Australia to Overhaul Bankruptcy Rules for Small Businesses

Australia’s government is instigating what it calls the most significant insolvency law reforms in almost three decades in a bid to give more small businesses a chance to survive the recession.

Under the plan announced by Treasurer Josh Frydenberg, incorporated businesses with liabilities of less than A$1 million ($707,500) will be able to keep trading while they develop a debt restructuring plan. That’s in contrast to current rules which can force small companies into immediate administration.

“This economic shock has been very severe and many businesses have had to close their doors, yet the bills have still been racking up,” Frydenberg said in a television interview Thursday. He’s described the plan as adopting key aspects of the U.S. Chapter 11 bankruptcy process, moving from a rigid, one-size-fits-all ‘creditor in possession’ model to a more flexible ‘debtor in possession’ model.

Hit by the lockdowns and state-border controls due to the coronavirus pandemic, Australia’s economy contracted by the most on record last quarter, pushing it into its first recession in almost 30 years. A planned recovery, driven by early lifting of restrictions and reopening of its economy, was offset by a resurgence of the virus in Melbourne, the nation’s second-largest city.

Frydenberg said in a statement that the A$1 million threshold covers about 76% of businesses subject to insolvencies today, 98% of which have less than 20 full-time employees.

The new process, expected to start Jan. 1, “is in contrast to the current regime where owners effectively lose control of their business, with an administrator being placed in control and determining any restructuring plan to be put to creditors,” Frydenberg said.

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