The Australian Federal Government has announced significant insolvency law reforms that will affect small businesses with liabilities of less than $1 million. The reforms are expected to commence on 1 January 2021 and will introduce, among other measures, a new debt restructuring process and liquidation pathway for small businesses which the Government intends to be simpler, more flexible and more efficient than existing processes.

In brief

We update our earlier client alert with a version including additional details that are available.

In brief

On 24 September 2020, the Treasurer announced that the Australian Government would introduce new legislation to give effect to:

This alert briefly discusses key amendments to the insolvency legislation that the federal government has enacted and how councils can protect themselves from contractor insolvency in construction contracts.

Changes to insolvency legislation

This week’s TGIF discusses the key elements of the Federal Government’s recently announced reforms to insolvency laws for businesses with liabilities below $1 million.

Key takeaways

The Treasurer has announced the most consequential changes to Australia’s insolvency laws in 30 years.

The changes are styled on the Chapter 11 regime utilised in the United States. It represents a significant shift from the current ‘creditor-in-possession’ regime to a ‘debtor-in-possession’ system. Incorporated entities with liabilities of less than $1 million will be able to access the scheme.

Some of the key features of the proposed scheme are:

Ahead of the October budget, the treasurer has announced proposals to overhaul insolvency laws in Australia, to introduce provisions to allow struggling businesses to continue trading whilst a restructuring plan is developed. The changes, which share similarities with US Chapter 11 bankruptcy provisions, are yet to be legislated, but are proposed to commence with transitional provisions from 1 January 2021.

A legislative instrument was registered by the Commissioner on 22 September, setting out the revised alternative tests for decline in turnover to qualify for JobKeeper fortnights from 28 September 2020 onwards.

The new alternative tests remain broadly in line with the original, with the same 7 circumstances available to entities where there is not an appropriate relevant comparison period in 2019. These include businesses that:

What's next for Australian businesses after the temporary COVID-19 insolvency law relief expires at the end of 2020? The government's new announcement sheds light on the next steps.

Key takeouts

The Australian Government has announced proposed major reforms to corporate insolvency laws for incorporated businesses with liabilities of less than $1 million that are facing financial distress.

The temporary safe harbour introduced by the Federal Government is not a panacea for directors of distressed businesses. It may be time to act now.

The Coronavirus Economic Response Package Omnibus Act 2020 introduced relief measures in the second stage of the Federal Government’s plan to 'cushion the economic impact of the coronavirus and help build a bridge to recovery'.^[1]

The Australian federal government has continued introducing temporary and potentially permanent insolvency law reforms intended to assist the economic repair efforts during, and following, the pandemic. In the latest development, which occurred in somewhat strange circumstances, the federal government has announced that it will shortly introduce new laws into parliament, which are intended to reduce complexity, time and the costs for small businesses to restructure their financial affairs.