to the pandemic.
  • The changes will make it easier for owners to restructure their business and cheap for them to liquidate in case of failure.
  • 240,000 small businesses risk collapse in Australia as the country enters a recession.
  • Visit Business Insider Australia’s homepage for more stories.

Australia is venturing into uncharted waters as it tries to figure out what business failure should look like in a post-pandemic world.

Treasurer Josh Frydenberg announced on Thursday that small businesses will operate under US-style insolvency laws in an effort to see them through the pandemic.

“It is with this objective of keeping more businesses in business and people in jobs that the Morrison government is embarking on the most significant reforms of insolvency law in almost 30 years,” Frydenberg wrote in an opinion piece.

Under the changes, businesses with liabilities under $1 million that are insolvent – that is, can’t pay their debts – will be given 20 days to restructure their operations in a bid to remain viable.

Creditors will then be able to vote on the plan and allow the business to overhaul its operations. If they vote against it, a business will then go through a cheaper, simplified liquidation process to wrap it up.

Significantly, Frydenberg noted that “employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors”, safeguarding workers from being left in the lurch.

Earlier this year, the government changed the law to allow businesses to operate even while insolvent, leading to fears that thousands of “zombie firms” were being created and postponing an inevitable collapse.

Businesses welcome ‘well-intentioned’ changes but say they need more

The changes were welcomed by the Small Business Ombudsman Kate Carnell who said they would go “a long way” to giving control back to small business owners.

“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,” Carnell said.

However, with Deloitte modelling suggesting 240,000 small businesses are at risk of failure, the Ombudsman continues to call on the federal government to subsidise up to $5,000 worth of financial advice for owners.

“Unfortunately small businesses with cash flow issues, compounded by falling revenue, may not seek out professional advice because it’s deemed to be unaffordable. This could prove to be devastating for the business owner and their family,” Carnell said.

CreditorWatch said while the reforms are ‘well-intentioned”, they would “do little to generate jobs and growth down the track”.

“In August, RBA Governor Phillip Lowe warned that a considerable number of insolvencies would emerge, with many businesses unlikely to recover from the ‘forced economic hibernation’ imposed in March,” economist Harley Dale told Business Insider Australia.

“That remains the case, regardless of any legislation that allows companies to continue trading while insolvent.”